Incentives that hinder growth (part 2)

INCENTIVES can help, but these can also hinder, growth. And while some incentives help grow a small sector in a limited way, these same incentives may harm the growth of a larger sector over a longer term.

This concern has assumed great importance lately.

Last March 6, the Board of Investments (BOI) conducted a public hearing on its proposed Investment Priorities Plan (IPP). The public is now given a chance to propose amendments up to March 20. We write this today to guide such amendments. These are particularly important as they relate to agriculture, which is key to the much talked about – but sorely lacking – “inclusive growth.”

Example

The case of incentives hindering growth may well apply to those given to the Thai firm Charoen Pokphand Foods Philippines (CPFP). According to an official Board of Investments letter: “CPFP is applying for pioneer status based on the magnitude of its investments.

The firm’s broiler project costs P2.326 billion (roughly equivalent to $55.394 million), which far exceeds the minimum investment required to qualify Agriculture/Agribusiness and Fisheries Projects for Pioneer status espoused under the 2012 IPP Specific Guidelines.”

In the “Incentives that hinder hrowth (Part 1)” published last Dec. 7, 2012, we argued that pioneer status, with its attendant incentives of a 4-to-7-year income tax holiday, should not be given mainly on size.

Fortunately, at the March 6 BOI public hearing, it was announced that this provision had been deleted from the proposed 2013 IPP.

We also recommended that incentives should be given, not in isolation of unintended harmful larger consequences, but as a strategic tool to follow a well thought-out roadmap for a given sector’s development. At the March 6 hearing, it was stated that this approach would be followed. But alas, since the roadmaps have not yet been completed, the 2013 IPP would generally be the same as the 2012 IPP.

Amendments

This should not be the case. We had stated that our government should follow its own guidelines.

CPFP should not be faulted for applying for incentives under the BOI guidelines.

However, there is the issue of whether government followed this 2012 IPP guideline: “Applications to registration must be endorsed by the concerned agency when applicable.”

We understand that the Department of Agriculture is opposed to giving CPFP pioneer incentives. Was this provision violated? This gray area should be resolved immediately.

Nevertheless, the main question is: “Should firms investing in the much-needed areas of agricultural commercial production and commercial processing be given incentives?” The initial answer is yes. The BOI draft answer, given that the proposed 2013 IPP for agriculture is practically the same as the 2012 IPP, is likewise yes.

We agree only conditionally, and therefore believe the draft should be amended. There should be a provision that this should be allowed only if this does not violate the principle of a level playing field.

This is the main objection of Alyansa Agrikultura leaders who oppose the 2012 IPP guidelines that have enabled the CPFP to get incentives. Of course, this objection is valid if it is true that CPFP is not bringing any pioneering new technology in an area that has relatively low risk. To give newcomers incentives where existing players who have already invested their resources and time in a similar venture would violate the principle of a level playing field. In addition, because of unfair competition, many existing jobs maybe lost.

This new provision should follow our earlier recommendation: “Incentives should only be given if, without these investments, the investor would not come in. Furthermore, the principle of a level playing field should be respected.”

Main solution

To achieve growth and development, incentives should be considered only as icing on the cake. And if the icing is poisonous, it can destroy the whole cake.

The cake should be the roadmap for each sector. This roadmap will identify the sector’s major bottlenecks such as governance deficiencies, infrastructure gaps, and rampant smuggling. Solve these bottlenecks, and investments will pour in without the need for ill-conceived incentives. Incentives given under faulty IPP guidelines deprive our people of much needed tax revenues and at times, even disrupt a level playing field that unfairly punishes existing players.

But if incentives are given to encourage investments for pioneering and risky areas which do not disrupt the level-playing field, they will then help, rather than hinder growth.

These proposed amendments must be considered in the drafting of the 2013 IPP guidelines as the March 20 deadline approaches. –Philippine Daily Inquirer