Attracting FDI

If you believe the press releases of government and some in the private sector, the economy is doing great. Not even the weak peso is a problem… and is even a blessing. But be careful in reading the small print.

Government agencies, even the BSP, are not beyond issuing releases with misleading headlines. Take the headline of a recent BSP release: FDI surge three-fold in June 2017. If you have a habit of mostly just reading the headlines, you will feel good.

The more accurate headline was the story in PhilStar Business:  FDI up, but new investors outnumbered by those leaving. The story with the byline of Julian Ocampo, explained that BSP data in the same release actually showed, “there were more foreign investors who flew out of the country in June than new ones…”

Indeed, “foreign direct investments posted a net inflow of $674 million, nearly triple the same period last year. But this net inflow came only from existing foreign companies in the Philippines that borrowed funds from their mother agencies abroad.” In other words, we didn’t attract new foreign investors.

The PhilStar story explains: “The BSP records these transactions as FDI as they supposedly signal expansion plans of existing foreign firms here who use borrowed funds to finance business in the Philippines.” This sounds like if one worked even for just one hour in the past week, he/she is counted in government’s labor survey as employed. It gives us a better employment rate number than it really is.

Actually BSP’s release had all the important details but needs explanation and context:

 “The increase in FDI inflows during the month was due largely to the expansion in debt instruments (or intercompany borrowings from foreign direct investors by their subsidiaries or affiliates in the Philippines) to $647 million.

 “However, equity capital investments posted net withdrawals of $72 million during the period as placements ($113 million) were outpaced by withdrawals of $185 million)… The net withdrawals in equity capital negated the reinvestment of earnings of $72 million during the month.”

 Another important note is that our cumulative or year to date FDI as of June was 14 percent lower than last year’s. The three fold increase in our FDI is accurate but it comes from a low base. More importantly, it pales compared to Vietnam, a country we have been competing with until a few years ago.

 Vietnam attracted $19.22 billion in foreign direct investment (FDI) in the first half of 2017, up 54.8 percent against the same period last year. In June alone, foreign investors poured over $7 billion, according to the Foreign Investment Agency under the Vietnamese Ministry of Planning and Investment.

On the other hand, we are running out of time to reach the BSP forecast of $8 billion in FDI for the entire 2017. If we consider FDI as a measure of investor confidence in our economy, we have a lot of work to do. 

Our government should know by now why foreign investors find Vietnam, a country run by a communist party, is more attractive than us, shameless capitalists ever since. Why? Why indeed?

It should be obvious that our biggest hindrance to a really more robust economy and higher investor confidence is political risk. We are too engrossed in politics… and the wrong kind… with four impeachment cases being considered by the House. The attack on Constitutional institutions designed for check and balance is also not going unnoticed.

Foreign investors are also worried about the deterioration in the rule of law with the worldwide reports on the EJKs happening under the anti-drug war. Rule of law is very important for investors because it reassures them of fair treatment in case they face problems with their investments here.

Last April, Inquirer published a report quoting London-based economic research firm Capital Economics that red-flagged risks from political uncertainty. Our situation has only gotten worse.

“We expect the economy to grow strongly over the next couple of years. The main risk to the outlook is the uncertain political situation, which risks unnerving investors and undermining planned reform,” Capital Economics said in a chapter on the Philippines titled “Strong prospects risk being undermined by politics” in its April 11 report on Asia.”

It seems investors and market analysts are banking on tax reform to happen this year. It may happen, but no one knows how close to the administration bill will eventually be passed by Congress.

Excitement over Build Build Build has been drummed up to fever pitch. But we are now being told that we may not have enough trained manpower in government or the private sector to carry out the program. They are even talking of importing construction workers, a politically untenable plan in the light of our country’s chronic unemployment problem.

During the public hearing for DOTr’s budget next year, Sen. Loren Legarda pointed out that they have only spent close to 20 percent of their current budget with less than four months to go. DOTr’s lack of ability to carry out projects, a point I have been raising, is staring us in the face… and with that, the ability of Build Build Build to contribute to economic growth becomes questionable too.

Foreign investors have also been saying that until we fix the restrictive economic provisions in the Constitution, our FDI numbers will remain unexciting. The focus this government has on constitutional revision is on political changes in the form of government rather than on the restrictive economic provisions.

In the meantime, heroic efforts are being waged to try to fix the investment problem through ordinary legislation. The House recently passed a bill that updates our Public Service Law that was passed in 1936. While the 80 year old law had been amended a number of times, it fails to define what is covered by the term “public service.”

There is a difference between “public utility” and “public service”. And up to now, there is enough ambiguity that has resulted in the inability of foreign investors to participate in the public service arena.

By practice, the two areas merge so that it is assumed the economic restrictions in our Constitution cover power, water, transportation and telecommunication. The new Public Service Act passed by the House, and pending in the Senate, makes a distinction between public service and public utility. This opens transportation and telecommunications for foreign investment.

That’s just about right. The provision of services in electricity and water involves natural monopolies that use natural resources normally requiring regulation. On the other hand, transportation and telecommunications are highly competitive tech-based businesses. Indeed, the more competition the better for the consumer.

It is hoped that with the passage of the Public Service Act, there will be more vigorous competition in our transportation and telecoms industries. With fast advancing technological developments, restrictions in transport and telecoms look ridiculous and totally inappropriate.

Thus far the local oligopolies in these industries have been able to fend real market competition that the big foreign players can provide. This works against consumers --- making us suffer bad service and unrealistically high rates.

The disruption brought by Uber on the local taxi industry shows how technology can bring about real competition and expand consumer choice. In telecoms, investment in technology will raise the bar for performance. But the local telcos will invest to speed up improvement of internet services only if they are threatened by real competition which no local entity can provide.

 In any case, it is time to update an 80 year old Public Service Law. If we can do this quickly, it could help change the image of the country as a difficult place for foreign investors to do business. In the end, we all benefit as the economy grows on the back of much improved services.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco.