Philippines Could Be Crippled by New FDI Rules

As much as US$15 billion in foreign investment in Philippine listed companies could retreat overseas if new rules on foreign investment drafted by the Securities and Exchange Commission and circulated for comment go into effect, analysts say.

The draft rules, which came about after the Philippine Supreme Court ordered the SEC to come up with new guidelines, actually would further complicate and limit access by foreign investors to the Philippine economy at a time when the country badly needs foreign investment to meet its burgeoning infrastructure needs, critics say.

Many economists have expressed doubt about the Philippine economy because it is built far too much on remittances from overseas workers and business process outsourcing from the west, both of which are subject to the vagaries of the global economy and national policy in foreign countries.

Although the economy is forecast to continue expanding at a 6 percent clip through 2014, manufacturing employment isn't growing fast enough without foreign investment and there are grave reservations about the ability of the economy to attract investment of the kind China and many Southeast Asian nations have pulled in for assembly of electronics, cars and other exports. Local capital simply isn't available to do the job.

While the government is justifiably proud that in recent months the Philippines has outpaced FDI growth for other Southeast Asian countries by percentage, growing by a heady 15 percent, it still badly trails its neighbors in volume, attracting only US$1.5 billion compared with US$8.4 billion to Vietnam, US$8.1 billion to Thailand, US$19.2 billion to Indonesia and US$54 billion to Singapore, according to the United Nations Commission on Trade and. Development.

Reform to allow increased international direct investment has been blocked by a complex amalgam of private interests including labor unions, leftist NGOs, protectionist local companies and others. That has meant the country has fallen behind a long list of other Asian economies in Asia attracting vital investment needed to drive the economy.

The SEC rules are regarded as a stopgap. Too many limitations are built into the constitution and modification is probably not politically possible, at least right now. The government of Benigno S. Aquino III has already ruled out any attempts at constitutional change. International investment remains limited to no more than 40 percent in restricted industries including mining, telecommunications, transportation and media.

According to a 2010 report, titled Investing Across Borders by the World Bank, among the 87 countries surveyed, "the Philippines imposes foreign equity ownership restrictions on more sectors than most other countries," and puts more informal roadblocks in the way of what investment could take place.

For instance, establishing a foreign venture takes 17 procedures and 80 days, slower than the average both for countries in East Asia and the Pacific and the global average as well, the World Bank report notes. The constitution prohibits foreign companies from buying land, nor can a foreign company mortgage leased land or use it as collateral to buy production equipment. It can't lease public land. Commercial dispute arbitration with foreign companies takes more than a year. It restricts foreign participation in many sectors. Ethiopia, the Philippines and Thailand are amongst the world's most restricted economies, with an indicator score of 0 for several sectors, according to the World Bank report.

The Supreme Court ordered the SEC to come up with new the rules after it upheld a ruling in which Philippine Long Distance Telephone (PLDT) was found to have violated the law by allowing foreign ownership of more than 40 percent of its voting shares. Pangilinan, a Filipino and the chairman of PLDT, controls the telecommunications company through his Hong Kong-based holding company First Pacific Co.

PLDT has revamped its capital structure through the issuance of voting preferred shares to allow profit to flow to foreign groups that have invested the most money in PLDT, while keeping voting rights in the hands of local entities.

While PLDT has taken that step, under the new draft rules, for listed companies to meet the SEC interpretation of the foreign ownership requirements, they will be forced to reorganize their corporate structures by either creating a new class of shares or forcing foreign shareholders to reduce their holdings, according to a report by Pacific Strategies & Assessments, a Manila-based country risk firm. "Moreover, corporations nearing the foreign ownership cap limit will find it difficult to attract more foreign investment."

In an interview with local media, Manny Pangilinan said PLDT and several other major companies in industries covered by the rule could be affected, warning that many, if not all foreign investors have the option leave the country in favor of other Southeast Asian markets that, unlike the Philippines, are starting to open up to more foreign capital. Myanmar, long closed to foreign investment by the now-discredited government, in particular has seen a rush of foreign investors, with investment seminars in the capital of Naypyidaw drawing as many as 500 potential takers as the democratically elected government has set out to change the rules.

"What this country needs to come to grips with is if it needs foreign investments to develop certain industries," Pangilinan told a press conference in Manila last month.