Wasted subsidies

Subsidies to government-owned and -controlled corporations (GOCCs) are a drain on government finances and usually a waste of taxpayers’ money. It’s good to learn that such subsidies declined 16 percent to P10 billion in the first five months of 2013 from P11.95 billion a year ago. Economic officials claimed that improvements in the financial operations of some state-owned firms made them less dependent on government support.

However, the bigger picture for the past 13 years is far from desirable. From P9.06 billion in 2000, total government subsidies to GOCCs declined to P7.58 billion in 2002. But the next year, the level almost doubled to P14.98 billion. This stayed near this figure in the following years until it surged again to P27.34 billion in 2007. The worst was in 2011 when subsidies to state firms peaked at P53.7 billion. Last year, total subsidies to GOCCs amounted to P42.64 billion.

There is more than enough literature to show that public corporations generally perform poorly compared to private corporations. A World Bank study as early as 1995 identified three reasons why this is so: No one has a clear stake in generating positive returns because there was no single identifiable owner (many departments or agencies may run a particular GOCC); many state-owned companies have multiple or conflicting objectives (a corporation may be formed to lower the price of a socially sensitive good but is expected to maximize its returns); and access to subsidies, transfers and guaranteed loans created a moral hazard such that there was no incentive to be efficient since there was no threat of bankruptcy.

The Senate’s economic planning office also did a substantive study on the government corporate sector in 2006 with help from the United Nations Development Program. The study, which covered the period 1999-2004, found that the often conflicting goals of promoting consumer welfare and financial viability were present in the charters of many GOCCs. The Light Rail Transit Authority, for example, was mandated to provide efficient mass transport system in Metro Manila. However, its fare structure was considered one of the lowest in Southeast Asia, not because it was efficiently managed, but because it was heavily subsidized. Another was the Local Water Utilities Administration, which was tasked to review the tariffs that water districts imposed on consumers. However, citing a 2005 World Bank report, it said revenues of several water districts were not enough to allow cost recovery largely because tariff increases have been hostage to political interventions.

The National Irrigation Administration was tasked with the construction, operation and maintenance of irrigation systems nationwide. It collected irrigation service fees (ISF) to cover operation and maintenance expenses as well as construction costs. But the Senate study noted that the actual ISF covered only operations and maintenance. As a result, NIA consistently registered losses during the entire period of the study.

Another major user of subsidies, the National Food Authority, was tasked to ensure adequate and continuous supply of food items at affordable prices. Its chief mandate was to procure grains at a price that would give farmers a fair return on their investment and make the price of rice affordable to low-income families. True to its mandate, the study noted that the average procurement price of NFA grain was 9 percent higher than the market price, and the average NFA rice was 18 percent cheaper than ordinary rice. As such, NFA was likewise in the red for the duration of the study period. Other similar examples were the Philippine National Railways, National Electrification Administration, and National Housing Authority.

It’s time to make a drastic move to end subsidies to GOCCs that do not deserve them. Subsidies to state-owned agencies like the NFA have also been a major source of corruption. One way is to sell or let go of those that can be run more efficiently by the private sector. The government has succeeded in this endeavor by privatizing the power-generation sector of National Power Corp. and the water supply system of the Metropolitan Waterworks and Sewerage System.

Every year, the government promises to cut the amount of subsidies extended to GOCCs as part of efforts to put the country’s fiscal house in order and to push companies to improve their operations. Subsidies extended to state-owned firms that do not deserve them mean less funds for social services like education and health care. It’s time to stop this wastage.