PHL’s quest for FDIs beset with missed opportunities

Foreign direct investments (FDIs) are coming in trickles that it would take years for the Aquino government to fill the bucket unless it would aggressively improve infrastructure, simplify steps of doing business and reduce corruption.

The government has been bragging about the more than $2 billion in pledges of foreign investment from its official trips to China, Japan and US. But most likely only less than 50% of these pledges would be realized, Prof. Florian Alburo of the UP School of Economics told GMA News Online.

The Chinese pledged $1.28 billion to be invested mining and renewable energy projects while the Japanese promised $1 billion to be poured in energy, ship building, mining and property development. The Americans would invest $15 million in coco-water business.

Alburo, who teaches international trade, said in his studies on the country’s FDIs 15 years ago, only 50% of the pledges become actual foreign capital invested in enterprises that generated jobs. “Today, this might be even lower than 50% because of the competition for FDIs in the ASEAN. Our neighbors are more aggressive in attracting foreign investments, not to mention their better infrastructure and more efficient bureaucracy.”

FDI flows are new or additional investments paid by a foreign entity to a resident enterprise in another country during a certain period such as capital or equity contributions or remittances from abroad, reinvested earnings, technical fees and royalties. It is reported as part of the country’s balance of payments.

So far, the government has taken steps to reduce corruption, but it has yet to build infrastructure like airports and seaports and make the bureaucracy efficient. Thus, doing business here remains tedious and costly.

Missed opportunities

Alburo said the Philippines’ quest for foreign direct investments has been beset with missed opportunities. “When the opportunity was there, the country was not up to it.”

He said in the 70s when the country was under President Marcos, foreign investors found it costly to locate here because of inefficient communications and inadequate infrastructure.

“A foreign investor would have to wait for eight years before he could get a phone line. That time, the fax or facsimile had been increasingly used for business transactions, but it required a phone line,” he said.

He said President Marcos, thinking that a free market economy was a waste of resources, helped create companies that were monopolies owned by people close him. The monopolies controlled markets and dictated prices of goods and services.

Also during the Marcos administration, the Bataan Export Processing Zone in Mariveles, the country’s first free trade zone, was established. “But at the time there were no good seaports near the zone that not many foreign companies chose to locate in the zone,” he said.

The Marcos government wanted to export competitive products that it built the special zone to attract foreign investments. It believed foreign capital was needed to promote employment, technology transfer and industrialization.

To entice them to locate in the zone, the Marcos government gave tax breaks and incentives. Today, this thinking persists among government policymakers.

Then, in the 80s the Japanese started looking for locations for their factories outside Japan because of the appreciation of the yen. But he said the country could not compete with Singapore and Thailand, which had better infrastructure and communications to attract investments. “We missed that too,” Alburo said.

This was part of the Plaza Accord in 1985 when countries like Japan, France, Germany, UK and US agreed to open their markets to exports from developing countries and invest in other countries to sustain growth and provide more jobs.

In the 90s during the administration of President Ramos, telecommunications was liberalized, but infrastructure was still inadequate. “There was surge in foreign investments in the region. But China had built more and better infrastructure and other facilities that it got the bulk of investments. We again missed that,” he said. The government then deregulated the country’s major industries and privatized non-performing government assets.

Change of directions

The Philippines could not sustain the development of infrastructure mainly because of discontinuity in economic policies. “For the past 30 years, the Philippines has gone through reversals as a result of changes in leadership and lack of continuity in economic directions. Consequently, the country’s FDI flows have been low and slow compared to other ASEAN countries.”

From Marcos to PNoy, each government has had economic directions different from its predecessor. “So the result was a series of reversals, a different direction for every change of administration,” he said.

Citing data from the UN Trade and Investment Program, Alburo said the country’s FDIs in 2009 amounted to only $1.9 billion compared to Singapore’s $16 billion, Thailand’s $6 billion, Indonesia’s $4.9 billion and Vietnam’s $4.5 billion.

Meanwhile, data from the World Bank’s World Development Indicators show that during the past 10 years, from 2001 to 2009, the Philippines’ FDIs reached its highest of close to $3 billion in 2006 and 2007, drastically decreasing to $1.54 billion or almost half in 2008 owing to the global financial crisis. But it eventually recovered in 2009 with $1.95 billion.

In 2008, the world’s stock markets fell, many large financial institutions collapsed and some governments came up with rescue packages.

Massive investments

“But this (the country’s FDI flows) is still very small,” said Alburo. “We need massive foreign investments to increase the number of productive enterprises and generate employment. We have about 3 million jobless people.”

He estimated that the government would need at least P500,000 to generate employment for one person. “That means formal employment with wages and benefits required by law, as well as vacation and sick leaves.” This would require at least P1.5 trillion or about $35 billion. He said the government has to work doubly hard to attract foreign investments to keep pace with the surge in the number of unemployed.

Data from the National Economic and Development Authority show that the country’s gross domestic product (GDP) for the first half of 2011 slowed to 4% from last year’s 8.7% partly because of reduced public construction, which dropped 48% from 22%. Exports of goods and services also decreased from 21.5% to 0.8%. GDP represents the total value of all goods and services produced over a period.

In July 2011, the country’s unemployment rate was estimated at 7.1% and an underemployment rate of 19.1, according to the National Statistics Office’s July 2010 and July 2011 Labor Force Survey.

Businessmen’s advice

Peter Perfecto, executive director of the Makati Business Club (MBC), told GMA News Online the government should focus its scarce resources on strengthening infrastructure, health and primary education and addressing weak institutions. MBC is composed of senior business executives from the largest corporations in the Philippines.

He said the government must roll out vital infrastructure projects, including those that have been identified for public-private partnerships such as roads, seaports and airports. This will help the government by making the private sector jointly invest in these projects.

“These will help improve the environment for more investments. With the various projects and programs of the National Competitiveness Council on tourism, education, ease of doing business, anti-corruption and judiciary, an improved climate for FDIs can be realized sooner,” he said.

The National Competitiveness Council is a public-private task force that aims to improve the country’s competitiveness. It focuses on 11 areas, among them, anti-corruption, governance, judiciary, infrastructure, energy, education and human resources.

According to Global Competitiveness Report of the MBC and the World Economic Forum (WEF) which was released last month, corruption, inefficient government bureaucracy and inadequate infrastructure have remained the top three problematic factors for doing business in the Philippines. Some 90 business leaders from the Philippines gave their opinions based on the WEF Executive Opinion Survey in the last four years.

Specifically, the report said the government must address corruption along with other major areas of competitiveness such as security, seaports, airports, labor market and primary education.

In Doing Business 2011: Making a Difference for Entrepreneurs, a joint publication of the World Bank and International Finance Corp., the Philippines ranked 148 in ease of doing business out 187 economies. Among ASEAN countries, the country is way below its neighbors with Singapore ranking first, Thailand at 19 and Malaysia at 21.

It identifies regulations that enhance business and those that constrain it. It measures ease of doing business based on nine stages of business life, namely, starting a business, dealing with construction permit, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. – OMG, GMA News