Philippines economy: Charter change for foreign investment

March 10 (Economist Intelligence Unit) — On March 3rd a committee of the House of Representatives (the lower house) voted overwhelmingly to amend the constitution and give Congress (the legislature) the power to reduce or remove restrictions on foreign participation in certain economic activities. If ratified, the proposal will make it possible to amend the constitution’s protectionist provisions for the economy through legislation, rather than via a national referendum.

The proposal still has a long way to go before ratification and could be stalled or defeated at any stage, but it is nonetheless a significant development. It represents the most serious, yet pragmatic, effort to date to amend the constitution’s provisions banning or limiting foreign participation in a wide array of industries.

A simplified solution to liberalisation

Although other countries also restrict to a varying degree foreign ownership in certain critical sectors, in the Philippines such restrictions are spelled out in the constitution, making change a costly and complicated process. Previous attempts to
amend the constitution did not take off because they were too grand, complex and ultimately overwhelmed by popular distrust of the incumbent president.

The proposal, which was authored by the lower house speaker, Feliciano Belmonte, adds just five words-“unless otherwise
provided by law”-to the relevant provisions in the constitution’s articles on the Philippine economy and patrimony, education, science, technology, arts, culture and sports. In itself, the amendment would not change any of these provisions at present, but it would ease the lifting or modification of restrictions.

One factor in favour of Mr Belmonte’s proposal is that the amendment is spelled out from the start. Past proposals called
for the convening of a constitutional convention or the conversion of the two houses of Congress into a “constituent
assembly”. Both are open-ended processes that could end up amending not just the constitution’s economic provisions, but
also lift or extend the term limits of the president and other elected officials. Previous proposals to amend the constitution
were doomed by suspicions that the incumbent president and other politicians were merely seeking to circumvent their term limits.

The president, Benigno Aquino, is not supportive of the idea of amending the constitution’s protectionist economic provisions, as he believes that they are the least important factors behind the current low level of inward foreign direct investment (FDI). According to Mr Aquino, government corruption and poor infrastructure are the greatest impediments for investors. He fears that amending the constitution could divert attention away from the main task of improving governance, building infrastructure and enhancing the investment climate.

Mr Aquino has not opposed the proposal, however, and has allowed Mr Belmonte, a key political ally, to push through the proposal in Congress. Another ally of Mr Aquino, the president of the Senate, Franklin Drilon, is also supportive of Mr Belmonte’s proposal, giving it a fair chance of being approved by the upper house. Some of Mr Aquino’s advisers have said that the president may be persuaded to support the proposal to amend the constitution once he sees that there is widespread support for it among the cabinet, as well as among his supporters in the business community and civil society.

Wide swathes of the economy-including the mass media, retail trade, utilisation of marine resources and seven other
activities-are still completely closed off to foreigners, while 18 other activities allow partly foreign-owned companies if
international investors accounted for between 20% and 60% of equity. Public utilities, utilisation of natural resources (such
as minerals) and ownership of private lands are open only to companies that are maximum 40% foreign-owned.

Other obstacles to increasing FDI

Inflows of FDI have grown much faster in recent years, from just US$1.3bn in 2010 to US$3.6bn in 2013. However, this still pales in comparison to the average of US$12bn in FDI that went to Malaysia, Indonesia, Thailand and Vietnam in 2012. A significant constraint to more foreign investment entering the Philippines is the lack of infrastructure. Although the government has begun to ramp up public spending on roads, bridges, ports and other civil works, Mr Aquino’s flagship programme to attract private investors to build infrastructure through public-private partnerships (PPP) has had a sluggish roll-out.

Part of the problem is that only a few big local conglomerates have the financial and operational capacity to build and operate the large PPP projects. Foreign companies are barred from bidding on their own projects and have to partner with local players, as many of the PPP schemes involve the operation of a public utility.

Without nationality restrictions on the operation of public utilities, the PPP programme may attract more foreign participants, and the previous bids would have been more competitive overall. Of the six PPP projects that have been awarded so far, two were won by consortiums led by Ayala Corporation, the Philippines’ largest conglomerate; another two were secured by Megawide Construction, one of the country’s biggest construction companies; and another was won by a group led by San Miguel, the largest domestic food and drinks maker, which is diversifying into infrastructure. Congressional debate on the amendment is set to begin in May, but only time will tellwhether the country’s potential to attract foreign investment will be realised through the move to amend the constitution.