What is holding back Philippine FDI?
MANILA, Philippines (UPDATED) - The stage has been set. The Philippine economy has been growing in leaps and bounds and the country is poised for further growth. All it needs is a little financial injection from foreign firms with big pockets.
However, while the country’s latest GDP growth of 7.8% is the fastest in the region, the Philippines still lags behind Southeast Asian neighbors in attracting foreign direct investments (FDIs).
In 2012, the Philippines attracted a measly $2.8 billion in FDI, according to data from the United Nations Conference on Trade and Development (UNCTAD). This is a tiny amount compared to that of its neighbors such as Vietnam, which attracted $8.4 billion, Thailand $8.6 billion, Malaysia $10.07 billion, Indonesia $19.85 billion and Singapore $56.65 billion.
President Benigno Aquino III acknowledged the need to boost FDI in his 2012 SONA where he announced his aim to increase FDI rates in lucrative industries such as the BPO and manufacturing and shipyards to more than $10 billion a year.
Data from BSP shows that this goal has been far from realized. FDI went down by 8.5% in the first quarter of 2013, with the country receiving only $1.3 billion in net investments between January and March.
While the Philippines remains a laggard, there is a silver lining. Because its FDI growth comes from a very small base, it means that the country is recording the highest FDI rates in the region of 185% against the 2.11% average expansions across the Asean-6 countries in 2012. Its FDI total of $2.8 billion in 2012 was a staggering leap from the $981 million recorded in 2011.
“The Philippines remains the regional FDI laggard but interestingly saw the sharpest year-on-year rise in the Asean (Association of Southeast Asian Nations),” said Citibank in a recent report.
The environment is right
While FDI levels still remain low, the situations and timing couldn’t be better. According to data provided in the World Economic Forum’s Global Enabling Trade Report 2012, the country’s macroeconomic fundamentals are strong, making them attractive to at least a fraction of the foreign investors concerned over the Euro crisis.
It’s not that the foreign investors are not interested. Rising costs due to floods and political risks in other Southeast Asian countries have led to neighboring countries such as China, Japan, and Thailand eyeing up the Philippines for possible expansion plans across all industries.
Further afield, investors from Sweden, Australia and the US have been sizing up the Philippines’ booming BPO industry, while the country's rich land resources have been attracting the attention of British investors looking to invest in renewable energy. The Canadians are looking to enter the country with their mining expertise and equipment.
The 60/40 rule
The main thorn on the side of attracting FDI is the 60/40 foreign ownership law.
The Republic Act No. 7042 or Foreign Investments Act of 1991, the law that governs the participation of foreign entities in economic and commercial activities in the Philippines, states that foreigners may hold interests in corporations, partnerships and other entities in the Philippines, provided that these are not engaged in an activity that is reserved by law only to Philippine citizens or to entities that are wholly owned by Philippine citizens.
The maximum amount of foreign equity that is allowed in a company depends on the type of activity that the company is engaged in, which is listed on the ‘negative list’.
"There still continues confusion in terms of how foreign ownership restriction is applied. We're monitoring closely because we get queries, a lot of investors wondering if there's a change in the weighting. Depending on how you interpret rule that will affect the free float factor. But we're not doing anything because we're awaiting the regulator, the court to make final decision and come to a final resolution," Chin Ping Chia, MSCI head of equity research for Asia Pacific, said.
Only Filipinos or corporations at least 60% owned by Filipinos are allowed to own land in the Philippines, but foreigners are allowed to lease land for 50 to 75 years depending on the land's classification. Private corporations, whether local or foreign, can only lease up to 1,000 hectares of alienable public lands. There is no limitation regarding private lands.
The same ownership cap is applied to nationalized activities, including media, utilities and more.
Depending on what industry foreign businesses are looking to tap into, their experience of setting up shop in the Philippines can either be painful or pain-free. If a company were to set up their business in one of the country’s special export zones, they can set up wholly owned units easily and receive incentives and efficient services as long as they ship their output abroad.
The difficulty lies when countries try to tap the domestic market and work their way through complicated bureaucratic procedures, local government corruption and partnerships with Filipino firms.
The Philippines is also notoriously low in its ranking on ease of doing business. Companies have to go through 16 separate procedures to start a business in the Philippines, compared with 3 in Singapore and 9 in Indonesia.
Businessmen, analysts and economists have been increasingly voicing their opinion that removing the clause and improving access and protections of foreign-owned business, would lead to a big boost in FDI.
“The Philippines opened its doors to international investors, but kept a business climate that's restrictive by global standards. The Philippines is constrained by Constitutional and statutory economic restrictions on foreign ownership and has maintained a conservatively open investment milieu. There may be a need to evaluate existing statutory economic parameters as the Philippines further redefines its international economic policy," said Albert del Rosario, Foreign Affairs Secretary, at the inaugural forum of the Angara Center for Law and Economics on August 3, 2012.
On October 29, 2012, President Benigno Aquino III signed Executive Order No. 98 to expand the list of investment areas and economic activities reserved for Filipinos under the 9th Regular Foreign Investment Negative list. However, analysts say that the last two decades saw only the retail and gambling sectors open up to foreign investors.
Sectors to watch out for
There are potential areas of investment that foreign firms have been increasingly eyeing up.
In the latest annual ranking of the top 100 global outsourcing destinations by Tholons, Manila and Cebu claimed the 3rd and 8th spots, respectively. Tholons noted in an interview with Inquirer that the Philippines is considered one of the most promising global IT-BPO destinations due to the "region's maturing outsourcing brand, improving macroeconomic environment, and expanding domestic markets."
New opportunities for expansion and increased productivity will result from technology trends in cloud computing, mobility, social, big data and security.
Early results from 2013 underscore the importance of the manufacturing sector to the economy. In the first quarter, GDP grew by 7.8% year-on-year, led by a 10.9% increase in industrial activity. In May 2013, economist Bernardo Villegas predicted an "avalanche of investments" in the Philippines.
Growth is also evident in the network of free zones, which has grown from 16 since the Philippine Economic Zone Authority (PEZA) was set up in 1995 to 277 as of the end of 2012. IT centers, which include BPO facilities, accounted for 139 of this total, followed by manufacturing, with 69 free zones. Multinationals that set up shop in these areas benefit from a number of financial incentives, including up to 6 years of tax exemptions.
Flooding in Thailand and the escalating tensions with China by Japan and Taiwan due to longstanding territorial disputes have resulted in Japanese and Taiwanese firms eyeing up the Philippines as a possible new destination.
Many of these firms are looking at expanding their operations in the Philippines. More recently, this sector has seen a lot of interest from Japanese and Korean firms. A number have already set up operational facilities to cater to the South America export market and a long list more set to move in.
Japan is now the country's largest source of investors and is the country's largest trading partner to date.
Mining is another area that promises to yield high investment returns, given that the Philippines is considered “to be the 5th most mineral-rich country in the world for gold, nickel, copper and chromite worth over $840 billion.”
However, passing the mining reform bill is needed to boost the country’s FDI, something which Goldman Sachs Chief Growth Markets Strategist Christopher Eoyang described as “outrageously low.”
"The ability to exploit this potential is reasonably dependent on the FDI. But FDI as well will depend on the policies, particularly the mining reform bill, that the government will pass," he said in a May 23 roundtable meeting.
"If (mining reform bill) is not part of the overall growth picture of the Philippines, I'm guessing our long-term growth rate forecast would go down," he added.
The $5.9 billion Tampakan gold-copper mine in South Cotabato is under a Financial or Technical Assistance Agreements (FTAA) mode, which allows 100% foreign ownership. The Swiss owners, however, decided to delay the start of operations to 2018 from 2016 due to the legal issues their local government host has imposed on their mode of extraction — open pit mining.
Interest in developing renewable energy in the Philippines is building up, particularly in geothermal and wind power generation.
Oil and gas exploration is one area that will require foreign technology. A lot of major global oil/gas countries are now focusing on upstream activities (exploration and production) where margins are higher.
However, according to the British Ambassador to the Philippines Stephen Lillie, the 40% limit on foreign ownership in these upstream activities is "unhelpful" in attracting investors.
Foreigners are allowed to own 100% of power generation businesses following the passing of the Electric Power Industry Reform Act (Epira), which liberalized the power industry. The renewable energy law, however, is silent on foreign ownership in ventures involving direct exploiting the country's natural energy resources.
Prior to the Renewable Energy Law, there were very limited participants in the sector with most of the projects being initiated by the government itself either through the state-owned National Power Corporation (Napocor) or Philippine National Oil Company (PNOC).
While there are a number of lucrative industries and international firms that are showing their interest, it is mostly the red-tape that has hindered this potential source of finance from flooding in.
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