Europe-PH News

First of three parts

With the Asean integration drawing near, the Philippines appears to have already folded its hand early in the game, after it failed to remove foreign-ownership restrictions in the Constitution at a time when dismantling barriers to foreign investment is as paramount as ever.

House Speaker Feliciano Belmonte Jr. decided not to put his bill—Resolution of Both Houses (RBH) 1—to a vote before Congress went to adjournment sine die.

RBH 1 was meant to be the first step to liberalize the stringent economic provisions of the Constitution limiting foreign participation in particular business sectors.

The lawmaker, who has been pushing for the measure for several Congress now, reasoned that he did not have the necessary numbers for the measure to hurdle the third and final reading, and, as such, did not push the House to vote.

The proposed resolution would insert the phrase “unless otherwise provided by law” in foreign-owner-ship provisions of the Constitution, including land, public utilities, natural resources, media and advertising industries.

The sections identified by Belmonte are (1) Section 2, Article XII, on exploration, development and utilization of natural resources; Section 3, Article XII on alienable lands on the public domain; Section 7, Article XII, on conveyance on private lands; Section 10, Article XII ,on reserved investments; Section 11, Article XII, on grant of franchises, certificates, or any other forms of authorization for the operation of public utility; Section 4 (2), Article XIV, on ownership of educational institutions; and Section 11 (1 and 2), Article XVI, on ownership and management of mass media and on the policy for engagement in the advertising industry.

The insertion would pave the way for the sectors to open up to foreign participation by virtue of future legislation.

The proposed bill, now dead in the water, will effectively change the country’s course in capturing future foreign direct investments (FDI), foreign and local businesses say.

The Makati Business Club and the Management Association of the Philippines, along with the European Chamber of Commerce of the Philippines and the American Chamber of Commerce, said, with foreign restrictions still in place, the country’s standing as a laggard recipient of FDI in Asean may be cemented.

In 2014 the Philippines reached a record-breaking $6.2-billion FDI, a growth of 66 percent from the previous year, and above the target of $4.4 billion assumed by the government.

Despite the milestone, the fact remains that, historically, the Philippines has been capturing the least FDI in the region for over a decade.

Even as the Philippines steadily improves its economic profile on various fronts, notching credit-rating upgrades and improving in competitiveness rankings, foreign restrictions still pose as front-liners in barring investments. FDI is not just a major source of external financing for emerging economies, such as the Philippines, but is also a driver for economic development.

With FDI comes capital formation, knowledge and technology transfer. This type of cross-border investment entails acquiring a long-term interest in a domestic enterprise, and may comprise construction or improvement of a factory, capital infusion and reinvestment of funds earned by
a subsidiary.

The Asean region has received more FDI, as a percentage of national output, than any other developing region, says the World Bank in its East Asia and Pacific Economic Update, released in 2014. However, even as the region takes the lion’s share of FDI, the Philippines’s cut has been relatively low compared to other Asean economies. The Philippines’s failure to capture a larger chunk of the strong inflow of FDI into the region has been widely observed by global think tanks and economic-development authorities.

The World Bank estimates that between 1979 and 2012, the country has been attracting less than $500 million annually in FDI. After 2009, the bank said, the Philippines experienced some semblance of stability in the economy, but is still hampered by the many foreign-ownership restrictions in areas such as services and land ownership.

While each Asean member-state imposes its own restrictions on FDI, the Philippines has often been tagged as among the most restrictive in the region.

In the Organisation for Econ-omic Co-operation and Development’s (OECD) FDI Regulatory Restrictiveness Index for 2013 (or the FDI Index), the Philippines ranked as the most restrictive country among 60 economies.

The index measured restrictive regulations in terms of foreign-equity ownership, in screening and approval of FDI, restrictions on foreign personnel and other restrictions, such as land ownership.

The OECD’s Southeast Asia Investment Policy Perspectives 2014 notes that the restrictiveness score is inversely proportional to the FDI stock a country receives.

The Philippines and Myanmar have among the most stringent regulations and received the least FDI stock as a percentage of gross domestic product.

The Asian Institute of Management’s (AIM) Policy Center compared other Asean economies’ FDI flows in sectors that are restricted in the Philippines.

The FDI in the restricted sectors, the AIM said, accounted for a sizable part of other Asean nations’ total FDI. In Malaysia these sectors accounted for 28.5 percent of its total FDI, while in Indonesia, these comprise 11.4 percent. The research authority said mining and quarrying accounted for the bulk of the inflows of restricted sectors in other Asean economies.

FDI in electricity, gas and water, transport, storage and communication in Vietnam, from 2009 to 2012, was tenfold the amount received by the Philippines during the same period, according to a policy paper of the AIM. Most of these sectors are partially restricted from foreign ownership in the Philippines.

Other Asean nations, meanwhile, have gradually been taking steps to liberalize their protected sectors and have reaped the benefits of opening up their economy to foreign participation.

Thailand increased the allowable foreign equity from 25 percent to 100 percent, and the share of the financial sector’s FDI rose from 3 percent to 16 percent. The country also passed the Foreign Business Act of 1999, which increased FDI to the industrial sector, as it opened up previously restricted areas such as cement manufacturing, textiles, liquor, garment, footwear and retail, to name a few.

Vietnam also undertook reforms in its foreign-ownership restrictions from 1990 to 2005, leading to a growth in FDI according to the World Bank. Its Foreign Investment Law, passed in the late-1980s, allowed 100-percent foreign-equity participation, but only issued licenses for wholly owned foreign projects that have substantial benefits. According to the bank, this was gradually relaxed over the years that, in the 2000s, over 60 percent of projects were wholly owned by foreigners.

Cambodia, one of the most open economies to foreign activity next to Singapore, amended its law on foreign investment in 2003. FDI was encouraged through incentives, such as renewal of land leases up to 99 percent; full exemption on duties of imported inputs; no price controls; and no discrimination between foreign and local investors.

In the case of the Philippines, the limitations on investments are on two lists under the Foreign Investment Negative List: List A and List B. List A contains restrictions enshrined in the Constitution and specific laws, while B are those restricted for public health, national security and defense reasons.

List A consists of both professions limited only to Filipinos and sectors where foreign participation ranges from 25 percent to
40 percent.  

Source: Business Mirror