PDEx and its role in trading of Philippine Government Securities

I seldom share bad news about the Philippines given there is already enough available. However, this one is close to my heart as its something that has to be addressed if we are to attract foreign investors in investing in Philippine government securities. A recent investor forum sponsored by the Philippine government here in preparation of the state visit of President Aquino to Australia to brief Australian financial institutions in investing in the Philippines. In fact, Finance undersecretary Roberto Tan mentioned some pending new approaches to the trading of government securities to increase the level of activity. Let’s hope part of it involves addressing this anomaly present in the role of PDEx.

September 12, 2012

Government failure

IF ONE were to engage in trading of government securities, he cannot avoid doing business with an amorphous organization called the Philippine Dealing and Exchange Corp. (PDEx). Is PDEx a private organization, a quasi-public institution, a private institution imbued with public interest, or what?

How PDEx has reached its virtual monopoly status in the trading of government securities is a demonstration of government failure. Through errors of omission and commission, and perhaps working in cahoots with, at best, innocent, or at worst, corrupt public officials, PDEx now dominates, monopolizes, trading of government securities.

The sooner this sordid mess is cleaned up the better. The responsibility for securing the integrity of government treasury bills, notes and bonds, both their initial issuance and subsequent trading, is the responsibility of the Department of Finance (DoF), not the Securities and Exchange Commission (SEC).

The SEC is responsible for corporate bonds not government securities. But even then, there should be no exclusivity and certainly no monopoly.

If the DoF would like to assign the execution of its functions to a private partner, ala public-private partnership — a questionable act in the first place because of the issue of confidentiality of government securities transactions — then the act of choosing a private partner should go through the bidding process. This way the best private institution will be chosen and the government will get paid by the winning bidder.

Right now, PDEx is exercising what is clearly a DoF function without the benefit of public bidding. That’s highly disadvantageous to the government. The Commission on Audit should look into this.

POWER TO TAX?
Here’s another questionable part of this deal. PDEx collects fees — and ad valorem at that — from both buyers and sellers of government securities. It collects fees even from transactors who didn’t use its trading platform, charging them purportedly for mapping purposes. Which agency of the government gave PDEx the privilege of collecting fees?

And if the fees are coercive in nature, then it is a tax. But only the government has the power to tax. More precisely, only Congress can pass a tax law. So, which agency of the government usurped the powers of Congress?

A fundamental tenet of taxation is that the real burden of any tax falls on real people (shareholders, workers, consumers) and not on corporations or traders. The higher the fees (taxes), the higher the burden.

The last time this convoluted issue was brought to the public eye was on March 22, 2011. The Senate committee on banks, financial institutions and currencies conducted a hearing to look at the proposed Senate Resolution No. 347, “Resolution… to conduct an inquiry in aid of legislation into the implementation of Republic Act No. 8799 which has resulted in undue delegation, monopoly and restraint of trade and violation of other related laws such as the General Banking Law and the Secrecy of Bank Deposits Act with the end in view of enacting legislative measures to address the same and protect national and financial security, and the investing public.”

The Senate hearing was attended by no less than the Bangko Sentral Governor, the Chairman of the Securities and Exchange Commission, the Deputy Treasurer, and prominent personalities from the Philippine financial world.

The hearing was presided by Senator Francis Escudero, chairman of the subcommittee on fixed income securities but Senator Sergio Osmeña III, chairman of the committee on banks, financial institutions and currencies, was also present.

Both Escudero and Osmeña asked the right questions. Not surprisingly, none of the top government officials took responsibility for giving the PDEx the cloak of legitimacy that it now appears to enjoy. Even some of the prominent banking and finance officials tried very hard to dodge questions and issues raised by the two senators and their counterpart in the House of Representatives, Congressman Luis Villafuerte.

It is clear that none of the senior public officials present were willing to acknowledge paternity for PDEx’s birth. This suggests that there must be something wrong with it.

Unfortunately, the Senate hearing was adjourned before any of the major issues were resolved.

After a year and a half, I am not aware of any subsequent Senate hearings on the matter. But it is important that the conversation should continue in order to clarify the issues and to introduce amendments to existing laws, where warranted.

Every day of delay means that a private institution continues to rake tons of money in the guise of performing a public function. From the point of view of fiscal responsibility, public accountability and openness, that’s unacceptable.

Equally unacceptable is that the existing arrangement is going to make the cost of public borrowing costlier. Potential buyers of government securities will certainly consider the uncertainty of how much PDEx will charge in the future (already unreasonable high according to some traders) for transactions of government securities. This should be a major concern for the Department of Finance which is expected to borrow heavily from domestic sources in the next few years.

Today, the outstanding government securities stood at ₱3.1 trillion. The government is expected to borrow some half a trillion pesos or more in the next few years. The cost of government borrowing is going to be higher because of the PDEx fees. The higher the stock of government securities, the higher the costs of borrowing for the government, and the higher the returns to PDEx owners.

Why allow a privileged few get away with tons of money on their way to their banks at the expense of bank shareholders and government securities owners, including small savers? And why do our legislators and top public officials allow this injustice to persist?

Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines (Diliman). He was formerly secretary of budget and management in the Estrada administration and undersecretary for budget operations in the Aquino 1 administration.

Article location : http://www.bworldonline.com/content.php?section=Opinion&title=Government failure&id=58357

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