Price control turns off investors – Merrill Lynch

The government’s insistence on placing "controls" on domestic fuel and electricity prices is sending negative signals to investors, according to a leading economic and market analysis firm.

In a study released in early October, Merrill Lynch said that the Philippine government’s limiting the increase of domestic fuel and electricity prices "is not a positive signal for investors."

"The profitability of refiners and power distributors has been undermined," it added.

World crude oil prices increased by over 200 percent since March 1999 while domestic pump prices of petroleum products grew by a little over 60 percent in the same period. Adding insult to injury, is the continued deterioration of the Philippine peso against the US dollar, which is the trading currency for petroleum products in the world market.

One of the key reasons for keeping domestic prices of fuel and electricity down, is the government’s effort to tame inflation. And to a certain extent, government has achieved this objective as inflation has been kept at a conservative 3.5 percent as of end September this year.

The low fuel price policy has contributed to at least half the success, the report said. It further stated that the other half of the story is that domestic refiners have lost money in the first half of 2000 and continue to incur losses as the retail price of fuel has not risen in step with import prices of crude.

"We fear that if fuel prices remain politicized, it will discourage investment in the oil industry in particular if not the Philippines in general," it added.

Existing players in the oil industry added that aside from having the prices of petroleum products in a highly politicized state, other forms of government intervention have forced refiners and the rest of the industry to take a second look at making more investments.

One such "government intervention" is the proposed National Oil Exchange (OilEx) which the players have said gives them more concern than the continued decline in the value of the peso.

In a recent interview the leading new player in the downstream oil industry Total Petroleum Philippines Corp. said that they are more concerned with the OilEx rather than the peso’s decline.

The currency decline places everyone in roughly the same footing while the OilEx gives one government entity all the control for acquisition, distribution and storage of petroleum products.

Meanwhile, the same highly politicized problem is true on the case of electricity rates which have remained the same in the past three years. What is hurting Meralco according to the study is that its creditors require an eight-percent return-on-rate-base (RORB).

Meralco officials have made it clear that it needs a rate increase of P0.30 per kilowatthour (kWh) to reach the required RORB. "Investors who have anticipated a rate hike for power distributors since the first quarter of the year have been terribly disappointed."

Meanwhile, Merrill Lynch stated that fuel efficiency has deteriorated since the early ’90s following the entry of fossil-fired power plants to cope with the fuel shortage. "For example, we estimate that it took 25 percent more fuel to produce every P1 million of the gross domestic product (GDP) in 1999 compared with 1990," the report explained.

Fuel efficiency is measured according to the study as the number of barrels consumed for every P1 million of real GDP.