Fostering Competition Public Disclosure Authorized in the Philippines: The Challenge of Restrictive Regulations NOVEMBER 2018 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the view of the Australian Government, the Canadian Government, the World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Fostering Competition in the Philippines: The Challenge of Restrictive Regulations A project of the World Bank Group, with the support of the Australian Government through the Australia- World Bank Philippines Development Trust Fund, and the Canadian Government. NOVEMBER 2018 i This report was prepared by a World Bank Group team led by Graciela Miralles Murciego (Senior Economist, GTCTC) and Roberto Martin Nolan Galang (Private Sector Specialist, GTCEA) that included Sara Nyman (Economist, GTCTC), Tilsa Ore (Consultant, GTCTC) and Leandro Zipitria (Consultant, GTCTC). Key inputs were provided by Georgiana Pop (Senior Economist, GTCTC), Tanja Goodwin (Economist, GTC04), Seidu Douda (Analyst, GTCTC), Karen Annette Lazaro (Consultant, GTCEA), Beatrice Tanjangco (Consultant, GTCEA) and Camila Ringeling (Consultant, GTCTC). Gretchen Aquino (Consultant, GTCEA) contributed to the data collection process using the OECD Product Market Regulation (PMR) Questionnaire. Osongo Lenga (GTCTC), Yvette Villostas (Program Assistant, CEAOH), and other team members in the Philippine Country Office provided valuable logistics and administrative support. Martha Martinez Licetti (Lead Economist and Competition Policy Global Lead, GTCTC), Javier Suarez (Lead Economist, GTC03), and Paul Phumpiu (Senior Consultant, GTCTC, and former Chairman of the Competition Commission of the Peruvian Competition Authority INDECOPI) peer reviewed the report. The team thanks the World Bank Group experts for their comments. The Philippine Competition Commission (PCC) provided valuable inputs, comments and feedback. The team thanks Chairman Arsenio M. Balisacan, Commissioner Stella Luz A. Quimbo, Commissioner Atty. Johannes Benjamin R. Bernabe, Commissioner Atty. El Cid R. Butuyan and Commissioner Atty. Amabelle C. Asuncion. Additional departmental units and agencies that participated in the process of data collection and validation include the Philippine Statistical Authority (PSA), the Energy Regulatory Commission (ERC), the National Telecommunications Commission (NTC), the Philippine Postal Corporation (PHLPost), the Philippine National Railways (PNR), the Philippine Ports Authority (PPA), the Maritime Industry Authority (MARINA), the Land Transportation Franchising and Regulatory Board (LTFRB), the Civil Aviation Authority of the Philippines, the National Water Resources Board, the Department of Trade and Industry (DTI), the Professional Regulation Commission (PRC), the Governance Commission for GOCCs (GCG) and the National Economic and Development Authority (NEDA). The team worked under the overall supervision and guidance of Mona E. Haddad (Practice Manager, GTC02), Jose Guilherme Reis, Practice Manager for Trade and Competition (Trade & Competitiveness Global Practice), Birgit Hansl (Program Leader, EACPF) and Mara K. Warwick, (Country Director for the Philippines). The findings, interpretations, and conclusions expressed in this Report are those of World Bank staff and do not necessarily reflect the views of the Australian Government, the Canadian Government, and the World Bank or its management, Executive Board, or the governments they represent. For questions and comments on the content of this publication, please contact Graciela Miralles Murciego ([email protected]). Questions from the media can be addressed to David Llorito (dllorito@worldbank. org). For information on the work of the World Bank Group on Competition Policy, please visit www.worldbank. org/en/topic/competitiveness/brief/competition-policy For information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph ii Contents List of Figures iv List of Tables vi List of Boxes ivii List of Acronyms viii Executive Summary 1 I. Developing an effective competition policy framework in the Philippines 18 II. Identifying regulatory obstacles to competition in the Philippines’ markets 38 1. State Participation and Control of Economic Activities 45 1.1 Public Ownership 45 1.2 State involvement in business operations 56 2. Barriers to market entry and rivalry 63 2.1 Administrative burdens on startups 65 2.2 Complexity of regulatory procedures 66 2.3 Regulatory protection of incumbents 66 3. Barriers to trade and investment 70 3.1 Explicit barriers to trade and investment 71 3.2 Other barriers to trade and investment 75 III. Designing a road map for pro-competition reform for the Philippines 80 1. Sector-specific competition snapshots 82 1.1 Electricity 82 1.2 Telecommunications 84 1.3 Transport 92 1.4 Professional Services 94 2. Making markets work more efficiently 96 IV. Quantifying potential benefits of increased competition 97 Annex 1: OECD-WBG PMR values for the Philippines 101 References 102 iii List of Figures Figure 1: GDP growth of the Philippines as compared to selected regional and non-regional peers 19 Figure 2: Market concentration in manufacturing in the Philippines and selected EAP countries 21 Figure 3: Evolution of market concentration in manufacturing in the Philippines 21 Figure 4: Distribution of manufacturing markets by level of concentration based on standard HHI thresholds 21 Figure 5: Distribution of agriculture markets by level of concentration based on standard HHI thresholds 21 Figure 6: Distribution of wholesale/retail markets by level of concentration based on standard HHI thresholds 21 Figure 7: Distribution of transport/storage markets by level of concentration based on standard HHI thresholds 21 Figure 8: Extent of Market Dominance for selected countries (7 least) 22 Figure 9: Extent of Market Dominance and GDP 22 Figure 10: Extent of Market Dominance and GDP per capita 22 Figure 11: Business risks related to weak competition policies in the EAP region 23 Figure 12: Distribution of average market-level price cost margins (PCMs) for the Philippine manufacturing sector 24 Figure 13: Distribution of average market-level price cost margins (PCMs) for the Philippine agriculture sector 24 Figure 14: Distribution of average market-level price cost margins (PCMs) for the Philippine wholesale/retail sector 24 Figure 15: Distribution of average market-level price cost margins (PCMs) for the Philippine transport/storage sector 24 Figure 16: Manufacturing markets in the top deciles of HHI and PCM distributions 27 Figure 17: Agriculture markets in the top deciles of HHI and PCM distributions 27 Figure 18: Wholesale/retail markets in the top deciles of HHI and PCM distributions 27 Figure 19: Transport/storage markets in the top deciles of HHI and PCM distributions 27 Figure 20: A Comprehensive Competition Policy Framework 30 Figure 21: Years since enactment of competition law and years since the competition authority became functional (selected countries in EAP and SA) 31 Figure 22: Scope of the competition laws (selected countries in EAP and SA) 32 Figure 23: Elements of effective implementation of competition law and policy 34 Figure 24: Economy-wide PMR Methodology 39 Figure 25: Economy-wide PMR Score (2017) 40 Figure 26: Decomposition of PMR sub-indicators for the Philippines and selected regional comparators included in the PMR database 41 Figure 27: Decomposition of PMR Score for the Philippines 42 Figure 28: High-level overview of the MCPAT approach 43 Figure 29: MCPAT Typology of competition restrictions 44 Figure 30: State Control PMR Score (higher score indicates a greater degree of restrictiveness 46 Figure 31: Decomposition of state control 46 Figure 32: Number of Subsectors with SOEs 49 Figure 33: Building Blocks of Competitive Neutrality 53 Figure 34: Dispersion of subsidies 55 Figure 35: Barriers to market entry and rivalry PMR Score 63 Figure 36: Decomposition of barriers to market entry and rivalry 65 iv Figure 37: Barriers to Trade & Investment PMR Score 70 Figure 38: Decomposition of restrictiveness through barriers to trade and investment 71 Figure 39: Share of PMR countries (OECD and non-OECD) with quota restrictions in professional services 72 Figure 40: Proportion of markets with some foreign capitalization