MANILA - The Philippine business community is euphoric about the election of
reform-minded President Benigno "Noynoy" Aquino, but many foreign investors
don't yet share the sentiment. Regulatory uncertainty has crimped new foreign
direct investments (FDI) in the Philippines in recent years, and early signals
from Aquino threaten to undermine confidence in his policy direction.
Aquino's threat to review certain business contracts entered into by the
scandal-plagued Gloria Macapagal-Arroyo administration has raised new
uncertainty among investors about the country's regulatory and legal
frameworks. Meanwhile, contradictory interpretations of laws and regulations by
central and local authorities have jeopardized existing foreign investments in
the provinces.
On the campaign trail, Aquino promised a new era of official
transparency and economic progress, a message that has been warmly embraced by
local and foreign business groups. Rampant corruption, declining infrastructure
and regulatory uncertainty have all conspired against the Philippines ability
to attract new FDI.
In 2009, the Philippines attracted a mere US$1.9 billion, substantially less
than most of its regional neighbors. In comparison, Singapore brought in $37
billion while Malaysia, Thailand and Vietnam all attracted more than $10
billion. In the first four months of this year, the Philippines attracted only
$481 million, or about half of $947 million it notched in the same period last
year, according to National Economic Development Authority statistics.
"Slower foreign direct investments means slower economic growth in the future,"
said Benjamin Diokno, a former budget secretary. He noted that a downturn in
FDI will inevitably translate into fewer domestic employment opportunities -
the driving force behind the growing exodus of Filipinos in search of work
overseas.
Take, for instance, foreign investor Sagittarius Mines Inc (SMI), which is
exploring for copper and gold in the remote mountains of Tampakan town in South
Cotabato province. The Tampakan project aims to tap the largest undeveloped
copper and gold deposit in Southeast Asia, and the company had earlier
announced plans to begin commercial production by 2016.
The project's prospects dimmed after former South Cotabato Governor Daisy
Fuentes signed a provincial ordinance last month that prohibited open pit
mining, representing the first such legislation to be enacted in the country.
Fuentes, who was elected to congress in May, argued that the ordinance was
necessary to protect the welfare of constituents and the environment.
Foreign business associations have countered that the new law goes against the
principles of the 1995 Mining Act. They have expressed concern that rules and
regulations can be changed arbitrarily at the local level in ways that
undermine the sanctity of long-term contracts they have entered with the
central government.
SMI, which is controlled by foreign miners Indophil Resources and Xstrata
Copper, has spent $72 million on a feasibility study for the project. Its
mining rights were originally granted to Australia's Western Mining Corp (WMC),
which signed a contract with the central government in 1995 that allowed for
100% ownership of large mining projects with an initial investment of at least
$50 million. WMC sold its rights to SMI in 2002 after a local community group's
leaders backed out of a memorandum of understanding it had entered with the
company.
The potential loss of the SMI deal would be especially costly. According to the
Bureau of Mines and Geosciences, the government could lose as much as $7.2
billion in taxes and royalties over the next 19 years if SMI withdraws from the
project. Newly installed Governor Arthur Pingoy Jr has said he would look into
the issue and possibly conduct a review of the new environmental code, but
foreign investors say the law's passage has already substantially raised
regulatory risk across the country.
Complicating matters was the tendency of Arroyo's government to succumb to
pressure groups at the expense of contractual obligations. MTD Capital Berhad,
Malaysia's second-largest toll-road operator, has spent nearly $300 million to
finance a highway project south of Metro Manila, but has been unable to raise
tolls due to grass roots opposition. The company has claimed that its inability
to increase fares, as agreed in its original contract with the government, is
threatening the viability of its investment.
The Malaysian company has also faced off against a recalcitrant local partner,
Philippine National Construction Corp (PNCC), which refused to relinquish
control over toll collection. It learned the hard way about the disconnect
between presidential power and autonomous government agencies. When MTD Capital
Berhad's local subsidiary tried to enforce an order signed by then executive
secretary Eduardo Ermita for PNCC to yield to its authority, PNCC refused to
recognize the order and its security rounded up and detained staff, according
to people familiar with the situation.
Local investors are not immune from regulatory uncertainty. Danilo Manayaga,
president and chief executive officer of biotech firm Secura International
Corp, has waited over five years for a government decision on whether his
company may produce a new anti-rabies drug. The Philippines has one of the
highest rabies incidence rates in the world due to its large number of stray
dogs and relies on expensive imports for treatment.
Manayaga entered a joint venture with the government, but progress has been
stalled because officials cannot decide whether his investment should be
categorized under the build-operate-transfer or private-public-partnership
investment promotion schemes, he said.
It all adds up to a regulatory tangle that has badly undermined the country's
investment climate at a time of intense competition for global funds. Aquino
has vowed to make the Philippines a more attractive FDI destination, but his
early pronouncements, particularly about reviewing contracts undertaken by the
outgoing administration, have added more confusion to the mix. And without a
definite plan to achieve more regulatory certainty, its not clear that the
Philippines will be any more attractive to foreign investors under Aquino than
it was during Arroyo.
Joel D Adriano is an independent consultant and award-winning freelance
journalist. He was a sub-editor for the business section of The Manila Times
and writes for ASEAN BizTimes, Safe Democracy and People's Tonight.
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