Staple Foods Sector Diagnostic Country Report 1

1.Background 2.State of competition and competition reforms 3.Overview of the market structure 4.Competition concerns 5.Overview of Research methodology 6.Impact of competition reforms 7.Computing impact of competition reforms What to expect 2

As in many developing countries: post-colonial Philippines pursued industrialization via import substitution No comprehensive anti-trust law Various competition related laws EO 45: the Department of Justice designated as the country’s competition body (OFC) Of special concern: overlap of duties and responsibilities of OFC based on EO 45 Competition reform in the Philippines 3 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Competition reform in the Philippines Powers of OFC based on EO 45: -prosecute violators to prevent, restrain and punish monopolization, cartels, and combinations in restraint of trade; -enforce competition policies and laws to protect consumers from abusive, fraudulent, or harmful corrupt business practices; -supervise competition in markets by ensuring that prohibitions and requirements of competition laws are adhered to, and to this end, call on other government agencies and/or entities for submission of reports and provision for assistance; -monitor and implement measures to promote transparency and accountability in markets; -prepare, publish and disseminate studies and reports on competition to inform and guide the industry and consumers; and -promote international cooperation and strengthen Philippine trade relations with other countries, economies, and institutions in trade agreements. 4 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Competition reforms in rice 1.Presidential Decree No. 4 2.Agricultural Tarrification Act Converted all agriculture import quotas to tariffs Exception for rice (time-bound; to 2017) 5 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

NFA and private sector imports 6 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Marketing Issues Dawe et al (2009): - In 2002, between Thailand and the Philippines, the difference in mark-up from paddy to wholesale is 6% - Marketing costs are 100% of the gross marketing margin in Thailand, and 55% that of the Philippines ($29/ton) - Marketing margin at wholesale-to-retail stage: only P0.33 pesos per kg of palay higher in Manila vs. Bangkok 7 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Marketing Issues Rapid appraisal: confirms the findings of the literature survey showing a competitive market structure for domestic rice production and marketing -> little scope for reforms such as lifting barriers to entry One study does find persistence of excess profit in trading  Entrants into the industry are not necessarily low cost traders/millers  Low cost traders find it difficult to expand: lack access to working capital  Barriers to entry to foreign investors: information, policy 8 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Market structure and NFA The procurement price of the NFA together with its financial health determine its ability to compete with private traders for palay stocks 9 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

NFA Procurement ( ) Wide swings in paddy procurement, but maximum is about 5% 10 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

NFA Palay Basic Support Price and Paddy Price YearNFA Support PricePaddy Prices Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Market structure and NFA The NFA manages to stabilize retail prices, but keeps domestic process high by means of an import monopoly 12 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

NFA Rice Distribution (% of net food disposable) 13 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

World and domestic prices, nominal protection rate, 2013 World Price (P/kg)Domestic Price (P/kg)NPR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Warehouse Facilities Number of warehouse operators have been increasing from As of December 2013, there are a total of 450 NFA warehouses in the Philippines with a total capacity of 1.5 million metric tons [but only 21% utilization rate] 15 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Total Number of Applicants per Line of Activity Line of Activity TOTAL127,038116,622123,249112,319109,44794,629 Retail66,42263,21877,19370,43366,96054,032 Wholesale4,6284,8733,6143,0733,0653,314 Retail-wholesale16,78514,36711,45710,37010,8529,936 Mill 12,73912,32410,4699,6728,3838,288 Warehouse8,80910,67911,04210,91213,13011,783 Threshing1,7351,7061, Shelling Drying Manufacture1, Importing Exporting Indenting Packaging Transporting6,1035,4605,2934,8154,6934,842 Others7, ,6671,

Evaluating Impact of Competition Reform on Trade The model for economic surplus analysis is TWIST (Total Welfare Impact Simulator for Trade) Baseline data: 2013 market Scenarios: 1. Free Trade (increased in 2013) 2. Increase in import quota (2013 quota increased at 404,702 to 1 million ton) 17 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Results of TWIST Elasticity of demand Baseline Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 404, ,390 49,470 5, , , ,907 49,470 5, , , ,636 49,470 5, ,732 Changes from baseline Free trade Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 3,796, , ,985 -5, ,464 2,577, , ,985 -5, ,994 4,970, , ,985 -5, , Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Results of TWIST Elasticity of demand Baseline Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 404, ,390 49,470 5, , , ,907 49,470 5, , , ,636 49,470 5, ,732 Changes from baseline Increased quota Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 595, ,706 -6,599 6,096 25, , ,694 -9,554 5,065 33, , ,675 -5,082 6,611 21, Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Benefits from the two scenarios: Free trade: economic benefit by as much as P138, million above baseline Increase in import quota: economic benefit by as much P25, million above baseline 20

Why import monopoly persists Organized farmer groups constitute a strong lobby vs liberalization Tolentino and de la Pena (2012) rather the following lobby groups: - The NFA Employee’s Association; - The various service providers to NFA (trucking, logistics, warehouses, etc.); - Financial institutions which lend to NFA; - Network of corruption within NFA that exploits the difference between NFA retail price and market price, and between domestic price and world market price 21 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

Conclusion Rice importation policies need to be rationalized and effective in protecting not only the interests of producers but also consumers and other market participants. Huge differences in the costs of bringing in imports and moving domestic supplies to consumers makes smuggling lucrative. A properly-set tariff level under a liberalized importation policy -- allowing anyone to bring in rice – reduce consumer prices, offer moderate protection to farmers 2014 – 2017: critical period for the rice sector governance 22 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact