Earlier this month, Philippine Socioeconomic Planning Secretary, Ernesto Pernia, director-general of the National Economic and Development Authority, announced that a number of restrictions are to be removed from the government’s Foreign Investment Negative List (FINL) – sectors and industries where foreign participation is prohibited or limited. Certainly, this is good news for overseas investors – but it’s also positive news for the Philippines.
Business groups in the archipelago have been asking for a relaxation of foreign-participation restrictions since 2012. That year, however, not only did then-president Benigno “Noynoy” Aquino turn a deaf ear to their requests, he actually expanded the list by adding a number of new items. Again in 2015, he left the FINL intact.
Restricting opportunities for investors and stalling or hampering their enterprises will see that money and those enterprises go elsewhere. It’s a simple equation: the freer the investment climate, the greater the investment pull. Put another way, the thinner the investment rule book, the fatter the investments booked.
And that’s what’s behind the government’s latest move. By lifting restrictions on international players in the construction industry it hopes to bring overseas money and expertise into greater play to boost President Rodrigo Duterte’s ‘Golden Age of Infrastructure‘ – the PHP8.4 trillion ‘Build, Build, Build’ programme that will run through to the end of his term in 2022.
Once off the list, foreign contractors who presently can hold a maximum of 40% in Philippine-based companies in their sector, will be able to bid for big-ticket infrastructure projects. In short, wholly owned foreign firms will be free to invest in their own right.
‘Investment Freedom’ is one of the indicators by which the 2017 Economic Freedom Index (EFI) evaluates the ‘Open Markets’ of 186 countries world wide. The Heritage Foundation, the Washington-based think tank which produces the index, contends that countries that pursue the ideals of economic freedom, of which investment freedom is a central tenet, are “strongly associated with healthier societies, cleaner environments, greater per-capita wealth, human development, democracy, and poverty elimination”.
Here from the EFI we’ve extracted the global results for the ‘Investment Freedom’ rankings of the 10 states of the Association of Southeast Asian Nations (Asean) to show how the Philippines compares with its main regional competitors. The results are: Singapore, 16th; Brunei, 75th; Cambodia, 89th; Malaysia, 95th; Philippines, 96th; Thailand, 130th; Indonesia, 147th; Laos, 148th; Vietnam, 164th; Myanmar, 167th.
On the face of it, the Philippines’ performance looks respectable, coming middle of the Asean league and roughly half way globally. The fact is though, with the exception of Singapore, none of the Asean countries does particularly well and most could do a lot better.
In the case of the Philippines that wouldn’t really be a big ask, and had the measures just taken by this administration been taken in 2015, undoubtedly it would be ahead of where it is. But there’s still much more that it can do to make the country a more desirable foreign direct investment (FDI) destination.
What scores against the Philippines is not just the investment-restricted sectors on the FINL but it’s burdensome and inefficient bureaucracy; poor legal recourse for foreign investors and – of course – restrictions on land and real-estate ownership: the stubborn 60:40 rule by which foreigners are limited to a 40% equity share of an enterprise.
Excluding the last of these impediments which would require changes to the country’s constitution, the other negative factors could be eliminated fairly quickly. And yet, although the past and present administrations have and continue to tackle the problems of a bloated bureaucracy – and its attendant problem, corruption – it’s still not been cut down to size. Similarly, the equally intractable problem of the country’s legal system – among the slowest and most inefficient in the entire region – remains a major concern for investors from overseas.
Frustratingly, the Philippines gets nothing like the FDI it should, given its stellar growth rates over the past few years – the highest of any country in Asean and, right now, the highest in Asia barring China. We can only imagine how FDI inflows would pour in if bureaucratic and legal red tape and other delays and petty rules were eliminated. And if the 60:40 obstacle was removed, we believe the sky would be the limit for foreign funds coming to the Philippines.