Another administration, another failure for economic Cha-cha ‘choreographers’

June 25, 2015 at 17:18

By Catherine N. Pillas & Jovee Marie N. dela Cruz

First of three parts

With the Asean integration drawing near, the Philippines appears to have already folded its hand early in the game, after it failed to remove foreign-ownership restrictions in the Constitution at a time when dismantling barriers to foreign investment is as paramount as ever.

House Speaker Feliciano Belmonte Jr. decided not to put his bill—Resolution of Both Houses (RBH) 1—to a vote before Congress went to adjournment sine die.

RBH 1 was meant to be the first step to liberalize the stringent economic provisions of the Constitution limiting foreign participation in particular business sectors.

The lawmaker, who has been pushing for the measure for several Congress now, reasoned that he did not have the necessary numbers for the measure to hurdle the third and final reading, and, as such, did not push the House to vote.

The proposed resolution would insert the phrase “unless otherwise provided by law” in foreign-owner-ship provisions of the Constitution, including land, public utilities, natural resources, media and advertising industries.

The sections identified by Belmonte are (1) Section 2, Article XII, on exploration, development and utilization of natural resources; Section 3, Article XII on alienable lands on the public domain;  Section 7, Article XII, on conveyance on private lands;  Section 10, Article  XII ,on reserved investments;  Section 11, Article XII, on grant of franchises, certificates, or any other forms of   authorization for the operation of public utility;  Section 4 (2), Article XIV, on ownership of educational institutions; and Section 11 (1 and 2), Article XVI, on ownership and management of mass media and on the  policy for engagement in the advertising industry.

The insertion would pave the way for the sectors to open up to foreign participation by virtue of future legislation.

The proposed bill, now dead in the water, will effectively change the country’s course in capturing future foreign direct investments (FDI), foreign and local businesses say.

The Makati Business Club and the Management Association of the Philippines, along with the European Chamber of Commerce of the Philippines and the American Chamber of Commerce, said, with foreign restrictions still in place, the country’s standing as a laggard recipient of FDI in Asean may be cemented.

In 2014 the Philippines reached a record-breaking $6.2-billion FDI, a growth of 66 percent from the previous year, and above the target of $4.4 billion assumed by the government.

Despite the milestone, the fact remains that, historically, the Philippines has been capturing the least FDI in the region for over a decade.

Even as the Philippines steadily improves its economic profile on various fronts, notching credit-rating upgrades and improving in competitiveness rankings, foreign restrictions still pose as front-liners in barring investments. FDI is not just a major source of external financing for emerging economies, such as the Philippines, but is also a driver for economic development.

With FDI comes capital formation, knowledge and technology transfer. This type of cross-border investment entails acquiring a long-term interest in a domestic enterprise, and may comprise construction or improvement of a factory, capital infusion and reinvestment of funds earned by
a subsidiary.

The Asean region has received more FDI, as a percentage of national output, than any other developing region, says the World Bank in its East Asia and Pacific Economic Update, released in 2014. However, even as the region takes the lion’s share of FDI, the Philippines’s cut has been relatively low compared to other Asean economies.  The Philippines’s failure to capture a larger chunk of the strong inflow of FDI into the region has been widely observed by global think tanks and economic-development authorities.

The World Bank estimates that between 1979 and 2012, the country has been attracting less than $500 million annually in FDI. After 2009, the bank said, the Philippines experienced some semblance of stability in the economy, but is still hampered by the many foreign-ownership restrictions in areas such as services and land ownership.

While each Asean member-state imposes its own restrictions on FDI, the Philippines has often been tagged as among the most restrictive in the region.

In the Organisation for Econ-omic Co-operation and Development’s (OECD) FDI Regulatory Restrictiveness Index  for 2013 (or the FDI Index), the Philippines ranked as the most restrictive country among 60 economies.

The index measured restrictive regulations in terms of foreign-equity ownership, in screening and approval of FDI, restrictions on foreign personnel and other restrictions, such as land ownership.

The OECD’s Southeast Asia Investment Policy Perspectives 2014 notes that the restrictiveness score is inversely proportional to the FDI stock a country receives.

The Philippines and Myanmar have among the most stringent regulations and received the least FDI stock as a percentage of gross domestic product.

The Asian Institute of Management’s (AIM) Policy Center compared other Asean economies’ FDI flows in sectors that are restricted in the Philippines.

The FDI in the restricted sectors, the AIM said, accounted for a sizable part of other Asean nations’ total FDI. In Malaysia these sectors accounted for 28.5 percent of its total FDI, while in Indonesia, these comprise 11.4 percent. The research authority said mining and quarrying accounted for the bulk of the inflows of restricted sectors in other Asean economies.

FDI in electricity, gas and water, transport, storage and communication in Vietnam, from 2009 to 2012, was tenfold the amount received by the Philippines during the same period, according to a policy paper of the AIM. Most of these sectors are partially restricted from foreign ownership in the Philippines.

Other Asean nations, meanwhile, have gradually been taking steps to liberalize their protected sectors and have reaped the benefits of opening up their economy to foreign participation.

Thailand increased the allowable foreign equity from 25 percent to 100 percent, and the share of the financial sector’s FDI rose from 3 percent to 16 percent. The country also passed the Foreign Business Act of 1999, which increased FDI to the industrial sector, as it opened up previously restricted areas such as cement manufacturing, textiles, liquor, garment, footwear and retail, to name a few.

Vietnam also undertook reforms in its foreign-ownership restrictions from 1990 to 2005, leading to a growth in FDI according to the World Bank. Its Foreign Investment Law, passed in the late-1980s, allowed 100-percent foreign-equity participation, but only issued licenses for wholly owned foreign projects that have substantial benefits. According to the bank, this was gradually relaxed over the years that, in the 2000s, over 60 percent of projects were wholly owned by foreigners.

Cambodia, one of the most open economies to foreign activity next to Singapore, amended its law on foreign investment in 2003. FDI was encouraged through incentives, such as renewal of land leases up to 99 percent; full exemption on duties of imported inputs; no price controls; and no discrimination between foreign and local investors.

In the case of the Philippines, the limitations on investments are on two lists under the Foreign Investment Negative List: List A and List B. List A contains restrictions enshrined in the Constitution and specific laws, while B are those restricted for public health, national security and defense reasons.

List A consists of both professions limited only to Filipinos and sectors where foreign participation ranges from 25 percent to
40 percent.

The proposal to amend the Constitution—despite enjoying the support of the business community and was among the main legislative agenda of the previous administrations—has been rejected repeatedly by no other than President Aquino. The 1987 Constitution was ratified during the term of his mother, the late President Corazon Aquino.

President Aquino asserts that investments are coming in despite existing restrictions limiting ownership by foreign investors in certain sectors. The President also announced his stance against Charter change (Cha-cha) until 2016, saying Congress is wasting time on it.

Communications Secretary Herminio B. Coloma Jr. said he has yet to see a signal that the President had relented on his firm belief that there is no need to amend the economic provisions of the 1987 Constitution.

Resolution of Both Houses (RBH) 1, filed by House Speaker Feliciano Belmonte Jr. and Sen. Ralph Recto, is eyeing to amend the provisions on the 60-40 rule limiting foreign ownership of certain activities in the Philippines.

The resolution will include the phrase “unless provided by law” in the foreign-ownership provision of the Constitution, particularly land ownership, public utilities, natural resources, media and advertising industries.

Under Article XII of the Constitution, foreign investors are prohibited to own more than 40 percent of real properties
and businesses, while they are totally restricted to exploit natural resources and own any company in the media industry.

The Foreign Investment Negative List, released every two years, serves as a guide to non-Filipinos on what economic activities they can participate in.

On List A, foreign ownership is limited by the mandate of the Constitution and specific laws. On List B, foreign ownership is limited for reasons of security, defense, risk to health, and morals and protection of small- and medium-scale enterprises.

The amendments to the Charter need to be approved through separate votings by both chambers, with a three-fourths vote required from them.

Belmonte said to make the country globally competitive in attracting foreign direct investment (FDI), as well as to spur productivity and employment generation, “we need to amend economic provisions of the Constitution that are deemed restrictive and counterproductive.”

“Relaxing [the Constitution’s] economic provisions would make the country competitively attractive to foreign investments, capital and technology in utilities, media and education, among others,” he said.

The so-called 42-man Visayan bloc in the House of Representatives, led by Liberal Party Rep. Alfredo Benitez of Negros Occidental, is also in favor of the economic Cha-cha.

“We, the members of the bloc, do hereby express our support to RBH 1 proposing amendments to certain
economic provisions of the 1987 Constitution, particularly on Articles XII, XIV and XVI,” Benitez said.

According to Benitez, the bloc, recognize that the Philippines is currently enjoying a growing confidence from foreign investors and that minimizing the economic restrictions sends a strong signal to investors that the government is serious in improving the investment climate in the country, and in sustaining the positive outlook of the economy.

But despite these strong claims that the economic Cha-cha is good for the country’s economy, the proposal amending the economic provisions of the 1987 Constitution has failed to get the support of several lawmakers in the House of Representatives.

Belmonte has just admitted that the proposal amending the Constitution will unlikely be passed this 16th Congress after the lower chamber went on a six-week break without adopting it.

The Speaker also admitted that they aborted their plan to put on final vote the RBH because the leadership did not have the numbers to get the approval.

“People who are in business, our businessmen, foreign businesses, cannot understand why such an innocuous amendment, which is simply an empowering from Congress, is having a difficult time to pass,” Belmonte said.

As the author of the bill, Belmonte said he would still push the measure’s passage in the House, but only as a “political statement.”

In the Senate, Recto has also given up hope that they will be able to pass the amendments during the 16th Congress, which is set to end in June next year, after the lower chamber failed to adopt it.

“These economic provisions are perceived to be trade and investment barriers responsible for the continuous decline of foreign investments and are restrictive by global standards,” Recto said in his version of the resolution.

Besides Recto, Senate President Franklin Drilon, Senators Juan Edgardo Angara, Ferdinand Marcos Jr., Grace Poe and Cynthia Villar are supporting the economic measure, provided that only economic provisions are amended.

According to Belmonte, during the 15th Congress, he also filed the economic Cha-cha but failed to get the nod of both houses of Congress due to lack of support from President Aquino.

“In the 15th Congress, [former Senate President] JPE [Juan Ponce Enrile] and I wrote a letter to President Aquino asking for his support on our proposal [amending the Constitution] . . .in other words, a great constitutionalist like JPE agreed entirely with me. But President [Aquino] wrote a memo and he said ‘l’ll have it studied.’ But the 15th Congress ended, we did not receive his study,” Belmonte said.

Besides Mr. Aquino, the Catholic Bishops’ Conference of the Philippines (CBCP) is also opposing the proposal changing the so-called highest law of the land.

CBCP President Archbishop Socrates Villegas said the proposed amendments should first undergo in-depth analysis.

“Before we rush into amending the Constitution, we, your bishops, urge all responsible to conduct serious studies in economics, sociology, the law and in related disciplines, including the Catholic social teachings,” Villegas said in the CBCP news web site.

Manila Auxiliary Bishop Broderick Pabillo said the government should address corruption if only to improve the FDI inflows into the country.

Pabillo, in a CBCP web-site article, also said he sees no need for economic Cha-cha, saying it is widespread corruption that has long been affecting the country’s growth.

According to the bishop, many investors are wary of investing in a country where corruption in the government is rife.

“Let us not touch the Constitution anymore. What we need to do is fix our economic climate by addressing corruption because that drives foreigners away,” he said.

In the lower chamber, Party-list Rep. Fernando Hicap of Anakpawissaid militant groups, like the Kilusang Magbubukid ng Pilipinas and its regional affiliates in Southern Tagalog, Central Luzon and Cagayan Valley, are mainly opposing the removal of protectionist provisions that ban 100-percent foreign ownership of corporations and land.

Hicap said Cha-cha would activate anti-Filipino and anti-people laws that favor foreign interests, especially those against farmers’ rights on land, workers right to living wages, small businessmen and Filipino professionals.

Party-list Reps. Emmi De Jesus and Luzviminda Ilagan of Gabriela branded the Cha-cha as an act of treason.

Party-list Rep. Terry Ridon of Kabataan also expressed belief that RBH 1 would “destroy the standards and limits set by the Constitution” and would also spell disaster for the Philippine economy.

“RBH 1 poses a double-edged threat: one, it will open new loopholes in the 1987 Constitution that would allow the haphazard revision of economic provisions; second, the catch-all amendment pushed by the House Speaker will inevitably lead to the bastardization of constitutional standards and limits,” Ridon said.

Party-list Rep. Neri Colmenares of Bayan Muna said any form of Cha-cha now, whether it be economic or political, is dangerous because it will open the floodgates for any or wholesale amendments to the Constitution.

Also, according to the survey by Pulse Asia, about three of five Filipinos do not want the 1987 Constitution amended at this time, though nearly half of them are open to having it amended sometime in the future.

“For 62 percent of Filipinos, there is no need to amend the 1987 Constitution at the present time—with 32 percent opposed to Charter change at any other time and 30 percent being open to Charter change at some future time,” it said.

The survey results came following Belmonte’s several statements that the amendments he is pushing are purely for the economic provisions. Belmonte said he will not allow anyone to insert any provision other than what is specified in his resolution.

“We are not interested in changing the [form of] government, only the economic Cha-cha. Foreigners don’t care what form of government we have; what they are interested in is what kind of economic policies we have,” the Speaker said.

For Bagong Alyansang Makabayan Secretary-General Renato Reyes Jr., the House of Representatives will be committing a “national betrayal” once it approves the so-called economic Cha-cha.

“While foreign powers are playing tug-of-war in the West Philippine Sea, here are our congressmen moving to sell the entire Philippines to foreign interests. This is the worst form of betrayal,” Reyes said.

“The rush to ease constitutional restrictions on foreign ownership is one of the biggest threats to our sovereignty and economy. The entire country will be up for sale to foreign powers,” he added.

“This move removes from the Filipinos the power to chart our own economic progress. We would be forever subsumed under the interests of big foreign corporations and their profit motives,” Reyes said.

But House Majority Leader and Mandaluyong City Rep. Neptali Gonzales II said some people believe the move is political. “They [people and some lawmakers] don’t want a Cha-cha because they think we are targeting to insert political provisions such as extension of term, allowing the president to run for reelection and shifting [from presidential] to parliamentary [the] form of government.”

Conclusion

For both foreign and local business groups, the failure of Resolution of Both Houses (RBH) 1 to pass anew—after gaining traction at the House of Representatives—is again another big blow to the efforts to make the country more competitive as an investment hub in the region.

The Management Association of the Philippines and the Makati Business Club predict a more difficult road ahead as the Asean integration nears, coupled with the region’s commitment to liberalize investment regulations through the Asean Comprehensive Investment Agreement (ACIA).

The ACIA, which has been in force since 2012, mostly focuses on attracting more intra-Asean investment.

However, with the Philippines submitting various “reservations” on equal treatment of Asean investors in the ACIA Reservation Schedule (based on the restrictions on the Constitution), only a little improvement is seen in terms of attracting either intra- or extraregional investments.

“More foreign investments will come in if invited and made welcome. Last year the Philippines had $6.2 billion, and that is better than the $1 billion to $1.5 billion we had before. But that is still small, compared to our neighbors. While the country is growing and is in a [demographic] sweet spot, it should be allowed to grow to its full potential,” said Michael Raeuber, president of the European Chamber of Commerce in the Philippines (Eccp) in a text message.

According to the state think tank Philippine Institute for Development Studies (PIDS), economic Charter change (Cha-cha) is an ideal recourse for the Philippines if it wants to benefit from the establishment of the Asean Economic Community (AEC) in 2015.

“The country needs to be competitive in order to take advantage of the growing marketplace of opportunities, especially for small and medium enterprises,” the PIDS said. “Platforms like the AEC and other free-trade agreements are gaining more success in terms of reducing or removing market entry and access issues.”

Under the AEC, market-access opportunities for Filipino firms can expand as they can sell to 600 million people in the booming region and own majority of their Asean operations.

The integration also provides that Asean companies can own 100 percent of companies in countries in the region and should be able to own at least 70 percent of services companies.

The Asean is composed of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

“The regional experience indicates that where countries have relaxed restrictions, FDI have increased, providing significant economic benefits to the receiving country,” the PIDS said.

“Countries that have relaxed foreign-ownership restrictions have enhanced their competitiveness and achieved a higher trajectory of economic growth.”

That’s why the Joint Foreign Chamber of Commerce and Philippine business groups have also expressed support for the passage of the economic Cha-cha.

Businessman Manuel V. Pangilinan said that to promote inclusive growth in the country, Congress should pass the resolution amending the economic provisions of the 1987 Constitution.  Pangilinan added that Cha-cha is needed for the country’s economic development.

Makati Business Club Chairman Ramon del Rosario Jr. also showed his support for the amendments of the Constitution, particularly the economic provisions to attract FDI, as the unemployment rate in the country is increasing.

Also, Former President Fidel V. Ramos has expressed support to efforts to change the economic provisions of the Constitution to attract more foreign investments and spur economic growth.

American Chamber of Commerce in the Philippines Senior Adviser John Forbes still have high hopes for the measures. “I hope the Speaker’s assessment proves too conservative. We were quite shocked by some of the public statements by Filipinos opposed to the resolution.”

Other groups backing the economic Cha-cha are the Philippine Exporters Confederation, Employers Confederation of the Philippines, the Philippine Chamber of Commerce and Industry and the various foreign chambers of commerce in the country.

But while the economic Cha-cha enjoys the support of the business sector and some government entities, it also has its share of oppositors.

University of the Philippines Economics professor Solita Collas-Monsod, in her commentaries, argued that FDI’s role in economic growth in high-performing Asian economies has been minimal at best.

Moreover, income distribution, a significant indicator of the “inclusive growth” agenda of the administration, is not directly linked with an increase in FDI, according to Monsod.

Other opponents of the proposed resolution said improvements in infrastructure, bureaucracy and red- tape regulations are the main concerns of foreign business groups, which could be remedied without touching the Constitution.

On the part of civil society, Kilusang Magbubukid ng Pilipinas, Gabriela, Bagong Alyansang Makabayan, Anakpawis, and League of Filipino Students have actively campaigned against the measure on the basis of economic nationalism.

Fear among these groups stem from the expectation that opening up more sectors to foreign control will widen the development gap between the high- and low-income segments of society.

The Coalition for a Citizens’ Constitution, another civil-society group, maintained that the political system of the country should be the focus of reform efforts, not the Constitution.

Another advocacy group, the Ibon Foundation, states that economic sovereignty is needed for emerging economies like the Philippines, and that opening up land ownership to foreign control will lead to exploitation of natural resources.

Aside from the fear of unmitigated use of land by foreign investors, another worry is that opening up particular restricted professions will be snapped up by foreigners, and divert employment from local workers.

Perhaps one of the more unspoken fears of civil society is, with the insertion of the phrase “unless otherwise provided by law,” business groups, industry heads and investors would make Congress pass laws that will liberalize specific sectors that they have interest in.  This would vest Congress with considerable power.

No voice of opposition has been louder than that of Malacanang’s, which reiterated that opening up sectors restricted in the Constitution is not a guarantee of future economic growth or higher FDI levels.

This stance is vastly different from previous administration. The economic Cha-cha, in general, has been pushed by former Chief Executives Fidel Ramos, Joseph Estrada and Gloria Macapagal-Arroyo.

Estrada and Arroyo particularly included changes in the economic provisions in the Constitution, in their advocacy.

Attempts by the previous leaders similarly failed as these were suspected to be driven by a desire to extend their terms of office, an unpopular notion that quickly roused opposition among the public, especially during Arroyo’s term.

The push for Cha-cha under Arroyo and Estrada were also overshadowed by their own share of political scandals and corruption controversies. And yet oddly enough, even with President Aquino’s reluctance to support economic Cha-cha, it gained considerable traction in the present administration due to the initial unity of supporters in Congress. Still, it appears that is not enough.

Another administration is about to close, and the economic Cha-cha again lacked the choreography to earn everyone’s nod.

Image Credits: Nonie Reyes

 
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