Michael Alan Hamlin
Posted on September 23, 2009
Policy instability is one of four major factors responsible for the Philippines’ poor showing in the World Economic Forum’s (WEF) most recent Global Competitiveness Report. The top three factors are corruption, inefficient bureaucracy, and inadequate infrastructure. Last week, we were treated to another example of policy instability with the Philippine Senate’s passage of a bill converting the Bataan Economic Zone (BEZ) into a special economic zone and Freeport. The House of Representatives previously approved a counterpart measure.
In the second quarter of this year, foreign direct investment (FDI) fell 73% from a year earlier. For all of 2008, FDI was down almost half at US$1.52 billion from 2007 at US$2.9 billion. That year, Thailand received more than $10 billion in FDI, and Indonesia took in almost $8 billion. And the Philippines’ poor record for attracting FDI won’t improve anytime soon, according to Dennis Arroyo, director for national planning and policy at the National Economic and Planning Authority.
The passage of a bill creating a special economic zone and Freeport would normally be greeted with enthusiasm, but BEZ investors say that’s not the case in Bataan. The bill doesn’t call for the creation of a new economic zone, but the conversion of an existing zone under the jurisdiction of the Philippine Economic Zone Authority (PEZA) into a locally administered economic zone.
According to a Senate news release, Senator Richard J. Gordon, who co-authored the bill, believes “local governments should have a strong hand in operating the Bataan Special Economic Zone and Freeport as they had in (the) Subic (Feeport) because the local folks would have more enthusiasm in making it into a viable operation.” The Subic Freeport was formerly a U.S. Navy base. Mr. Gordon’s argument is flawed in two fundamental ways.
First, PEZA is the principal generator of FDI in the Philippines, generating almost 65% of total FDI in the second quarter. PEZA enjoys a strong positive image among investors for policy stability and transparent management. Those are not qualities shared by the Bataan provincial government, in contrast. Governor Enrique “Tet” Garcia, Jr. was ordered suspended by the Ombudsman last year for six months as a result of the alleged illegal seizure and auction of a business property in 2005. Employees of the company, Sunrise Paper Products Industries, Inc., filed the complaint.
BEZ investors tell me that they do not know if Mr. Garcia will respect the contracts they signed with PEZA, which exempt investors who pay five percent of gross revenues as income tax from all local and national taxes, including real property taxes. The Senate bill passed last week, investors say, includes a provision that will require them to pay real property taxes. For investors who have created jobs in Bataan in good faith on the basis of their PEZA contracts, this is a show stopper.
There are other potential issues affecting investors that have persistently hounded local Freeports in the Philippines, including Subic. Predominant among these issues is smuggling new and secondhand automobiles, trucks, oil, and other illegal imports, which both result in the failure to create local jobs and imperil legitimate investments. Corruption, presumably including smuggling abetted by government officials, is the number one factor responsible for the Philippines’ poor competitiveness ranking in the WEF report.
Second, if local governments are as adept at generating FDI as Mr. Gordon suggests, wouldn’t it make sense to place all economic zones under the jurisdiction of local governments? After all, the Subic Freeport was the number two source of FDI in the second quarter after PEZA. In fact, the Subic Freeport is managed by an administrator appointed by the president of the Philippines. The Subic Freeport website says it plays a key role in the national government’s effort to achieve international competitiveness.
For a country that attracts as little FDI as the Philippines does, it has more agencies engaged in generating FDI than it needs. These agencies include the Board of Investment, PEZA, and existing Freeports. In an ideal world, local governments would be vigorously promoting local investment to generate jobs and direct and indirect tax revenues. In the world we have, investors are looking for good governance, efficient bureaucracy, reliable infrastructure and policy stability, as the WEF report shows.
Until local governments demonstrate they can provide those attributes, it makes sense for investment to be overseen by a central authority. That doesn’t stop local governments from promoting themselves to investors. In fact, there are many examples of local governments working closely with PEZA and other investment agencies to do exactly that, and with considerable success.
It will be interesting to see how the Bataan Freeport fares in attracting investment. In the meantime, its administrators should learn to take care of existing investors. It may find itself trying to make up for lost investors, rather than building on its existing base.