The investment climate

Published by rudy Date posted on April 6, 2011

A good investment climate produces new investments that yield productivity and profits for the proponents. It is efficient when it further encourages investments to be made at low cost with high prospects for profits and social benefits (in the case of public investments).

Many factors are at play to define the investment climate. These include the presence of laws and regulations that are conducive to economic activity; the existence of investment incentives, the presence of conducive public infrastructure; general economic and social conditions obtaining at the moment.

There are fundamental functions that only a government can provide to make the investment climate conducive. These functions go beyond just providing peace and order and good governance. They even go beyond the factors that the external economic environments contribute either to facilitate or hinder investments.

The government can provide sound macroeconomic policy so that it facilitates a crisis-free environment. Also, it might sustain investment attraction through good fiscal and investment incentives that reduce the cost of doing business.

The government itself is a huge enterprise. It can undertake investment stimulus or provide public procurement policies that are directed for certain ends. Of late, much has been said about public private participation in infrastructure projects as the key approach toward attracting private investments in government projects.

“Public-Private-Participation (PPP) investment projects.” The presidential pronouncements on PPP are clear. He wants to promote them so that he can get public infrastructure projects accelerated.

Because of the acknowledged lack of public infrastructure, private investments are often said to be discouraged from expanding as warranted by demand. Certain public investment projects are identified as important in removing bottlenecks in the economy. Then, there are required leaps in public investments that are essential in accelerating economic growth in the country.

Private participants in the PPP projects are likely to be ever present. There is money to be made from government sponsored projects after all. But it is also important that the PPP projects are economically and technically sound, plus fact that they need to be adequately and soundly financed.

How can the nation be assured that the best possible PPP projects are implemented? The rules for choosing private partners for the projects could be made transparent. The firms that are chosen should have strong credentials, are technically capable, and further have good financial arrangements.

The worst possibility for PPP project selection is that they are the result of prearranged sweetheart deals between the contracting parties. The nation pays a high price in terms of project costs and quality of the investment in such cases.

Past scandals in large public projects and programs (PIATCO-terminal 3 project, ZTE communications project, fertilizer scandal, to cite only projects of recent memory) should be sufficient warning to all. The scandals are politically charged. True, politics provides the grist for assuring accountability of the parties to a contract. But the influence of politics could be minimized as basis for project selection if greater reliance is made on competitive bidding of projects.

A competitive solution in the matter of choice of qualified project proponents and project contracting would move the country forward in terms of large investment projects. A practical solution is to encourage foreign direct investment participation in such projects.

A potential outcome of such a method is that higher standards of project preparation and choices might result. Scandalous contracts might be avoided. Competition would contribute toward avoidance of bad projects choices or high costs of projects.

The revision of the constitutional restrictions on foreign investments might help a lot in this way. But the government today has no intention of working along this line of reform.

It is therefore possible that PPP projects will be constrained by lack of proponents who could help in providing a fairer competition in reducing project costs and in assuring good quality outcomes for PPP investments.

‘Integrity and professionalism of the public agencies.’ How will public agencies that take part in major PPP projects contribute to the successful outcomes of these projects? One answer would be if there is a high degree of professionalism within the agencies.

Professionalism within the agencies may provide adequate safeguards for projects to be judged on the basis of sound economic criteria. In part, the reason would be because such an organization will be able to oversee the preparation of sound project feasibility studies.

The career executive service in the government would have taken care of this requirement. Failure to follow through major reforms in the career service and the politicization of that service has weakened many public agencies. Salary standardization undertaken on a wide scale in the government has weakened the overall competence of the government service.

Professionalism of the public agencies is integral to the promotion of proper governance. That effort has to be in the preparation, contract conclusion and monitoring of the project implementation. Based on past performance, the problem of securing a dependable outcome on this score is somewhat uncertain. Why? The record of past large projects has not been encouraging in terms of cost and quality.

Long term fixing of the problem of professionalism in the public sector involves paying attention to the upgrade of the salaries of government agencies that perform sensitive public functions. It is not an easy task that can be fixed in short period of time.

‘Doing Business: Investment climate for all types of businesses: small, large, strategic.’ On a general level, the idea behind an investment climate is that it is relevant for all kinds of investors, large and small. One indicator of the business or investment climate is the Doing Business survey that is rated every year by the World Bank, through its private subsidiary, the International Finance Corp. (IFC).

The Doing Business surveys provide information on how a country stands up in relation to all others – industrial nations, regional neighbors, specific countries with which the country might be compared over time or specifically across specific issues, or against the best performers in economic development. In short, it is possible to make a specific statement about a country’s business climate that is backed up by substantial information on the basis of very specific issues of comparisons.

For the moment, the information conveyed by the Doing business survey for the year 2011 does not tell a bright story. It is the same story in previous years. In the 2011 rankings calculated by the World Bank, the Philippine rank overall among 183 economies is 148. This is not a good indicator of where the country stands.

A lot of work is cut out for the government to improve the business climate. –Gerardo P. Sicat (The Philippine Star)

Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

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