Omerta

“ To grow mushrooms you feed them with manure and keep them in the dark.”

He violated omerta or the code of silence and for that he was fired.

I am referring to Dr. Tony Leachon, the medical adviser to the National Task Force on Covid 19. The NTF is the implementing arm of the IATF. Leachon publicly called out the IATF for “losing focus in everything, risk communication, priorities, data management, and execution of all plans. It’s as if the DOH is playing around but these are lives….for every wrong decision the department makes so many lives are lost.”

Coincidentally, Ombudsman Samuel Martires announced he had ordered the investigation of the DOH for :

1. The delayed procurement of protective equipment to health workers.
2. Alleged lapses and irregularities that led to the death of health workers and rising deaths and infections among medical frontliners.
3. Inaction in the release and processing of compensation for healthcare workers who were severely ill with COVID19 and who died.
4. Confusing and delayed reporting of COVID19 deaths and confirmed cases.

The office of the Ombudsman reported being given the run-around by DOH officials in the course of its investigation.

These come after Eliseo Rio, former undersecretary of the DICT, resigned over the approval of Stay.Safe Philippines as the official app “for social distancing and health condition reporting and contact tracing“ when it is “useless” and “approved without technical vetting”. 

What we are seeing is an apparent culture of hiding and possibly deceit in the high levels of the DOH. Anecdotally the private sector reports similar refusal of the DOH to share virus information with the Thinking Machine, an initiative of business to build a data warehouse of COVID19 cases. Coupled with the shutdown or attempted shutdown of media platforms like ABS-CBN and Rappler who have been important sources of investigative journalism, we are increasingly in a world of darkness where the only information we are encouraged to have are the canned messages from state agencies and spokespersons. A ranking IATF official said: “There can be several messengers but only one message”. Fair enough but what if the message is misleading, wrong or worse, dangerous? Citizens are told to report wrongdoings but public servants are muzzled. When does an official stop serving his masters in Government however corrupt or inept and when does he start serving the public whose interest he is vowed to protect?

A shroud of silence has been thrown over our community. Anybody who speaks out of turn is dismissed or worse.

To this date we do not really know where we stand on the pandemic. All this talk about flattening the curve has disappeared because we do not have a curve. The data is not real time, is potentially scrubbed and inconsistently aggregated. We are told  the NCR barely made the health grade and if we do not behave we will be remanded back to ECQ. It is always our fault, never the fault of those in Government who now are being shown to be incompetent, possibly up to no good  or ignorant, we do not know which is worse.

In the meantime the Filipino and the economy continue to take a beating. The macro numbers will be reported after the end of Q2 but evidence is emerging the carnage is worse than forecast.

The Asian Development Bank predicts the Philippine economy will contract by 3.8% this year compared to the Southeast regional average of 2.8%. Coming as we did from being the fastest growing economy to now one of the deepest in recession tells us how serious a hole we are in.

On the ground we see the credit numbers worsening. The key metrics are the credit card, mortgage and consumer credit numbers since these are more reflective of the true plight of the average Filipino and the data is real time. Loans to businesses are often single payment with maturities of three to twelve months. We will not see defaults until these loans come due starting in Q3. Consumer credit, credit cards and mortgages, however, are paid in monthly installments so they are the canaries in the mine. They give us a more immediate indication of the financial stress among the public who make up 70% of aggregate demand. One major seller of motorized tricycles, electronics and white goods with several billions in installment sales nationwide gives us a picture of the crisis: Pre-covid, the company had 85% of clients paying on due date. In the first month after the lockdown, this number dropped to 75%, in the second month it fell precipitously to 47%. This tells us the consumer is running out of gas. After keeping workers on their payroll for 2-3 months, businesses have started to lay off employees. Social relief transfers have similarly run out. These explain the fall-off in credit payments. This trend is expected to continue as businesses are unable or unwilling to stay open with the health protocols be they lack of public transportation or unsustainable social distancing rules.

BSP Governor Ben Diokno said there is ample liquidity in the system for banks to lend yet SMEs complain credit is not available. This tells us banks are channeling the extra cash for their prime clients and to reinvest in Treasury bills. The last T-Bill issuance of PHP30 billion was over four times oversubscribed. New money to very small and micro businesses who make up over 60% of jobs is not there and for a reason: Banks are not prepared to lend if they will not be repaid. What was previously a liquidity crunch is now for many an insolvency issue. BPI reports 14% of its SME loans and 30% of its Microfinance credits are seeking restructuring and overall non-performing loans will peak in 2021.

Diokno reported that the Treasury has still not drawn on its PHP240 billion credit facility with the BSP yet the President announced the Government has no more money.

There is seemingly a lack of urgency among our Government officials. They react to the crisis rather than anticipate it. They wait for numerical validation or follow what our neighbors are doing; even if they already know from experience what is the answer. They are forever behind the curve. It is business as usual.

The IATF is kicking the can down the road on testing and contract tracing.

The DBM, DSWD, DOLE or whoever its job is to release the second tranche of social relief has delayed the monies even if they already have the contact details of the 18 million recipients. It is taking an investigation by the House to ferret this out.

DOH Sec. Franciso Duque says we were not late in procuring much needed PPEs, our neighbors were just early.

The BSP is waiting for its June 25 Monetary Board meeting to decide whether to cut its policy rate from its current 2.75%. Yet the Governor admits inflation is well within control and the economy is working at under capacity. He knows the Treasury is already borrowing at 2.1%. Why does he have to wait until June 25 to lower rates?

The Administration did not certify the Bayanihan Bill Part II as urgent but the Anti-Terrorism Bill was. There are 18 million Filipinos looking for relief and where are the terrorists?

This is the issue: Despite the rhetoric and motherhood statements, our Government officials have not internalized the crisis that is affecting millions of Filipinos. They do not appreciate that every day a bill is not passed, a program not implemented, monies withheld, the peso kept over valued; is another day millions go hungry. They are looking at the problem from 30,000 feet. They are focused on the numbers not at the faces behind the numbers. They are beholden to the international certifications of good standing. They admit to following what our neighbors are doing not what needs to be done.

These officials could do well to spend just one morning visiting the slums and the afflicted rather than zooming on the wonders of the Philippine economy. Only then might they stop looking at our crisis as an economic concern and start looking for what it really is, a major humanitarian disaster.

Why Is It Always The Filipinos’ Fault?

” I didn’t say it was your fault, I said I was blaming you.”

At some point we must recognize the problem might not be with the patient, the problem might be with the doctors.

In an interview with CNN Phils. Presidential spokesperson Harry Roque said: “If I were to be candid, it looks like M.Manila only got a mercy grade (pasang awa) that is why we remain in GCQ. The NCR’s doubling time of 6.9 days is lower than most areas’ 10 days. We are looking at a seven day doubling time case rate wherein it would take seven days for cases to double in size. But we have a 70% excess critical case health capacity which is why we are still in GCQ.”

Translation: It is our fault our health grade is what it is. If we continue to misbehave we shall be remanded to the ICU. After 90 days of lockdown, the longest and the strictest in our region, all without a peep; after 7 million have lost their jobs; after 18 million are waiting for non-existent relief; after hundreds of thousands of SMEs have collapsed; this is what we get, an official reprimand. What more, Mr. President, do you want us to do?

Why is it always about us and not about the people tasked with designing and implementing protocols that are apparently not working? Maybe the issue, Sir, is not with the patient, maybe the issue is with the health experts you have assigned to deal with the problem. 

Nations around the world are re-opening their economies and their borders. After the most stringent and longest of restrictions our authorities are threatening us with a return to further confinement.

All quarters – Senators, media, business, privately some of the Cabinet members, increasingly the public – have called out the deficiencies in the data, transportation protocols, the testing, the contact tracing, the processes, the costs, the suspected anomalies, the incompetence, the mis-pronouncements of the health experts in the IATF; yet nothing has been done about it. There is no accountability.

Dr. Tony Leachon, the national coronavirus task force adviser, admitted in an interview with ANC on June 16 reported by Rappler that DOH Sec. Franciso Duque, IATF Chairman, needs ” a new vision and strategy”, that it was time “to regroup”, “to step up”, “to listen to the people” and to invite the help of a “guiding coalition”. He thought Duque should work “at the pleasure of the people” and not presumably of the President. An honest assessment from the adviser to the IATF yet our leadership continues to suggest the problem is with us Filipinos, how unruly, irresponsible and “pasaway” we are, how we fail to social distance even as police chiefs party in close quarters. 

We are admonished that if we do not behave we will be kept in school after class, we will be thrown back into maximum security prison, we will be reverted as with Cebu City, to ECQ, we will be punished.  And yet all Filipinos are trying to do at this point is survive. 

Slum dwellers dozens to a room, workers struggling to get to work with no means to do so, small businesses allowed to open only under unsustainable conditions, suppliers harassed at the numerous checkpoints, ex-military men shot for no reason, the poor waiting endlessly for relief only to be told there is no more money, ordinary folk eking out a living under the most oppressive of circumstances; are just trying to make it past the day only to be told by insensitive officials speaking from air-conditioned rooms and protected by security and power; that that is not enough. At this rate the poor will be erased like drug addicts and the problem finally solved.

Acting NEDA Sec. Karl Chua tells us the recovery of the Philippine economy remains “very uncertain.” Two months ago Chua announced COVID was a “temporary setback” and that we will be in a V-shaped recovery. He reported the economy lost PHP 1.1 trillion in the first 45 days of the lockdown and expected that figure to double by year end. The unemployment rate is currently at 17% and growing.

Japan just upgraded our credit standing to A- but despite our financial strength we have the most modest stimulus in the region. Congress has passed a bill upping the package by ten times only to be told it is constitutionally not fundable. The BSP is reluctant to actively coax the peso down even as our neighbors have depreciated theirs to keep their exports, investment and tourism competitive. A weaker peso would boost the meager savings of OFWs now displaced, would bolster BPO receipts and would promote aggregate demand and taxes. 

Labor Sec. Bello says unemployment could hit 10 million. IATF Co-Chair Karlo Nograles seems unperturbed: “There will be increased demand for jobs in healthcare and medical sectors, on-line retail and deliveries.” If this is what he believes can save a PHP 19.5 trillion economy, we are in trouble. Incidentally this is the same man who earlier announced the goal of the IATF is “to push the (virus) peak to 2021” whatever that meant.

We, the public, have done our part and kept our peace even as we are beaten back and told to accept our condition at the risk of warrantless incarceration. We have stayed at home, worn the masks. The private sector is the reason we have the 70% excess capacity in our health facilities. Hemorrhaging companies have maintained their payrolls to minimize the employment carnage. Big business and ordinary citizens have opened their wallets to help the marginalized keep above water. So those in Government, please do not treat us as the culprits, the erring students, the irresponsible patient, the cause of why we are not making the health grade. We have done our share. Have you the Government done yours?

A Case For Economic Federalism

If anything good has come out of COVID19 it is Sen. Bong Go’s Balik Probinsya, an initiative to relocate people and the economy to the rural areas. I have advocated the same for some time but found no enthusiasm. The virus has finally provided the health reason to return to our provincial roots.

In the last years the Philippines has grown by an average of 5-6%, at times the highest in the region ex-China. Our economic managers boasted we are the new tigers of the region. Yet this growth came at a price. 

Our growth was powered by a boom in construction, real estate, banking and BPO’s which were principally urban centric. Agriculture was neglected resulting in flat or negative growth even as the rural areas house two thirds of the population.The urban explosion saw a mass migration from the provinces to the cities, principally the NCR, with the problems we now see in traffic, drugs and criminality, urban poverty, educational disparity, water shortages and a widening of incomes between the rich and the poor. 

Our cities are no longer a problem of economics they are now a problem of physics. M. Manila has a population of 14 million. It is the densest capital in the world with 41,000 people per square kilometer. In certain slums this number is 88,000 people per square kilometer. In 2018 MMDA reported 400,000 vehicles (now closer to 500,000) travel EDSA daily which has a road capacity of 300,000. The MRT/LRT move some 600,000 passengers a day when it was designed for around half that number.

COVID and social distancing has highlighted the physical limitations of our urban centers. When we are forced to be six feet from each other from what was previously one foot, we compound our density problem by a factor of 6. This translates to public transportation and many retail businesses being economically unsustainable.

The solution is to reverse the migration to the cities but that is only possible if we change our economic model. Simply giving families PHP 100,000 as currently proposed – 87,000 have applied – to move out will not do the trick. We have tried relocating squatters to outlying areas but they eventually return to the city because there are no jobs anywhere near.

Many Filipinos want to return to their hometowns because it is cheaper, life is simpler and they are with family. But they will only relocate if there are good jobs and ideally adequate schools for their children, healthcare for their families and infrastructure – roads, communication, water – for mobility, connectivity and viable agriculture. How does one start to do that?

My solution is what I call economic federalism. Political federalism means giving political power to provincial governments. Economic federalism means giving provinces the regulatory and fiscal means to set their own economic destiny with their own protocols and incentives to attract private sector investment.

In the U.S. individual States compete aggressively with each other be it to attract a Toyota car plant, or to house Amazon’s third center of excellence, or to invite a sports franchise like the Seattle Supersonics to locate to their city (Despite a small market, Oklahoma won the right by offering to build a sports stadium for what has since become the Oklahoma Thunder). It is not all about money and tax incentives. In the case of Amazon the criteria was availability of qualified human capital, infrastructure like a nearby airport, public transport, good schools for families and affordable housing.

This is the same model I suggest for the Philippines. Provinces should be invited to bid for local and foreign investors to locate their plants and businesses to their area. But this requires a number of things: One, provinces should be given a bigger share of national tax revenues. This will allow them to allocate funds in accordance with their differing needs. For example, some LGUs may decide to spend for tourism, others for workers housing for manufacturing, others for education and internet infrastructure for BPOs. Under the Local Government Code, LGUs currently get 40% of the National Government’s (NG) tax collections. Skeptics will say giving more to LGUs will increase leakages but there is no evidence corruption at the local level is any worse than at the national.

Two, provinces should be allowed to develop economic zones where the constitutional limitations on land ownership and development of natural resources can be eased. For example, 50 year leases should be allowed to entice businesses to locate.

Three, provinces should be allowed some leeway in implementing CARP rules for land redistribution, resale and zoning. Agro-industrial conglomerates require large parcels of land for efficient large scale farming. The present CARP restriction to 600 s.m. plots is not viable. It has resulted in subsistence farming with inadequate road and water infrastructure. As a result only some 25% of CARP farmers pay their loan amortizations to the Land Bank. 

Four, to attract manufacturing, provinces should be allowed to establish their own rules for labor contracting and form Industrial Peace Councils with labor, employers and LGUs. For example, some designated zones could allow lower transitory minimum wages in exchange for skills training, subsequent tenure and non-wage benefits. In the late 1900s Cavite Governor Remulla “guaranteed” industrial peace which prompted many foreign investors to build plants in Cavite. Major cities must retain the national standards for wages and job protection to establish a handicap system for the provinces.

Five, develop the municipal bond market by allowing say tax free municipal bonds as in the U.S; and establish LGU credit ratings. Issuances from emerging LGUs could be partially securitized with their 40% Treasury allocations. This will allow LGUs to finance their own infra projects and lower the NG’s BBB financing needs. It will motivate governors and mayors to be fiscally prudent to qualify for the program. They will be under credit watch. It is a win-win model for all, the National Government, the LGUs, the politicians  and voters.

Six, LGUs should be encouraged to set their own education standards beyond the minimums required by the DepEd. This will improve the quality of their state universities like in English proficiency; to promote the human capital needed by businesses like BPOs.

Seven, the LGUs should develop seamless supply chains but much of this will happen naturally once the anchor locators are in place.

This is the vision, to create economic zones of wannabe Singapore island states competing aggressively with each other to attract investments and employment. There will be bragging rights and peer pressure to perform. The  Philippine Statistical Office should  measure provincial economic outputs e.g. gross provincial product, inflation, employment, etc.; to allow for comparables.

Economic federalism will have the advantages of political federalism without the latter’s dysfunctional power dynamics and costs. It will require some legislation but should be easy and quick to implement.

Economic federalism will decongest cities with all the health, economic and quality of life benefits. It will spread economic wealth across the country and narrow income inequality. It will allow LGUs to set their priorities in accordance with their needs. It will accelerate development by decentralizing decision making to the provinces. Red tape can be dispensed since communities are smaller. It will mobilize resources to their most efficient use by having market forces rather than constitutional, administrative or mislaid laws; determine outcomes. It will encourage LGUs to improve the community’s educational and technical skill since these are major drivers to attract higher value businesses. It will promote jobs, education, housing and healthcare so workers will have no reasons to migrate to the big cities. Once the seed has been planted, a second wave of private investments will follow.

LGUs will compete aggressively for telco cell towers. This will enhance their communication backbone which is required to attract BPOs, technology and knowledge  enterprises. This will expedite the nation-wide roll out of internet connectivity. Currently LGU bureaucracy is a major reason for the slow build of cell sites.

Economic federalism  will finally free the provinces from the fiscal shackles of Imperial Manila. NG decision makers will likely oppose economic federalism because it will diminish their budgets and their influence; even if they retain the power of oversight. Ultimately it will boil down to the political will of the President whether or not to give provinces the right to economic self determination.

How Will This End, In Court?

The fate of 109 million Filipinos has come down to a legal argument. That is how dysfunctional we have become.

Congress just passed ARISE, a PHP 1.3 trillion stimulus package that dwarfs by ten times the PHP 130 billion lifeboat of the Treasury called Progreso. The latter has opposed the House bill because it fails a Constitutional test. Under Art.VI, Sec. 25, clause 4: “A special appropriations bill … shall be supported by ‘funds actually available’ (emphasis mine) as certified by the National Treasurer or to be raised by a corresponding revenue proposed therein.” In layman’s terms, the House cannot pass a supplemental spending bill without a clear source of revenues.

According to a leading Constitutionalist the term “revenue” would seem to exclude borrowings. However, he adds: ”The clause that ‘funds are actually available’  – which is a separate ground – can be used to borrow money under RA 4860 and the National Treasurer can certify that funds are available.”

This is the analogy: When a company acquires another company, it is often obliged to legally confirm that funds “are available” for the transaction meaning that the acquirer has the cash in the bank or the committed credit lines to do so. In our case, the Treasury could get a consortium of banks to firmly underwrite a bond issue which should be sufficient for the National Treasurer to certify the availability of funds. The money is there: We earlier secured a USD 2 billion bond issue that was four times oversubscribed. This week, the Treasury completed a 3 year PHP 30 billion Treasury issue which was also four times oversubscribed.

Bottom line: If the Treasury wanted it, it could find a way to finance the Congressional package. But our economic managers do not want it. One, the funding needed would allegedly almost double our budget deficit and jeopardize our credit rating.

Credit ratings are like golf handicaps, they are a comparative measure, not an absolute one. They do not state how credit worthy you are, they only state how credit worthy you are in relation to other countries. Acting NEDA Sec. Karl Chua : “Our current plan puts our deficit at close to 9% of GDP which is the median of our neighbors and emerging markets. If the latter should adjust theirs, we will do so accordingly.” Even if he meant it, it was a terrible thing to say. It admits we do not have an independent fiscal policy, we simply play catch up with our neighbors. It implies NEDA is more concerned with saving our credit rating than saving Filipino lives. It tells us Chua is still wearing his World Bank hat, not his NEDA hat.

Two, the House package has shown up the modesty of NEDA’s lifeboat. Our neighbors have stimulus packages of 8 -20% of GDP, ours, depending on the count, is between 0.70 – 4.1% of GDP. Having said that aggregating stimulus packages is a political exercise, not an economic one. Governments fluff their “stimulus” with everything including the kitchen sink to show their publics how much they care. 

For example, Government loans and credit guarantees to the private sector are often included in so called stimulus when they are arguably not. Although they promote liquidity today, they have to be repaid tomorrow which is a future drag on the economy. Thus Dr. Chua’s claim that a one peso capitalization of the GFIs is better than a one peso cash transfer to the private sector is smoke and mirrors. He believes the GFIs can leverage their one peso capital by a factor of 8.5 in loans without saying what happens when the loans must be repaid – or most possibly not paid: If the latter the one peso “stimulus” becomes a PHP 8.50 hit to the GFIs and eventually to the tax payer.

Three, our economic managers do not want to be charged with violating the Constitution. It might even be a non-bailable, heinous crime given the magnitudes involved.

Four, our economic managers do not know how long the lockdowns will last. They are not in charge of the IATF agenda. Their role is simply to clean up after.

Five, nobody likes to be told what to do. 

The Government is banking our economic recovery on BBB. This is the equivalent of offering a stage 4 cancer patient a 3 year subscription to Fitness First. What the dying patient needs is to get out of ICU today, not a work-out program for tomorrow. Again if BBB is the flagship, why did the Government just chop PHP 122 billion from the DPWH’s budget?

Or why is the Government offering to reduce income tax rates and tax collections by PHP 42 billion in the next six months and PHP 600 billion in the next few years when “there are no funds available” for economic recovery?

Or why is the DOF not coaxing the BSP to weaken the peso when this would boost aggregate demand, taxes, exports, FDIs and eventual tourism? Sec. Dominguez sits on the Monetary Board. 

Or why was the Bayanihan Bill, Part II, not certified as urgent? Is there relief spending in the bill the Government has no “available funds” for?

Economic managers are human, they have legacies to protect. For treasury officials, it is about being fiscally responsible, controlling budget deficits, monitoring the national debt, and guarding the one grade they follow assiduously, the country’s credit rating. The latter is a measure of their performance.

For central bank Governors it is about keeping the currency stable and inflation under control. Interestingly, BSP Gov. Ben Diokno, I am told, used to be an advocate of a weak peso before being appointed to his position. No longer, as BSP head he probably believes a depreciated currency would not look good on his CV even if it is good for the economy.

So whose is the mandate to promote full employment and save a dying economy? 

 Returning to ARISE vs Progreso, our recovery now sits on a constitutional issue that could  be resolved if the players decided to work in good faith. ARISE has its deficiencies but the two programs can be reconciled giving face to all concerned. For example:

1. ARISE could include a one time tax assessment on real property over say PHP 3 million; and idle land.
2. ARISE could include a temporary assessment on dividends and other forms of passive income. This would motivate businesses to reinvest rather than distribute profits and consumers to spend rather than save.
3. ARISE could temporarily increase taxes on motor vehicles.
4. ARISE could delete its provisions on credit lending. Leave that to the banks.
5. PROGRESO could defer the income tax cuts and save over PHP 600 billion in taxes over time.
6. PROGRESO could secure underwriting commitments for the USD 6 billion and PHP 90 billion in oversubscriptions to its recent bond and T-bill issuances.
7. PROGRESO could increase funding to quick response, bite-sized rural water, roads and classrooms to widen the economic spread and promote Balik Probinsya.
8. PROGRESO could temporarily transfer SSS. GSIS and PAGIBIG contributions to employees to increase demand.

The political optics of the merged program, ARISE PROGRESO, would be great: Soak owners of capital to support the poor. Many of the wealthy would not mind as long as they believed the plan was “unified, performance based, time bound and transparent” to use a much overworked phrasing.

The Senate has still to deliberate on ARISE. Currently they and Malacanang are said to favor the more limited Progreso which would kill the House measure. In retaliation, the House might smother the tax provisions of Progreso.

The alternative for Congress is to pass ARISE as part of the 2021 Appropriations Bill. This would not be a supplemental budget so would be subject to the normal borrowings of Government. That is only a few months away, probably quicker than fighting the legal and political hurdles and Treasury opposition to ARISE.

In the meantime the poor, the unemployed, and the small businessmen watch  as our national warriors go to battle with themselves.

Our Education Is A National Disgrace

We have a long term crisis in this country and it is not COVID.

In a 2018 OECD study of 15 year olds in 79 countries of varying economic status, the Philippines ranked last in Reading (79th of 79) and second to last (just ahead of the Dominican Republic) in Math and Science. China, Singapore and Hong Kong scored the highest in all categories.

Our crisis starts in basic education and extends to tertiary learning. Today we will look at higher education. 

In 2016/2017 we had some 3.5 million college students attending 2,000 higher education institutions (HEIs) made up of 1,710 private colleges and 233 State and Local universities. Most of the private colleges are small for-profit diploma mills with fewer than 1,000 students.

Many business groups have invested in for-profit higher education either as an altruistic or as a business proposition: Ayala and the Yuchengcos are in Mapua, Lucio Tan in UE, SM in National University, the Tangcos in STI and iAcademy, the Montinolas in FEU, the Laurels in Lyceum, Dennis Uy in Enderun, the PHINMA group in various small institutions). Education can be a lucrative enterprise. It is an expanding market, cashflows are locked in for four years, enrollment fees are essentially unregulated, the income tax rate is 10% versus 30% for regular companies, there are no property taxes.

Top tier HEIs market themselves on the basis of their brand, the number of top notchers in Government certifications and in the quality of their basketball teams, not necessarily in that order of importance.

Filipino parents will pay what it takes to educate their children. The demand is what economists call inelastic. As a result, education has one of the highest gross profit margins (up to 56% for some publicly listed schools) in an industry that has changed little over time. Other than technology, the school experience  is not significantly different today than it was many decades back. Yet enrollment fees have steadily climbed by around 5-7% compounded annually. A major expense is for teacher salaries which remain low. The starting salary for many private HEIs of around PHP 25,000/month is lower than for many state institutions. With average class sizes of 25-40 students paying anywhere between PHP 130,000-250,000 per student per annum and a teacher earning between PHP 300,000-500,000 p.a. the math tells you how lucrative higher education can be.

Private educational institutions must spend at least 50% of revenues for teaching related activities to qualify for the reduced income tax rate. Despite this limitation private HEIs are cash cows. There are four publicly listed HEIs – FEU, Mapua (through iPeople), STI and CEU. As of end of their 2019 reporting periods they held cash and equivalents of PHP 2.3 billion, 1.4 billion, 313 million and 120 million respectively.

Higher education has had financial setbacks in the last few years but has since recovered. In 2016, the K12 scheme was implemented adding two years to high school. We are on our second year of the program which ends in 2023. This resulted in colleges missing entrants for two years. Many colleges compensated by establishing two year senior courses but not at full fees.

 In 2017, RA 10931 or Universal Access To Quality Tertiary Education was passed. It provides for free tuition for state universities. This culled enrollment in private colleges as students moved to free state institutions.

 Now there is COVID. Private colleges – even the higher tiers – are predicting enrollment losses of 50-80% as many parents can no longer afford or refuse to pay hefty annual fees just for online courses. College education is not only about learning, it is also about the social experience which online learning cannot provide. The Co-ordinating Council of Private Education Association predicts  up to two million students will drop out of private schools and migrate to already over-crowded state schools.

The tier one colleges are the least affected by COVID. They will simply dip into their waiting lists to fill up enrollment with students whose parents can afford. The biggest losers will be the second and third tier institutions particularly those charging close to tier one fees. They will see enrollments culled by the migration to the better schools and to cheaper or free colleges.

How do our HEIs fare by international standards? In 2017 the World Bank reported only UP was included among 359 Times Asian University Rankings. Thailand had 10 HEIs, Malaysia 9 and Indonesia 4. In a world ranking of 1,102 HEIs again only UP made it. In another survey, the QS World University Rankings, only UP (357), Ateneo (551-600), De La Salle (701-750) and UST (801-1,000) got in. 

We have the largest number of HEIs in the region yet we produce the lowest number of researchers (81 researchers per million of population vs. 205 in Indonesia and 115 in Vietnam) and knowledge producers, the people needed in this age of technology where creativity, critical thinking, innovation and the ability to synthesize and communicate masses of information; are the imperatives.

What accounts for our poor showing? Studies show tertiary education correlates highly with level of national spending on Education, quality of basic education, the drop-out rate in middle and high school, teacher standards, the dependency ratio (number of people dependent on a working class person), and per capita income. 

Our Constitution requires that “the State assign the highest budgetary priority to education”. The 2019 Philippine Budget allocated PHP 659 billion or 3.4% of GDP to education, the lowest among our ASEAN neighbors. Vietnam spends 6.l%, Malaysia 6.1%, Thailand 4.1%. The United Nations recommends a figure of 6%.

Our basic education is in shambles. Our students rank the lowest in worldwide reading, math and science. Some of this may be ascribed to the migration of our mode of instruction to Tagalog from English.

Our teachers are poorly paid. Yet the Constitution states that “teaching shall attract and retain its right share of the best available talents through adequate remuneration and other means of job satisfaction and fulfillment”. We continue to see a brain drain in teachers as they move to the U.S. or work as OFWs or transfer to corporates. 

The Philippines’ dependency ratio has been improving (currently around 0.48%) which has helped stave the crisis in our schools.

In another positive note, the move to add two years of senior high school is good. We were only of a handful of countries in the world that only had ten grades in basic education. College entrants are now older and more mature which helps in their learning capabilities. The DepEd also reported an increase in the number of students returning for senior high school.

So where is the fix?

One, we need to solve our problems in basic education, otherwise it is garbage in, garbage out for higher education. Improving basic education starts all the way at the bottom. In 2017, the changes in kindergarten curriculum and age entry showed dramatic improvement in subsequent grade performance.

Two, we need to keep kids in school. In 2018, 8% oof Grade 6 students did not make it to Grade 7; 18% of juniors did not move to senior high schoo; mostly for financial reasons. In 2016 38% of the work force had not completed high school. In 2018 the out of school youth was estimated at 3.4 million.

Three, we need to spend more on classrooms, teacher salaries and skills, and student subsidies. In 2019, we were short 34,000 classrooms which the DepEd calls “additional requirements” not a backlog. At 6% of GDP, the UN recommended percentage of education spending to GDP, we would have to almost double our education budget by PHP 511 billion. New classrooms are arguably more critical than Build-Build-Build yet it is not a major part of the COVID stimulus package. On the contrary our economic team recently diverted PHP 22 billion from the Education budget to COVID related expenses.

Four, we need to improve the quality and capacity of state universities. We have a handful of tier one private colleges that are catering principally to the rich. This is widening the  educational divide between rich and poor making it impossible to narrow the economic divide.

COVID has exacerbated the problem as students migrate from the lower tier HEIs to overcrowded state universities. Many students are going to have to miss at least one school year before things normalize.

Five, in the absence of quantum changes, we may have to accept our limitations and focus on technical and vocational training (tech-voc). This requires fewer years of post high school (two vs four) and more immediate prospect of work albeit of a lesser kind. We would become the low-value components, the maids, in the new world of technology and advanced health care industries.

There are efforts to marry our inherent artistic and culinary skills with technology in programs like Ateneo’s SALT (Science and Art of Learning and Training) and La Salle’s Benilde curriculum.

Six, the lower tier private universities may need to change their educational models. They may have to expand their online platform to build capacity at a lower cost.

Seven, we need to return to English as our principal mode of instruction.

It is unclear whether the entry of Big Business in education is good or bad. There is an inherent conflict between profit and education. Despite their financial standing none of the business backed universities made it to international rankings. All the top HEIs in the U.S. and Europe are non-profits.

We have an existential crisis in education that has gone unnoticed for years. COVID has unmasked our failings. We are at the bottom of world rankings for a nation that has always prided itself in learning. 

How we got here is a national disgrace.

Governing As One

There is growing tension between the Legislative and Executive branches of Government over the economy.

The economic whizzes in Congress are just about to get passed a PHP 1.3 trillion supplemental budget (6.7% of GDP) to turn around the country. The bill will provide much needed relief to the poor and unemployed, infrastructure, education and strategically important but distressed companies largely in the travel and tourism industries. 

The Congressional package will dwarf the more modest stimulus of our economic team called PH Progreso. All in Progreso is said to total PHP 847 billion (4.3 % of GDP). It is the smallest package among our ASEAN neighbors. The latter are spending an average of 10% of GDP with Singapore up to twice that figure.

Acting NEDA Sec. Karl Chua, spokesperson for the Government’s economic team, has pushed back against the Congressional lifeboat because the bill is “not fundable”. Without citing the exact provision of the law, Chua claims the Government must identify “new sources of revenue” and/or “available funds” before it can trigger a supplemental budget. Such sources are currently “very limited”. Chua added that borrowing from multilateral institutions and the international bond markets do not qualify as “new sources of revenue”.

Congresswoman Stella Quimbo, one of the authors of the Congressional proposal, said the Executive’s PHP 130 billion stimulus is “a pitiful response to the biggest economic catastrophe since the World War”. 

Speaking to the NEDA head’s comments, Congressman Joey Salceda, another author of the bill, retorted: “Tell that to the 8 million families whose jobs were destroyed”. NEDA reported that 7.3 million Filipinos are now unemployed or 17.1% of the labor force. It also announced the economy lost PHP 1.1 trillion in the first 45 days of the lockdown.

Sec. Chua has said COVID19 is “a temporary setback” and will be followed by a “V-shaped recovery”. If so we will be one of a very few economies in the world expected to do so.

 The foundations for the sharp bounce will supposedly be Build-Build-Build, a comprehensive tax overhaul, the strengthening of our Government financial institutions and a cash spend of PHP 130 billion.

BBB will be the rocket that will propel us into the stratosphere. Yet in the last four years I can only think of two infra projects that have actually taken off and that was when the economy was in full flight, there was money, and labor was fully mobile. Again the Government just recently reduced the DPWH’s budget for infra by PHP 122 billion and diverted it to COVID related expenses. In today’s conditions, BBB looks like a leap of faith or an exercise in salesmanship.

The tax measures will reduce the corporate income tax rate from 30% to 25%, giggle the tax incentives in the Special Economic zones and extend Net Tax Loss Carryover (NOLCOS). NEDA confirms the reduction in the income tax rate will deplete the Treasury’s coffers by PHP 42 billion this year and several hundred billion in the next few years. Consciously cutting tax collections when there are “very limited” sources of new revenue for stimulus is a contradiction in terms. Is the man arguing against himself? 

Very few companies are expected to be profitable this year so the drop in income tax rates is not meaningful. The only significant businesses that will arguably make a profit this year are in food production, utilities and banking, none of which have expressed plans to expand. As for the PEZA tax reform, even the PEZA companies and the PEZA Administrator are against the new “incentives”. 

Progreso will strengthen the Philippine Guarantee Corp., the Land Bank and DBP. NEDA believes this program can be leveraged 8.5 times as opposed to a cash transfer which is a single event. Has Dr. Chua forgotten the Economics 101 concept of economic multiplier where an injection of one peso produces a multiple of that in outcome? Again, COVID has pushed companies from a liquidity problem to a solvency one. Extending loans and guarantees to companies going over the cliff is not only fruitless, it is arguably reckless.

The meat in the Progreso sandwich is the PHP130 billion cash spend but at less than 1% of GDP it is unlikely to go very far. It is a couple of months of social relief.

The Government’s annual budget is initiated by the Executive and presented to Congress for approval. This time the House has decided to present its own appropriation bill under its “power of the purse”. The President can veto it or sign it in which case the Treasury will have to fund it. Can Team Sonny refuse to do so since it is by NEDA’s thinking “illegal”? In fact Progreso and the House bill can cohabitate. They are not binary.

Meantime the peso strength is crushing our OFW remittances, foreign direct investments, and any potential rebound in exports and international tourism. Various reports confirm the Philippines is not in the destination of companies relocating out of China.

Multi-store retailers and distributors are going crazy with the varying local Government health protocols.

So how exactly is our V-shaped recovery supposed to happen?

The stand-off between Congress’ and the Executive’s stimulus is symptomatic of what is happening in this country. We see the same divide between the national government and the LGUs  over the return of our OFWs and domestic travelers, between the Treasury and DTI on one side and the BSP on the other over foreign exchange policy, between the health experts in the IATF and our economic team over the restart of the economy, between the imperative of getting people to work and the DoTr’s “gradual, partial, calculated and limited” transport scheme, between one municipality and the next over travel restrictions and health protocols. Agencies and departments of Government have become little fiefdoms with little compunction to act together. In the meantime the economy grinds to a halt and millions of Filipinos are literally and economically stranded. There is no co-ordinated response to COVID.

President’s Duterte has a decentralized style of management. He favored Federalism only to walk it back when told it would be too expensive. His favorite marching order is “I don’t care how you do it, just do it”. Outside of law and order (read terrorism) and corruption, President Duterte has little interest in the minutiae of governance. We have become a de facto federalist state with no common purpose nor accountability. The anti-terror bill was certified as urgent even when there is no terror to be found yet the Bayanihan Bill, Part II,  has not, even as millions are starving in the streets. Where have our priorities gone?

COVID has unmasked our failings. We have an opportunity to recognize these weaknesses, to use this pandemic to correct our  mistakes whether it be in building a proper management information system, realigning our priorities like Bong Go’s welcome Balik Probinsya program, fixing our crumbling education and health care systems; or focusing on finally narrowing the widening socio-economic gap in this country; but it all starts with a unified vision, a common purpose and a single Government.

 Bayanihan as one, healing as one, these are the marketing sound bites of this Administration. What about Government as one?

COVID, Here We Come, Ready Or Not

It was not quite the 1945 Liberation or the Berlin Wall or the second coming of the Messiah but June 1, 2020 is one we will remember, the day we went from MECQ to GCQ, from maximum security to minimum security prison.

The easing of the quarantine comes against news the DOH’s COVID numbers are rising. The DOH has said the new data is an accumulation of old data but nobody is listening. The public has stopped trusting their numbers because so much of them have proven to be outdated, scrubbed or otherwise unreliable. We are better off, it appears, flying blind.

It is too early to tell how life will unfold under the marginally eased protocols but already we have glimpses. Traffic is up in EDSA but light most everywhere. People are stranded as the new DoTr and MMDA transportation measures go into effect. Newly re-opened businesses are frustrated by the varying health measures in different jurisdictions. Regulators are learning  – or not – as they go along dragging the private sector in their coat tails.

In the meantime the Treasury is still looking for money. The House is considering a bill that on paper could require another PHP 1.4 trillion in stimulus. The President wants it so Sec. Dominguez is looking for new funding that ideally would be deficit and money supply neutral, would not require borrowing and could be quickly triggered with a minimum of leakages. 

Sonny has scraped the 2020 Budget for monies that can be diverted to social relief. This includes PHP 122 billion from the DPWH budget (good-bye Builld-Build-Build? ) and PHP 22 billion from Education. BBB, you will recall, is the rocket that was supposed to propel us into a V-shaped recovery so what happens now?

Here is a suggestion that Team Sonny may consider. It does not give money directly to the poor but transfers cash to working people who can use it for relatives in need. It will not add to the country’s deficit nor increase our national debt. Its distribution is immediate and efficient. It will boost consumer demand and tax collections.

We have a workforce of about 72 million (defined as people between 15-65 years of age) of which, pre-COVID, 37 million were fully employed and 6 million under-employed. About 17 million or 40% of the employed are registered with the SSS; and 14 million with PAGIBIG. Most of these are good jobs with good pay with responsible employers.

Employees contribute monthly 7.5% of their wages to SSS and employers a counterpart of 3.63% or a total of around 11%. PAGIBIG contributions are 2% each from the employer and employee or total of 4% of wages. Assuming an average monthly salary of PHP 12,000, the monthly SSS and PAGIBIG contributions are PHP 22.7 billion and PHP 6.7 billion respectively or a total of PHP 29.4 billion a month. 

The Government could require that rather than pay the SSS and PAGIBIG, the contributions go directly to the employees, net of monthly loan obligations. This money will be treated as an advance on future pensions so the impact on the SSS and PAGIBIG actuarial numbers should not over time be significant. The program could be mandated or be voluntary i.e. workers could choose to retain their current arrangements rather than receive their contributions today. If the actuarial impact should jeopardize the financial standing of SSS and PAGIBIG, workers opting for the program could be charged a minimal interest on the “advance”, deductible from future pensions. The idea is to provide workers with cash to day when it is needed against future savings.

The program could have a limit of say 4 months. This will immediately add some PHP 117.6 billion to consumer demand and social amelioration with no bureaucratic drag. This figure might be lower than estimated since ECQ has culled the workforce.

Employers and employees also pay a premium to Philhealth but this cannot be touched since Philhealth needs the money especially after paying for over-priced test kits.

The other source of funds could be PAGCOR which last year made a profit of PHP 70 billion but will make less this year.

Motor vehicle taxes should be increased and scaled to penalize multiple car owners.

Property taxes should be raised as the rich should shoulder a bigger part of the COVID burden. It could be a one time special assessment to fund a one time exogenous shock.

A depreciation in the peso would boost aggregate demand and the accompanying tax take.

The move to the “new normal” has outcomes which we will only discover as we move forward. The one area which has received insufficient attention is education. COVID is expected to impact some 2 million students who will drop out of higher education from a combination of financial distress and fear of contamination. It will affect 27 million in basic education as schools deal with new social protocols in already over-crowded class rooms and economic inequalities in distance learning; but these are the subject of another conversation altogether.

Our country has been released into a COVID world of which we do not know the outcome. We could return to another lockdown if the second wave of COVID was to return. The last three  months has forced us to reflect on our way of life and of thinking. It has traumatized many, some permanently, but it has also been good. We now realize we need less than we think. We know death is at our doorstep we just don’t know when it will knock. We  have had conversations with friends and family about intimate subjects previously untouched, laughed a lot often in despair or in irony, renewed acquaintances, learnt new skills, become healthier, smiled and introduced ourselves to strangers albeit at a distance, and discovered the meaning of humanity. We have become kinder and gentler, I think.

Nobody knows the answers to our future. All we know is that COVID whether in its present form or another is here to stay. We have not banned smoking or cars just because they produce cancer and road fatalities. Like COVID they are risks to be managed. The quicker we normalize our dread of the virus the easier it will be to adjust to the new paradigm. 

What we cannot do is to continue to live in fear.