Philippines crisis

Patrick Crow
Washington, D.C.
[email protected]

The Philippines Supreme Court has thrown the oil industry-and the government's entire economic policy-into disarray.

The court struck down a February law decontrolling the oil industry, the centerpiece of the government's effort to overhaul its economy by allowing competition in vital industries (OGJ, Oct. 27, 1997, p. 35).

The court said the law's provisions on tariff differentials, inventories, and predatory pricing inhibited competition and were unconstitutional.

To encourage refinery investments, the law had set a 7% tariff on imported products and 3% on crude. But the justices said forcing firms to choose between huge refinery expenditures or paying higher tariffs was a restriction of free trade that violated the intention of the law.

If the court does not reconsider, the old laws will be reinstated. The Energy Regulatory Board would have to approve products increases and tariffs would be 10% on crude and 20% on products.

The ruling also revives the Oil Price Stabilization Fund, which the goverment created in 1984 to cushion domestic prices from wide fluctuations in the foreign exchange and world crude markets.

When public opposition discouraged the government from raising prices in 1995, the fund went into the red and still owes oil firms 2.6 billion pesos.

Reactions

The court's action cheered consumers but depressed the peso and oil stocks.

It also stalled many investments in Philippine refining and marketing.

As a result of the ruling, the nation's three refiners-Petron Corp., Pilipinas Shell Petroleum Corp., and Caltex (Philippines) Inc.-may have to absorb millions in losses.

The Makati Business Club, the Management Association of the Philippines, the Financial Executives Institute, and the Federation of Philippine Industries lamented the court's action.

They said, "The Supreme Court's decision will have an adverse impact on domestic and foreign investments not only in the oil industry but in other industries as well (creating) grave doubts about the government's policy reforms involving deregulation and liberalization.

"At a time when Asian economies are under a great deal of pressure, destabilizing moves are the last thing we need."

Government's options

Of course, the government will ask the Supreme Court to reconsider.

President Fidel Ramos also ordered officials of the energy, trade and industry, and finance departments to consider other options.

Meanwhile, the Senate Energy Committee staff was drafting a bill to satisfy the court's objections to the law.

It probably will remove the tariff differential. And, until the market is deemed competitive, it would drop provisions that restrain new market entrants by requiring a minimum inventory requirement of 10% of their annual sales volume. It also would allow the selling of products well below the industry average cost ("predatory pricing").

Finance Sec. Roberto de Ocampo said the court ruling could delay the Philippines' release in December from 30 years of International Monetary Fund supervision.