Do we really want investments?

"I decided to write you," a reader e-mailed me, "because I was dismayed with recent stories in the papers about Gov. Tet Garcia threatening to sue JG Summit for not wanting to put up a petrochemical plant in his home province of Bataan." So, what else is new?

As if Tet’s threat was not damaging enough, my reader, who is a Pinoy investment banker, noted that other officials are just as out of synch with the national effort to attract investments. "I was equally upset," my reader wrote, "with the announcement by a Public Estates Authority official that Japanese investors may not locate their planned landmark $100-million hospital in the reclamation area because the place was ‘off limits to foreigners’ (what an ugly term to use)."

As an investment banker, my reader declared he is "sure that these stories have once again caught the attention of possible foreign investors doing their due diligence on the Philippines." It is reasonable to ask whether we really want investments, foreign or local. Or, maybe we really just instinctively shoot ourselves in the foot because we have this tragic suicidal tendency as a people.

Our reader complained that it is bad enough we have ill-advised barriers enshrined in our Constitution that prevent foreign companies from investing in a wider selection of domestic-market industries. It is ironic that many so-called nationalists forget that foreign investments not only create jobs but also provide strong enough competition to entrenched local vested interest groups to prevent them from continuing to exploit our people with low wages and high prices.

Now, we have to suffer people like Governor Garcia and that PEA official who have both reinforced foreign investors’ judgment that the Philippines is not an attractive investment location compared to Malaysia and Thailand where foreign investors are treated as fairly as their local capitalists. Even China, a communist country often accused of being xenophobic, welcome foreign investors better than we do. As a result, China has attracted the lion’s share of such investments in recent years that is responsible for its phenomenal growth.

China (including Hong Kong), has reportedly received about $67 billion in direct foreign investments in 2002 – more than double that of the US ($30 billion). That’s more money than all of Latin America, for example, received in 2002 ($56 billion), and more than the combined total of Eastern Europe (including Russia), and the Pacific, (including a surging Australia) -$29 billion plus $24 billion respectively.

The worse part about Tet Garcia, is that he is intelligent enough to know that he is most possibly wrong about the legal basis of his demand that JG Summit must build its petrochemical naptha hydro cracking plant in Bataan rather than Batangas. I am familiar with the issues involved in the first case brought before the Supreme Court which Bataan won. I was with the PNOC when that controversial case arose. This one of JG Summit is different.

What actually were the facts and the ruling by the Supreme Court?

Under the Investment Incentives Act, an enterprise such as the proposed naptha cracker that produces the raw materials for the downstream petrochemical plants is entitled to certain incentives including tax holidays, etc. The incentives multiplied substantially if the plant were to be located in an economically-depressed area as defined in pertinent laws. Bataan was classified as one such economically-depressed province. Batangas was not, hence a plant located there would be entitled to just the basic incentives.

The Taiwanese petrochem company that wanted to build this naptha cracker filed an application with the BOI during the Cory era and indicated Bataan as the site of its operations, specifically land belonging to PNOC. The BOI granted it the corresponding registration certificate pertinent to its being located in Bataan.

The ink on the BOI certificate was not yet completely dry when the petrochem company announced its intention to construct its facilities in Batangas, not Bataan. The petrochem company maintained that the BOI certificate was in effect a contract, insisting that it had the right to put up its operations in Batangas or elsewhere. Then Congressman Tet Garcia understandably raised hell.

What was the ruling of the Supreme Court?

The Court held that the petrochem company could not have its cake and eat it too. If it wanted to avail of the substantially higher incentives, it should stay in Bataan or some other economically depressed province. But if it would transfer instead to, say, Batangas, it should first surrender its original registration certificate and thereafter file a modified or new application which would indicate Batangas as the site of its operations. Its enhanced incentives would also be correspondingly adjusted.

The Supreme Court did not compel it to stay in Bataan. It left to the petrochem company the choice of where to locate its operations - subject however to applicability of the appropriate incentives. For certainly, a Batangas location would not entitle it to Bataan incentives.

It is clear, and I suspect it is as clear to Tet Garcia as well, that the case of JG Summit’s naphtha cracker plant is totally different from that earlier case with the Taiwanese owned Luzon Petrochemical Corporation. In the first place, JG Summit never thought of Bataan as a possible site because it already has downstream petrochemical plants producing polyethylene and polypropylene in Batangas. It proposed to build the naptha cracker close to their two downstream plants as a form of backward integration, with the cracker producing the raw materials for their downstream facilities.

They need the naptha cracker because they want better control on availability and pricing of this basic input material, which obviously determines the pricing and availability of their downstream products. Requiring them to locate the naptha cracker in Bataan would create logistical problems and increase operating costs that would kill the project and probably even the current downstream operations.

I am sure Tet Garcia knows the Supreme Court did not rule that henceforth any naptha cracker plant can only be situated in Bataan. Hopefully, the antics of Tet won’t kill another important basic industry this country needs to be competitive. But our trade and industry officials and even Malacañang must realize Tet is not so much the problem of the Gokongweis but of the Board of Investments which gave JG Summit the incentives.

This administration must defend its position vigorously or lose more credibility in the eyes of potential investors. As for that PEA official, Ate Glo must set him straight. They need people like that like they need holes in their heads.

VoIP and telco VAT

I got this e-mailed reaction to our column last Wednesday from Dodo Galindo, an old friend during my Petron days. Dodo used to head Petron’s technical services group until his retirement.

I am glad you made an issue of VoIP and the government seems to be responding positively to it. I was recently in the U.S. to visit my daughter and my brother (who is an executive of AT&T). My daughter is connected to an internet provider Vonnage, which also provides VoIP for an additional minimal monthly subscription. Through VoIP, they can call anywhere in the U.S. and Canada for free.

My brother was also telling me they are aggressively promoting VoIP because it is a cheaper alternative for their subscribers. So you see how competition really makes companies implement new ideas for customers to benefit. This is also is a strategy for telecom providers to survive under intense competitive environments.

On telco VAT, I am really wondering why some telcos are making a big issue out of the additional VAT of two percent. Anyone can buy prepaid cards for 10 to 25 percent discount. They can just bring down the discount on these cards to account for the additional two percent VAT and am sure retail customers will not feel it since they are paying for the prepaid card price indicated in the card anyway.

Too much work

A blind guy on a bar stool shouts to the bartender, "Wanna hear a blonde joke?"

In a hushed voice, the guy next to him says, "Before you tell that joke, you should know something. Our bartender IS blonde, the bouncer is blonde. I’m a 6' tall, 200 lb black belt. The guy sitting next to me is 6’2", weighs 225, and he’s a rugby player. The fella to your right is 6’5" pushing 300 and he’s a wrestler. Each one of US is blonde. Think about it, Mister. Do you still wanna tell that joke?"

The blind guy says, "Nah, not if I’m gonna have to explain it five times."

Boo Chanco’s e-mail address is [email protected]