“Why, there is no mention of high wages? Or restrictive labor laws? !!!”

The Aquino administration has put job creation—to get Filipinos out of poverty—as a, if not “the” main goal over the next six years.

Well I agree, but it ain’t going to happen unless some major changes occur. An area we have focused on is attracting foreign investment. Filipino investors know their own country, know where the pitfalls lie, where the opportunities are. But, and this is where the difference lies and generally (there are some notable exceptions), they don’t have any choice but to invest at home.

Foreigners have unlimited choices; they can go anywhere. And in recent years, they have mostly gone anywhere, anywhere else but here. Over the last 11 years the Philippines has attracted the least, by a multiple factor, foreign direct investment in the region. Some US$17.6 billion came into the country while in the same period US$72 billion went to Thailand. Vietnam took in US$30.2 billion; Malaysia, US$45.8 billion. Even Indonesia with its unsettled environment in the early years attracted US$26.8 billion.

So what has been going wrong?

We looked into it in an extensive study that included in-depth research and interviews with investors. The first barrier we found was a perceptual one: What businessmen perceived the country’s attractiveness to be based on how it was led.

In Cory Aquino’s time the first two years saw a rapid peaking of investment, rising from near-nothing to over US$1 billion. As the coups d’etat occurred and weaknesses in the system were exposed, FDI fell back to the same miniscule level by the end of her term. Under Fidel Ramos there was a similar, immediate and dramatic rise, close to the $2 billion level, but thereafter a mild slackening. Joseph Estrada rode a roller coaster of investment, while Gloria Arroyo saw little in the first half of her term but some improvement in 2006 and 2007 before a decline as her term ended.

Apart from the importance of the leader, the other barriers to investing in the Philippines that we found were:

1. Contract sanctity violations;

2. Supreme Court decisions that were anti-business;

3. The risks created by unclear or changeable regulations;

4. Interference by local government;

5. Unreasonable local taxes and fees that are imposed; and

6. Corruption

These barriers plus the lack of infrastructure were major reasons why the Philippines sank to 87th out of 133 in the World Economic Freedom competitiveness ranking.

The harm that these barriers can do is perhaps most dramatically shown by our current lack of electricity. We are heading for blackouts all over again because Arroyo forced re-negotiation of fixed contracts to pander to populism at the expense of the investor. For ten years, there was no investment in much-needed new power plants. The government couldn’t be trusted.

Shell is being accused by the Bureau of Customs of misdeclaring its imports of raw materials—catalytic cracked gasoline (CCG) and light catalytic cracked gasoline (LCCG)—to evade payment of the correct taxes. But in reality, no guide classifications exist in the Customs code so Shell, with consent by Customs officials, declared the items as raw materials and paid lower taxes. And in fact, they are raw materials because those items can’t be sold in gasoline stations in their imported form. But now Customs is saying otherwise and is accusing Shell of misdeclaration.

And then the Cotabato government decided to pass a law banning open-pit mining, despite the fact that it’s in contradiction to national law. That has put the largest investment the Philippines have ever seen in jeopardy.

Xstrata was to invest at least US$5 billion in what would be one of the largest mines in the world. The US$5 billion is more than 3 times bigger than ALL the FDI in 2008—US$1.5 billion. And a local government says no. Despite a national law that says yes.

The government, for reasons I don’t understand, doesn’t seem to be able to put its foot down and just override the local government’s decision in the national interest.

One of the signs that these barriers to investment exist is the fact that for over six years now, the Philippines actually has had an excess of savings over investment—at an average of 6 percent of gross domestic product. In short, there is money for investment, but hardly anybody is investing. Legal restrictions could be part of the reason, but there are some “work-arounds” to minimize the impact of restrictions.

The more serious barriers could be the unwritten ones such as non-enforcement or unsettling of contracts, arbitrary interpretations of rules, corruption and others I have already mentioned.

Infrastructure is a particular impediment so it’s heartening to see the Aquino administration addressing it, at least in part, through the Public-Private Partnership conference it is holding next week. But that only gets at some of the big stuff where the private sector may be able to make a little money. There’s much else where the private sector won’t be interested, but the infrastructure must be built—not all roads can be toll roads.

The positive effects of increased infrastructure spending on economic growth and poverty alleviation are well-established. Safe, reliable, cost–effective infrastructure can have significant effect on industrial productivity and costs. In turn, higher industrial productivity will have a positive impact on investment, employment, and export earnings—all growth-enhancing factors. Furthermore, income inequality declines with higher infrastructure quality and quantity.

The Philippines spends less than 3 percent of GDP on infrastructure. It must spend more than 5 percent.

Corruption is an entire subject in itself. That the Philippines ranks 134th of 178 countries in the Transparency International scale says it all, and puts it as the worst in Asia excluding the inconsequential countries. Corruption thrives and must be stopped. It won’t be until some truly big fish are truly in jail. The President says it’s his number one goal. How long should we wait?

***

The oil pipe leak that dislocated the residents of West Tower Condominium in Barangay Bangkal, Makati is going to widen the eyes of the “ambulance chaser” lawyers. Here’s a chance to sue First Philippine Industrial Corp., the owner of the pipe, for millions.

Well, they might want to check a few facts first. The pipeline was built in 1967. In the 1970s, the local government approved—over the objections of FPIC lawyers, please note—the construction of a flyover where the footings would be worryingly close to the pipe line.

Sure enough, the worry eventuated. About 30 years of constant vibration from thousands of vehicles traversing the overpass shook cracks into the pipe.

I’m an engineer and I can assure the lawyers that vibration breaks things. It’s even used as a test of the strength of new products to accelerate the effect of normal day-to-day use. And anyway, you do not build on top of a buried pipeline, particularly one as important as this one. The whole line should have had, would have anywhere else, a clear right of way, not all sorts of things built on top of it. How are you supposed to maintain something when you can’t get to it?

The pipe developed leaks not because of the irresponsibility of FPIC, but because of the irresponsible approval of a flyover where it shouldn’t have been.

So, ambulance chasers, go after the Makati government at that time. They deserve your administrations. –Peter Wallace, Manila Standard Today