Beating up investors

Michael Alan Hamlin

Posted on November 11, 2009

Just days after Philippine president Gloria Macapagal-Arroyo’s government issued Executive Order (EO) No. 839 freezing oil prices, the Chinese Embassy’s economic counselor, Wu Zhengping, told mining officials the Philippines must address some key concerns for the industry to attract investment from his country. “The first thing you have to do is improve your investment environment,” he said.

If the administration does improve the investment environment-including easing restrictions on foreign ownership and providing adequate infrastructure-China reportedly is eyeing a long-term strategic relationship with the mining industry, according to Wu. “It’s a win-win arrangement,” he said. But so far, there are no winners. “The Chinese are going global, but I just don’t see any substantial investments here in the Philippines,” the executive vice president of the Chamber of Mines in the Philippines, Nelia Halcon, told AFP.

Investment in the Philippine mining sector has stalled despite high hopes among potential investors, soaring commodity prices, and large ore deposits, officially estimated at 83 billion tonnes. The Philippines has the third-largest reserves of gold in the world and the fourth-largest reserves of copper. Factors contributing to the negative investment environment include opposition of civil society and indigenous peoples, ineffective government and shifting investment rules and incentives, and corruption, according to officials of foreign chambers in the country.

Mr. Wu didn’t mention that his own government has had some high-profile disagreements with the global mining industry. In July, China arrested four executives of the Rio Tinto Group-the world’s second-largest iron-ore exporter-for allegedly stealing commercial secrets and bribery. Demand for iron-ore in China accounts in large part for high global prices-it is the world’s largest consumer of iron ore-and it is pressuring Rio Tinto and other suppliers to keep prices in check, pretty much in the same way the Philippine government is picking on oil companies.

It is difficult and probably impossible for strategic investments to succeed when partners seek to gain unfair and heavy-handed advantage against each other. China’s actions toward Rio Tinto are clearly short-sighted. To keep its economy growing, China must keep building. Because it is consuming 60% of the world’s seaborne iron ore, it is unlikely that China can alienate the world’s second-largest supplier for long.

And the Philippines can’t put off its day of reckoning for long, either. Despite China’s demand for metal ore of all kinds, the Philippines’ large ore reserves, and its proximity to China, China isn’t investing in the Philippines’ mining sector. Government-linked ZTE Corporation’s experience-rightly or wrongly-demonstrated just how risky investment in the Philippines can be for China’s companies. Because the Philippines attracts the lowest level of foreign investment in Southeast Asia, government officials should be concerned about improving the environment for job- and revenue-creating foreign investment.

But they’re not. According to Press Secretary Cerge Remonde, that’s because government has the responsibility “to protect the interest of the greater number of people,” rather than a few investors, their employees, and their customers. Mr. Remonde, who accused oil companies of being “opportunistic” in a radio interview over the weekend, said, “These oil companies should listen to the sentiments of the people.”

However, since the greater number of people in the Philippines are the poor and the poor consume only about 20% of oil products distributed in the country, Mr. Remonde is actually protecting the non-poor, who will complain about high prices of gasoline, but will get truly grumpy if they have difficulty buying gasoline-at any price. Yet that’s what EO 839 will produce: a shortage of oil products.

As Mr. Remonde and his boss no doubt understand, it is not opportunistic to insist on making money and refusing to sell products and services at a loss. The price freeze forces oil companies to do that. If it goes on for long, they will no longer be able to operate. It is not hard to imagine individual and institutional investors suing a publicly-owned oil company for selling its products and services at a discount because doing so erodes the value of their investment.

Price controls don’t work, as all economist presidents understand. Ironically, they can also make an unpopular government even more unpopular. To see why, take a trip to the market this week to buy some pork chops. Don’t be surprised if your suki (favorite vendor) is running short on supply. That’ll be because government has also cracked down on “opportunistic” market vendors, forcing them to keep retail prices stable although wholesale prices are going up. Vendors aren’t oil company executives, but they understand financial suicide just as well.

It’s hard to understand what advantage Mr. Remonde and his colleagues hope to achieve from beating up investors… and vendors. On one side, they can’t make investment much worse than it already is. And on the other hand?

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