E&Y urges government to extend grant of SPV perks

Global accountancy firm Ernst & Young (E&Y) is urging the government to extend beyond September this year the grant of incentives under Republic Act (RA) 9182, otherwise known as the Special Purpose Vehicle (SPV) Law of 2002.

E&Y officials said that it takes months and sometimes years to package bad assets of Philippine commercial banks. And it also takes a relatively long time to auction off banks’ non-performing loans (NPLs) as well as their real and other properties owned and acquired (ROPOA).

There are at least P100 billion in bad assets, which has burdened the country’s banking system. That has likewise resulted in a tight credit environment for the economy.

E&Y is the transactional advisor of the Land Bank of the Philippines (LBP) for the disposition of some P17-billion in bad assets. They also advise the Philippine National Bank (PNB) for similar purposes.

It is a global institution dealing in accounting, auditing, tax issues and advisory, transaction advisory, risk advisory and management. It is represented in the Philippines by practice member SycipGorres and Velayo (SGV) & Co.

"The most immediate thing regarding the SPV Law is that it should be extended," Beaux R.J. Pontak, E&Y senior manager said. "It is indeed urgent because it (the law) did not have a chance to do what it was suppose to do."

The law was passed in late 2002 but only took effect in early 2003. It took another few months for the implementing rules and regulations (IRR) to be enforced.

The tax and other incentives embodied in RA 9182 will only be effective for SPVs that have registered with the Securities and Exchange Commission (SEC) on or before Sept. 18 this year. Likewise, all transactions must be successful on or before April 2005.

An SPV is generally a joint venture company between the bank burdened by the bad assets, and a foreign asset management company or AMC. However, the bank can apply for a SPV even if it still does not have a partner.

Pontak explained that other Asian countries that had already taken the SPV route have their own version of the SPV law. Korea has its ABS (asset-backed securitization) Law, Taiwan has the AMC (asset management company) Law, while China has several laws put together for NPLs to make sure of the efficient repratriation of the bad asets.

"But in the Philippines it has the SPV law which has an expiration clause. If it is a good law, why expire it," officials said.

The accountancy and financial experts said that aside from extending the life of the law or specifically the incentive package embodied in the law, the banking system including government should gather all the information from all the experience of other countries that have successfully implemented the SPV practice.

"Then they can adopt some practices that are considered at par with international standards, especially in terms of reducing frictional costs," the E&Y senior manager said.

AMCs spend more than a million pesos just to be involved in the SPV exercise without necessarily acquiring the bad assets. That is considered among the frictional costs which could be reduced and thus making it attractive for foreign investors.

E&Y executives reminded that the Philippine is a relatively small investment market for bad assets compared to Korea, Thailand, and China.

One of the purposes of the SPV law is to raise the value of the bad assets. If there are no transactions, the banks and the Philippines gets nothing.

"But if there are transactions it results in investments, more tax revenues, new industries and employment, in other words better allocation of resources," Pontak explained.

Earlier, the Bankers Association of the Philippines (BAP) said that it was drafting a proposed bill, which sought to extend the effective date of incentives under RA 9182.

"We hope that the legislators can understand the importance of the SPV for the banking system, and for the country’s financial health," BAP president Cesar EA Virata said.

Calling it a simple piece of amendment, Virata said that at the least they would want the dates "September 18, 2004" to be replaced by mere "2006" or "2007", and the April 2005 date moved accordingly.