Daily Archives: February 24, 2014

Removing restrictions on foreign ownership

One of my challenges in my consulting practice to promote foreign investment in the Philippines is the many restrictions to foreign ownership. And while I can understand President Aquino’s fear of making constitutional changes to remove them (he fears changes may be also made particular in the political areas), this is an essential need to attract them. The writer is right too in saying that this may be another way to make the country build its defences against China in the light of recent territorial issues. Will the President change his mind about the matter? Let’s hope he will eventually will.

From BusinessWorld Philippines

February 23, 2014

Who’s afraid of ChaCha?

By Calixto V  Chikiamco
WHO’S AFRAID of Charter Change?
It seems President Aquino is, judging from his negative remarks when asked about the Belmonte resolution. The Belmonte resolution refers to the House resolution filed by Speaker Sonny Belmonte seeking to amend the economic provisions of the Constitution by inserting the phrase “unless provided by law” into those Constitutional provisions that limit foreign ownership in public utilities, land, mass media and advertising, educational institutions, and exploitation of natural resources.

President Aquino is seeing phantoms. Even if passed, the Belmonte proposal doesn’t really change anything. It just allows the legislature to make changes as conditions permit. In other words, both the Senate and the House have to debate the merits of opening up certain sectors, and even if the bill is passed, it still has to go to the President, who may veto it.

Nonetheless, the Constitutional amendment proposed by Speaker Belmonte will send a powerful signal to foreign investors that the country wants to open up the economy and can do so by legislation, without going through an extremely difficult process of amending the Constitution. The Philippines is one of the few countries in the world where restrictions on foreign ownership are in the Constitution. Mexico’s Constitution excluded foreign ownership in the exploitation of its petroleum resources, but its Congress recently amended its Constitution to remove the restriction.

President Aquino said that China has grown by double digits even if it has restrictions in the foreign ownership of land, implying that we could do a China even with our Constitutional restrictions. Firstly, China doesn’t have limits on foreign ownership in its Constitution. We do, and it covers not only land ownership, but also strategically important public utilities. Secondly, we aren’t China. China welcomes foreign direct investments (FDI). Annual FDI in China totals about $60 billion or more while we have the lowest in Southeast Asia, amounting to about $3 billion or so. Indonesia, at $18 billion, and Vietnam, at $8 billion, attract more FDI than we do. Our Constitution is telling foreign investors to keep out, and the President expects that we can do a China and become an investment haven?

The other objection being raised against liberalizing these Constitutional restrictions is that what matters more to foreign investors are lack of infrastructure and corruption, rather than the foreign ownership restrictions. However, the lack of infrastructure can be related to the Constitutional restrictions in the ownership of public utilities. Foreigners are allowed to build but not operate airports, seaports, toll roads, shipping, airlines, power distribution, and telecoms. Even iceplants are deemed “public utilities” and declared off-limits to foreigners. Because of these restrictive provisions, the Court of Appeals recently declared that Fedex is disallowed from operating a cargo transshipment facility.

This means that there will be an effective lack of competition in Public-Private Partnership Projects in infrastructure because only the same “Filipino” conglomerates can bid for those projects.

Moreover, it’s not only foreigners who are not investing in the Philippines, but even Filipinos. Our investment rate at 19% is lower than the average investment rate of 30% in other Asean countries. Why is this? Alexander Bocchi, the Italian World Bank economist, provided the answer to the puzzle: Monopolies abound in strategic industries in the Philippines, which fetter downstream and upstream industries through high prices, poor quality of products or services, and anti-competitive practices. The only way to break the stranglehold of these monopolies is to allow well-capitalized foreign companies to provide them competition, and that means liberalizing the economic provisions of the Constitution.

Thus, the current restrictive ownership provisions in the Constitution represents a big “binding constraint” to more investment, more jobs, better infrastructure, and all-around inclusive development of the economy.

However, if President Aquino can’t be swayed by economic arguments, he should consider ChaCha in the interest of national security. President Aquino has said that China is on the top of his mind in his remaining years in office. If that is so, the best strategic response to China is ChaCha. Why?

First, because foreign governments will have a greater incentive to help the Philippines uphold its maritime security and freedom of navigation if their citizens have a greater economic interest in the Philippines. If, as President Aquino told the New York Times, he wants more friends and allies in the international community to help the country defend its maritime sovereignty against China because the country can’t do it alone, then why don’t we get more foreign investments to come in? Wouldn’t foreign governments have a greater interest in the territorial integrity and maritime security of the country if their citizens had substantial economic interests tied up in our economy?

Second, because we can’t modernize our vital infrastructure, so necessary for national defense and security, without foreign investments. Government doesn’t have the money nor the technology to modernize our strategic infrastructure — ports, railways, telecommunications, airports, etc. — yet presently, foreign investors are barred from operating infrastructure facilities because they are deemed “public utilities.”

Third, the present restrictive provisions of the Constitution attract only foreigners who are willing to use dummies or creative legal maneuvers to invest. This represents a national security problem because it attracts the wrong kind of foreign investors: those who corrode our values and our institutions. We won’t be able to attract world class companies that are governed by ethical rules of conduct and the anti-graft laws of their respective governments to do business in the Philippines.

Last, because we can’t join the US-led Transpacific Partnership (TPP) if we don’t remove those Constitutional restrictions and level the playing field for all investors, foreign and local. The TPP is the strategic foundation of the US re-pivot to Asia. It’s an economic initiative spearheaded by the US that seeks to promote economic cooperation and trade among member nations in the Pacific with the exception of China. Japan, Vietnam, and Malaysia have already joined.

Not only would not joining put the Philippines at a competitive disadvantage economically vis a vis other nations like Vietnam and Malaysia, but in addition, it would send a bad signal that the country is not interested in a strategic cooperation with the US. Not joining the TPP is inconsistent with President Aquino’s own call to seek assistance from the US and other countries for help in defending the country’s territorial integrity.

President Aquino, connect the dots. We get inclusive growth, more jobs, better infrastructure, improved consumer welfare, enhanced national security, and stronger economic ties with the US and other allies if the Belmonte resolution is passed and the economic provisions are eventually liberalized by legislation.

Article location : http://www.bworldonline.com/content.php?section=Opinion&title=Who’s afraid of ChaCha?&id=83812

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