Honeyman: Globalization

Monday, November 14, 2011

WE WERE all distressed when, a few weeks ago, Governor Marañon was marooned at Perth Airport. He was a victim of QANTAS’s (aka Queers And
Nymphomaniacs Trained As Stewards) grounding of its fleet. International surveys do not confirm Perth as the worst airport in the world but even its supporters would agree that it lacks ambiance.

So what went wrong? Whether we call it ‘grounding’ the aircraft – the management’s description – or a ‘lockout’, the union version, there is clearly disharmony within this fine airline, which uniquely has a perfect record of no fatalities (though there have been some close calls in the last few years).

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Why the unrest? To some extent, it is the traditional issue of a recalcitrant union trying to squeeze more money from a parsimonious management, but the reality is more profound. It is no longer possible for a first world airline, paying first world salaries to all its staff to be profitable. Last week, Air France announced that it has joined the ranks of those which will make a loss in 2011.

What to do? Qantas’ CEO, Alan Joyce, a charmless Irish-born executive, and a victim of his country of origin’s dentistry, believes that the only way to increase profitability is to farm out most of Qantas’s activities to countries with lower labor costs and, preferably, a docile workforce.

Hence, the answer is globalization, which potentially creates employment opportunities in the Philippines. Lufthansa and Singapore Airlines already have maintenance facilities here. We believe that it should be possible for Qantas to outsource some activities to the Philippines. Information and Communications Technology (ICT) is an obvious example.

What is needed is a clear understanding of Qantas’s requirements and to compare these with what we can provide. The next step is to identify where we may fall short of requirements.

For example, in Negros, we have a substantial number of capable ICT people who, given the right training, would be highly useful to the specialized requirements of the airline industry. Organizing the training is well within the capability of the province’s ICT experts. Large benefits to our economy will accrue from enhancing our ICT skills. And Governor Marañon’s inconvenience will not have been in vain.

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PEACe Bonds II

Any investor finds it challenging to ensure that the value of his investments keeps pace with inflation. And it’s usually impossible to do so without taking risks.

For the past ten years, we have seen steady inflation in the Philippines.

The cost of living now is approximately 50% higher than it was in 2001. In that year, the government issued P10.7 billion worth of ten year PEACe Bonds to a select number of friendly banks. The bonds attracted an interest rate of 12.75% compounded annually to be repaid when the bonds matured in 2011. This represents a gain of 232%, which compares highly favorably with the 50% inflation that we experienced over the same period. But Finance Secretary Cesar Purisima has applied the standard withholding tax. This has the effect of reducing the gain from 232% to 186%. Still a great return. We would settle for this, but not the banks. They have cried foul and have sought the help of the Supreme Court (SC).

The SC has not yet reached a decision but, as an interim measure has required the Department of Finance (DOF) to release the tax component to the banks who should then put the disputed funds, P5 billion, into escrow pending the Supreme Court’s resolution. The DOF has not complied with the SC’s order, claiming that it was only received the day after the Treasury repaid the bonds. ‘As if this matters’ chorused many legal people. ‘DOF could be cited for contempt of court.’ What’s new? We all know the Executive Branch has, to put it politely, limited respect for the Supreme Court.

The Banks’ lawyer Francis Lim says that DOF officials are exposing themselves and the government to triple the amount of the transaction or P105billion (the matured bonds are worth P35 billion before the contested tax is applied), on top of actual damages, by way of civil liability, to the bondholders. We are not so sure. Sec 3 Art XVI of the Constitution says ‘The State may not be sued without its consent.’

We do not know whether all the 19 banks involved have the same opinion.
Most are keeping quiet. Perhaps there are some who recognize the public interest, and therefore ultimately the banks’ interest, is best served if the banks recognized the pragmatic decision of Cesar Purisima and accepted the tax payable on the generous 12.75% compound on the PEACe Bonds. If so, we hope they will speak out soon.

The Treasurer in 2001, when the PEACe Bonds were issued, was Sergio Edeza who is now President of the Bank of Commerce. We remember the Bank of Commerce. In early 2007, before the election, impoverished congressmen trooped to Malacañang to receive GMA’s Conditional Cash Transfer. The congressmen emerged, wealthier than before, clutching their bounty in Bank of Commerce cartons. The involvement of the bank in this brazenly dubious activity was not edifying.

In 2010 we elected a government which vowed to reduce corruption and to ensure that the sins of the past do not go unnoticed. Issuing the PEACe Bonds in 2001 at such as a high rate of interest was contrary to the public interest. The banks should stop whining about the tax issue.

Any bank, which disengages from the tax-free claim, would gain public respect and support.

This would be more valuable than Piolo Pascual’s puerile endorsement.