Potential investors have this one big concern: our rules confuse them. They get the feeling our rules change a bit too much and too frequently and corruption is at the bottom of it. As businesses must plan for the long term, they want policy and regulatory stability and consistency.
Corruption, it is said, is more politicized in the Philippines. It has been pointed out and not only just in jest, that when investors pay off officials in neighboring countries they deliver and they stay bought. Not so here!
I remember hearing one potential investor telling me that their problem with us has to do with every change of administration. That often means agreements have to be renegotiated all over again. And every renegotiation means, well… you know what.
Since large investments take more time to get going than the six-year term of a Philippine president, they see this political uncertainty a big disincentive. So they end up choosing Vietnam instead where they can talk to one or two senior Communist party officials and binding commitments are made.
Of course they like it that P-Noy has made the Daang Matuwid the hallmark of his administration. But they are also realistic to accept that change will not happen overnight.
In the meantime, graft and corruption in key agencies, aggravated by lack of transparency can still be expected. Investors are also wary of “regulatory capture” where rule making agencies are captured by vested interests making it difficult to expect a level playing field for newcomers.
In a recent joint statement, major local business groups noted: “Though the Philippines continues to improve its competitiveness rankings, the World Economic Forum’s Global Competitiveness Report 2012-2013 still lists policy instability as the fourth most problematic factor for doing business in the country.”
The Management Association of the Philippines, the Makati Business Club, the Philippine Chamber of Commerce and Industry and the Employers’ Confederation of the Philippines raised this policy instability problem with regard to the Pandacan oil depot issue in particular. But the basic policy consistency issue covers a broader area affecting our potential attraction to investors, local or foreign.
The groups pointed out that the “lack of stability and predictability in policies and regulations can only serve to erode the renewed confidence and trust in our governance institutions that President Aquino has painstakingly built under his administration.”
Investors call this problem “political risks.” These “political risks” are major considerations when investors look at the possibility of investing here.
Last week, I also wrote about how investors are confused and discouraged by the never ending debate between the DOF and the DTI on investment incentives. Can’t we just agree now and stick to it so that potential investors can make the right assumptions when they do the math on the wisdom of investing here?
Maybe to us the seemingly confusing environment is perfectly normal. But we are scaring foreign investors we need to attract.
We have to make our rules less mysterious and more predictable. That’s how to approximate the level of investments our Asean neighbors are getting.
PLDT ruling
The other big item under this “policy consistency” problem has to do with the recent ruling on what constitutes compliance to the constitutional restrictions on ownership of certain types of businesses. After years of litigation, the Supreme Court has come up with a ruling that many fear would make foreign capital already here leave.
Until the Supreme Court made that ruling, foreign investors were guided by SEC’s interpretation of what the constitution allows. The new ruling turned out to be more restrictive. There are fears many of our largest corporations will have problems of compliance.
What makes it somewhat confusing is the extensive discussion incorporated in the body of the decision, an obiter dictum, of how the constitutional restrictions ought to be implemented. An obiter dictum is a statement of opinion or belief considered authoritative though not binding. The dispositive portion of the SC decision however, seems less threatening.
For instance, the obiter dictum talked of how the 60/40 rule should apply on each class of stock and not just on all voting shares taken as a whole.
For another, it also talks of not just the legal ownership of shares that ought to be considered but the beneficial owners. That would invalidate the strategy of using so called PDRs or depository receipts that allow foreigners to invest in restricted businesses so long as the legal ownership is held by Filipinos.
The thing is… there may not be enough Philippine capital available or willing to buy out all those foreign owners. Our stock market is also being kept alive by foreign buying and will not be worth the trouble if only locals are left to trade.
Hans Sicat, the president of the Philippine Stock Exchange told the SEC hearing that the ruling at its extreme is a market changing event. He warned that it could trash newly won gains in the economy’s recovery.
In other words, we may be writing ourselves off from the international capital market. If that happens, we will become a Burma before the current liberalization. I am also sure that will knock off any dreams of meaningful economic growth and make it that more difficult to reduce poverty incidence as unemployment and underemployment will worsen.
Maybe the SEC can just rely on the dispositive section of the SC ruling which temporarily provides a good way out of the problem. But even in this case, many other large corporations will have to scramble to get their ownership structure in line the way PLDT did.
It is easy to denounce the SC obiter dictum and decision as once again striking a blow to our investment climate in the same way that the SC did in that infamous petrochemical case and Manila Hotel case some years ago. But I suspect the SC is correct in interpreting the intention of the constitutional restrictions.
Honestly, we are a very insecure people when it comes to foreign participation in business. I see the framers of the constitution as merely reflecting those fears and biases. Yet, to those of us who understand the workings of the world economy today, the rules arising from these fears take us out of the game.
For instance, it took quite a bit of effort to tone down the Retail Trade Nationalization Law. And as it turned out, it was not toned down enough to achieve its purpose of attracting big foreign investors in the retail trade like Walmart and Carrefour that exist even in Communist China.
It is probably just as well that the SC decision brought up the ultimate implications of those ownership restrictions so that we can change those constitutional provisions now. Let us decide once and for all if we welcome foreign investment. It certainly makes no sense to leave such a big sword of Damocles hanging over potential and indeed, even current foreign investors.
Unfortunately time may work against us. Many of those current investors may decide they don’t want any of our long running drama and just leave in a huff. If they do, the implications on our image to investors would be severe.
More importantly such withdrawal of resources impairs our ability to provide good jobs to our people. As we can see now, we need those jobs badly and local capital is simply not enough to create all those jobs.
The numbers present a grim idea of the nature of our problem. At end-July, the Philippines’ unemployment rates stood at seven percent, equivalent to 2.82 million Filipinos without jobs, according to the National Statistics Office. If we count underemployment, which refers to Filipinos with jobs but still looking for additional incomes, the number is worse at an astonishing 22.7 percent of the country’s labor force.
In contrast, joblessness in neighboring countries is lower – Thailand, 0.7 percent; Vietnam, 2 percent; Malaysia, 3.1 percent; China, 4.1 percent; and Indonesia, 6.6 percent – according to the National Statistical Coordination Board.
It is perhaps important to remind P-Noy that upgrading our level of FDI is how we should fight poverty. This is the way to create hundreds of thousands of jobs.
I hope P-Noy does not think the Conditional Cash Transfer program is an anti-poverty measure by itself. It is not. CCT is merely a stop gap measure. The CCT merely helps bring children growing up in poverty a chance to break out of it.
Any real anti-poverty program must create jobs as a means to make economic growth more inclusive. To do that, we need investments. To get investments, we must make our rules clear, consistent and hospitable to investors.
Politics
Here’s something to think about supposedly from Plato.
Those who are too smart to engage in politics are punished by being governed by those who are dumber.
Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco