Lifting foreign equity limits not enough to lure investors

The proposed lifting of restrictive economic provisions in the Philippine Constitution will make the country a bit more competitive but will not be enough to create a tsunami of inward foreign investment, prominent economist and national scientist Raul Fabella said.

While he agreed that the proposed lifting of foreign ownership limits would make the Philippines more investor-friendly, Fabella—a resource person during the recent hearing held by the Lower House Committee on Constitutional Change—pointed out that this must be accompanied by a slew of other reforms to reverse decades of underperformance versus neighboring countries.

“The problem of being bottom of mind as DFI (direct foreign investment) destination in the region has many fathers—foremost among them being: the high cost of doing business, the number of signatures and time delay hurdles on applications, the high cost of power, the uncertainty of the regulatory environment, the weakness in the judicial system and the unsettled peace and order—more likely these come higher in the mind of investors rather than ownership restrictions. These will not go away,” Fabella said in a commentary sent to Inquirer.

He added that “mixed messaging” was a problem in the Philippines. He noted that the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, for instance, would increase the effective taxes on Philippine Economic Zone Authority (Peza) locators because the 5-percent gross income tax was equivalent to 17-percent corporate income tax, which was the same as the regular corporate income tax offering of Vietnam.

Attracting foreign investment is like attracting hotel clientele whereby guests are always looking at a package of offerings, the economist said.

“If your offerings are multiply inferior, say dirty toilets, bad air-conditioning and poor safety, solving one—dirty toilets alone—will not bring about a flocking of clients but only among those for whom hygienic toilets are crucial. But it is a start toward the creation of a competitive package of features. Advocates should avoid overselling,” he explained.

In the past two decades, the investment rate in the Philippines has been very low—at 22 percent of gross domestic product (GDP) at its best versus 25 to 33 percent across the region—while government capital outlay was also the lowest at 2 to 4 percent versus 7 to 10 percent of GDP among peers.

“If we are not investing more in our own country, it’s hard to see why foreign investors will do so,” he said.

On the provision that limits foreign ownership of land, Fabella said he believed that “whoever can make the land flower best should cultivate it.”

“Citizenship does not equip one to make the land flower. The distribution of the economic surplus should be treated separately —say, by taxation —and where the interests of the locals should be served sustainably,” he said.

On the process of lifting the restrictions, wherein the phrase “unless otherwise provided by law” is proposed into specific sections, Fabella said this modality for lifting the restrictive provisions would still depend on Congress to act and could take time to happen, if at all. He agreed with Rep. Edcel Lagman’s view that this seemed a signal of frailty rather one of resolve.

“Arguably the most insidious of red flags about the Philippines as a foreign investment destination in the last two decades starting in 2002 was the Piatco fiasco involving the Terminal 3 of Naia (Ninoy Aquino International Airport),” he said.

After its completion in 2002, Naia Terminal 3 was a spanking new $370-million white elephant because of the legal dispute involving the ownership of the facility. The protracted dispute between the Philippine government and Fraport of Germany effectively red-flagged the Philippines as a foreign investment quagmire.

Had the foreign ownership restriction not been there, he noted that Fraport would have had controlling interest and the Piatco fiasco would not have arisen. In 2013, the Court of Appeals awarded Piatco $371.43 million as just compensation. By the time the Supreme Court affirmed the Court of Appeals decision in 2015, including interest, the compensation had ballooned to P24 billion by 2016.

“Apart from derivative lost DFI, the cost of Article 12 Section 11 on Piatco alone is staggering,” he said. INQ