Merger

Competition is usually a good thing. It curbs profiteering, encourages innovation and, as a general rule, protects consumers.

That should not be dogma, however. There are business conditions where bigness or market dominance serves the community better.

First, there are natural monopolies. These are industries where the barriers to entry are so high that consumers are better served by a single provider. An example of this is electricity distribution. It is uneconomical for rival firms to compete in the same market.

Then there are natural oligopolies. Our telecoms industry, for example, cannot take more than the three major players already in the game. A new entrant will need to invest in redundant infrastructure that may not be supportable by the market.

There are instances where merging the major players works better for consumers. Such mergers may create economies of scale and encourage investment in new technologies.

An example here is the impending merger between the Philippine Clearing House Corporation (PCHC) and Bancnet. The two companies are clearing switch operators for PESONet and InstaPay, respectively. The two use new digital technologies to hasten payments and settlement.

Although they may look alike at first glance, the two companies are distinct from each other. PESONet is a batch electronic fund transfer (ETF) credit payment scheme. It is the electronic alternative to the traditional paper-based check system.

On the other hand, Instapay is a real-time low-value ETF credit push scheme for transactions amounting to P50,000 or less. This the scheme that makes possible the extensive ATM banking system we now have in place. The ATM system benefits the consumers because the service is available all hours. It benefits the banks because of its labor-saving features.

Therefore, the two entities are not really competitors.

Combining the two entities will make transferring funds more efficient for everybody. The merger of the two will allow a company with more financial resources to invest in further innovation.

Some might fear that the merger might result in higher transfer fees and lower quality of service for end users. This is unlikely. The shareholders of these two entities are also direct customers. They are interested in achieving greater efficiency in fund transfers. They want the merger to happen precisely to achieve the corporate size capable of investing in new technologies.

Fund transfers are the most common services used by Filipinos. It is unlikely that the banks will want higher rather than lower transaction costs for these services.

Furthermore, the merger will open the door for other non-bank financial institutions to become shareholders. The resulting broader ownership base will foster a wider array of services offered.

This merger is a classic case where the pooling of resources will produce better synergy beneficial to all consumers.

Out-of-the-box

A legislator has offered a plan to bring down rice prices to P20 per kilo for the poor and P30 for all consumers. It is a plan that involves some out-of-the-box calculations.

In place of the scattershot distribution of P40 billion in subsidies to the rice industry, Rep. L-Ray Villafuerte proposes a scheme where one million hectares of riceland will be engaged in a contract-growing arrangement. This scheme will concentrate on the top ten rice producing provinces.

Under the Villafuerte plan, government hands out P40,000 per hectare to rice farmers before the planting season begins. The amount may be in cash or in fertilizers and seeds for high-yield varieties. In exchange, the farmers agree to sell the palay harvested to government at only P9 per kilo. The higher the yield per hectare, the more the farmers will earn.

This scheme, says Villafuerte, will bring down retail prices for rice to close to P20 per kilo. He estimates that, based on an average output of five metric tons of palay per hectare, on a post-milling conversion rate of 60 percent, it will yield three billion kilos of rice. Government can then sell half of that output through the Kadiwa network at P20 per kilo. The balance can be sold through regular retail outlets for P30 per kilo.

Villafuerte speaks from his experience as three-term governor of Camarines Sur. During that time, the province rose from being the 12th biggest rice producer in 2008 to 8th place by 2011. By 2016, Camarines Sur had become the 4th biggest producer of rice.

In addition to the P40 billion for pre-harvest rice contracting, the Villafuerte plan requires government to set aside another P45 billion for palay procurement. The amount will be recovered after retail sales. By his computation, rice prices could be dramatically brought down by next year.

To further sweeten the pie, Villafuerte also proposes that cash prizes or other rewards be given to local governments where rice production achieves the highest yields per hectare. The additional incentives should get local governments directly involved in raising domestic rice production.

Villafuerte estimates that government will earn P30 billion from selling 1.5 billion kilos of rice at P20 per and P45 billion more from selling the other 1.5 billion kilos at P30 per. That makes for a total of P75 billion in government earnings. At the end of the cycle, government outlay will amount to only P10 billion – about the equivalent of what government collects from rice tariffs.

In exchange, the legislator argues, the scheme should boost local rice production and lessen our dependence on imports. We still await the reaction of farmers to this proposal.

This is an audacious plan to be sure.