Some of our legislators seem to imagine we have a centrally planned economy. Because of that, they legislate stuff that undermine the efficient operation of our market – undermining stability and closing opportunities for progress.
Years ago, the Agri-Agra Law was passed commanding the country’s banks to lend 25 percent of their portfolios to the agricultural sector. The law bypasses credit quality standards maintained by our banks. Rather than lend to doubtful borrowers, many banks decided it was cheaper to pay the penalties of non-compliance.
The penalties were not small. The millions paid out in fines translated into added costs for financial services that were ultimately passed on to clients. All Filipinos who use our banking system were penalized.
But compliance with the legislated mandate will have incurred higher costs in the form of intolerable non-performing loan rations. That would have weakened the capital adequacy ratios of the banks and rendered our banking system unstable.
Our banking regulators tolerated banks paying fines rather than lend out to unworthy borrowers. In the end, with superior regulation in the face of inferior laws, our banking system subsisted.
But the legislators who imagine we have a command economy rather than a market-driven one would not stop. Not learning from the utter failure of the Agri-Agra Law, they mandated our banks to set aside an additional four percent of their lending portfolio to “innovation-related” investments – however that might be defined. Again the banks were forced to do their own work-around.
Now some legislators are proposing legislation that commands the banks to set aside 10 percent more of their lending for MSMEs. This will bring up the mandated share of lending to 39 percent of loanable funds. This will penalize more credit-worthy enterprises in the end.
Banks maintain an 80-90 percent loan-to-deposit ratio, which is prudent. If mandated lending eats up half of what is available, productive borrowers will be crowded out and the credit market will be completely distorted. There is no worse way to warp our economy.
The core economic function of the banking system is to mobilize savings and efficiently allocate capital towards productive economic activity. Credit allocation ought to be based on economic viability and market discipline. Forced allocation through legislated mandates wrongly prices risk, distorts capital flows and produces inefficient deployment of scarce financial resources.
The Philippines is the only country heavily reliant on mandated credit quotas – even if we do not have the database for proper underwriting and risk validation. This is a measure of poor legislative quality.
Banks bear fiduciary responsibilities. They are accountable, above all, to their depositors whose money they hold in trust. If that money is irresponsibly invested and banks fail, savers bear the pain.
Government and industry should collaborate on structural reforms that improve bankability rather than rely on compulsory mandates that are ultimately destructive.
Poison pills
Reconciliation between the warring Lopez cousins seems possible. This will happen when the majority realizes that what it called “poison pills” embedded in the deals concluded between First Gen and Razon-controlled Prime Infrastructure Capital are not insidious after all. They are normal agreements to ensure management continuity.
Energy investments are naturally of long-gestation. Those entering into long horizon partnerships would reasonably want assurance the management acumen of their partners remains.
The deal between First Gen and Prime Infra involves some of the most astute and hard-nosed players in Philippine business. They put in real capital, not just press releases. The volume of the capital they put in will take many years to recover. It is natural they want to be certain about the reliability of their counterparties.
Now we know that tycoon Enrique Razon Jr. insisted on clauses in the deal with First Gen that the other Lopez cousins initially considered a “poison pill.” The tycoon trusted Piki Lopez’s leadership over the Lopez energy investments. He wanted assurance that the team that guided First Gen through difficult times will remain as his partner in a complex, long-gestating undertaking.
BDO Unibank extended financing to the deal on the basis of the leadership continuity covenants. The Social Security System, also a funder, affirmed continued confidence in First Gen’s current management. International heavyweights such as KKR, Macquarie and Tokyo Gas continue to maintain their substantial stakes partly on the basis of their confidence in the quality of management and the assurance of leadership continuity.
In a word, there is nothing underhanded in the clauses that guarantee leadership continuity at First Gen. It is entirely normal in business agreements.
Piki Lopez has performed well at the helm of First Gen. Under his leadership, First Gen successfully pivoted to renewables. For this he rightfully earned the respect of other business leaders. The powerhouse partnership with Prime Infra is anchored on the fundamental respect and familiarity that characterizes the relationship between Piki and Ricky Razon. Without that, this deal falls apart. Funders will be hesitant.
The Lopez Group has had its share of business failures that resulted in capital hemorrhage. This includes failed ventures in Bayantel, Extelcom, ABS-CBN Mobile and legacy cable operations. Let us not forget the Maynilad episode.
Independent auditor SGV flagged the fact that ABS-CBN’s current liabilities exceeded its current assets by P12.4 billion, concluding that “a material uncertainty exists that may cast significant doubt on (ABS-CBN’s) ability to continue as a going concern.” This matters.