Fear factor

An expat whose government contributed to the so-called “Bicol Express” train project remembers with frustration the effort to get the rehabilitation of the Manila-Bicol railway service underway about two decades ago.

Construction supplies for the project were pilfered and ended up as materials for housing, the expat recalled. Certain individuals pocketed part of the funding and then cut corners to cover up the thievery, altering the project specs and driving the foreigners crazy.

This story is still remembered by businessmen in the expat’s homeland, as they assess the Philippine government’s invitation for international participation in public-private partnerships in big-ticket infrastructure projects.

Stories of public officials demanding commissions from private investors before approving deals have also been related to me by Western expats.

Apart from the not-so-subtle shakedowns, investors have also complained of the heavy influence of politics when doing business in the Philippines. Certain local politicians, I’ve been told, openly demand grease money to facilitate business permits or make the correct computations for taxes and other fees. These taxes and fees can run into hundreds of millions annually for major investors so the grease money demanded can be substantial.

Problems can be worse when a business enterprise competes with those of politicians, their relatives and cronies.

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Persuading investors that there is a level playing field in this country is one of the biggest challenges that the Aquino administration must hurdle if it seriously wants to make the country more business-friendly and improve in competitiveness.

President Aquino has created a Task Force on Ease of Doing Business, which will implement an action plan to be drafted by the National Competitiveness Council.

As in other initiatives announced in the past three years, investors can be expected to monitor the work of the task force, but they are likely to continue holding back on actually putting their money in the Philippines.

P-Noy, for all the talk about new ways of doing business here, is seen to be unable to break the stranglehold of vested local interests in several key aspects of the economy.

It’s clear that the principal participants in his major infrastructure and other PPP projects are the same big local groups. For foreign investors, the fear factor remains. They are fence sitting, and restricted ownership in many fields isn’t the only reason.

They worry about our weak regulatory environment. They worry about the prospect of endless litigation in our all-powerful judicial system, with their investment disappearing in a sinkhole. They worry about laws that cannot be enforced, about unfair competition posed by private bankers engaged in all types of businesses.

The perception is that politicians have slimy tentacles everywhere. Consider the concerns expressed by the European Union about the integrity of the training and accreditation of Filipino seamen as ship officers. A European official noted that there are at least 18 agencies playing a role in this task. An attempt to shut down two of the most notorious maritime schools, I was told by exasperated Europeans, was blocked by politicians.

There are about 300,000 Filipino seamen on EU-registered commercial ships who will be affected if the training and accreditation system fails to meet European standards. A review of reforms will be conducted possibly in October, but officials from certain countries hosting large numbers of Filipino sailors aren’t optimistic about the results.

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Such problems are on top of many other concerns of investors, who like to point out that the Philippines is competing with its neighbors in luring job-generating businesses.

Among the 10 members of the Association of Southeast Asian Nations, the Philippines ranks eighth, and 138th overall among 185 countries, in the latest Doing Business Survey undertaken by the World Bank-International Finance Corp. (IFC)

P-Noy, in creating his newest task force, wants a so-called Gameplan for Competitiveness to set reform targets in the 10 indicators used in the World Bank-IFC survey on ease of doing business. These are starting a business, dealing with construction permits, getting electricity, registering property, obtaining credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

In enforcing contracts alone, the Philippines has a colossal problem.

If P-Noy wants investments in manufacturing, which can create the jobs he wants, he should deal decisively with a concern I have heard a lot from investors: the expensive, unreliable and inadequate power supply. Weak or fluctuating power ruins machinery and other equipment. It disrupts production and delivery schedules. The problem is compounded by the cost of power in this country, which is the second highest in East Asia after Japan.

P-Noy has given assurance that the power situation at least in Mindanao will stabilize by 2015. Investors aren’t too sure; they calculate that it will take from three to five years to get new power plants on stream – if no barriers are placed by politicians, other vested interests, and crooked or incompetent bureaucrats.

There are, of course, brave souls who have invested in the Philippines under P-Noy, and they are thriving, mostly in business process outsourcing. But our level of foreign direct investment (FDI) is depressingly low compared with those of many of our neighbors.

What can P-Noy do, short of Charter change which he still believes is a bad idea, to dispel the fear factor and attract respectable levels of FDI?

Apart from dealing with the power situation ASAP, many businessmen and foreign diplomats, speaking for their investors, have told me that passage of an anti-trust law will help.

It will also help if P-Noy will jettison some members of his current team, and make sure the replacements will not smack mainly of political accommodation.

He may have to breathe down the neck of Transportation and Communications Secretary Jun Abaya, who seems to have been infected with the risk-averse inertia that characterized his predecessor and patron Mar Roxas. Perhaps Abaya has been busy, like his party-mate Roxas, with the elections?

Risk-averse inertia is not a monopoly of Abaya’s department. If P-Noy thinks this is an unfair perception, he will have to work doubly hard to reverse it.