Rent seeking

21 June 2011

By Calixto V. Chikiamco

What’s wrong with Philippine society is that its economic system is primarily characterized by rent seeking. So, what’s rent seeking? It’s the non-market extraction of surplus or profit. It means the profit is generated from licenses, quotas, monopolies, protection, and other government granted privileges.

It differs from true capitalism where the profit or surplus is extracted from the market, usually through innovations in product or marketing and distribution. True capitalism is dynamic because it results in innovations and increases in consumer welfare. Society benefits as a result. In rent seeking, there’s no innovation, nor additional value to the consumer. Instead, there’s unearned extraction from the consumer. Welfare is diminished.

Rent seeking in the Philippines hasn’t stopped. It just takes new forms.

A vivid example of this is the Feed-in-Tariff (FIT) rate to be given to Renewable Energy Developers under the Renewable Energy Act. Under the proposal of the National Renewable Energy Board, all electricity consumers must pay an additional 12 centavos per kilowatt hour, amounting to 8 billion pesos per year, to subsidize Renewable Energy developers.

Why the need for a subsidy? Because the cost to produce energy by RE developers is much higher than conventional sources. The price for conventional sources (coal, natural gas, geothermal, big hydro) averages about P5 per kilowatt hour while the price to be paid for run of the river hydro is P6.15, biomass at P7.0, wind at P10.37 and solar at P17.95.

The difference between the price of conventional sources and the price to be paid for Renewable Energy must be made up by the FIT Rate, which is really a surcharge on consumers.

Some may ask: shouldn’t the Philippines do its share to halt carbon-induced global warming?

No, because the country’s contribution to carbon emissions is only less than 1% (.48%s). Hence, unlike the rich, developed countries, it has no moral or legal obligation to slow down global warming. Furthermore, the share of renewables in its energy mix is already 32%, much more than the 10% in the US and other countries.

But here’s the cake: Not only are we poor consumers being coerced to pay three times as much for solar energy and two times as much for wind, but in addition the developers are guaranteed a generous rate of return for the next 20 years! No risk on their part, even of technological obsolescence, because that risk has been passed on to us poor consumers who must pay the same FIT Rate for the next 20 years even if the cost to produce solar energy drops by 50%.

The guaranteed rate of return is not the only form of rent seeking. Under the proposal of the NREB, there will be no auction, whether among the different technologies (run-of-the-river hydro, biomass, wind, and solar) or among suppliers within a specific technology. Everything will be negotiated (wink, wink). No competition either on price or on time period (i.e., for a time frame less than 20 years) will be allowed.

Aside from that guaranteed rate of return and the no-sweat, no-competition policy, the developers will be enjoying a seven-year income tax holiday, duty-free importation, special realty tax rate, zero VAT on sales and purchases, cash incentives, 10% tax rate after income tax holiday, and so on.

The high-costing wind and solar energy producers are resisting a dispatch policy of cheapest first because they say that the country must have a “portfolio strategy.” It’s a conceit to think that the government can ever place bets on a particular technology. Should the government have subsidized the pager industry? Or the typewriter industry? The only valid criterion is value for money or efficiency. The market, not NREB, must determine the winners.

Besides, solar and wind are unstable and unreliable sources of energy, dependent as they are on weather and other climatic conditions. They would be poor choices for a diversification strategy. They can never be energy sources for industrialization.

Also, why the rush? A policy of waiting when solar prices are expected to come down to grid parity in five years would better serve the power consumers, but the NERB wants to hand out contracts and lock in the profits of developers for the next 20 years now. We can only speculate why.

Rent seekers usually cloak themselves with noble aspirations to mask their predation. Since the 1950s, rent seekers have raised the lofty banner of nationalism in order to keep out competition and to mask their government granted monopolistic privileges.

Today, the new cloak is not nationalism but “environmentalism.” But it’s the same old predation. Different color perhaps (green), but the same old predation.

What’s disturbing is that the manufacturing sector, already suffering from the highest power cost in Asia, will have to bear this burden in addition to the lifeline rate and other impositions. This is the road to perdition because societies collapse when the productive sectors of society are “taxed” to subsidize the inefficient, non-productive sectors.

The scourge of Philippine society is not corruption per se, but rent seeking. What the NREB proposal shows is that the scourge has not been eliminated. It’s just taking new forms. Pity us poor consumers. We can only say, “Please, moderate the greed.”

5 Responses to Rent seeking

  1. June 21, 2011 at 10:46 pm
    manuelbuencamino

    There is a fine line between rent-seeking and incentives for investment. It is vital to know where that line is.

    A friend of mine put up a factory in China. The government there gave him incentives to use solar power instead of the traditional sources.

    The solar panels were expensive so the government offered very low financing and a very low down payment plus his amortization will come out of the earnings that will be derived from selling his excess power to the local grid. Is this rent seeking?

    Another thing: the local government gave him 20 hectares for his factory because it will be located in an area with high unemployment. Is this rent seeking?

    Finally, because his product is for export he is allowed to exchange his export earnings at a higher rate than the official exchange rate. He says that because of this incentive he can either sell his exports at a substantial discount or pocket the money as earnings. Is this rent seeking?

    “It’s a conceit to think that the government can ever place bets on a particular technology. Should the government have subsidized the pager industry? Or the typewriter industry? The only valid criterion is value for money or efficiency. The market, not NREB, must determine the winners.”

    Don’t industrialized countries place bets on particular technologies? Is the space industry not subsidized? What do you think Obama was doing when he prioritized the US nuclear power industry in his growth program, was he letting the market determine the winner? What is the Chinese government doing when it encourages manufacturers to avail of solar power, is this not placing a bet on the solar power industry?

  2. June 22, 2011 at 4:37 am
    GabbyD

    i dont understand this:

    ” but in addition the developers are guaranteed a generous rate of return for the next 20 years! No risk on their part, even of technological obsolescence, because that risk has been passed on to us poor consumers who must pay the same FIT Rate for the next 20 years even if the cost to produce solar energy drops by 50%.”

    true that the rate is the same, but the absolute amount shouldnt be the same. as he explained earlier:

    “The difference between the price of conventional sources and the price to be paid for Renewable Energy must be made up by the FIT Rate, which is really a surcharge on consumers.”

    so if the price of conventional sources fall( which is a cost for the firms), the price paid by consumers must fall to to keep the rate of return constant.

  3. June 23, 2011 at 9:49 pm

    Rent seeking is asking for something that you couldn’t get if there were a competitive market; hence it is played in the political-regulatory arena. It seems we like our “economic managers” to decide things for us (the wink-wink part of Chikiamco’s piece).

    But if Chikiamco is right, the FIT is just another IPP guaranteed contract. Thus, FIT is a daughter of the mother rent-seeking IPP.

    What to do? Declare the IPP contracts as unconscionable. Then, do a “sliding” FIT – the subsidy element of FIT should disappear over time as cost of solar falls. The problem: These two are easier said than done.

    Still, there is one very good reason for going solar. You as consumer cannot be coerced into paying a subsidy for electricity for anyone else. Unless of course “they” insist on taxing sunlight.

  4. June 23, 2011 at 9:57 pm

    Addendum: In mature democracies, rent seeking seems almost harmless because those who might be “coerced” to pay for the “rent” will find ways to resist. See David Henderson’s definition at http://www.econlib.org/library/Enc/RentSeeking.html.

  5. January 2, 2012 at 6:57 pm

    Buencamino,

    Ang clueless mo naman.

    Rent-seeking involves the government extracting from the private sector, or institutionalizing a practice where the government’s allies or supporters are given choice positions, franchises or privileges that allow them to extract from other members of the private sector, not the government giving incentives to the private sector.

    The 1987 Constitution institutionalizes rent-seeking because when it says sixty per centum must be owned by local investors, it forces the foreign investors to find local dummy partners who are usually oligarchs and are rent-seekers! Institutionalizing this requirement that foreign investors seek local partners or dummy partners is exactly rent-seeking. Think about it. Who will do most of the work? The foreign partner, of course. The local partner does nothing and just sits pretty and receives the “rent.”

    Buencamino naman. You are still trying to furiously defend Noynoy and his mother’s ugly constitution and the rent-seeking system they set up.

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