More perks alone won’t attract investors

The problem with our leaders and legislators is their simplistic, politically motivated way of doing things. That’s why we have failed to keep up with the pace of economic advancement of our neighbors in South East Asia. Take the matter of investment perks, for instance. ASEAN countries offer roughly the same types of incentives to attract foreign investors. But compared to us, they are attracting more investors, including the communist-led and war torn Vietnam.

For some reason, our leaders and legislators have refused to accept the obvious fact that the key to attracting investment dollars is building an environment conducive to business and not just offer the usual freebies. In selecting a country, investors look for a government that will help them achieve their business goals (no red tape, good infrastructure, reasonable regulatory environment), a judicial system that is impartial and a national police that can guarantee the personal security of their executives and staff.

An official of Thailand’s Board of Investments told Business World what it takes to attract investors: “Frankly speaking, incentives are overall the same. It’s up to the conditions in each country. The most important thing is service from the government.” Given that Thailand had been hugely successful in attracting major investors through the years, their secret is simple enough.

Forbes magazine has cited the so called Wriston’s Law as a means of measuring attractiveness to investors. This refers to banker Walter Wriston who famously said capital (meaning both money and ideas), when freed to travel at the speed of light, “will go where it is wanted and stay where it is well treated.”

By applying Wriston’s Law of capital and talent flow, Forbes pointed out, you can predict the fortunes of companies, countries, states and cities. Everything must start with this most basic question: Do organizations (or countries) attract money and talent, or repel them?

Viewing it from this perspective, it is clear that if we want to attract investors, local and foreign, we do not need more laws. We do not need more investment incentives or perks. What we need is good governance to keep local investors here and convince foreign investors to come here. We should not minimize the importance of local investors. Many of them are invested heavily in neighboring countries including China. Some locals are even investing in Russia.

Rationalizing our investment incentives laws had been a long time project of this administration. But because there are so many parochial interests being espoused by politicians, the lonely battle being waged by the Department of Finance (DOF) appears to be going nowhere.

Take the case of a proposal to convert the Bataan Economic Zone (BEZ) into the Bataan Special Economic Zone and Freeport (BSEZFP). The DOF is saying this would result in foregone state revenues of as much as P15 billion a year. Not only that, I have heard that present locators are even worried that local politicians who will take over management of the zone will be less professional than PEZA, the zone’s current administrator. That would make the zone less attractive to investors, current and potential.

In any case, the proposal will prove to be problematic for the DOF in its heroic efforts to keep fiscal balance, one concededly bright achievement in Ate Glue’s watch. Senate bill no. 2118 aims to provide various fiscal perks to locators of the proposed Bataan Freeport. The freebies are supposed to encourage more investments and to create more jobs. The opposite might happen as present locators leave.

They want such perks as a four-year income tax holiday (ITH) for registered firms in developed areas and a six-year ITH for enterprises in less developed areas. Items that will enter the country through the Bataan freeport will also be exempt from the payment of duties. Given our track record, that sounds to me to be a thinly disguised way of legalizing smuggling or facilitating it. It is as if we don’t have enough problems in Cagayan and Subic.

Worse, the cash-strapped National Government is also being obliged to subscribe to 60 percent of the authorized capital stock of P20 billion of the Bataan Special Economic Zone and Freeport Authority (BSEZFPA) that the proposed law will establish. That’s P12 billion that could be used to benefit the entire country rather than just some politicians in Bataan.

They plan to raise the remaining 40 percent or P8 billion by selling shares to the public. They must be delusional to think that the public would buy shares in such an agency at this time when investors are very selective in their investment choices. In essence, they know they will depend on the government’s 60 percent until they have spent it all. Then use the same patronage political game to ask for some more.

The DOF has taken the position that requiring the National Government to spend P12 billion for BSEZFPA’s capitalization could affect its capability to spend for other worthier projects. “The capitalization requirement to the proposed authority will have negative budgetary implication to the national government, an unwelcome development especially at a time when the need for stronger revenues for social services and infrastructure becomes more pronounced,” Finance Undersecretary Gil S. Beltran said.

Our politicians should no longer be reminded about the need to be judicious in the use of our resources but the finance officials reminded them anyway and for good reasons. “There should be more prudence in the disposition of our scarce resources,” Usec Beltran added. The Finance department also warned that the bill could widen the country’s budget deficit.

In a four-page letter to the Senate Committee on Economic Affairs dated July 30, the finance official correctly said such measures were no longer needed since the existing BEZ is already attracting investments. “The DOF believes that the proposed conversion of the existing Bataan Economic Zone into the Bataan Special Economic Zone and Freeport is no longer necessary,” the letter read.

As I pointed out earlier, the Finance department also warned that the establishment of another free port would generate difficulties in customs administration and could worsen the problem of smuggling. “We strongly take the position that there should be a moratorium in the creation of more free ports. Because of the ‘free flow’ of goods into the free ports and the non-imposition of taxes and duties, the free ports become very vulnerable to smuggling activities,” Mr. Beltran said.

But that may be the point. Some people must have seen a thriving smuggling business model in some of the existing free ports. If this bill manages to pass Congress, it is proof that bad politics will prevail all the time under our current political dispensation.

The DOF also opposed giving an income tax holiday to locators, claiming this would result in revenue losses of as much as P3 billion a year. “The grant of generous income tax holidays to the proposed BSEZFP could result in annual foregone revenues amounting to at least P500 million to at most P3 billion,” Mr. Beltran said.

A current locator wrote me that they are happy with the current arrangement with the Philippine Economic Zone Authority (PEZA). The DOF is also saying PEZA which oversees the operations of economic zones, should instead be given responsibility to further improve BEZ’s infrastructure to make it more attractive to investors.

As it stands, the Bataan zone is currently not doing so badly under PEZA. Mr. Beltran, who heads the department’s domestic finance group, noted that from 1994 to 2007, locators in BEZ increased to 49 entities from 39. He added that from 1995 to 2007, the total investments in BEZ rose to P7.76 billion from just P1.4 billion from 1982 to 1994.

We don’t need a new law and spend all that money to try to breathe some more life in the Bataan export zone. If the politicians are saying PEZA, with its experience in running EPZs, had been unable to do it right, the more reason we should doubt the ability of the local government to get that done. They are asking for a helluvalot of money from the national treasury at a time when we need every centavo to produce the most benefit for the most number of Filipinos.

Let us see if Ate Glue will support her DOF officials or succumb to politics as usual. As if we still don’t know how her brain works! –Boo Chanco (The Philippine Star)