June 5, 2015

By: Honesto C. General

Those who are pushing for the passage of the Bangsamoro Basic Law had better look into the history of Cagayan de Oro City and Davao City.

Some fifty years ago, I was based in Davao City as the Regional Manager for Mindanao for the Insular Life-FGU Insurance Group.

Every three or four months, I would visit Cagayan de Oro, which was then a one-street town. At one end of the street was Ateneo de Cagayan. At the other end was the public market, usually referred to as Divisioria. Beyond was the sea.

Early last year, I was in Cagayan de Oro to attend the wedding of my grandson. I was amazed at how the city had grown. The old main street was still there and so was Divisoria. But at the other end, Ateneo de Cagayan had blossomed into Xavier University. Beyond Xavier was an entirely new section where Ayala, SM, Puregold, Rustan’s had set up shop just like in Makati. We stayed in a hotel which was part of a worldwide chain. One evening we went out to dinner. We found a Chinese restaurant and we had to wait for half an hour to get a table.

The airport terminal used to be a Quonset hut, handling only World War II C-47’s Now the airport services four-engine planes.

The growth of Davao City is even more spectacular. The airport terminal building used to be a US army surplus Quonset hut. Now it is like the terminal buildings in Manila. Sixty years ago, the only hotel in Davao was the 50-room Apo View. Now, there is a 1,500 room hotel, and another one like it is being built. Ayala, SM, Rustan’s, Puregold have all set up shop.

So, now, the question is this: Will Bangsamoro develop like Cagayan de Oro City and Davao City?

Will Ayala, SM,. Rustan’s and Puregold set up shop in Bangsamoro. Not likely.

A major characteristic of a modern society is a vibrant insurance industry. Will the life insurance companies deploy countless agents in Bangsamoro? Not likely, because the Moro is uninsurable and even more so under BBL. Will the non-life insurance companies set up shop in Bangsamoro.

Not likely, because Moro businesses are not insurable.

So, while the rest of Mindanao will be growing by leaps and bounds, Bangsamoro will remain stagnant economically. Now, that will be a threat to peace in Mindanao.



June 16, 2009

If all the Senate did in its recently concluded session was to pass the anti-cartel bill, all the consumers in our blighted archipelago should truly be grateful.

The Competition Act of 2009, Bill No. 3197, was authored by Senators Enrile, Trillanes IV, Roxas, and Angara. The title is a dire warning to the cartels that have scourged us: “An Act penalizing unfair trade and anti-competitive practices in restraint of trade, unfair competition, abuse of dominant power, strengthening the powers of regulatory authorities and appropriating funds therefore, and for other purposes.”

The Constitution allows monopolies, but they are regulated.  Meralco is the sole and monopolistic distributor of electricity in Metro Manila, but the Energy Regulatory Board keeps Meralco on a short leash.

Cartels, or combinations in restraint of trade, are not allowed by the Constitution.  But there are no rules. The provisions in the Penal Code are toothless because it is not backed up by a regulatory framework.

What is a cartel? Two or more suppliers or manufacturers colluding to avoid competition and keep their prices high are a cartel.

The most glaring cartel is the cement industry.  When I built my house in 1960, there was more than one cement factory around. The cheapest cement cost P1.90 per 50-kilo bag, delivered at site.  Today, the cement cartel has only one price, P180 per bag in Makati. You can scour the landscape and you will find no product the price of which has soared to such heights as cement.

The banks are also a cartel.  The Bankers Association prescribes the minimum lending rate by members.

Besides price fixing, there are other subtle ways for cartels to ply their evil trade.  For example, cartel members agree to sell their wares only in their respective areas of operation.  Also, a cartel of electric motor manufacturers can agree to assign to each member a certain horsepower rating.

The Enrile bill, for the first time, grants the Department of Justice vast powers to investigate and prosecute on its own.

The penalties are severe.  A natural person who violates the law can be fined at least P1,000,000 or at most P10,000,000, and a prison term not exceeding ten years.  A firm can be fined at least P10,000,000 or at most P100,000,000.

In the U.S., the anti-cartel law is enforced by the dreaded Anti-Trust Division of the Justice Department.  Not even Microsoft would dare cross swords with the Anti-Trust Division.

About 20 years ago, an international conference was held in Glasgow. The conference was to hammer out rules on insurance on nuclear plants, a new line of insurance.  When the agenda reached the item on pricing, the American delegation stood up and begged to be excused.  Had the delegation taken part in price fixing, the Anti-Trust Division would have hauled them off to the nearest jail as soon as the delegation landed back in New York.

About five years ago, the Philippine telecom industry had a conference in Honolulu.  When they agreed to fix prices, the conferees realized what they had done.  They all scooted to the airport before the Anti-Trust Division could grab them.

The Enrile bill now goes to the House.  Let us hope that our wise representatives, instead of pushing for such silly matters as Con-Ass, will quickly approve the bill.

In next year’s elections, all consumers should remember the authors and those who voted for the Enrile bill.

The Enrile bill is long overdue.  But better late than never.

(Next: The Longest Running Cartel)


June 10, 2009

The Comelec has finally closed the deal to buy 80,000 computerized counting machines — worth a whopping P7.2 billion of taxpayers’ money — for next year’s elections.  Somehow, I cannot bring myself to sing Alleluia.

As a result of rampant cheating over the years, our elections have lost credibility.  They no longer represent the people’s sovereign will.

The proposed solution to the problem is to limit, if not eradicate, human intervention by computerizing the circuitous election process.  They say machines do not engage in dirty politics and have absolutely no bias one way or the other.  Automation is the magic carpet we have been looking for…

Oh, really now.  Computerized elections will lead to computerized cheating. In fact, it may even be easier to cheat.  Without computerization, a voter walks into his precinct, shows his voter’s certificate, signs the voter’s list, is given his ballot, which he fills it up in secret, and puts his vote into the ballot box.

Or, after he signs in the voter’s list, he is told, under duress, to go home as somebody else will fill up his ballot for him.

Or, for a price, the voter is told to stay home on Election Day.  Somebody else will vote for him.

In computerized voting, somebody else will simply punch the machine for him.  One dirty finger does it all.

And you cannot sue a machine in any of our courts.  Where can you find a judge who will hear a case against a machine?

What happens if a machine conks out during the counting?  Will a technician be around to fix it?  Will there be a stand-by unit to take over?  What if the trouble cannot be fixed?  Will failure in election be declared? If so, what then?

What will happen if some crazy mixed-up whiz kid still in high school introduces a virus into the system and the entire system comes crashing down?  A so-called firewall might be protecting the system, but an impenetrable firewall has yet to be invented.

Then, we might have no elections – the dreaded no-el.  What then?

In the end, automated elections will only work where it is not needed – in places were there is no cheating, and there are a lot of them around the archipelago, as in the thirty precincts in Bel Air Village Makati, where I vote.

Where, from experience, cheating is rampant, automation will not work. Those who have perennially cheated will find new ways to cheat.

The trouble is that Comelec is trying to tackle pockets of localized problems with a nationwide solution.  Local problems need local solutions.

Finally, those who cheat must be found out and punished. No one here has gone to jail for violating the election code.  In the U.S., the cheats go to jail.  Look at Mark Jimenez.  He made an illegal campaign contribution. The U.S. government extradited him and locked him up for two years.

Anyway, let us hope and pray that that automation will not fail us. If it does, failure could lead to chaos. Heaven help the Philippines.


June 9, 2009

Throughout Philippine recorded history, the Moro proved, time and again, that he is capable of outstanding feats of enterprise and bravery.

Twice a year, when the wind was right, and for almost three centuries during the Spanish regime, fleets of as many as one hundred vintas sailed out of Jolo. Navigating by the stars, these voyages brought the intrepid Moro around the Philippine and Indonesian archipelagos. Sometimes, they reached the Indian Ocean, other times as far south as Papua New Guinea.

If the Moro was engaged in legitimate trade and commerce, Jolo today might be a trade hub like Singapore.  But the voyages were not trading missions. They were out to loot, pillage and plunder. For example, they would land in Albay to claim the annual rice harvest from the rich Bicol valley.

But the main mission of the voyages was to capture natives to be sold in the slave market in Jolo. An adult male fetched P40; an adult female, P20, and a child, P10.  Sometimes, after a slave raid, the ravaged community simply disappeared from the map. The shores of our archipelago are still dotted with stone watchtowers – mute witnesses to that terrible era.

Jolo was a slave state. It is estimated that 300,000 slaves were sold in Jolo. Every household had slaves to do housework, tend to the fish pens and till the rice fields. Slaves ran the family business, and, for this purpose, a Tagalog was supposed to be the best.  On a raid, slaves were used as weapons carriers.

The raids were state-run joint ventures.  The sultan provided the boats and weapons, a labor contractor provided the men. The proceeds were divvied up according to a pre-agreed schedule.

Slave trading was highly profitable. Even when the colonial government introduced the canonero, a steamboat with deck guns, in mid-1800, the raids went on. The slave trade finally ended in 1903 when General Pershing declared slavery illegal. He freed the slaves and closed down the Jolo market.

Spoiled by a slave culture, the Moro lost his appetite for hard work. Today, a century later, he is still seen as a lazy and inept farmer or a double-dealing peddler.

He also remains uninsurable. Life insurance companies do not insure people who have no birth certificates issued by the civil registrar, and no written marriage contracts.

During the 10-year pacification campaign waged by General Pershing from 1903, the Moros engaged the Americans, and later the American-led Philippines Scouts, in numerous battles. The Moros lost all those bloody battles.

But Pershing wrote, “They are absolutely fearless, and once committed to combat, they count death as a mere incident.”

Finally, in 1913, the Moro made his last major stand in Mount Bagsak, Sulu. When the Datu knew the battle was already lost, he ordered his gallant men to put on their best clothes. Everybody was to die well-dressed.

Pershing, who personally led his forces, wrote later in his official report, “Let us not forget the vanquished foe…He fought with an unswerving courage and superb gallantry that was the admiration of all. Let our assurance of goodwill be extended to him in his defeat, and let no opportunity be allowed to pass by to do a kindly act, or to extend a word of encouragement to these brave people.”

But the bravery and gallantry were misplaced. Throughout the campaign, the Moro always fought for his Datu, not for a higher purpose such as freedom and liberty. Also, the datus never trusted each other. They never banded together to present a stronger front against the Americans.

It was not until the 1970’s when Nur Misuari, with his Bangsa Moro battle cry, was able to pull the major tribes together. But, when he became governor of the Autonomous Region of Muslim Mindanao (ARMM), he spent his time enjoying the trappings of a potentate. Now he is in jail, on trial for rebellion.

The Moro continues to fight, as kidnapper in Sulu, and as a rebel in Cotabato out to carve an independent state, which is nothing but a pipe dream. This is the never-ending tragedy of these enterprising and brave people. (More later.)


May 14, 2009

Nationalism, or love of country, can be used for good or ill. We should always be on the watch. Let us take a look at the history of the fire insurance industry.

For decades before World War II and until the early 1950’s, the fire insurance industry was a virtual colony of the British. An obscure outfit in London innocuously called the Fire Offices Committee (FOC) tightly controlled the price of fire insurance. The FOC was the implementing arm of the international fire insurance cartel. As in all cartels, FOC’s mission was to keep premiums on a high level.

The price list and the rules of the cartel were inscribed in an intricate manual called “the tariff”. It was the Holy Scriptures. Any deviation was called a “breach of tariff”, a mortal sin that confined the offender to eternal damnation.

Then, in 1960, with nationalistic fervor sweeping the country following our independence from American rule in 1946, the fire insurance companies cut the long-standing umbilical cord with FOC. Rightly so, for the fire insurance business to be under foreign domination was no longer acceptable. The nationalists in the companies association felt that the cartel had to be run by Filipinos who loved their country.

In the heyday of the postwar economic boom, insurance companies sprouted like mushrooms. By 1960, the cartel felt that the industry was overcrowded with some two hundred companies. For love of country, the industry could not be allowed to collapse. The cartel lobbied for, and President Macapagal issued an order banning the licensing of new companies, domestic or foreign. The ban, which lasted for some thirty years, tightened the grip of the cartel.

The insurance code had been enacted long before World War II. The cartel lobbied for, and, in 1964, Marcos decreed a new code. Under the new code, the cartel qualified for and was granted a government license to operate. In all our history, the insurance cartel is the only cartel with a government license.

The cartel’s powers were now total. It then flexed its muscles. It prescribed stiff fines, reaching hundreds of thousands of pesos per offense, for breaches of tariff. Inspection teams spread out to look into the policy files of insurance companies, general agents and brokers.

Incredibly, at the latter part of the martial law regime, the cartel even seriously discussed the need for calling on the armed forces and the police to enforce the tariff.

What started out as a noble call based on love of country, ended up in the creation of a virtual police state. The nationalist Filipino cartel was far harsher than the international cartel ever was.

Then, in 1994, the insurance commission made a momentous decision. In line with the free trade agreements in the ASEAN region, the entire insurance industry was liberalized. In the fire insurance business, the tariff was abolished and the cartel broken up by simply withdrawing its license.

The ban on new companies was lifted. Foreign companies were allowed to come in through three doors: as a wholly owned subsidiary, as a full-fledged branch or as in joint venture with a domestic company.

Nine years later, the industry is more vibrant than ever before. The greatest change has been this: if an insurance company wants to stay in business, it has to compete for the buyer’s premium, no longer in the stifling atmosphere of a cartel, but under the searing sunlight of a free and open market.

The consumer has benefited the most. For example, the premium for a fire insurance policy on a residential building has come down to about one-third what it was before trade liberalization.

And so, to the new crop of nationalists, please answer these questions: Whose side are you on?  The seller or the buyer? The supplier of the consumer?

The battle lines should be drawn, not in the classrooms or the streets, but in the marketplace.



18 November 1994

Choosing a good insurance company, one that will pay a valid claim fairly and quickly, is never easy, if only because there are so many companies to choose from.

There are 102 non-life companies and 24 life companies. They come in all shapes, sizes and colors. Some sell the whole range of policies, others specialize in just a few lines. Some hold office in several floors of high-rise buildings, others are one-room affairs on side streets. The largest non-life company writes P1.5 billions in premiums, the smallest less that a million. Most are Pilipinos, of course, but some are Americans, British, Swiss, Taiwanese, Japanese, a Canadian and a New Zealander.

Short of evaluating these companies by an actuary or a financial analyst, here are some guideposts.

Like some wines, insurance companies mellow with age. This is especially true with life companies. The rule of thumb used to be that the gestation period of a life company was seven years. Nowadays, because of stiff competition, the gestation period can be as long as twelve years. An insurance company is not a get-rich-quick scheme. Anybody who wants to make a quick buck had better put his venture capital somewhere else.

Since the late sixties, when insurance was seen to be an overcrowded industry, the Insurance Commission has licensed no more than five new companies. Reckoned from the date of the original license, Pilipino companies are at least twenty years old.

This is not to say that all the old companies must be good and the new ones are not. A few companies organized before World War II are creaky from old age as to be practically senile. On the other hand, some of the new companies are vibrant with youth.

When someone tells you that all companies are the same because all are licensed by the Insurance Commission, politely but firmly show him the door. In most cases, a license (it is actually called a Certificate of Authority) means nothing but that the company has met the minimum requirements of the Commission. If having a license is about the only thing the company can say about itself – well, who wants a company with minimum requirements?

When a company tells you not to worry because it carries enough reinsurance, alarm bells should start ringing in yours ears. It is true that, for a company to take upon itself all the potential liabilities under a policy is not only suicidal. It is against the law. So, the company passes on the excess liabilities to other companies. This is called reinsurance. Those who accept reinsurance are called reinsurers.

But the reinsurers are not accessible to you. They are not parties to your policy. If you have to sue the company on an unpaid claim, you cannot bring the reinsurers into the suit.

For the same reason that the reinsurers are not parties to the insurance contract, the company cannot use the failure of the reinsurers to pay their share of the claim as a defense for not paying a claim.  In short, when you buy a policy, you rely entirely on the company to have reliable reinsurers to back him up.

In the end, a financial statement is not much help. A company is people, and a lot depends on the people running it. But you cannot have a dossier on the owners and managers.

There is a short cut to all these. Find an agent or broker who comes highly recommended. The rule of thumb is: he should be making a good living at selling insurance on a fulltime basis. He is your bridge to a good insurance company. It is his professional duty to see to it that you buy the policy you need, at the best terms and conditions. And when you have a claim, he works on the company and its adjuster to have the payment made fairly and quickly. This is what he gets a commission for.



13 July 1991

When you buy fire insurance on your home, it is fairly easy to cover the building. If your house is rather new, computing the amount of insurance is sometimes a simple problem of adjusting for inflation the original figure at which you built, or paid for, the house. If your house is quite old, you may have to ask help from an architect friend or hire a professional appraiser.

Insuring your personal effects, whether you own your home or you are renting, takes a little bit more effort.

The standard terms and conditions of a fire insurance policy cover you at depreciated values (current brand-new prices less depreciation). So, you compute the sum insured on your personal effects at depreciated value.

But you can also insure at replacement value or brand-new cost (no deduction for depreciation).  The rate (the unit price of your policy) remains the same, but the premium (total price) goes up because you are covered at the higher replacement value. If you have a claim, you will get paid as if all your things were brand-new. This method is called insuring old for new.

I always recommend replacement value insurance, whether on a building or its contents.

With the help of your broker or agent, make an inventory of your personal effects. It is easier to do it room by room. You may have to call the stores you bought the major items from in order to bring you up-to-date on prices. Items like clothes and kitchen utensils will have to be appraised in lots.

You can insure all personal effects except goods held in trust or on commission, bullion or jewelry, any curiosity or work of art worth over P200, manuscripts, plans, drawings, designs, patterns, models, molds, securities, documents of any kind, stamps, money, checks, books of accounts or other business books and computer software. If you wish to insure these items, the policy should specifically say so, although it is hard to put figures on manuscripts, plans, and the like. It is also better to insure such items as jewelry and computer software under separate policies specially designed for them.

The value of your personal effects (the policy will refer to them as “household contents”) should be lumped and rounded off into one sum insured. There should be no listing in the policy. This renders the policy so flexible as to take in replacements and additions without having to make any changes in the policy.

To the basic perils of fire and lightning, you should add earthquake, typhoon, flood, explosion, falling aircraft, vehicle, collision and smoke. These extra perils cost so little it is almost foolish not to have them included in the policy.

You should insure portable items such as the TV set, VCR, microwave oven against robbery and theft. Do not insure everything. It costs too much.  Besides, nobody steals a dining room table.

There is a difference between robbery and theft. If someone walks through an open door and runs away with your stereo, that’s theft. If he has to kick in the door, or pulls a gun on you, that’s robbery.

Since you are insuring specific items, you need to give a list. Each item will carry a separate sum insured and a deductible (that bottom part of a claim that the company does not pay).

Insurance companies do not offer robbery coverage in certain areas in Metro Manila where the risk is considered too much to handle. In areas where they do, they have looked into the security arrangements in the neighborhood.

What I have outlined above is how to insure personal effects under the standard fire policy expanded to include other perils. Some companies offer policies labeled Homeowners and Tenants Comprehensive Policies or Home and Contents Policy. They are variations of the same theme.


May 12, 2009

When Jose Ma. Sison organized the Communist Party of the Philippines in 1969, a great number of people all over the world still believed that Communism was the wave of the future. The USSR was a superpower. The Warsaw Pact nations threatened Western Europe. Castro held Cuba. Communists were on the march in Vietnam and the dominos were seen to be soon tumbling all over Southeast Asia. The Cold War was going the Communist way.

Today (this was written in 2000), things are different. The Communists have lost the Cold War. USSR is gone; what is left is trying hard to transform into a market economy. The Berlin Wall has crumbled. Communist East Germany has been merged with Democratic West Germany at great expense to the latter. The Warsaw Pact nations have shed their Communist rags. NATO faces no foe of consequence. China has been trying for 13 years to enter the World Trade Organization (WTO). Cubans continue to flee to Florida. The Vietnamese desperately need foreign investment because every last one of the 10,000 corporations they set up after they won the war went bankrupt six months later from incompetence and corruption. North Koreans feed on grass.

In the Philippines, the Communist rebellion has sunk into a hypocritical extortionate racket that, vulture-like, feeds on the poorest of the poor in the farthest barrios. And the biggest hypocrite of them all is Jose Ma. Sison.

The Communist collapse has shorn Sison of his ideological underpinnings. You no longer hear him spout the Communist mumbo-jumbo about the proletariat and the bourgeois. But, as he did last week, he continues to cry his hypocritical heart out for the poor in the countryside. Whenever he does this, I puke. The people in the barrios remain poor because of the 10 percent “revolutionary tax” that Sison’s New People’s Army (NPA) extorts at the point of an M-16 automatic rifle. Purportedly set up to protect and fight for the poor in the countryside, the NPA now is the barrio folk’s heaviest burden, financially and emotionally. The NPA taxes everything: rice and corn, copra and wood products, coffee and cacao, abaca and root crops, sari-sari store sales and public school teachers’ salaries, and, if the priest or pastor will allow it, even church collections. Barangay captains are given a monthly quota. On top of it all, there is the constant terror hovering over the poor barrio folk.

If not much investment goes to the barrios, we have the NPA to thank for it. A foreign company wanted to look into the feasibility of reviving an old gold and copper mine about three years ago. As if on cue, the NPA showed up with their demands: P1,500,000 for a “permit to operate” plus 10 percent of payroll. The foreigners turned down the demands, packed up, and have not been back.

In the guise of protecting the environment, the NPA hates big-time operations in the countryside such as banana plantations and large-scale mines. But the real reason is that they do not pay tribute. They would rather spend their hard-earned money on setting up their own security force.

The NPA prefers the barrio to remain poor and, as a result, vulnerable to the revolutionary tax. And where does the money go? It certainly does not stay in the barrio; there is little there to spend it on. Obviously, the money ends up in Manila and the other big cities to finance the propaganda war. Who covers the expenses to mount a public demonstration? Who pays for those red flags and streamers, effigies and placards? Who buys all the red paint splattered over the city? Who foots the bill for the press conference and media coverage? How can the loudmouth leaders live without any visible means of support?

I go along with the Army intelligence that says money also winds up in Sison’s secret dollar account abroad. He screamed his protest so loudly over TV that if I had opened my bedroom window, I would have heard him all the way from Holland. Confucius says, he who protests to high heaven must be guilty as hell.

Another Sison hypocrisy: poverty is the root of the rebellion. There are countries poorer than the Philippines, Bangladesh for one, that do not suffer from a Communist rebellion. The real root of the rebellion is a small band of pigheaded one-time idealists who refuse to admit that Communism is a total flop as a system of raising the quality of life of the masses.

Still another Sison hypocrisy: Communism failed because the Communists everywhere did not do it right. But Sison will do it right. He, and he alone, has the magic formula to make Communism work. He does not say why he keeps the formula to himself.

Sison awaits the call to return to his homeland as a Messiah, come to save the Filipino people. That is the highest hypocrisy of all.



(With Presidential elections less than a year away, some well-meaning non-governmental organizations, are gearing up to educate the poor rural voters. Here is a piece I wrote in 08 May 1998.)

We city folks tend to look down, and then turn our noses up, on the rural voters.
We are the educated, they are not. We do not sell our votes, they do. And just how can they make their choices in logical, cold-blooded fashion as we intelligent voters do? How can the barrio folk ever hope to grasp the complex issues of the day? We are matalino, they are tanga. Perhaps, we should be the only ones given the right to vote.

As a friend of mine would call it: pure, unadulterated fertilizer.

Let me tell you about a close encounter I had with a very rural voter. Enzo had come to have dinner with me about a month before an election during the Aquino presidency. It was Lent and my late brother Bio and I were staging in our farm, on the foothills of Mount Isarog in Naga City, our annual pabasa or passion, two weekends before Easter.

The pabasa is the singing of the Passion of Christ set in verse. The current Bicolano version was written and approved by the Church way back in 1887. The singing, more like chanting really, was led by a small group of women from the barrio. The non-stop pabasa started at three Saturday afternoon and ended at about seven the following Sunday morning.

Bio took care of breakfast.  Dinner and drinks (mostly gin, of course) were on me. Our pabasa was always well-attended, less out of piety of the barrio folk but more because of the excellent food and beverages we served.

At dinner time, Atoy, our overseer, introduced Enzo to me. Although Bio and I have been staging the annual pabasa for about ten years, this was the first time I met Enzo. He was wiry and tall, about five feet and eight inches, with an unmistakable Castilian strain on his face. He spoke in a soft voice and I had to strain to understand him.

Enzo was a kaingero, a slash-and-burn farmer, the poorest of our rural poor. His kaingin (badang in Bicolano) was farther up the mountain. Beyond his farm was dense, virgin forest. He was planting camote (sweet potatoes) over no more than a half hectare of land at the very edge of the world. No voter could have been more rural than Enzo.

First, we talked business. I asked him how he set the price for his camote. He said that he would leave his harvest with a friend in the public market in Naga City, and then canvass the prices of the things he wanted to buy, such as a pair of rubber sandals for his wife and some clothes for their two kids. If the price had gone up since the previous harvest, he would adjust his price accordingly. I wondered how the Asian Institute of Management would think of Enzo’s business methods.

Then, we talked politics, and our conversation (in Bicolano) went something like this.

I asked, “Are you a registered voter?”

He said, “Yes.”

“Are you going to vote in next month’s elections?”


“But, why? You live so far away from everybody, you don’t even hear the church bells summon you to Mass or vespers. Why bother?”

I expected him to say that Captain Atoy, his barangay chairman, had asked him to go. Or worse, that it would be a good chance for him to make some money from those dirty politicians.

Instead, without any emotion in his voice, he said, “If I do not vote, then I will be like the wild animals that roam around my kaingin.”



So, President Ramos has fired the first shot in a war against monopolies and cartels. And the Senate and the House, as always, have written two versions of an anti-trust bill.

Okay, guys, I am prepared to assume that you mean well. But let us straighten out a few things before monopolies and cartels start getting bandied around like such word-pairs as graft and corruption, peace and order and suka’t bawang.

Just what is wrong with monopolies and cartels? Simple: they eliminate free and open competition; as a result, they keep consumer prices high. Apologists have, for decades, said that the aim is to avoid ruinous, cutthroat competition. Current thinking counters that this does not justify the existence of monopolies and cartels. Besides, if a business cannot stand competition, it should go to another line of business. Matira ang matibay.

Now, for some definitions. A monopoly is “an exclusive privilege of engaging in a particular business or providing a service, granted by a ruler or by the State.”  Meralco has a monopoly on the sale of electricity in the franchise area granted to it by the State. Danding Cojuangco’s Bugsuk Island project was a monopoly, being the sole supplier of hybrid coconut seeds, as decreed by the dictator.

A cartel is an “association of business firms for establishing a national monopoly by price-fixing, ownership of controlling stock, etc., thereby eliminating free competition.” Cartel is the terms used in Europe; the U.S. uses the word trust, hence the other word, anti-trust. The most descriptive term for cartel is: combination in restraint of trade.

The oil companies here are a cartel, inflicted on the consumers by their own government through the Energy Regulatory Board. Before ERB, oil firms competed fiercely with each other. Now that the government dictates prices, competition has been wiped out.  Hence, the high price of oil products.

Fixed minimum prices are not the only tools of a cartel. A cartel of contractors bidding for a government project may rig the bidding by agreeing who should submit the winning bid. A cartel of manufacturers may divide the market by agreeing who will manufacture what and sell where. For instance, manufacturers of electric motors may agree on who will make 50-hp models and who will make the larger types. Or, they may agree who should sell in Mindanao or Visayas.

All these arrangements are designed to avoid competition, thereby keeping prices high.

Notice that a monopoly looms huge, dominating the landscape. A cartel usually operates in some dark back alley, in secrecy, beyond sight.

Then, there is a small matter of a two-sentence constitutional provision. Instead of being tucked away in some obscure section of our penal code, the rule on monopolies and cartels is now enshrined in the basic law of the land.

The Constitution, according to a lawyer friend of mine, says that monopolies are prohibited or should be regulated as public interest requires.

If public interest so requires, a monopoly may be allowed. But it should be regulated tightly. Meralco is a good example. It is in the public interest that there should only be one electric franchise holder in Metro Manila. Imagine the chaos that will result if several electric light companies are allowed to string up their lines all over the same area. But since Meralco is a monopoly, government regulates it closely.

On the other hand, cartels (the Constitution uses the term “combinations of restraint of trade”) are not allowed, period. There are no exemptions.

In short, my lawyer friend said, from the standpoint of public interest, a monopoly may be good or bad, but a cartel is always bad.


May 11, 2009

For being one of the organizers of the Light a Fire Movement, an underground group set up against the Marcos dictatorship, Eduardo B. Olaguer languished for six years in the Bicutan detention compound and the Muntinlupa penitentiary. Saved from the firing squad by the intercession of Cardinal Sin, Ed was released shortly before the February 1986 People Power Revolution.

Having faced death many times during his incarceration, nothing has fazed Ed since then. He now has a nice home in upscale Alta Vista, Quezon City. With some friends, he built on Aurora Boulevard the 18-story Aurora Milestone Building which he runs. Ed has paid his dues, lived a full life, and should just lie back and enjoy and do charity work.

Instead, Ed has taken up arms against the four banks he does business with. He has also brought his complaint to the attention of Bangko Sentral and the Senate and House committees on banks. I suggest the Bankers Association should start circling the wagons. Ed is on the warpath and everyone who has ever taken out a bank loan should rally to his side.

Ed complains that the interest the banks had actually charged his company was over and above the rate agreed upon and specified in the promissory notes. My guess is that this practice of overcharging borrowers is done in all banks and, for that matter, also by finance companies.

Let us go to the basics. Interest is what you pay for using the bank’s money. But when is the interest due and payable? Since ancient Rome, and even earlier to ancient Phoenicia, the basic concept is that the interest is due and payable at the end of the period over which you borrow the money; in other words, after you have used the money. Also, rates are always expressed in percent, or each hundred, and reckoned on a yearly basis; hence, the Latin or Roman term per annum, or each year.

When a Roman merchant borrowed the equivalent of P100 at 6 percent interest per annum to finance a business trip, he forked over to the lender, at the end of one year, P106. If the lender relends the entire P106 for another year at the same 6 percent per annum, then the merchant paid, at the end of the second year, P100 x 1.06 x 1.06, or a total of P112.36. Notice that the P6 interest earned at the end of the first year also earned interest, of thirty-six centavos, at the end of the second year. The interest is said to have been compounded, or as bankers quaintly put it, rolled over.

These basic concepts on compound interest have come down to us through the centuries. Today, these are drilled in every high school and college all over the world. But, it seems, the banking world is different.

Now, Ed’s complaint. Let us say the interest rate specified on a promissory note is 18 percent per annum. The bank makes you feel it is doing you a favor by allowing you to pay interest on easy monthly installments at the rate of one-twelfth of 18 percent, or 1.5 percent, at the end of one month. This means that the monthly 1.5 percent interest is compounded twelve times over the next twelve months. At the end of the twelve-month period, you will have paid, not 18 percent as written on the note, but 19.56 percent or an excess of 1.56 percent. If any banker is interested, I will show him the mathematical proof over a cup of coffee at his expense.

In other words, because of the factor of time, 1.5 percent paid at the end of each month for twelve straight months is not the same as 18 percent paid in lump sum at the end of twelve months. It is higher. In effect, the bank, instead of giving you a discount, actually penalizes you for paying interest in advance.

But Ed’s revolutionary fervor has cooled down. He does not go far enough. The bank raises the rate even higher. For example, on a P1,000 loan, the bank computes the interest for, say January, based on a 360-day year, thus: P1,000 x 0.18 x (31 / 360) = P15.50. At the end of twelve months, you will have paid P1,000 x 0.18 x (365 / 360) = P182.50 in interest, not P1.000 x 0.18 = P180. Your interest rate rises by an additional 1.39 percent per annum.

By the way, if you place P1,000 in the bank to earn 18 percent interest per annum, the interest the bank gives you for January is computed, based this time on a 365-day year, thus: P1,000 x 0.18 x (31 / 365) = P15.29. Notice the difference? The bank gets you coming and going.

What all this boils down to is that the interest rate you actually pay (the bankers call this the effective rate; it should be called the defective rate) on your promissory note is 18 percent plus 1.56 plus 1.39 for a total of 20.95 percent, an excess of 2.95 over the agreed and documented 18 percent. For every P1,000,000 you borrow, the bank overcharges you P29,500 in interest every year. Hey, that excess is nothing to sneeze at.

Ed says, and I agree with him, that with this overcharge, the bank violates the terms of the promissory note and the Truth in Lending Act.

Not content with overcharging borrowers, the banks still have a few tricks up their collective sleeves. If you are really unlucky in choosing the bank to borrow money from, you can get clobbered with any number of the following:  application fee, reservation fee, inspection fee, appraisal fee, notarial fee, legal fee that raises the cost of your loan.

Then, there is the pretermination fee. This fee is a throwback to the good old days when you could take out a long term loan at a preferential rate. The longer the term, the lower the interest rate. Conversely, the shorter the term, the higher the rate. When I borrowed money to build my house fifty years ago, I took out a 20-year at a fixed preferential rate of six percent per annum. If I cancelled the loan anytime within those 20 years and for whatever reason, I would have been charged a pretermination fee. The is to penalize you for being such an ungrateful ass.

The pretermination fee is similar to the so-called short rate penalty that an insurance company charges you for cancelling a fixed-rate fire policy before the annual expiry date.

Today, the banks have turned the world upside down. The longer the term (if you can get it) the higher the rate; the shorter the term the lower the rate. It is really a ploy to nail you down to prevailing market rates. For example, on a yearly renewable note payable on regular monthly installments, the bank charges you what the market rate is on the morning a payment is due. If you cancel the note, you get clobbered with a pretermination fee. This is not right, since you are not getting any preferential treatment anyway on your note. Nowadays, the pretermination fee is really to discourage you from jumping to another bank. In other words, the pretermination fee is a tool for restricting competition.

But the deepest cut a bank inflicts on a borrower is the so-called discounted loan. The full annual interest is discounted, meaning deducted, from the initial disbursement of your loan. For example, if you borrow P100,000 at 18 percent per annum, the bank deducts a full year’s interest of P18,000 and you are handed P82,000. In other words, you paid 18 percent interest of the full P100,000 but you get to use only P82,000. Another way to look at this is that the interest is collected, not at the end of twelve months, but at the beginning. The immediate effect is to raise your interest rate to (P18,000 / P82,000) x 100 percent = 21.95 percent.

Then, when you consider the opportunity loss on the P18,000, the cost to you of your loan rises some more. Assuming you make a modest 20 percent profit on your working capital, the opportunity loss is P18,000 x 0.20 = P3,600. This translates into an additional rate of (P3,600 / P82,000) x 100 percent = 4.39 percent. The whopping cost of the loan is now 21.95 plus 4.39 = 26.24 percent. This is 8.24 percent over and above the agreed 18 percent.

Finally, considering that these loans are backed up by collateral, usually urban real estate appraised by the bank at a minimum of around one and a half times the loan, under a written agreement that binds the borrower in a tight steel grip, the cost of borrowed money becomes truly staggering.

Ed Olaguer raises the issue to the macro level, the big picture. He estimates that the total loans outstanding from commercial banks is P2 trillion. In which case, the total overcharge that banks illegally gouge the borrowing public is between P50 to P156 billion a year. This is added to the selling prices of all goods and services. No wonder consumers are groaning under steep prices. No wonder the Philippines cannot compete globally.

What should be done? I am not about to suggest that the banks return all the money that he have illegally gouged from the public. That would trigger the collapse of the banking system. And nobody, not even the victimized borrowers, wants that. But the banks had better start cleaning their act. There are a number of Opus Dei stalwarts in the banking system. Perhaps, they can spearhead the clean-up.

But, take heart, fellow suffering borrowers. Ed Olaguer sued the banks some years back. He won in the lower Court. He won on appeal.  The case is now in the Supreme Court.  Ed is supremely confident that he has a winning case. When, not if but when, the Supreme Court rules in Ed’s favor, I suggest he should the canonized as the patron saint of bank borrowers.



The continuing media war being waged by the banking industry against the imposition of the value added tax (VAT) is getting to be a bit too irritating to ignore.

The banks were exempted from the tax when President Aquino introduced it in 1987.  They were again exempted when, in 1992, President Ramos expanded the scope of the tax. But, time has finally run out. The exemption has been finally cut and the banks’ income is not subject to VAT just like everybody else, notably the non-life insurance industry.

The banks complain to high heavens. First, they say that the tax is too complex to implement without putting up expensive office systems. If the banks are scared of the intricate procedures involved in the value added tax system, it is because they have been exempted from the tax since 1987. They worked hard to get the exemption, and now, sixteen years later, they want to use their ignorance that stemmed from that exemption to justify the continuation of the exemption. They want their cake and eat it too.

When insurance came under the VAT system in 1992, the companies shifted gears from the old premium tax (similar to the banks’ gross receipts tax) without too much strain. Insurance brokers like me quickly adjusted to the new tax.

Second, the banks claim that VAT will violate the sanctity of long term contracts now in force. My son Louie has a loan with a fixed term of ten years. But the interest rate is not fixed. It fluctuates with market conditions. VAT applies to whatever is the current interest on the loan. Do you see a violation of the sanctity of the contract?

Third, the banks say that VAT should not apply to them because there is no value added to their services. The interest rate, the various fees (notarial, commitment, inspection, appraisal, transfer, whatever) are the values added.

Fourth, the banks say that the VAT will hit the poorest of their borrowers since they cannot pass on the tax to anybody else. The rural banks are pushing this line. They are correct that, if the borrower is an individual, the VAT on the interest is an additional cost of his loan. And he cannot pass this on to anybody. But if this is a valid reason for exempting bank transactions, then the VAT should be scrapped altogether whenever an individual buys anything subject to the tax. He should not pay the tax when he buys fire insurance on his house, checks in at a hotel, eats in a restaurant, buys clothes, and sees a movie. The fact is the hapless individual payer, the low man on the totem pole, always ends up  paying the tax, whatever name it may be called.

The banks – organized here as a cartel – shed crocodile tears over the poor borrowers. When did the cartelized banks ever worry over their poor borrowers’ welfare? Haven’t they been soaking their poor borrowers with high interest rates all these years? I haven’t forgotten that, not too long ago, interest rates were as high as 24 percent, pretty close to usurious.

The banks say nothing about the benefits they will enjoy. From their VAT collections from clients, the banks can now deduct the VAT they paid on all the taxable purchases, such as stationery, office machines, computers — and executive lunches.

The tax does raise the cost of borrowings. As a result, there will be fewer borrowings, and more defaults. Under these conditions, the banking cartel may not survive, as there will be more competition among banks. Interest rates and fees will go down, thereby cutting the banks’ huge profits. This is what really worries the banks.