Wednesday, October 03, 2007

Reaping the whirlwind

“For they have sown the wind, and they shall reap the whirlwind: it hath no stalk; the bud shall yield no meal. . . .”The Book of Hosea, Chapter 8, verse 7

THE other day (October 2), the European Chamber of Commerce expressed concern that the Philippines is wasting a lot of time and opportunities by allowing some companies to corner the best sites for wind power, and yet have done anything to develop them.

“I do not understand why these sites have been cornered by some companies that are not developing anything,” said Hubert d’ Aboville from the European Chamber and president of the Paris-Manila Technology Corp. (Pamatec). “So to me, it’s a terrible waste of time,” he said.

Indeed, we share d’Aboville’s frustration. That the companies were able to corner those choice places and letting them stay idle suggests several things.

First, the firms probably didn’t have the expertise and resources to undertake such a capital-intensive undertaking. Second, the firms were probably out there simply for speculative purposes. This situation is not good, as it tends to raise the cost of entry into wind farming, an unfortunate condition given the huge opportunity costs involved and the urgency of the need to address global warming.

We are concerned because this kind of behavior seems to fit well into the classic rent-seeking type of wealth creation that is plaguing the country. It’s the same kind of practice that we see in the distribution of timber license agreements in the past, of mining tenements and other concessions dispensed by the State. We wonder if the government has been transparent in the allocation of these places for wind energy.

In the ’70s and the ’80s, the Marcos government parceled out large tracts of “public lands” in Mindanao to his cronies for agribusiness plantations, mining concessions and logging. It was a phenomenon that contributed to the displacement and poverty among indigenous peoples, and the continuing inequality and underdevelopment in the area.

Being among the first to get allocation for the choice sites certainly is not bad per se. It’s a “rational” behavior for any businessman in search of profit. But when such behavior goes against public interest, then the government should intervene. For instance, the government should reserve the right to cancel those allocations and give them to someone else if they stays idle for sometime.

Why not bid out the allocation of those sites? That way, the process of prequalification would ensure that only those who are really interested to develop wind power and have the financial and technical resources to do so would be interested to bid.

Ultimately, the problem lies in the existing policy of restricting foreign-equity ownership in energy projects. Wind farms belong to the energy and utility sector, where foreigners are allowed maximum ownership of only 40 percent. These types of projects are usually capital-intensive. Local businessmen would need the money, experience and expertise of foreign investors if they want to engage in such projects.

However, foreigners are probably not inclined to sink in huge amounts of money in a local firm, knowing that they are not going to call the shots. This is one reason why we end up having speculators cornering choice slots without seeing them put up Earth-friendly energy projects that we sorely need to reduce oil dependence and contribute to the healing of our very own planet.

In the ’60s and the ’70s, it was fashionable to have policies that were supposedly intended to restrict “foreign control of the commanding heights of the economy.” It’s an unfortunate conspiracy theory that has become counterproductive in the present context. It may be worth revisiting this kind of policy, especially when it comes to Earth-saving types of investments. (Written as editorial for BusinessMirror, 4 Oct 2007)


Anonymous said...

Hello Dave, am reading a book right now by Tim Harford , The Undercover Economist. In the 7th chapter (The Men Who Knew the Value of Nothing),he writes about game theory and how that was successfully applied to UK's bidding (more like an auction) of their limited 3G licenses.

Rivers and Roads Until I Reach You said...

Hi thanks forr sharing this