RP more restrictive than most

THE PHILIPPINES restricts foreign direct investments (FDI) from entering into more sectors than most of the 86 other economies covered by a World Bank report released yesterday.

And when foreign firms are allowed in, they will have to face among the most tedious registration processes in the region and in the world, said the report, titled: “Investing Across Borders 2010.”

These findings were based on a 2009 survey of an average of 27 “local experts” like lawyers, consultants, investment promotion bodies and chambers of commerce — not primarily investors — in each economy covered in order to determine the attractiveness of investment policies.

Hence, the study is not a survey of investor perceptions, but provides indicators “based on legal facts and expert responses…by a small number of FDI specialists in each measured economy.”

The World Bank said its teams “had interviewed investors in several countries during the initial pilot tests and found that they were often not familiar with the specifics of the countries’ legal and regulatory frameworks, and that their survey responses were limited to unique sector-specific experiences at one point in time.”

“In contrast, commercial lawyers — many of whom serve as local counsel to foreign investors — and other professional service providers were ideally positioned to complete the… survey,” the study read.

“The group of respondents providing… data in each country had, on average, roughly 180 foreign clients…” it added. “This significantly increases the number of transactional experiences as a basis for… data.”

The report clarified that policies for special economic zones were not included in the study.

It sought to “expose potential challenges” by analyzing how policies assisted investors in four areas, namely: entry into sectors, registration of the business, access to land, and arbitration.

Philippine investment policy fared poorly in the first two indicators: entry and ease of starting a business.

“Among the 87 countries covered by the Investing Across Sectors indicators, the Philippines imposes foreign equity ownership restrictions on more sectors than most other countries,” the report noted.

The restriction is rooted in the Constitution, which bans foreign firms outright from certain sectors like media and education.

Various laws prevent full foreign ownership of businesses in mining, telecommunications, power, banking and transportation, among others.

The study noted that, in mining, for instance, foreign ownership is limited to a maximum of 40%. Such ownership of up to 100% may be allowed if the investor enters into a financial or technical assistance agreement with the government which, among others, requires investment of at least $50 million.

“There is limited interest [because of these restrictions],” European Chamber of Commerce of the Philippines Executive Vice-President Henry J. Schumacher said in a telephone interview yesterday.

“The latest sector that I think is really affected is the energy sector in terms of renewable energy, for instance. Foreigners are restricted to 40% equity,” Mr. Schumacher said.

The chamber, he said, hopes the government will change at least the interpretation of some of these laws.

Board of Investments officials could not be immediately reached for comment.

“But ultimately, the economic provisions of the Constitution will have to be changed,” Mr. Schumacher stressed.

Moves to amend the 1986 Constitution had started during the presidency of Fidel V. Ramos in 1992-1998.

But every attempt to push changes to the charter had been met with suspicion that it would be used to extend the term of the incumbent, instead of being confined to amending provisions in order to open up the economy.

Former president and now Pampanga Rep. Gloria M. Arroyo (2nd District) filed last July 1 a resolution that seeks to convene a constitutional convention, but Presidential Spokesman Edwin Lacierda immediately said the administration’s Liberal Party, which is moving to gain a majority in the House of Representatives, will not include this among its legislative priorities.

The World Bank report went on to note that government processing of foreign business registration papers here is “slower than both the average for [10] countries in East Asia and the Pacific and the global average.”

It takes 80 days, for instance, to start a foreign business here versus the 68-day regional average among Cambodia, China, Indonesia, Malaysia, Papua New Guinea, Philippines, Singapore, Solomon Islands, Thailand and Vietnam.

The report clarified that “establishment procedures alone are not a strong determinant of FDI inflows.”

“However, burdensome processes are an irritant and at times a deal breaker, particularly for small and medium multinational corporations. As the first interactions the foreign investor has with a country’s administration, start-up procedures can quickly seal a country’s reputation as being investor-friendly or not,” the report stated.

The report put the Philippines in a better light for the two other indicators: land use and contract arbitration.

While the country lags behind the regional and global averages in terms of the strength of land lease rights and access to land information, it scored well in terms of availability of land information and the ease of completing a private land lease.

The Philippines was also judged as having generally stronger arbitration laws and easier court processes than the regional and global averages.

Countries that hope to improve their attractiveness to investors should enhance transparency, predictability and effectiveness of laws, the report stated.

It also prescribed equal treatment of domestic and foreign firms when starting a business, setting clear rules for land acquisition and consolidating arbitration provisions into one code.

Latest available data from the Bangko Sentral ng Pilipinas show that FDIs increased 18.6%, year on year, to $396 million in the first quarter, compared to the 31.6% annual contraction recorded in the same period last year, prompting authorities to cite this as a sign of renewed investor interest amid a recovering global economy.

But a regional comparison puts country-specific data in perspective. The Philippines managed to attract just $1.52 billion worth of foreign direct investment in 2008, or 2.5% of what flowed into 10 Southeast Asian economies that year, latest available data from the Association of Southeast Asian Nations Web site show. –JESSICA ANNE D. HERMOSA, Reporter, Businessworld