Cut bureaucracy fat before taxing more

There will be zero credibility and support for President Arroyo’s call for sacrifices and higher taxes unless it becomes obvious there is a sincere and effective effort to cut fat in the bureaucracy. Previous efforts to streamline the bureaucracy have been failures because politicians lacked the sincerity and determination to see the effort through. People refuse to abandon the mistaken notion that government is the employer of last resort.

We end up spending a bundle on termination benefits only to have the vacated positions filled up again with political protégés. The other problem, as one Cabinet member once told me, is that the good employees are the ones who leave to take advantage of the benefits and the non-performing ones stay.

It became clear to me that we were in trouble when the National Treasury had to borrow money to meet payroll. In private business, a going concern funds basic operating expenses like payroll through normal internal cash generation and borrow to finance capital outlays. Government should be able to meet payroll from revenue generation and borrow only to finance infrastructure outlays.

According to Sen. Ralph Recto who heads the Senates Ways and Means committee, payroll expense of the National Government has tripled in 10 years, shooting up from P92.5 billion in 1994 to P286.5 billion this year. Recto said payroll expense – called "personal services" in official budget-speak – now accounts for almost one-third of the national budget, equal the share of debt service.

The P286.5 billion "personal services" allocation represents 33. 1 percent of this year’s national budget, Recto explained. "This was 28 percent in 1994," Recto pointed out, "an increase that is also reflected in the government payroll-to-GDP ratio, which was 5.5 percent in 1994 but is now 6.1 percent."

In contrast to the hefty one-third share of "personal services" in the national budget, capital outlay, or funds for roads, classrooms, and the like has to make do with a measly 6.1 percent share of the national budget this year. "In fact, in 2002, while the budget for salaries grew by 3.5 percent, funds for infrastructure plummeted by 24 percent," Recto said.

Surprisingly, the increase in the payroll budget was largely on the adjustment of salaries and not due to new hires. The irony of it all is that the growth in the payroll budget hasn’t plugged manpower shortages in frontline agencies like schools and police stations.

Worse...the count 1.1 million public workforce includes those in the National Government only and does not include employees of local governments and government corporations. "Clearly, if the bureaucracy were a human body, the muscle has not been well distributed," the senator from Batangas observed.

I suppose the increased population requires an increase in the government workforce to service more citizens. But as Sen. Recto observed, the distribution of government workers is not good. We should have more front line personnel like doctors, nurses, teachers, beat policemen and some others who do real work. We should have less paper shufflers and no more 15/30 types.

Then again, Sen. Recto can be more credible as the Senate’s taxman if he can explain why his P200 million in pork barrel funds are spent almost exclusively for his district in Batangas. He was elected nationally and no longer a congressman. Better yet, he should follow the example of Sen. Ping Lacson and renounce his pork barrel, if only to set the example that he is serious about making sure the government’s scarce resources benefit the greatest number of people.

Malampaya

Energy Secretary Vince Perez gave me a quick and lengthy reply to our column expressing fears about the lack of transparency in the "privatization" of PNOC-EC’s 4.9 percent interest in the Malampaya service contract. Much of the background in the letter had been given here previously, so I will go directly to the more important points Vince raised.

First of all, Secretary Perez is insisting "this proposed transaction is currently being handled in the most transparent manner." Secretary Perez said they are tasked by the National Government to privatize that interest "via public offering or strategic stake sale." They selected ING Barings as PNOC’s financial adviser, but PNOC was unable to launch a public offer because of poor equity markets.

ING Barings then recommended in February 2003 "that the PNOC approach strategic investors comprised primarily of industry players whose investment decision was not influenced by the state of the Philippine equities markets." According to Vince, the "added advantage raised for approaching strategic investors was the view that this investor class would be willing to pay the highest price for the SC38 interest as they were long-term players who understood the business best and who may have a strategic interest in acquiring the asset."

So they "marketed to more than 50 such investors from March to September of 2003." They conducted an international investor roadshow, visiting more than 10 investor groups in different countries. Vince also claimed they published the proposed privatization transaction in international and local papers on Dec. 19-22, 2003.

They also promulgated and issued bidding rules and guidelines that were noted by the Privatization Council (an inter-agency body tasked to oversee privatization transactions) to be consistent with privatization laws and relevant regulations. These same guidelines allowed for a negotiated process with a single group in the event that there was only one single proponent that responded to the invitation.

But they only received one bid after all that effort, according to Vince. This came from a group of Korean companies. Vince said they obtained approvals from the PNOC board to start negotiations with the Korean group. "We proceeded on this basis and in fact published a second set of invitations on March 9 to 11, 2004, again in both local and international publications."

Unfortunately, they "did not get any additional bids from other investors notwithstanding the second round of invitations." That was why they were "limited to ongoing negotiations with the Korean group, this has not arisen out of any preferential or favored arrangements." Secretary Perez also said he has left Lazard 7 years ago and the fact that the Koreans engaged Lazard as their financial advisor, "bears absolutely no relevance on our evaluation or process of shortlisting."

The points of Secretary Perez are well taken. But still, despite his assurance that he will not conduct a fire sale, a fire sale is what will happen. Even now, I understand that PNOC-EC management is under pressure to sell even below the floor price given the PNOC board. Most important, how do we know the real value of the asset if there is only one bidder? I wouldn‚t mind a negotiated process for privatizing assets that are dogs. But this asset is earning and more than paying for itself.

Maybe government should heed the sentiment of the market and wait for better times before unloading...that is of course, unless Vince has little confidence in President Arroyo’s ability to turn the economy around and improve the business climate in the short term. If the President accomplishes what she says she would, the price of that Malampaya asset would be a lot more specially in this era of rising petroleum prices.

Hopefully, Vince is optimistic about President Arroyo’s second term. Selling a valuable asset means you are bailing out and willing to sell at any price just to get out.

Defective Glasses

Here’s Dr. Ernie E.

A woman walks in a store to return a pair of eyeglasses that she had purchased for her husband a week before.

"What seems to be the problem, madam?"

"I’m returning these glasses I bought for my husband. He is still not seeing things MY way."

Boo Chanco’s e-mail address is [email protected]