60-40 rule to blame for low foreign investments?

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Foreign Affairs Secretary Albert del Rosario says the rule limiting foreign ownership of companies in the country to 40% restricts the flow of foreign investments in the country

MANILA, Philippines – Is the 60-40 rule on ownership of local companies the reason for the low level of foreign direct investments (FDIs) in the Philippines?

Foreign Affairs Secretary Albert del Rosario thinks so.

In a speech at the inaugural forum of the Angara Center for Law and Economics on Friday, August 3, del Rosario said the Philippines opened its doors to international investors, but kept a business climate that’s “restrictive by global standards.”

He cited a provision in the 1987 Constitution limiting foreign ownership of companies in the Philippines to 40%.

“The Philippines is constrained by Constitutional and statutory economic restrictions on foreign ownership and has maintained a conservatively open investment milieu,” he said. “There may be a need to evaluate existing statutory economic parameters as the Philippines further redefines its international economic policy.”

Del Rosario’s statement comes amid fresh proposals to amend the Constitution.

Senate President Juan Ponce Enrile and House Speaker Feliciano Belmonte Jr are both pushing for amendments to some economic provisions of the Charter, particularly the 60-40 ownership rule.

Enrile wants the ratio to be flexible so Congress could relax it if needed.

Foreign ownership, meanwhile, is the subject of a pending case against Philippine Long Distance Telephone Co (PLDT) before the Supreme Court. The high court had ruled that in computing foreign ownership of public utilities in the country, only common shares or shares entitled to vote in election of directors must be counted. PLDT and the Philippine Stock Exchange appealed the ruling, citing its negative impact on investments in the country.

‘It’s not the 60-40 rule’

But some economists do not share del Rosario’s view.

Former University of the Philippines Economics Dean Raul Fabella said that bad experience, not restriction on foreign ownership, is the reason for the country’s low FDIs.

Fabella said the Philippines got its biggest “black eye” in terms of foreign investments from the Ninoy Aquino International Airport (NAIA) Terminal 3, which is mired in legal and financial disputes. The bad thing about the project: a foreign entity had to get a dummy to do business in the country, said Fabella.

“The biggest obstacle to foreign investments is Terminal 3 of NAIA. That’s really the biggest black eye of FDIs in the country. My own feeling is the root cause of the NAIA 3 problem is because a foreigner had to get a dummy in order to play the game.”

For his part, Monetary Board member and economist Felipe Medalla said economic reforms need not require changes in the Constitution. He said what should be addressed at this point are the “monopolies” in the shipping and power industries as well as low quality media reporting.

Medalla added that sometimes, foreign investors who come to the Philippines are the wrong kind of investors since they are willing to break the rules. He said many foreign investors operate in the country through “dummies.”

“We get the wrong foreigner. The foreigner who is willing to break the rules. For me, that’s an important thing. So if you ask me, I would go for a better police force anytime,” he said.

National Statistical Coordination Board (NSCB) data showed that total FDI pledges contracted by 16.3% to P18.4 billion in the first quarter of 2012. Last year, FDI pledges were amounted to P22 billion.

Investment pledges of foreigners and Filipinos, meanwhile, contracted by 72.9% to P43.9 billion in the first quarter from P162 billion last year. – Rappler.com

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