Q & A with Dr. Jesus P. Estanislao
Q & A with Dr. Jesus P. Estanislao, former Finance Secretary of the Aquino Administration
In this interview with the former finance chief, energy journalist Myrna Velasco unearthed the policy muddle that paved the way for the abolition of the Oil Price Stabilization Fund (OPSF) which underpinned subsidized pricing when the oil industry was still under a regulated regime.
Dr. Estanislao took account of the fiscal mess that the Philippine government had to contend with because of the depletion of the buffer fund.
The situation necessitated overhaul of tax measures, he said, and the Filipino people were made to pay big time for the financial catastrophe that the subsidy-laden regulated oil industry had caused.
Read on for Dr. Estanislao’s further view on the recurring controversy over unending calls for new round of policy shift in the downstream oil industry:
What should be the way forward for the oil industry, policy-wise?
Well, I can speak only from the experience of the past when we had oil regulation. I remember when we had the OPSF which was my nightmare as Secretary of Finance. Regulation sounds good but it is terrible in natural practice, because government is subjected to a lot of political pressures.
Under regulated OPSF, especially OPSF, I’m talking about the OPSF experience which was really regulated price and so on, like when prices would rise internationally then the Philippine government would not allow local prices to go up. So, the difference, it’s absorbed by the OPSF – that’s not so bad per se. But when oil prices go down, then everybody pressures you to bring domestic prices down. So if your are government, like if your are the Secretary of Finance, I have to get back the money that I used to subsidize when prices go up, but all the politicians will tell you, oh you cannot do that.
So you will end up subsidizing and subsidizing and subsidizing; and when you try to get back the money you used for that, you are not free to get it, so it becomes one big problem of subsidy which puts risk on our consolidated public sector deficit – the infamous CPSF.
So for a government that is already suffering from a huge deficit and you add on an oil subsidy scheme, then you will really be in trouble.
At least now, everybody focuses on the deficit and knows what the deficit is – that time everybody hides the deficit under subsidy, so it becomes a real big problem for the country.
What happened to the State coffers then with deficit resulting from the subsidies due to the OPSF?
One of my greatest challenges at that time was to bring down the deficit – in the process that it became too unpopular, it’s something that you would have to do.
Was there any pressure exerted by the International Monetary Fund (IMF) on the removal of the OPSF?
OPSF was just one of the items, but the real problem then was the public sector deficit of the Philippine government. Although the biggest contributor to that deficit was the OPSF, therefore they (IMF) focused on it.
What are the implications of pushing Filipino consumers into having addiction to subsidies; and with the corresponding burden being passed on eventually to the taxpayers?
I like your word addiction. Exactly, what happened that time was every Filipino was made to pay for it through taxes. I had to impose various taxes – like oil tariff, so every time, there’s an importation of oil, I imposed additional Customs tariff. And then I had to impose Estanislao tax on oil, which lapsed in 1995. But that’s how I tried to solve the deficit.
But anyway, every Filipino paid mainly for oil consumption of Metro Manila gas guzzlers – that’s really what happened, it’s unfair to everybody, to every Filipino.
Because who drives big cars? – the rich. Yet who pays for the taxes, all taxpayers; all of us.
Realistically speaking, OPSF is not there anymore, but why do people still want to go back to regulation?
Why bring back a nightmare? Because people have very short memories. In fact some people who are proposing this (regulation for industry) were the same people who were already involved in the OPSF controversy. The key is you keep government out in what it need not do.
In fact, what you have now is deregulation – which in fact is not total deregulation because you have an oversight function through the Department of Energy, I don’t think the oil companies can do anything they want. There’s an oversight, and if they abuse, there’s a way of intervening, so it’s not a total deregulation wherein you can do anything you want. It’s not like what happened to the financial sector of the United States, wherein they were free to do everything they want.
Will you consider that a case of ‘spillover’ of addiction to subsidy?
It’s a very simplistic intellectual approach – when there is a problem of oil prices, you come up with the idea of regulation, but you’d better analyze why prices are high – it is not because of regulation or deregulation. You shouldn’t see things that way – because the real thing is, the peso is weak and international prices are high.
So what you can is two things: find more oil and strengthen the peso. That’s what you need to do.
What do you think is happening since there’s a lot of political noise on oil prices? Is this just a simple case of intellectual dishonesty?
I don’t want to accuse people of intellectual dishonesty. I just want to remind people that this happened to us several years ago, and we got away from the problem, why go back to the problem. And that’s what I feel strongly about. And since you got out from the problem, then you move on –you don’t go back, it’s stupid to do that.
How big was the deficit then?
Huge. It depends on what period you would want to refer to – at one time, it was about 5% of our GDP. The time when there calls to abolish the OPSF, it got to be that. So it was a big mess in the finances of government, the one thing you want to do is to bring the deficit down to 2% of GDP. At that level, you can have some flexibility, but you wouldn’t want to go beyond that, you can’t overspend – and yet there were times, we’re going about 7-8%, and big factor was OPSF.
What advice can you give lawmakers, advocacy groups and policymakers (the DOE for that matter) who can’t make up their mind – whether to have regulation or deregulation policy in the oil industry?
Simply go back to our financial history – and you have to go back all the way from 1986 to 1992. Just remember President Cory and the trouble that she had to go through to finally get rid of the problem.
Given projections of new round of P200 billion deficit -- and with the people pushing for regulation which may result in another subsidy scheme, what are your thoughts?
It’s irresponsible.
What about the lingering pricing controversies?
Pricing is market-determined, you leave it to the market. With respect to oil, this is the only industry I know which has an anti-trust provision. I hope we have that for the rest of the economy. I wish that we have anti-trust provision for everything, wherein you cannot just go into cartels or to just agree on the pricing – that’s prohibited in the industry. How I wish that it will be prohibited in all sectors of the economy.
So instead of going back, what you have to do is extend the oil deregulation philosophy to all sectors of the economy; then you will have explosion of economic activity.
On investors getting vilified, do you think they will still come in to help explore our domestic oil resources?
Of course not, they would be willing to invest. For the oil companies, you simply look at the returns they’re getting, very limited. I think they’re allowed to get 12% like the public utilities, how much they have been getting all these years that they have been deregulated.
Profit should not be a bad word, because without profit, you would not be able to move forward. I’m not saying that profit is the only focus, but profit is a very essential component of business. Otherwise, you go back to Communism, I think these people who have been pushing regulation have communist agendas – you have to believe in business, you have to believe in markets and part of the role of the market is to allow business to make money.
During your time as Finance Secretary, do you also have rallies opposing oil prices?
Plenty. I have many rallies against me.
How do we mature from all these political hubbubs and din of protests in the streets?
Precisely, don’t go back to that. You know that there were so many things that have been politicized – we’ve politicized oil pricing before, we got out of it, why do we want to go back to it – we have too many other things that we have politicized already.
For 2010 presidentiables – what politics must play in policy formulation?
Think country, think long-term – that should be very clear. Think for the next six years or think for the next 12 years and so on. You have to be consistent in resolving issues – if you solve one issue, you don’t go creating 50 other problems.
What about predictability of investment policies?
Investors are used to international movements, but investors cannot read what politicians will do the next day – that’s very destabilizing.
You cannot talk only about business policy, you have to talk about national policy. Like in the case of oil, okay, people are looking at oil pricing, but you have to look at all these issues in the context of the entire national economy and national development. That means, you have to strengthen your market, you have to ensure that the market mechanisms are working and that the institutions are strong.
What you should have is a lot of competition into the market, then you let the industry play according to market rules, and then government must get out of the way. You just set the parameters, if they misbehave, then that’s the time you intervene. But if they’re not misbehaving, why do you still come in? You’re like a momma who keeps on micromanaging your kids.
What do you think are the challenges of the next leadership?
The challenge for the next leadership is to be very clear as to what must be accomplished in the next six years – not broad policy statements, but a real strategy. This is what we will do -- very clear targets and very clear accountabilities. I would like to think that the government will do everything to solve our real problems – not just listening to these people who are talking about oil re-regulation.
There are other problems, so let’s not go back to the problems that we’ve already solved.
Have you started the push for industry deregulation?
Yes, we pushed it as far as we could. We certainly laid the groundwork for all the intellectual and political support to have the policy instituted.
