The Market Monitor Minding the Nation's Business
By Lito U. Gagni
The Philippines risks becoming an Asian pariah insofar as foreign direct investments (FDI) are concerned because of frequent changes in its investment rules that have bedeviled the entry of foreign investors.
The latest of such changes that actually encompassed a drastic alteration in the character of the investment game were manifested in two divergent rulings handed down by two government arbitration panels regarding the rate increases that water concessionaires Maynilad Water Services, Inc. and Manila Water Corp. sought.
Maynilad was allowed to have the rate increase it petitioned but Manila Water’s was disapproved. And analysts cannot seem to explain the variance in the rulings since the two concessionaires had the same set of problems brought before the separate arbitration panels of the government.
The two arbitration panels decided differently. The panel handling Manila Water ruled that Manila Water is a public utility and thus cannot recover the corporate income tax while the other panel handling Maynilad ruled that it is an agent and concessionaire and can therefore recover corporate income tax.
The divergence in the rulings of the arbitration panels which is chaired by a nominee from the International Chamber of Commerce , has thus come up with differing scenarios in the case of the East Zone and the West Zone. In the East Zone, there are two public utilities, that of MWSS and now the Manila Water while in the West Zone, there is just one public utility, the MWSS and one contractor, the Maynilad Water.
Due to the divergence in the rulings, Maynilad was allowed to increase its rates as it was deemed just a contractor and agent while the MWSS remains a public utility while Manila Water being deemed a public utility was ordered to reduce its rates.
Analysts said the problem in the MWSS’s change in policy was that the government represented to the then-bidders for the East Zone and West Zone in 1996 that MWSS would remain a public utility while the winning bidders would be treated as agents or contractors.
This is what is “woefully wrong” with the changes in the government’s own policy directives, analysts said, since a change, for instance, in the make-up of both Manila Water and Maynilad from being agents or concessionaires to being a public utility means they could not charge for their income-tax payments, thereby making them incur huge losses that often translate to operational inefficiencies.
These abrupt and often unwarranted changes in the government’s investment rules have resulted in the anemic entry of FDIs as compared to its other Association of Southeast Asian Nations (Asean).
Analysts said the recent rule change in the concession agreements that were dutifully conveyed to the bidders prior to the privatization of the MWSS coverage of operations would further dampen the entry of investors.
An investment banker, who spoke on condition of anonymity, said the Philippines, already lagging behind in investments when compared to its Asean neighbors, risk being a pariah because of these changes.
Already, the foreign chambers of business in the country, have similarly pointed to the investment-rule changes for the low FDIs into the Philippines.
American International Group (AIG), in its country risk assessment of the country, for instance cited two high-profile foreign investments that have encountered difficulties.
These are the Xstrata investments into the Tampakan gold-copper mine project, bruited to be the biggest copper-gold project in the world and the cancellation of the contract of Sinomach, a Chinese firm that was set to build an 80-kilometer rail line between Manila and Clark.
In the case of the Tampakan mining project, what it ran into was a provincial governor’s directive to ban open-pit mining and later the refusal of the Department of Environment and Natural Resources (DENR) to issue an environmental-clearance certificate.
AIG said in its briefing paper on the Sinomach rail link from Manila to Clark that, “the contract, financed with a loan from the China Export Import Bank, was one of several agreements signed by (President) Arroyo that Aquino tore up when he took office.”
Even local government contracts have not been spared from the rule changes. For instance, a dispute arose between SM Prime Holdings, Inc. and Bases Conversion Development Authority regarding its SM Aura Premier, a mall in Taguig City, due to changes in the land-use plans.
Analysts said that foreign investors may have to skip the Philippines as an investment destination unless there are ironclad rules that investment agreements signed by the government would not be subject to changes, like the one that marred the concession agreements of Maynilad Water and Manila Water.
A World Bank study showed that from 2010 to 2014, the Philippines had the lowest FDI as a percentage of gross domestic product. It had 1.3 percent compared to Thailand’s 3.3 percent; Malaysia’s 3.2 percent; Vietnam’s 5.2 percent; Indonesia’s 2.7 percent, Brunei’s 5.6 percent, Cambodia’s 8.8 percent and Singapore’s 21.4 percent.
For 2013, Vietnam registered FDIs of $22.4 billion while Malaysia and Thailand had FDIs of $11.7 billion and $13 billion, respectively. Cambodia had $5.9 billion and Indonesia, $28.5 billion.
The Philippines, for its part, had FDI of $3.9 billion—much lower than that of Cambodia, which has just opened its doors to foreign investors.
Analysts said that unless the Philippines wises up to the fact that investment agreements should not be subject to changes, the country might find itself being beaten by its Asean neighbors.