Carlito Añonuevo, Jenina Joy Chavez, Prospero J. De Vera, Alvin Firmeza, Jose Ernesto Ledesma, Nepomuceno Malaluan, Ma. Cristina Morales, Rene Ofreneo, Rene Raya, Jessica Reyes-Cantos and Filomeno Sta. Ana III, Action for Economic Reforms and Friends*

January 2002

Much heat has been generated by the national government’s issuance of the PEACE Bonds that resulted in the transfer of PhP1.4 billion to the Caucus of Development NGO Networks (CODE-NGO). For one, an esteemed colleague in the human development advocacy, Solita Collas-Monsod, has written that the critics’ accusation of cupidity or stupidity against ” everyone involved [with the PEACE Bonds]…reflects on their ignorance, or envy, or political opportunism.”

But a good number of critics are not the ignorant, envious and opportunist type. Our opposition to the PEACE Bonds stems from a cold analysis that CODE-NGO was engaged in impermissible rent-seeking to obtain the PhP1.4 billion.

Defining Rent-Seeking

The principal theorists on rent-seeking (J.M. Buchanan, R. Tollison, and G. Tullock) define it as “the resource-wasting activities of individuals in seeking transfers of wealth through the aegis of the state.” Similarly, R.B. Ekelund and Tollison describe rent-seeking as “activities whereby individuals seek returns from state-sanctioned monopoly rights.” Tullock views rent-seeking as “the activity of setting a monopoly or getting some other government favor.”

Of course, there will always be rent. But even those who point out the limits of the theory agree that there is rent obtained through “control of market positions” and that rent-seeking entails an opportunity cost (W. J. Samuels). The pernicious type of rent-seeking is one that consists of the non-transparent use of a position of influence or the use of corrupt methods to secure privilege from government, resulting in monopoly profits for a particular group or individual, to the exclusion of other individuals or groups who are similarly situated or who belong to the same class or sector. Not only does this result in the waste of resources; it also undermines the democratic processes of voting and transparent public consultations. Cronyism, patronage politics, and graft and corruption are linked to the worst kind of rent-seeking.

When applied to the Philippine context, the theory appears robust. No one will contest that big amounts of resources are invested in rent-seeking activities by competing interest groups. The problem is magnified when we look at the kinds of rent-seeking activities that are undertaken. Often they involve bribery and non-transparent influence- peddling.

Society has looked upon non-governmental organizations (NGOs) as the most consistent force in fighting bad rent-seeking. The fight has been waged through exposing cronyism and corruption and advocating policies that promote transparency and democratic participation in decision making. Hence, it is a very sensitive, painful matter within civil society if NGOs were found to be engaged in rent-seeking.

CODE-NGO’s Rent-Seeking

From CODE-NGO’s own account, we can establish that it undertook rent-seeking activities. Based on the papers provided by CODE-NGO, the transaction proceeded in this manner:

As early as March 2001, the CODE-NGO had actively lobbied government agencies for the issuance and sale of 10-year zero coupon notes at a rate that would allow it to sell at the secondary market for a profit. The profit was intended to set up a foundation that would finance poverty alleviation projects. The proposal was first presented to the Department of Finance (DoF). To make the instrument attractive to the secondary market, the CODE-NGO lobbied the Monetary Board and the Insurance Commission to grant the instrument reserve eligibilities. It also secured a Bureau of Internal Revenue (BIR) ruling, declaring the exemption of the issue from taxes on any gains from the sale, exchange, or retirement of the PEACE Bonds. The government finally agreed to the issuance of the 10-year treasury zero coupon notes, but opposed any outright purchase agreement (the original CODE-NGO proposal). Instead, the government decided to course the issuance through its auction mechanism. CODE-NGO participated in the auction on 16 October 2001 through Rizal Commercial Banking Corporation (RCBC), a government securities eligible dealer. RCBC cornered majority of the issue, sold it at the secondary market for a profit, and turned over to CODE-NGO PhP1.4 billion of the profit. This profit was used to create a permanent endowment and capital fund for the PEACE Foundation that was created by CODE-NGO.

We can draw from the admitted facts that CODE-NGO lobbied government to obtain a profit in the form of a rent. CODE-NGO is candid enough to admit that it worked for, and would have preferred, a government decision that would have given it a privileged position outright. The ultimate decision of government was to course the transaction through the auction. A negotiated settlement, after all, would have been a blatant act of government giving in to rent-seeking of a group that has close personal and political ties with the present administration. We cannot discount the fact that CODE-NGO banked on the political capital it built during the campaign to oust President Estrada, as well as personal connections, to secure from government certain decisions meant to corner for itself a monopoly rent— to the exclusion of other groups similarly situated.

That the issuance of the PEACE Bonds was done through auction is now used as an argument that CODE-NGO obtained its objective fair and square. Indeed, an auction is better than a negotiated settlement. But even in the auction, CODE-NGO’s rent-seeking behavior had already given them an advantage.

Among similarly situated groups, CODE-NGO had the privilege, if not sole access, to the auction. Other civil society groups were not even aware of this opportunity. In economic jargon, there was information asymmetry (an indication of market failure). If provided the information, other civil society groups could have participated in the auction by attaching themselves to eligible bidders.

But does CODE-NGO deserve special treatment, being the largest network of NGOs? While CODE-NGO may be the biggest network of NGOs, it nonetheless does not represent the whole NGO community. Nor does it claim to be the leader of Philippine NGOs. “Inequitable access” to the PEACE Bonds is hence a valid issue (a point raised by a social reformist with extensive experience in business, government and NGOs). In short, the issuance of the PEACE Bonds was a particularistic dispensation of privilege.

We also note that CODE-NGO and RCBC had a head start over the other dealers. That is, the first-mover advantage. Recall that CODE-NGO was the party that lobbied for tax exemption and liquidity reserve eligibility. The Bangko Sentral ng Plipinas (BSP) approved CODE-NGO’s request on 7 June 2001 for the 10-year, zero coupon bonds to have eligibility as secondary reserve. The BIR wrote a letter to CODE-NGO dated 31 May 2001 regarding its ruling on tax exemption for the 10-year, zero coupon bonds. And a month after the auction, the Insurance Commissioner issued a ruling addressed to the CODE-NGO, declaring the bonds to be eligible as capital and reserve investments for insurance companies.

Whether the forward information resulted in information asymmetry among the eligible dealers in the auction is debatable. In this regard, the public disclosure of all relevant information, including agreements between RCBC and CODE-NGO, is necessary to close this particular issue.

More bothersome is that some admitted facts provide fertile ground to speculate that irregularities may have been committed in the process to favor RCBC and CODE-NGO. Why was the instrument called PEACE Bonds when the government proceeds from the issue were not tied to any “poverty eradication and alleviation” projects of the government? Why was it so named as if CODE-NGO was destined to get the profits from the secondary market trading game?

CODE-NGO, by its own admission, did not have any property interest in the PhP10 billion, which the RCBC used to purchase the bonds. What then was the basis or consideration for RCBC to turn over PhP1.4 billion to CODE-NGO? The only explanation that CODE-NGO offers is that the amount it got from RCBC was the price of the “innovative” idea. But an idea, no matter how brilliant, does not assume a market value unless it is transformed into property, such as through copyright or a patent. CODE-NGO’s idea did not undergo such transformation. It is absurd to give CODE-NGO exclusive right to the idea of the issuance of a ten-year zero coupon bond, which is mislabeled PEACE Bonds. We can only agree to the observation of a noted and respected academician that the PhP1.4 billion must be the price of political capital.

Setback for Government and Civil Society

A final but equally important point: Even though the PhP1.4 billion gained by CODE-NGO came from RCBC (and to reiterate, what CODE-NGO had was not financial but political capital), this does not mean that government incurred no cost in the transaction. To be precise, there was an opportunity cost to government, equivalent to the PhP1.4 billion that CODE-NGO got from RCBC. The amount remitted to CODE-NGO was a cost to RCBC, which was factored into the price (interest rate of 12.75 percent) it bid for the zero coupon Treasury notes. Said differently, instead of government realizing gains from the transaction, RCBC used PhP1.4 billion to pay CODE-NGO.

All told, even in the absence of any illegality in the transaction, it is clear from the facts that CODE-NGO was engaged in rent-seeking. CODE-NGO’s behavior even reinforced the bad rent-seeking processes—non-transparency, exclusivity, patronage politics and cronyism—that are already entrenched in government. CODE-NGO itself condemned such processes not so long ago when it actively campaigned to oust then President Estrada.

The particularistic granting of privilege could have been avoided if the whole process had been transparent. The whole NGO sector should have been consulted. More important, public debate involving civil society and the legislature should have been done.

That said, the issue would have become a policy question. Still, the wisdom of such policy is open to challenge. For example, is it prudent to use the authority of the BSP to secure incentives to facilitate the creation of an endowment fund for NGOs or the private sector? Is it appropriate to impinge on the integrity of the Treasury auction to undertake the fiscal function of distributing resources?

We do not doubt the noble intentions of CODE-NGO. Neither do we question the social commitment of its leaders. But this does not justify the distortion that happened. Rent-seeking cannot seek refuge in the nobility of the cause or intention. Recall the many instances in which the interests of farmers and workers have been invoked to justify rent-seeking behavior (e.g., commodity levies set up ostensibly to modernize the coconut, sugar and other industries and to help emancipate the rural masses from poverty). The outcome of such, however, has been the plunder of public resources and the decay of the state.

Let it not be said that this straightforward criticism is borne out of a “crab mentality” to pull down CODE-NGO. We share the same feeling expressed by other concerned civil society members—we regret that CODE-NGO’s rent-seeking has given political ammunition to the opportunistic section of the opposition.

And lest it be forgotten, CODE-NGO was a product of the struggle against the Marcos dictatorship and that it was at the forefront of the struggle to impeach and oust Estrada. Both regimes were the most notorious for, among other negative things, promoting rent-seeking.

It is therefore most alarming to us when NGOs that fight rent-seeking turn out to have engaged in rent seeking, even unwittingly. For then, we lose the moral high ground in the struggle to transform the Philippine state and society.

The CODE-NGO’s actions should not escape the scrutiny and criticism of advocates of good governance. There are limits to civil society’s relationship with government, and sadly, CODE-NGO has overstepped the limits.

In so doing, it has set back the entire civil society struggle.


* This paper is the product of the collective work of Action from Economic Reforms and friends from the academe. We thank our friends in the academe for their contributions and comments, but any errors and omissions are the sole responsibility of Action for Economic Reforms.