Investment News Analysis

Negative to positive

Investment Freedom _ 2017 Index of Economic Freedom

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.

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  • Well, as long as foreigners are not allowed to own land and not allowed to own more than 40% of a company even it they paid up 100 % of the capital, it will remain unattractive for foreign investors to invest into the Philippines. To the contrary, more and more foreign investors are relocating their plants and offices from the Philippines to Vietnam. In addition to this foreigners have to apply for a staying permit every 2 months for the same price as you get a 2 years staying permit in Europe. Do you consider this an attractive environment for foreign investors. You answer…

    • Actually most Asian countries DO NOT allow freehold foreign land ownership (you can Google this) even though they have more liberal investment policies and laws regarding ownership of businesses so I do NOT believe the ability to freely own land is a matter of primary concern to foreign investors. I DO welcome more investment (and foreign ownership of businesses that can help the economy grow) but NOT at the expense of my countrymen being foreigners in their own land (which is a likelihood in such a scenario considering most Filipinos don’t have the capital to compete in the real estate market if it is opened to foreigners), which will probably open up a whole new can of worms for the country as a whole. This is NOT helped by the fact that our land distribution and ownership and reform questions are still far from solved (questions countries like Japan, Taiwan, and South Korea had to wrestle with before their ascent into First World status). Hence why I am open to laws that loosen the 60-40 idea and other pro-investor policies SHORT of allowing freehold foreign land ownership in this country. 😊

    • Thank you for your detailed reply, which I do of course appreciate. Just one question, would you as a foreigner invest in building up a fabrication plant, if the land you build it on is not yours?

    • If there are great incentives like tax breaks for at least the first five to ten years, employer/investor visas that allow you unlimited staying time provided you hired upwards of 50 local employees, good infrastructure (roads, railways, ports, airports), cheap but efficient utilities (water, electricity, telecommunications, etc), and long term leases of land (think along the lines of 50 years with an option to extend – a scenario that seems to be the case in many other parts of Asia), not to mention a tighter crackdown on corruption and red tape by government officials, I would definitely consider even without freehold ownership of land. 😊

  • In the post EDSA revolt of 1986 the Philippines economy was sputtering. The businesses of Marcos cronies were decimated and the country needed fresh investments. At that time, Cory was the darling of international politics and press and foreign investors were raring to come in.
    Then came the 1987 Constitution that effectively protected local oligarchs’ control of the economy thru the 40% limitation in foreign ownership of businesses. From then, only OFWs and later BPOs provided the needed economic lifeline, oligarch controlled public utility services lagged behind our ASEAN neighbors, public infrastructures went into standstill and the country remained underdeveloped.
    Let us keep our aspiration for change.

    • The foreign manufacturers in the Bataan Export Processing Zones, and in Baguio, Mactan, and Laguna were flourishing from 1978 to 1983. Those were not Marcos cronies businesses. But the economic sabotage caused by the KMU sympathy strikes caused FORD, MATTEL, Densil Don, Wilson Electronics, and other companies moved to other countries in 1985. During those times, there were no contractuals. Contractualization became a practice to avoid harmful strikes. I really hate the destabilizers and power grabbers.

  • … giving up on the 60-40 rule makes me scared because its like giving up on our land where our anscestors worked hard and died for… opening up to foreign investors can be good to the economy but it will eventually lead to losing our own identity.
    … can the government make rules with “foreign” investors if they already own a part of our land?… will they adapt to us or will it be the other way around?… i’d like to believe that our country has so much more to offer than selling ourselves to them in the name of progress.
    … our country has been invaded by the Spaniards, Japanese and Americans and yet the Filipinos fought hard to keep what is ours… with a good leadership i believe our country will beat all odds… should nationalism be taught again in school for us to realise the importance of our identity?… then let it be so.

    • Well mam, every Filippino can buy and own land in my country Switzerland, and every Filippino can own 100% of his company. Switzerland is a very small country and we are not afraid of loosing our identity. Well however, if you prefer that more and more foreign business is transferred to Vietnam, just continue, but do not cry afterwards and ask for financial aid from abroad. Then stand to your own made principles.

    • … Philippine situation is different from Switzerland… they are already rich and we’re just starting thus, susceptible to all kinds of manipulation with the use of money… yes, we are still poor because we dont have the capacity to work on under the sea exploration to make uae of our natural resources like gas and oil that are needed to be tapped… we need the rich countries as partners, not co-owners… we need equipments for exploration, to dredge out what the whole world will need in the coming future… yes, the Philippines have what they don’t have.

  • Correct me if I am wrong but seems China already has a stronghold on investment in the building and shopping mall sector here. If as I believe this really is the case allowing more players to this sector does not in anyway satisfy the needs of everyday Philippine people. This action only satisfies the rich one percent. It might encourage Philippine people to spend more but they are already overstretched in their spending and is the reason the money loans industry is so strong and corrupt.
    As in all building ( in this case the economy) the foundation needs to be strong and sadly there is no foundation. Surely the first step towards a brighter future for all Philippine people would be securing efficient and affordable export and import opportunities. This would allow small industries to expand and encourage others to start. Shipping and administration costs make this prohibitive so far and without real reason as other Asian countries are not so costly nor tied up in bureaucratic red tape or unseen costs!!!
    We all know including the Government that Balikbayan boxes are a way of getting around import but the quantities are small and not viable in a business sense or export sense. The alternative could be small business sharing more cost effective shipping containers to export product
    To me large investment is not the key and building the foundation for large investment to come later is. .

  • Beware again to US.Mafia CIA..They are planning to mastermind downfall of PRRDuterte..The reason again is.the Philippines Gold that donate by Late Pres. Marcos to peoples of the Philippines still under process by World Bank and Central Bank of the Phil…The Gold is still missing in the Phil…

  • If you were at other country, is it the same with us the policy in doing business. Do they have restrictions on econonic side? What are the effects of this business rwgulations to us filipinos? Why other are happy doing business in other country?