THE PHILIPPINES has one of the world’s most restrictive regimes for foreign direct investments (FDI) — a key source of jobs and capital — despite the fact its economy is now one of the fastest-growing in Asia and the Pacific, the Organization for Economic Cooperation and Development (OECD) said in its first investment policy review of the country that was released on its Web site yesterday.

“The Philippine economy is currently one of the fastest growing in the region,” the report read.

“Both remittances and foreign direct investment are at record levels, the business process outsourcing sector is booming, the country is improving in international rankings and has been upgraded by credit rating agencies [since 2013].”

The report clarified that the country’s economic gains “are in part the cumulative result of reforms since the late 1980s,” citing in particular trade liberalization, deregulation, privatization, as well as breaking up of monopolies in key sectors in the 1990s.

It also credited the current administration, which ends its term on June 30, for enhancing transparency in government, addressing corruption, improving public-private sector cooperation, liberalizing the financial and maritime transport sectors, as well as enactment in July last year of Republic Act No. 10667, or the Philippine Competition Act.

Average Philippine gross domestic product growth picked up to 5.92% in 2011-2015 from 4.96% in 2005-2010.

Faster economic growth, however, has barely made a dent on rampant poverty, whose incidence eased to 26.3% of the population last year from 27.9% in 2012, as well as on lack of jobs that has forced millions of Filipinos to leave their families for opportunities abroad, even as unemployment rate slipped to 6.3% last year from 7.0% in 2011.

WARNING AGAINST ‘COMPLACENCY’
“[I]n spite of this commendable success, a strong case can be made that the process is not complete and that further steps might help to achieve the critical mass of reforms required to place the Philippines on a sustained and more inclusive growth trajectory,” the report said.

It particularly zeroed in on the need to make the Philippines more FDI-friendly.

Citing its FDI Regulatory Restrictiveness Index, which covers 65 economies, OECD noted that “the Philippines’ FDI regime is one of the most restrictive compared to OECD and non-OECD countries”, adding that most of such restrictions stem from the Constitution’s 40% limit on foreign ownership in strategic industries and economic sectors like telecommunications, transport and electricity public utilities; agriculture, fisheries and forestry; construction; advertising; private radio networks and real estate.

OECD also noted that foreign investors have to meet $200,000 minimum capital requirement “which is among the highest worldwide” and “can constitute a serious obstacle for small foreign investors…”

“Restrictions on FDI in the Philippines are high by both regional and global standards,” the report read.

“Regional competitors for foreign investment are not standing still but are continuing with their reforms,” it warned, noting for instance that Vietnam “has revised its investment law many times over the past two decades, most recently in 2014” while Cambodia and Laos are currently doing the same and “Myanmar has reopened to foreign investment and is also reforming rapidly”.

“All of this cautions against too great a sense of complacency in the Philippines.”

While OECD said it “adds its voice to this chorus” of calls from within government, business, multilateral lenders and international organizations for the Philippines to ease such restrictions in its 1987 Constitution, it argued that this, combined with effective implementation of the new Philippine Competition Act “can provide… impulse” for fresh market entry and greater competition.

COMPETITION RULES
To be sure, the government has released for public comment RA 10667’s draft implementing rules and regulations (IRR), identifying transactions that would require state approval.

The measure signed into law on July 21, 2015 covers anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions (M&A) in the country.

The Philippine Competition Commission (PCC), which was formed only in January, had earlier issued interim rules for the compulsory notification of executed or proposed M&A when the value of the transaction exceeds P1 billion.

In the draft IRR, the PCC further defined the threshold with regard to the acquisition of voting shares in a corporation or interest in a non-corporate entity.

The PCC requires parties to such acquisitions to seek state approval “if the aggregate value of the assets in the Philippines that are owned by the corporation or non-corporate entity or by entities it controls — other than assets that are shares of any of those corporations — exceed P1 billion.”

Moreover, the PCC requires notification of the transaction if this would enable the acquiring entities, along with their affiliates, to hold more than the following percentages of the corporation’s outstanding voting shares: 20% if any of the corporation’s voting shares are publicly traded; 35% if none of the corporation’s voting shares are publicly traded; or 50% if the person/s already owned more than the aforementioned percentages before the proposed acquisition.

Parties should also report an acquisition of interest if the acquiring persons, along with their affiliates, would hold an aggregate interest that entitles them to receive more than 30% of profits or assets on the dissolution of the non-corporate entity.

In case acquiring persons already own 30% of the profits or assets prior to the acquisition, the threshold would apply to transactions that would allow the parties to own more than 50% upon the non-corporate entity’s dissolution.

“Where a person has already exceeded the 20% or 35% threshold for an acquisition of voting shares, or the 35% threshold for an acquisition of an interest in a non-corporate entity, another notification will be required if the same person will exceed 50% threshold after making a further acquisition of either voting shares or an interest in a non- corporate entity,” the draft IRR reads.

Failure to notify the PCC of transactions that meet the thresholds would render the merger or acquisition void, and the acquiring and acquired ultimate parent entities face a fine equivalent to 1%-5% of the consideration.

Interested parties should submit comments by May 25.

NOT ONLY FDI
OECD noted that “the persistent under-investment in the Philippines is not limited to attracting FDIs since domestic investment is still low in spite of a booming economy.”

Hence, the report said, “the challenge is not only to attract foreign investors but also to persuade domestic firms to invest and, above all, to ensure that the investment that arises helps contribute to inclusive and sustainable development”.

“Reforms in the Philippines all move in the right direction, but the reform agenda is not complete.” — with Keith Richard D. Mariano and R. S. C. Canivel