REY GAMBOA: INVESTORS EYE RP WITH EXTREME CAUTION
MANILA, December 10, 2004 (STAR) BIZLINKS By Rey Gamboa - Many were wondering whom it was kidding when the Department of Trade and Industry acted surprised over a decision by multinational company Unilever to close one of its food production plants in the country next year.
Unilever’s pullout of its Las Piñas plant, coming on the heels of several other manufacturing plants’ closures these past years, is seen as a reflection of investors’ not too positive outlook on the business environment in the country. The facility, which manufactures Unilever’s pasta, peanut butter and other food products, directly employs close to 200 people.
It is difficult to understand how the government could still muster astonishment over what happened. Clearly, the trend over the last five years over our attractiveness (or lack of) to foreign investors has been enough warning for our bureaucrats. Investors currently operating in the country, even a company like Unilever that has been here for more than seven decades, continue to keep wide open their option to relocate their manufacturing plants outside the country.
Recently, the World Bank bared a report that once again confirmed suspicions of a continuing decline in preference for the Philippines. The report was based on surveys covering over 30,000 firms in 53 developing countries, the Philippines included. Some 700 registered companies participated locally.
It described the Philippines "as another country whose firms report high concerns." The World Bank study, by the way, took into account data submitted by 6,500 companies in the region.
Substantially declining investments
The multilateral agency noted that foreign direct investments in East Asia, had declined substantially since the 1997 financial crisis with China as the only exception to the rule, having been the recipient for most of the investments that were pulled out from its neighboring states.
In the Philippines, foreign direct investments as a percentage of GDP declined substantially from 2.2 percent during the period from 1997 to 2001, to 1.3 percent in 2002 and 2003. From 1990 to 2003, cumulative investments compared to GDP lagged behind Indonesia, Thailand and Malaysia.
Macroeconomic instability, corruption, electricity rates, taxes, and the uncertainty of regulatory policies were the top five major concerns named by the surveyed companies as constraining investments in the Philippines, the World Bank survey showed.
Close to 50 percent of the Philippine firms surveyed stated that interpretation of rules and regulations is unpredictable.
To quote the World Bank: "Studies often attribute policy uncertainty to sudden changes in policies or regulations designed to advantage a favored firm at the expense of its competitors, as different branches or agencies of government vie for access to bribes or push the interest of different patrons, or as firms seek special privileges and favors with respect to large one-off concessions, infrastructure contracts or sale of public assets."
Company officials spend over 10 percent of management’s time dealing with the heavy bureaucratic and regulatory burden, or the so-called red tape, the survey showed.
Another disturbing result of the World Bank survey is the fact that Philippine companies report paying as much as four percent of their total sales to bribes.
A total of 35 percent of these companies find corruption a key problem. That in itself is part of the reason why local companies have failed to be competitive: The cost of doing business, corruption included, is just unbearable for most.
Poor infrastructure has also been a major problem for Philippine companies. For one, the costs associated with unreliable electricity supply alone amount to around 10 percent of a company’s sales, the highest in the region, and comparable to Kenya and India.
Second, public investment in the Philippines has been declining, and is one of the lowest at less than three percent of GNP. The country has in fact been ranked by the World Economic Forum as 68th out of 75 states in terms of sufficiency and quality of infrastructure.
Uncertainties of contract commitments
Not only are we bereft of adequate infrastructure in place, but some of our major infrastructure projects are on hold or frozen because they are either being contested in the courts, or worst, are being investigated "in aid of legislation" at the halls of Congress.
There is also this specter of government reneging on its commitment on contracts that have undergone a tedious process of evaluation and approvals. The threat that there will be political pressure to renegotiate terms and conditions even after the facilities are in place or projects have been completed hangs like a "sword of Damocles." Ask the independent power producers (IPPs) and other parties with contracts with government and you’ll get a feel of the extent of this threat.
Fiscal management scare
Government’s high budget deficit and huge public sector debt have also tended to crowd out private sector borrowing. Access to external private finance has also been limited by country risks factors. For instance, Moody’s warned of a possible credit ratings downgrade for 11 banks, our two top telecom firms and several others in line after a possible downgrade on the Philippines’ sovereign credit rating.
The findings of the World Bank study are not entirely new to businessmen, local and foreign alike. The concerns and issues highlighted in the study are common topics in various forums and dialogues with government officials. Of course, promises of action complete with pictorials are the usual endings of these so-called public and private sector consultations.
It is very unfortunate that over the years, the Philippines has turned into an investment quagmire where profitability is always at risk due to policy uncertainties, corruption and the high costs of doing business. It has become an investment area to be approached with extreme caution.
‘Breaking Barriers’ with R. Tantiongco, ex-chairman, Energy Regulatory Board
"Breaking Barriers" on IBC-TV13 (11 p.m. every Wednesday) will feature former Energy Regulatory Board (now Energy Regulatory Commission) chairman, Rex Tantiongco, on Wednesday, 15 December 2004.
The entire economy is reeling from the impact of rising energy costs. The consumers are doubly burdened by the incessant increase in oil prices and the recently imposed charges for higher electricity rates from Napocor.
What options are available to the government to manage the fallout of rising oil and power costs? Is the revision of the Oil Deregulation Law the answer to the high local prices of oil products? What prevents large electricity consumers from obtaining better electricity rates from independent power producers? Watch it.
Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at email@example.com. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.
Reported by: Sol Jose Vanzi
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