Changing the rules

Michael Alan Hamlin

Posted on May 28, 2008

No way to attract investors…

When the Philippines’ Supreme Court struck down a presidential proclamation granting investors in the Clark Special Economic Zone investment incentives in 2005, foreign investors, chambers of commerce, and business leaders were horrified. The Bureau of Internal Revenue quickly announced it would collect back taxes from locators causing further dismay and generating considerable negative publicity for the Philippines.

It was not until March 2007 that Congress passed and President Gloria Macapagal-Arroyo signed into law legislation creating the Clark Freeport Zone and restoring incentives. The new law also granted amnesty to investors registered with the Board of Investment (BOI) or Philippine Economic Zone Authority (PEZA), assuring investors that the terms under which they made their original investments would be honored.

Clark investors finally heaved a sigh of relief while other investors and potential investors shook their heads in disbelief, wondering how the Philippines could expect them to confidently invest without the assurance that agreements would be honored and rules governing the terms of their investment would remain in place. Unfortunately for the Philippines, it would not be long before investors were again threatened.

Four months after investor incentives were restored in Clark, Congressman Albert S. Garcia filed House Bill 1425. If the bill becomes law, the Bataan Economic Zone (BEZ), currently under the jurisdiction of PEZA, will be converted into the Bataan Economic Zone and Freeport (BEZF) under the jurisdiction of a new bureaucracy, the Bataan Economic Zone and Freeport Authority (BEZFA). That’s right – a special bureaucracy dedicated to regulating the BEZF independent of BOI and PEZA.

In August the bill was referred to the House Committee on Economic Affairs and scheduled for first reading December 18, 2007. That would prove to be a productive day for the House, as it approved the bill the same day apparently despite objections from PEZA and without the benefit of the perspective of the 62 locators presently operating in the park under terms of existing agreements with PEZA.

House Bill 1425 was brought to my attention by one of those 62 investors. A 15-year resident of the Philippines, the investor wrote in reaction to my column last week, “Increasing Competitiveness?” He and other locators are concerned that the real purpose of House Bill 1425 is to grant control of the BEZ to local political leaders, making their contracts with PEZA essentially meaningless.

Bataan is currently governed by Enrique T. Garcia, Jr., father of Congressman Garcia. The senior Garcia was previously governor of the province from 1992 to 1994, and he served in Congress from 1995 to 2004, when he was again elected governor.

According to the Bataan Province Official Website, the elder Garcia has had an interesting career. That career began with the defunct ESSO Philippines, where he worked for almost a decade before it was acquired by the Philippine National Oil Corporation during the administration of Ferdinand Marcos. So Garcia should be familiar with the perspective of investors, and how they view changes in investment regulations: Marcos nationalized the industry when the economy collapsed in 1973.

According to the BEZ investor, who is vigorously lobbying against House Bill 1425 and the Senate version, Senate Bill 2118 authored by Senator Loren B. Legarda, the Garcias are displeased that the BEZ has not developed as quickly as the nearby Clark and Subic economic zones. I sent an e-mail to the governor last week requesting an interview to discuss his perspective on the BEZ and the BEZFA, but have not heard back.

The investor believes that there’s just no way the BEZ can compete with Clark and Subic. “The zone is located too far from Manila and to be honest there is nothing out here. Even the capital of Bataan, Balanga, lacks anything to offer a potential investor. Most investors today opt for Clark, Subic, or the Cavite area in that these areas offer investors a lifestyle that they are used to.”

He notes that the local chamber of export businesses is opposed to House Bill 1425, and that “investors have been here for years with contracts with PEZA signed in good faith. No mention is made of what will happen to our contracts. If investors ever thought this would happen, no one would have invested in building their own structures here.”

The investor also notes that PEZA does an excellent job regulating economic zones all over the country: “They have the best incentives for investors and make things simple,” and he says that’s because Director General Lilia Clemente “is fair to everyone and is always there for investors when they have problems.” My own firm is PEZA registered, I should disclose. But the investor is right: It’s not hard to find investors who leap to praise PEZA and who appreciate their relationship with the authority.

Legarda filed the Senate version of the bill in March. Before the Senate thinks about passing it, perhaps it should hear from the BEZ locators, because, “Changing the rules in midstream is NOT THE WAY TO ATTRACT INVESTORS.”

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