1. Staple Foods Sector Diagnostic Country Report 1

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. NFA Procurement (2000-2013) Wide swings in paddy procurement, but maximum is about 5% 10 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

11. NFA Palay Basic Support Price and Paddy Price YearNFA Support PricePaddy Prices 1990 6 5.11 1991 6 4.7 1992 6.. 1993 6.. 1994 6 6.38 1995 6 8.2 1996 8 9.26 1997 8 8.63 1998 8 8.34 1999 9 8.09 2000 10.. 2001 10 8.52 2002 10 9.69 2003 10 9.86 2004 10 9.73 2005 10 11.08 2006 10 11.05 2007 11 12.39 2008 17 15.02 2009 17 14.28 2010 17 15.35 2011 17 13.55 2012 17 14.35 2013 17 17.33 11 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

12. 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

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

14. World and domestic prices, nominal protection rate, 2013 World Price (P/kg)Domestic Price (P/kg)NPR Jan 23.2429.8128.28 Feb 23.1829.7628.41 Mar 23.0429.7028.91 Apr 23.3229.7127.42 May 22.2029.8234.32 Jun 21.9230.3438.41 Jul 20.8131.5751.73 Aug 19.7232.9066.80 Sep 19.7934.0071.84 Oct 19.2733.4573.57 Nov 18.6333.5580.10 Dec 18.6034.1683.70 14 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

15. Warehouse Facilities Number of warehouse operators have been increasing from 1990-2010 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

16. Total Number of Applicants per Line of Activity Line of Activity199019952000200520102013 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 Threshing1,7351,7061,116638419370 Shelling614553330199125 Drying104213473496 645 Manufacture1,265488357234209221 Importing18860165153160 95 Exporting5611 89 Indenting29182715127 Packaging91635494335 Transporting6,1035,4605,2934,8154,6934,842 Others7,6032.6341,6671,249892927 16

17. 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

18. Results of TWIST Elasticity of demand -0.50-0.25-0.75 Baseline Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 404,702 33.70 387,390 49,470 5,627 442,486 404,702 33.70 781,907 49,470 5,627 837,004 404,702 33.70 260,636 49,470 5,627 315,732 Changes from baseline Free trade Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 3,796,035 -13.90 178,076 -33,985 -5,627 138,464 2,577,522 -13.90 169,605 -33,985 -5,627 129,994 4,970,516 -13.90 186,240 -33,985 -5,627 146,628 18 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

19. Results of TWIST Elasticity of demand -0.50-0.25-0.75 Baseline Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 404,702 33.70 387,390 49,470 5,627 442,486 404,702 33.70 781,907 49,470 5,627 837,004 404,702 33.70 260,636 49,470 5,627 315,732 Changes from baseline Increased quota Imports Retail price (P/kg) Welfare measures (P millions) Consumer surplus Producer surplus Importers revenue Economic surplus 595,298 -2.18 25,706 -6,599 6,096 25,203 595,298 -3.21 37,694 -9,554 5,065 33,205 595,298 -1.67 19,675 -5,082 6,611 21,204 19 Background – Competition Reforms – Market Structure – Competition Concerns - Assessment of impact

20. Benefits from the two scenarios: Free trade: economic benefit by as much as P138,464.10 million above baseline Increase in import quota: economic benefit by as much P25,203.33 million above baseline 20

21. 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

22. 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