Monday, September 19, 2005

CAP's Debacle

CAP: From pre-need's poster boy to whipping boy
Daxim L. Lucas and Elizabeth L. Sanchez
Inquirer News Service

COLLEGE Assurance Plan Philippines Inc. (CAP) is the biggest and most successful pre-need firm in the country's history.

It is also well on its way to becoming one of the country's biggest corporate failures.

In its death throes, CAP threatens to drag down with it a multibillion-peso industry, more than 40 pre-need companies, and the financial fortunes of millions of clients who hinged their futures on the promise of guaranteed returns.

To be sure, the company has performed well in the past, having paid out an estimated P13.9 billion in tuition benefits since its inception in the early 1980s. But it has since fallen on hard times.

Once a symbol of financial security, CAP's flagship product--the "open-ended" educational plan, which guaranteed matriculation benefits regardless of future tuition hikes--has fallen into disrepute. Schools no longer accept company-issued checks as tuition payments. The firm is insolvent, and its top officials have recently been charged by regulators before the courts.

Critics of the pre-need industry--and an increasing number of dissatisfied clients--now believe that early success has transformed successful financial schemes into financial scams.

Early warning
One such critic is banker and financial reform advocate Evangeline Escobillo.

As an officer of the Actuarial Society of the Philippines (ASP), she said that CAP's troubles, along with that of the pre-need industry, were predicted as early as the mid-1990s.

"As actuaries, we could tell even back then that something was very wrong," she said in an interview last week. "We had a hunch."

Having dealt with the mathematical aspects of the insurance industry in the past, Escobillo and some ASP members volunteered to review the finances and accounting practices of the pre-need industry.

A close cousin of the insurance industry, the pre-need industry was then "red hot." The economy was beginning to take off in the 1990s, disposable income was rising, and clients were buying educational plans in droves. More importantly, the real estate industry was booming, and high returns on investment were becoming the norm.

Even during the boom times, Escobillo said a cursory examination of industry practices already revealed shocking weaknesses.

"These companies' business models were counting on annual returns of 18 percent," she said incredulously. "That was very optimistic. It was not sustainable."

More importantly, her group discovered that the entire pre-need industry was using aggressive accounting practices which understated liabilities and tended to present a rosier financial picture than warranted.

Many owners and top officials of pre-need firms were content to mimic CAP's practices, not realizing that they were fooling themselves and their clients, Escobillo explained.

"Everyone else adopted it," she said. "No one bothered to question the system."

Ticking time bombs
The financial troubles that have befallen at least three major pre-need firms since last year merely highlighted in very harsh terms that the old business model of "open-ended" plans was a disaster waiting to happen.

The Federation of Philippine Pre-Need Plan Companies (FPPC), the umbrella association of the country's more than 40 pre-need companies, now admits that their old business model was bound to fail.

An oversight committee formed by the Securities and Exchange Commission (SEC) last year to track the financial health of embattled CAP described the firm's products as ticking time bombs.

These open-ended plans had a hidden flaw: it committed the firm to a financial obligation that had no ceiling (a deregulated tuition environment) amid increasingly limited returns on investments.

How did this scheme evolve?

In 1980, lawyer and pre-need executive Enrique Sobrepe¤a Jr. formed CAP and introduced the education plan after realizing that savings of the average family were often insufficient to send children to school.

His business model capitalized on the dream of every Filipino family to send their children to college.

Packaged as an educational plan, CAP pooled plan holders' premium payments and, with the aid of trustee banks, invested them in high-yield assets and securities. The success of the scheme was contingent on CAP's investments appreciating faster than the cost of college education.

It worked-but only for a while.

By the mid-1990s, the industry's business model was coming under intense pressure as the government deregulated the tuition environment for colleges and universities. The outbreak of the 1997 East Asian financial crisis signaled a sea change for CAP and the rest of the industry.

According to Escobillo, many pre-need companies like CAP tried to cover their ballooning liabilities and benefit payouts by simply selling more educational plans.

"The proceeds from the new sales were used to service maturing obligations," she said. "This is how pyramiding scams operate."

As with fly-by-night pyramid scams, the financial house of cards was bound to collapse, leaving many clients holding the bag.

Dashed hopes
Pietro Azurin, an electrical engineer whose son is a sophomore at a prestigious university in Metro Manila, bought his CAP education plan in the 1980s for roughly P14,000.

Azurin said he latched on to a CAP agent's sales pitch: that the firm will take care of sending his child to a school of his choice. He felt that he was buying more than a contract. He was trying to ensure a good future for his son through education, especially when old age ends his earning capacity.

"Ngayon, sa araw na inaasahan mo, wala na. Kailangan mag-umpisa ulit (Now it's no longer there in your time of need. We need to start over)," Azurin said, admitting that ordinary plan holders like himself did not see the symptoms of the industry's near collapse coming.

Azurin has now borrowed money from loan sharks and friends to pay for his son's enrollment and mid-term exams, as schools clamp down on students who fall behind on tuition payments.

He also pins his hopes on a promissory note from CAP which has pledged to reimburse him and other plan holders by next month for the advances they made for their children's education.

"Sinabi nila sa amin na huwag kami bibitaw, na pahabain ang pasensya. Pero malapit na maubos ang pisi namin (They told us not to let go, to be patient. But we're almost at the end of our rope)," Azurin said.

He complains about being "dribbled" between CAP and the SEC after airing his complaint to both parties. For now, all he can do is wait, after the SEC made him and other plan holders sign a letter to the CAP president seeking an explanation for the firm's woes.

Like millions of other clients of CAP and other pre-need firms, Azurin wants to know what went wrong. He wants to know if regulators were negligent. He wants to know what he can do to recover his hard-earned money and to make the company with sweet-talking salesmen honor its obligations.

Power Rates Hike

As I See It : Napocor petitions for yet another rate hike

Neal H. Cruz
Inquirer News Service

WILL OUR MISERIES NEVER CEASE? AFTER the expanded value added tax-which, upon its implementation beginning this month, will trigger a chain-reaction of increases in the prices of practically everything-we will be hit by another wallop. The power rate will increase-again-as if it is not yet high enough.

While the whole nation's attention was riveted to the political crisis, the National Power Corp. took advantage of the distraction to petition the Energy Regulatory Commission for yet another 71-centavo rate increase. The ERC already granted, just late last year, a provisional authority to Napocor to increase its rates by an average of P.9798 per kWh. In this latest petition, the power firm refused to go into the details as to why it is asking for another increase. It just said the increase would cover the cost of "oil and other operating expenses" of the ailing state-run firm.

On top of the rate increase, Napocor also managed to quietly get another $400-million (more than P2 billion) foreign loan. Of this, $300 million was obtained through the issuance of six-year floating rate notes. The remaining $100 million, secured only last week, completed the financial package. The fresh borrowings are all guaranteed by the government. They will set back the privatization of Napocor as mandated by the Electric Power Industry Reform Act (Epira).

Napocor is already the biggest contributor to the national budget deficit. It is expected to incur another P31 billion in losses this year, in spite of the fact that the Philippines is already running neck and neck with Japan, Asia's richest nation, as the countries with the highest power rates in the region. The Philippine government has already absorbed P200 billion (repeat, billion) of Napocor's debts, pursuant to the Epira. Thus, the taxpayers will have to pay for Napocor's debts, old and new, on top of higher electricity rates.

But while the government is quick to implement the Epira provision absorbing Napocor's debts, it is very slow in implementing the provisions to privatize this biggest of the government's white elephants.

Where does the money go? Here is only one example: A joint congressional panel investigating Napocor found out last year that thousands of Napocor officials and employees were paid a total of about P12 billion in retirement packages in preparation for the firm's auction sale.

Of the amount, P119.4 million was given to 25 executives and senior officers. After getting their generous retirement benefits, these top management executives were then re-hired at similarly fabulous salaries.

How can the government ask the people to pay higher taxes when it is squandering Napocor's dwindling funds to graft and corruption, in bribes to congressmen and mercenary witnesses, and for the expenses of camp followers made to travel abroad just to clap during GMA's speeches?

Why the government is giving priority to Napocor's fresh borrowings rather than to its privatization, as provided by the Epira law, is still a mystery. Privatization will, in fact, help the government raise the funds needed to pay Napocor's debts and reduce government borrowings as well as the tax burden on Filipinos. Privatization is one way to stop the financial hemorrhage brought about by new borrowings and to arrest the government's worsening fiscal condition.

New borrowings, on the other hand, will add to the already unmanageable debt burden. Who in his right mind will buy Napocor with its gargantuan debts?

Adding insult to injury is the jubilation of the Bangko Sentral over the new borrowings, when it should be sorry for them. Why? The latest borrowings, the Bangko Sentral boasted, "boosted the country's gross international reserves to an all-time high of $17.852 billion!" Adding more to our debt burden, that's something to be proud of?

Budget Secretary Romulo Neri, the guy who has started refusing to sign checks because there are no more cash to cover them, was more circumspect when he correctly pointed out that Napocor's debt is taking its toll on the government's fiscal position, with the bulk of government expenditures during the first seven months of this year going to interest payments alone. The bitter truth is, the government has no clear picture of what to do with the ballooning budget deficit and foreign debts. And Napocor is already the biggest single contributor to this deficit.

The Philippine government is already in a debt spiral-borrowing more to fund interest payments alone-not even the principal of maturing loans-thus making our national debt bigger and bigger, with no sign of how and when the spiral will end. This is the straight path down to bankruptcy.

The government's solution is simplicity itself: squeeze more taxes out of the people. But the Filipinos, among the poorest people in the world, have no more to give. They can't even afford their daily bread; where will they get the taxes to pay the government? They will be like the goose that lays the golden egg, which the greedy giant forced to lay more and more golden eggs so that it died.

I think Congress, which has the power of oversight on these borrowings, should look into the picture again and see where the money is going or has gone. It is imperative that Congress look into this mess because the executive branch has shown that it cannot stop the financial hemorrhage but, in fact, contributes to it. Just look at GMA's latest secret deal-the Venable lobby contract that will cost the taxpayers another P4 million a month, another expense they can no longer afford.

Who knows how many of these secret deals are still out there undiscovered?