LGUs: A big headache for investors

Arangkada also had a score card for LGUs and it isn’t pretty. Essentially, Arangkada reports that LGUs have mostly remained a big disincentive for investors. Efforts of national officials to entice investors into our country are largely negated by on-the-ground experience with local government units. Getting the LGUs excited about our investment incentives program is an urgent need.

I remember making the suggestion in this column that before DTI and BOI spend good money on international road shows to attract investors, they should call a big meeting of governors and mayors and appeal to the sense of patriotism of LGU officials. LGU officials look at investors as milking cows. They have also been emboldened to pursue their extortionist activities because of the increased powers they have under the Local Government Code.

Even locators in export processing and other industrial zones are not exempt from such fund raising activities of barangay officials. I have heard a lot of horror stories of how some barangay officials have actually demanded hard cash from shocked foreign investors. After having plunked in substantial amount of resources in their local operations, locators feel trapped and shortchanged when such official or unofficial extortion activities take place.

I recall a particular case in Batangas before Gov. Vilma Santos took office that was particularly problematic for investors in industrial parks. The previous governor increased the assessed market value (the basis for the tax) from P262 a square meter to P3,400 per square meter as well as the assessment level (the tax rate) from 35 to 45 percent. That was a double whammy for investors who have brought jobs and pay other taxes in the province. These investors made the decision to invest here rather than in China or Vietnam or Thailand on the basis of a package of guarantees, including what to expect by way of taxes. Then the Batangas provincial government throws in this surprise.

In fairness, there are attempts to harmonize national and local government efforts to get investors but much work has to be done. Even in Metro Manila, the various city halls are often denounced by entrepreneurs, many of them small Filipino livelihood efforts, for the red tape and corruption in getting such basics as business permits. There are also fire inspectors who insist that business owners buy their fire extinguishers from them. Investors are discouraged to risk their money here and create jobs because the very first step in getting a business started is mired in corruption at the LGU level.

Here are a few examples taken from the Arangkada score card on LGUs.

Arangkada Proposal: Programs to make LGUs (provinces and cities) more efficient and competitive in attracting investment should be continued and even intensified.

Status: There are bright spots at the LGU level – San Fernando, Iloilo, Bacolod, Cebu, Davao, General Santos, Calapan — with the assistance of foreign funded programs, i.e., the Performance Governance System of ISA. Traction and critical mass still need to be attained.

Arangkada: Give priority to the fastest growing regions.

Status: Regions 3, 4, 6, 7 and 11 are still the fastest growing regions but, overall, investors still complain of LGUs frequently shaking them down. This has caused big investors to bypass or leave the country for less costly as well as more transparent and predictable investment environments.

Arangkada: Increase efforts to correct the issues identified in the IFC Doing Business ratings.

Status: An increasing number of LGUs are streamlining their business permits and licensing processes, in addition to the one-stop shops they establish during the first three weeks of January each year for the renewal of business permits.

Arangkada: Steady reduction in the solicitation of bribes for bureaucratic services.

Status: July 2011 SWS Survey on Good Local Governance supported by TAF and USAID showed that LGUs only had +7 percent net satisfaction rating for eradicating graft and corruption. Only 40 percent of the respondents are satisfied with how LGUs addresses this concern. Compared to the results of 2009 survey, perception of extent of corruption in local governments increased in July 2011.

Arangkada: Observe incentives, such as exemption from local taxes, awarded by the national government to investors under national laws.

Status: Currently, there is no mechanism by which approval and implementation of investment projects are coordinated, specifically when it comes to granting tax incentives and ROW (right of way) acquisition. When the investment belongs to a preferred investment that is included in investment priority plan, the national government can issue a certification of pioneer status (6 years) and non-pioneer status (4 years) which the investor can show to the LGU to seek tax exemption. In short, exemption from local taxes does not automatically flow down from national to local. It has to be negotiated separately by the investor with the local government.

Arangkada: LGUs should respect the status of investor operations established in PEZA/IT zones. At the same time, guidelines should be developed and followed on which fees for local services (e.g. garbage collection) are acceptable.

Status: Some LGUs have been leeching investors, turning them off in the process. Local fees and taxes can be opportunistic and inconsistent with national goals and measures.

Arangkada: LGUs should fully support manufacturing and logistics, which provide local jobs, procurement and LGU revenue, and prioritize reducing and minimizing business costs. Investments are long term, done on the basis of existing rules and based on established zoning regulations. It is essential that LGUs maintain the rules long term too and that LGUs avoid rezoning developed industrial zones.

Status: Started but slow progress. LGUs need assistance on this. Resources, technical capacity and budget are usually lacking.

There are more tales of woe in the Arangkada score card. The point is made that if we want investors to come here and create jobs, it will have to be a national effort. I have no doubt about the sincerity of P-Noy and DTI Sec Greg Domingo in wanting to create a favorable climate for investors here. But it takes more than fiscal and other incentives to get the job done. LGUs must not only be more efficient and welcoming of investors, LGU officials must restrain their greed and make sure their underlings restrain their penchant for bribes and other such things. –Boo Chanco (The Philippine Star)