Tuesday, April 04, 2006

Development Economics : Less Can Be More

Mike Bamos, American Chronicle

Local government units (LGUs) would do well to recall the celebrated controversy regarding the awarding of the bid for the operation of the Subic Bay containerized port to the second highest bidder some ten years ago.

The highest bidder which would have given the Subic Bay Metropolitan Authority (SBMA) the highest royalty was disqualified because of a then existing law which prohibited a monopoly of operators in more than one port.

The argument of the company which submitted the lowest bid, however, merits our attention not only for the principle on which its argument is based but even more because of its relevance to the existing situation and to the future role of Northern Mindanao as Mindanao’s Gateway to the Philippine Domestic Market.

The company which submitted the lowest bid questioned the premise upon which the winning bid was awarded. As is usually the case, the Prequalification, Bidding and Awards Committee (PBAC, sometimes called the Prequalification, Evaluation and Awards Committee or PEAC in other government agencies) awarded the bid to the company which gave government the highest royalty.

If I recall correctly, the original winner which was disqualified would have given government a royalty of something like $58 dollars per twenty-foot equivalent unit (TEU), the eventual winner $20.50, and the loser $15. That’s a hefty difference between the first and second bids compared to the last.

The company with the lowest bid argued that if government intends to attract shippers to use Subic Bay as an alternative port to the congested South Harbor of Manila, it would have to give shippers an incentive for moving further away from the center of the action. In other words, the lower the toll on Subic port, the more attractive it would be as an alternative port to Manila.

Consider too, that Metro Manila being the primary consumer market in the country, how they would still have to truck their goods from Subic to Manila, an additional cost which, coupled with the present state of the road network between the two ports, is a significant consideration which might just not make Subic that attractive an option.

Even when the construction of additional piers by the proponent (as in the Subic case) is taken into consideration, the amount of the royalty paid to government will still be the main factor to determine the future growth of its operations. After all, what’s the need of constructing additional infrastructure when there are no shippers around to use it?

Decision makers who sit in the PBACs and PEACs controlling the access to Region 10’s service infrastructure, especially its ports and airport, should recall that case when awarding future contracts for the use of the present and expanded facilities which may significantly affect the future of Region 10 as Mindanao’s Gateway to the Philippine Domestic Market.

These include the Mindanao Container Terminal in Tagoloan, Misamis Oriental; the Cagayan de Oro-Iligan Corridor (CIC) international standard airport in Laguindingan, Misamis Oriental, and the the Tubod-Tangub bridge connecting the provinces of Misamis Occidental and Lanao del Norte.

Already, some businessmen from Nasipit, Agusan del Norte boast that an increasing number of shippers from Davao who truck their goods over the Agusan-Davao highway are opting to ship out from Nasipit instead of Cagayan de Oro due to the comparatively cheaper arrastre and stevedoring rates charged by the former.

Besides the additional 200 kms. overland to Cagayan de Oro, these same shippers also have to put up with the increasing congestion in Cagayan de Oro port. Couple this with the increasingly thorny traffic situation in the city, and one could immediately see the attraction which has made Nasipit the fastest growing port in terms of cargo throughput in the entire country in the last few years.

The public and private sectors have long been looking into ways to relieve this congestion at Cagayan de Oro port. One of this, the Mindanao Container Terminal at the Phividec Industrial Estate in Tagoloan, Misamis Oriental has now been realized. On the other side of the region, the plan for a new international port at Dalipuga, Iligan City is still being studied.

However, the high cost of operating the MCT as an alternative port to Cagayan de Oro has so far precluded its full operation. A way out of its dilemma may be considered in the earlier proposal to have the planned international-standard, trunkline airport at Laguindingan, Misamis Oriental operated by a private entity to promote the efficiency of its operations.

Way back in ‘96, one of those proponents, the East Midlands Airport of the United Kingdom, visited the area to look into the possibility of operating the Laguindingan Airport. Terry Lovett, the EMA’s managing director, told us how they had successfully managed to attract a wide variety of private cargo and passenger airlines to base in the EMA by initially offering them very low airport tolls (or in some cases, none at all) just to have them locate there and help them weather the first few years of operation which are the usually the most critical for the long term success of business enterprises. EMA went on to become the European hub of operations for both DHL and UPS.

We trust our decision makers, especially those sitting in the technical advisory committees of the PBAC and PEAC for our ports, airport and other service infrastructure, adopt a similarly enlightened stance in considering private sector bids for the operation of public infrastructure.

There has never been an occasion in business anywhere when the price elasticity of demand was refuted: the lower the price, the higher the demand; or similarly, the higher the price, the lower the demand. Bidders who submit the highest tolls may give government higher royalties, but they could well be the butcher who unwittingly killed the goose that laid the golden eggs

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