The myth of power and competitiveness

Is the high cost of power holding the Philippines back from stronger industrialization? Almost no economic forum I’ve attended goes by without someone complaining that our high power costs—often described to be among the highest, if not the highest, in Asia—keeps us from attracting more manufacturing investments. The claim has been repeated so many times that it has come to be accepted seemingly unquestioningly by most.

But let’s look at the facts. For the last six years, our manufacturing sector has actually grown faster than the overall economy. Since 2010, manufacturing has grown at an average annual rate of nearly 8 percent, while the overall economy has grown by a yearly average of 6-7 percent. In the six years prior (2004-2009), the sector grew annually at an average of only 3 percent. The dramatic speed-up since 2010 happened even as we remained second only to Japan in average power cost in the region. Clearly, there must have been something else drawing new manufacturing investments in the country, and even relatively higher power costs did not get in the way.

There’s more basis to question this seeming conventional wisdom that high-cost power undermines our attractiveness for investments. While we have been complaining of more costly power in past years, we have actually become the fourth largest shipbuilding country in the world in terms of tonnage produced, next to China, South Korea and Japan. Shipbuilding, with all the welding that it requires, should be among the more power-intensive manufacturing activities around. And yet, this has not stopped big companies like Hanjin, Tsuneishi and Keppel from investing in even more shipbuilding capacity in the Philippines, to produce large ships like bulk carriers, container ships and passenger ferries. Power cost is obviously not a vital consideration in their decision to locate here. I surmise it must have been the availability of the right skilled manpower (especially welders) and favorable locations (wide and deep coves) that mattered more.

Are we putting undue emphasis on power cost as a constraint to more manufacturing investment in the country? There is yet another important but perhaps little-known set of data that suggests we are: the Input-Output Table of the Philippine economy. Based on careful industry-by-industry analysis, the Philippine Statistics Authority regularly releases input-output tables showing how much of the outputs of any industry are used as inputs in the others. An important data set known to all serious economic researchers, the table makes it possible to determine the share of electric power (and other inputs) in the total cost of production in a given industry. Our input-output table is fairly detailed, breaking the economy down into 240 industries, 129 of them in manufacturing. The latest one shows that electric power makes up only 2.7 percent of total manufacturing costs on average, ranging from a low of 0.01 percent to a high of 29.5 percent, with batteries, wires, electrical equipment, and metal fabrication topping the list. The bulk (77 out of 129) of our manufacturing industries actually have power accounting for less than 2 percent of total cost. This implies that for most of manufacturing, even doubling of power costs would raise total costs by less than 2 percent. Asian Development Bank economist Norio Usui had called attention to the same in a 2012 paper, “Taking the Right Road to Inclusive Growth: Industrial Upgrading and Diversification in the Philippines.”

Meanwhile, we are using the seemingly misplaced power-cost argument to turn against the worldwide trend in favor of cleaner and more renewable energy, and embracing coal-fired power as if it were the key to our future prosperity. The cited observations suggest that we ought to be more circumspect than that. Don’t get me wrong; I don’t mean to argue that we shouldn’t be doing what’s needed to reduce power costs down the line. Of course we should. But to dismiss our prospects for greater industrialization due to higher power costs now is to neglect the fact that other key factors—like heavy taxation, policy reversals, cumbersome processes, and bad governance—may be our real problem.

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