Investment News Analysis

Bumbledom – cut it out!

red tape

The Department of Trade and Industry (DTI) is pressing ahead with efforts to eradicate red tape and introduce a further streamlining of processes which will make it easier to start businesses in the Philippines – a country renowned for laborious, time-consuming and inefficient procedures and questionable legal practices which in the past have helped to deter business rather than attract it.

And one metric which DTI Secretary Ramon Lopez is hoping will improve is the country’s ranking in the World Bank’s Doing Business Index, an annual study carried out by the international financial institution to determine the comparative level of ease for doing business in 190 countries. The next index will be issued later this year.

Presently, the Philippines is ranked 99 on a worldwide tally which puts it in the bottom half of all countries rated. What’s more relevant though is where it comes within its immediate geographical economic region; the place where it needs to fight strongest for market share in everything from foreign direct investment (FDI) and tourists coming in to agricultural and manufacturing products going out. In other words, where it lies in the context of the Association of Southeast Asia Nations (Asean) and East Asia.

Extracted here are the rankings for Southeast Asia (including the 10 Asean countries) and East Asia, taken from last year’s index. Singapore 2, Hong Kong 4, South Korea 5, Taiwan 11, Malaysia 23, Japan 34, Thailand 46, Mongolia 64, Brunei 72, China 78, Vietnam 82, Indonesia 91, Philippines 99, Cambodia 131, Laos 139, Myanmar 170, Timor-Leste 175.

While the larger economies of East Asia, plus that of Mongolia, are realistically out of reach in any medium-term sense, the Philippines should be able to move up the ranks within Southeast Asia, the region in which it needs to compete most. Presently it ranks last of Southeast Asia’s emerging economies and is trailed only by four smaller frontier economies – three of which are in Asean.

So where should it aiming to be? Well, Lopez has targeted a position of anywhere between 58 and 63 which right now – assuming everything stays the same within the markets of its regional competitors, would place it behind Thailand. In Asean terms that means it will need to do better than Brunei, Vietnam and Indonesia; and that’s surely possible, though Vietnam – at this end of the scale is the Philippines’ biggest rival – and it’s likely to be moving forward also.

Where it definitely has to improve though is in the index category for ‘Starting a Business”. Here, the Philippines ranks bottom of all Asean countries with the exception of Cambodia – lower even than the landlocked, communist one-party state of the Lao People’s Democratic Republic.

Basically, this is a measure of the procedures – both in terms of the number involved and the time for completing them – required to start a business. It also takes into account the cost for these procedures and the paid-in minimum capital outlay. Traditionally, acquiring the necessary approvals, licences, permits, required notifications, verifications and so on and so on, is what’s regularly frustrated new business ventures in the Philippines.

Right now it takes a week longer to gather all that together in the Philippines than the global average. Lopez plans to change all that; his goal is to reduce procedure time to the point that its 20 days ahead of the world average – just eight days. On present rankings that would put it ahead of every state in Asean with the exception of Singapore.

Lopez said: “Overall, we plan to reduce the steps and time in business permits and Bureau of Internal Revenue registration. At present it has 16 steps and we plan to reduce it to six steps”.

This, then, is part of the red tape that needs to be slashed and ripped up if there’s going to be any meaningful progress. But the Philippines has a penchant for bureaucracy – even a simple purchase in a retail store can become a time-consuming transaction while every detail of the purchased product, down to its serial number, is handwritten out on sales-memo pads to be filed in triplicate.

It also has to improve in two other index categories: “Enforcing Contracts”, where at present, within Asean it’s trailing Singapore, Thailand, Brunei, Vietnam, Malaysia and Laos; and “Protecting Minority Investors,” where every Asean country is ahead of it with the exceptions of Laos and Myanmar.

These are areas of particular concern to investors. There’s a large graveyard in the Philippines for projects that crashed and burned as a result of commercial disputes that failed to get resolved through the judicial process. And some very high-profile cases among them. These two poor category ratings highlight the inefficiency of the courts in dealing with these matters.

The Philippine court system has an unenviable reputation as far as many in the foreign-investment community are concerned; they believe the system is stacked against them. Frankly, the Philippine courts have a serious image problem and until this is addressed, it won’t really matter how well it does in other areas of doing business; this concern will always end up being a deal breaker.

On progress in the overall index rankings, however, Lopez, who is also co-chairman of the National Competitiveness Council – a public/private-sector group engaged in increasing FDI and export competitiveness – is a realist. He knows that a move of between 36 and 41 places at one go is a massive ask. It’s not going to happen overnight; the fact is it could take years to move up by that amount.

That said a great leap forward is possible; the Philippines did it in the year 2012-13 when it shot up by 30 places from 138 to 108 following implementation of a number of reforms concerning tax payments, credit acquisition and construction permits. But then it was coming from a much lower base. From its present level gains are likely to be more moderate. Lopez does believe however that the Philippines can shave around another five places from its current position which would certainly put it in touch with Indonesia.

While many indices are over rated this one is taken seriously globally, by entrepreneurs and central bankers and, more particularly, by investors. And it’s for that reason – boosting the Philippines attractiveness to overseas investors – that Lopez is concentrating on showing a forward-moving performance in the ease of doing business.

Rank position on the index of course is important, but an improving trend in some ways is even more alluring. And there is forward momentum to build on here. Last year, the Philippines was ranked 103, four places behind its present standing; another five-point advance from its present ranking of 99 would signal a steady pattern of improvement which in itself would boost business confidence. It’s precisely the sort of pattern that investors look for – sustained growth.

Philippine business itself knows too well where the culture needs to change to make the country competitive. Organisations such as the Makati Business Club, the Philippine Chamber of Commerce and Industry, and the Management Association of the Philippines have continually urged successive administrations to make much needed reforms to improve business practice and provide a level playing field for Philippines Inc.

The current administration, like its predecessor, is committed to removing many of the handicaps that have traditionally restricted and even deterred investment from coming in to help develop and expand most sectors of the economy. Government agencies like the Board of Investments and the dozen economic-zone authorities that straddle the country have streamlined their operations to provide an increasingly efficient service for foreign investors.

But with all that, there are still glaring problems. Red tape stubbornly clings to outdated practices; equally stubborn bureaucrats, particularly in local government units – the Lords and Ladies of Bumbledom – continue to resist change. We’ve witnessed the way some of these operate – as we’re sure many of our followers have too. These are haughty, arrogant. lazy individuals who believe their job requires the public (their actual bosses) pay homage to them. That debilitating ethos in the public-sector workplace really has to be eradicated.

Furthermore, inadequate departmental staff training, leading to misunderstandings, frustration and in some cases cancelled contracts, is another problem; as is corruption in all areas, including when acquiring permits and meeting fee deadlines. And also, protectionism, by which certain sectors remain off limits to non-Filipinos.

All this red tape needs to be cut to ribbons. The Volatilian™ had the opportunity of meeting Ramon Lopez some weeks ago and we have no misgivings over his commitment to drive this effort and move corporate Philippines and the economy further forward. He knows that investment is the lifeblood of the Philippine economy as it is of all economies. He also knows that attracting it is a highly competitive business in its own right and that the Philippines can never challenge its rivals in Asean or elsewhere while these problems anchor it to a past which much of Philippine business would like to forget.

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6 Comments

  • Unfortunately, there’s no money here. Tourism is such a powerful tool for Filipinos! Just got to get control of the solid waste, and educate Filipinos that burning everything, plastic etc. destroys children’s lungs.

  • … corruption/bribery has been the known reason why doing business in the Philippines is not easy… in the past grease money matters.
    … another problem i see is some investors want to own parcel of our land as a guarantee that they will not leave anytime soon… personally, i don’t agree with this option for so many reasons.

  • I am often asked by international companies whether to invest their business in the Philippines. I tell them if they have an alternative, better go for the alternative. Because you are not allowed to own land here and of your company you must give 51% shares into philippino hands. That is simply to risky and unattractive. Such kind of protectionism you won’t find in western countries.