She said, he said

Michael Alan Hamlin

Posted on October 11, 2006

“The Philippines will not become less competitive”

Speaking before foreign and domestic investors participating in a strategy workshop on increasing foreign direct investment (FDI) last week, President Gloria Macapagal-Arroyo said, “I want to assure you that our policy is to keep and to improve the incentives the Philippines offers strategic foreign and domestic investors, especially exporters.” In an apparent effort to remove any chance of a misunderstanding, Ms. Arroyo continued, “Speaking of fiscal incentives, let us assure you too that the Philippines will not become less competitive in the fiscal incentives we offer our foreign and domestic investors.”

Sitting in the audience and applauding the president’s statements along with other workshop participants, Ms. Arroyo’s message seemed clear to me. And that message was that the Philippines will seek to strengthen the investment and business climate for international and domestic investors, including the retention of investment incentives. And she went still further, saying, “I know that some of you are worried, that’s why I want to assure you that we will not support proposals that have the effect of reducing competitiveness.”

Yet in reported remarks over the weekend and early this week, Senator Ralph G. Recto, the principal sponsor of Senate Bill 2411 which seeks to rationalize investment incentives by repealing 35 investment and incentive laws and reorganizing investment incentive-granting agencies, said he doubts whether Ms. Arroyo seriously contemplates withdrawing support for the bill. Instead, he said, she likely meant to imply that Philippine competitiveness won’t be compromised if SB 2411 becomes law. Mr. Recto believes that withdrawing incentives will enhance national competitiveness because government will have more money to invest in education and infrastructure.

While education and infrastructure should be priorities, Mr. Recto is flat out wrong to suggest that withdrawing incentives will increase government revenues. Both foreign and domestic investors – neither of whom Mr. Recto nor his advisor, University of the Philippines professor Renate E. Reside, Jr., consulted in drafting SB 2411 – have made it clear that withdrawing incentives rather than rationalizing and strengthening them will have a profoundly negative effect on investment.

Some investors are already doing more than talk about the impact of Philippine competitiveness on their investment decisions. In February, for example, Intel Corporation announced that it will invest US$300 million to build a semiconductor assembly and test facility in Ho Chi Minh City. The Philippines competed aggressively with Vietnam for the investment, but lost out according to industry sources due to high power costs, uncertainty regarding the Philippines’ investment climate (particularly for re-investment), and aggressive incentives offered by Vietnam.

To be sure, investments in the electronics industry were up 12 percent in the first half of this year to $310 million from $270 million, and the industry is confident of continued growth. But removing attractive incentives such as income tax holidays could quickly and dramatically alter those expectations. And the stakes are enormous. Electronics exports account for 70 percent of all exports from the Philippines, and investment in the first half of 2006 alone will generate 8,750 new direct jobs and 60,250 indirect jobs according to Semiconductors and Electronics Industries in the Philippines (SEIPI) president Art Tan.

To contextualize the debate on SB2411, Texas Instruments (TI) announced over the weekend that it is evaluating the Philippines and China for a new $1 billion chip-making facility. The Philippine government has offered a 28-hectare site in Subic Bay according to Armand Arreza, administrator and chief executive officer of the Subic Bay Metropolitan Authority. Mr. Arreza told Manila Bulletin reporter Bernie Cahiles-Magkilat that, “We are working closely to bag the project because TI’s country manager in China is also lobbying for the project,” noting cost-of-power concerns raised by TI executives. The Philippines has the second-highest power costs in Asia, after Japan.

The cost of losing the TI investment would be substantial, indeed. Tens of thousands of direct and indirect jobs, individual income taxes, and increased export revenues are at stake. It would also be a blow to the Philippines’ national pride. TI, along with Intel, is one of the Philippines’ oldest and most loyal investors. Virtually every mobile phone in the world is built with chips produced in TI’s Baguio plant.

And you can bet that that China – and other competing countries for that matter – will happily step up and offer the investment incentives SB 2411 seeks to eliminate. Ms. Arroyo clearly understands the stakes. Hopefully, the Senate will catch on.

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