When Government Creates Monopolies

Friday, 17 June 2011 02:10

Written by Nonoy Oplas

Government is the main creator of monopolies in the economy, via the Constitution, legislative franchising, Executive regulations and local government laws and regulations.

Here are examples of monopolies and oligopolies created by the government.

1. The Constitution

On profession monopoly, it says, “The practice of all professions in the Philippines shall be limited to Filipino citizens, save in cases prescribed by law.” Filipino nurses, doctors, engineers, accountants, etc. can practice their profession in America, Europe and many other countries, but foreign doctors, nurses, accountants, etc. cannot practice here without some legal machinations.

For many sectors and industries, foreign ownership is limited to a maximum of 40 percent equity. So even if foreign capital and technology are the only viable players to expand competition, they are limited or not allowed to come in. The Constitution is also explicit in declaring, “Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.”

2. Legislative franchising

Many public utilities have to get a legislative franchise, a law granting a franchise or sole provider of certain services for certain areas. Electricity providers, telecom companies, etc. have to get a legislative franchise. Given the horse trading culture in Congress, it is not far out that the bigger the franchise and monopoly power given to a private corporation, the bigger the risk that corruption and/extortion can take place.

3. Executive regulations

The Department of Transportation and Communications (DoTC) is among the biggest agencies to have huge power to approve or disapprove new players. In airlines through the Civil Aeronautics Board (CAB), in shipping lines through the Maritime Industry Authority (MARINA), and in bus and taxi lines through the Land Transportation Franchising Regulatory Board (LTFRB).

While there may be five local airlines (PAL, PAL Express, Cebu Pacific, Zest Air, SEA Air), not all of them compete on all routes. Thus, for some destinations, there may be only one or two airline/s covering the area. In inter-island shipping like RORO (roll on, roll off), there are certain areas that are monopolized by a particular shipping company. The same with buses. There are dozens of provincial bus companies from Luzon to Mindanao, but in certain destinations, there is/are only one or two bus companies that cover the route.

Jeepney monopoly of certain routes is another example. Take the Ayala route. Bus passengers coming from the south (Parañaque, Las Piñas, Laguna, etc.) and going to Ayala have only one cheap transportation option, the jeepneys plying the Ayala-Washington route. Some of the ugliest and dilapidated jeepneys in the country are in Ayala Avenue, the premier financial center of the country. The jeepney operators have no incentive to improve their units since ordinary passengers have no choice anyway.

4. Local governments

Granting of franchise for tricycles belong to the city or municipal governments, not the LTFRB. Once tricycles dominate the route, the drivers and operators do not want the jeepneys or air-con vans to enter their turf. Ordinary passengers have to endure the discomfort and congestion inside a small tricycle as there are no alternatives except to take the taxi.

There are other legislative and executive agencies’ regulations that tend to limit competition in the economy.

Now, the President has issued a new Executive Order (EO) to control anti-competition and break monopolies and cartels. See this news report in Business Mirror, Aquino issues antimonopoly, anticartel EO. The report states:

President Aquino has designated the Department of Justice (DOJ) as the “Competition Authority” in charge of cases involving competition issues to help deter and break up monopolies and cartels in the country to ensure a level playing field.

In issuing Executive Order (EO) 45, dated June 9, 2011, the President said, “There is a need to promote competition and level the playing field in the market.”

The DOJ as the Competition Authority will investigate cases involving violations of competition laws and the prosecution of violators “to prevent, restrain and punish monopolization, cartels and combinations in restraint of trade.”

If the barrier to the entry of more competition is the Constitution or the Legislative franchising, what can the DoJ do? Lobby for early charter change?

A good example of an industry duopoly is the telecommunications sector. Before it was an oligopoly (Smart, Globe and Sun) but after the Smart takeover of Sun Cellular early this year, it has become a duopoly, and it is not good for the Filipinos.

The main barrier to foreign entry in the local telecom industry is the Constitution. Since foreign equity in public utilities like telecom is limited to 40 percent, interested foreign players will have a hard time looking for that local business group that can provide the 60 percent equity ownership, considering the huge capitalization required.

Another disadvantage of this set up is that the DOJ is given additional work which is far from its original mandate of protecting the citizens’ right to life, right to private property. By expecting the DoJ to do more business regulations function, its time and resources to promote property rights and promulgate the rule of law will be reduced and limited.

The only positive effect of this proposal perhaps is that the creation of another bureaucracy, the Fair Trade Commission (FTC), will become less likely.

Observing and asserting “anti-competitive, anti-cartel” behavior of a firm is tricky and subject to arbitrary political intervention and harassment.

When your price is lower than that of your competitors, you can be accused of predatory pricing. When your price is the same as your competitors, you can be accused of price cartelization. And when your price is higher than your competitors, you can be accused of price gouging. Whichever pricing you take, the government can invoke “anti-competition practice” if it wants to.

The President should not proceed with its new EO, nor should it push through the creation of an FTC. Government should reduce and simplify the rules and requirements for business, reduce the taxes too. This way, more companies will come in resulting in more competition in more sectors and sub-sectors of the economy.

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