Preneed in Need of Capital

I wanted to go back to the Waves of Philippine Business but the recent wave of bad news convinced me otherwise. Preneed firms under water, export manufacturing companies shedding labor, and a cement plant temporarily shutting down. I fear that the effects of the global recession are yet to be fully felt in the Philippines.

The response of the Philippine government is to pass its responsibility to other countries. Note this sad fact -

"Job creation is tough in the Philippines, where some 27 million people live on a US dollar a day or less and where one in three adults are unemployed or underemployed, according to official data.

Jennifer Manalili, head of the labour department's Philippine Overseas Employment Administration, said that as a last resort Manila could export more of its work force."

That's been the solution of the Philippine Government for many administrations already. Instead of thinking of creative solutions to spur local small businesses to prosper, politicians are busy eating away at their pork barrel and praising OFW's as heroes to cover up for their own shortcomings. There has got to be a more concerted effort to spur small business lending.

There are plenty of reasons why there are more sari-sari stores than supermarkets or groceries in the country. There are also plenty reasons why carinderias stay carinderias for eternity here. I am sure that one reason is poor lending practices or just common place ignorance about what is available out there. This deserves a post by itself at a future date.

I attended the "Meeting of Major Business Organizations on the 2009 Economic Roadmap" (Yes, that is the title verbatim) held two weeks back. The takeaway there was that the government would set up a support fund for returning OFWs. We just don't know when this will be in place or how this will be distributed. Maybe they will provide information soon.

Apart from that, the government is banking on the BPO sector to absorb the expected job cuts coming from the manufacturing/export industries. The BPO sector is expected to continue to grow this year. I wonder if President Obama will push through with his "bring jobs back to America" call.

What was not indicated (nor expected I believe) was the recent closure of three preneed companies - Legacy Consolidated Plans, Scholarship Plan Philippines, and All Asia Plans Corp. Before that, Pacific Plans of the Yuchengco group (now owned by Noel Oñate) also faced similar problems. There is something wrong with the business model of preneed firms, particularly those dealing with education pension plans.

(To know Noel Oñate's background check this.)

I wonder if schools in the country ever experienced recession? If I remember my corporation law right, I know for a fact that schools are not charged any income tax. So if they are not paying higher taxes, what merits their annual hike in tuition fees? Hmmm...

While it may sound like an excuse to some, Mr. Oñate's assessment is equally true - "He cites that while tuition has gone up by 30-40%, purchased educational plans earn only 10%."

In fact, just ask yourself, where do you invest money your money? Savings, mutual funds, the stock market, bonds, property, insurance. Now, assess all of these -

Those that give guaranteed returns are at the low single digits.

Those like mutual funds and the stock market are volatile and market dependent.

Bonds are below inflation rate (especially vs. last year), and most of them do not give you compound interest benefits.

Properties on the other hand are cyclical and depend very much on location (don't listen to your real estate broker about property as the best investment) and pretty much the rest of what happens to the value of your property rests on the FUTURE. Something you don't have any hold over.

Insurance on the other hand has a big return on your premiums invested. However, it requires that the planholder die first. So who enjoys the benefit? Definitely not the planholder.

So you see, where can you invest your money in the Philippines? These are probably the same questions the management team of preneed companies ask themselves.

While much of the anger and fury has been directed at preneed firms, there should be even more levied on schools. Private education is one of the major expenses in a family's budget. If tuition rate hikes are in the double digit areas, do you think that on wages alone, you'll be able to send your children to school? I don't want to wake up one day and see my tuition bill rise to 500,000 per semester. You should wonder about that too.