Tuesday, Oct 17, 2017
Industry & Trade | Asia-Pacific | Japan

Investing in the Philippines

‘From where we sit as lawyers, there is a determined effort for a new reform package’


1 week ago
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Emerico O. De Guzman, Eusebio V. Tan and Angara Abello Concepcion

Regala & Cruz Law Offices

An interview with Emerico O. De Guzman, Eusebio V. Tan and Angara Abello Concepcion of Regala & Cruz Law Offices

The Philippine economy was a top performer in South-east Asia in 2016 with a YOY growth of 6.8% and an estimated 6.8-7% growth in Q1 2017. This is mostly on the back of strong domestic demand, strong consumption, and resilience to external shock. To make sure this growth is sustainable, the government has put in place initiatives such as a 10-point economic plan, tax reform, IPPs, contractual order, and expansionary budget with emphasis in infrastructure. In your opinion, how do these measures guarantee a stable growth in the years to come?

The tax reform is a big thing; it is not every year or congress cycle that there is a new tax reform measure that comes around. The tax reform measure is a ground-breaking program meant to support and finance the “Build Build Build” program of the government. It is still in the process of being turned into legislation. There is a version that has been passed by the lower house, whereas the upper house is now reviewing it.

This is a key for formulating the parameters of the Infrastructure program. I understand that while it may not necessarily be according to the Administration’s prescriptions, there will be one that may be passed around early next year. That should prime the economy with good infrastructure and more investments. We are keeping our fingers crossed.

The Philippines has been growing in a pretty respectable way for several years now. It started in the previous Administration; we are the fastest growing in Southeast Asia and one time they were saying that growth was equal to or higher than China’s. The Philippines, since the last administration, was the flavour of the times and many foreign investors started looking at the country more closely. The current administration intends to continue the economic programs of the previous administration, although this time they stressed on infrastructure. In particular, they were saying that infrastructure before contributed 2.6% of GDP. They wanted to drive this to at least 5%, even something around 6% or 7% by the end of 2022. They say this will be the golden age of infrastructure. As per NEDA reports and DBM plans, they will be shelling out some eight to nine trillion Philippine pesos in funds from 2017 to 2022 for these build-build-build projects.

From where we sit as lawyers, we feel that because of the comments given to us by a number of clients who consulted with the legislators involved in the tax reform program, there is a serious and determined effort for a new reform package. The Senate is trying to fast track the passage of its own version on this program, and somehow it may not necessarily dovetail with what the lower house has approved. The Senate is taking a look at the details of the program that the Senators might feel have to be refined further for one reason or another.

 

The government of the Philippines is making efforts to attract money inflow into the country with measures such as the development of special economic zones, and international agreements on government level, especially in a regional context. This shift in policy has already resulted in ODA worth over $19 bn from China and Japan alone. Additionally, according to the latest BoI and BSP reports, the first half of 2017 has resulted in $5.7bn FDI pledges, a 30% increase since end of 2016. The BSP has raised its net FDI inflow target to $8 billion from the original target of $7 billion for this year after it reached a record high of $7.9 billion last year. How would you define the current investment climate of the Philippines for foreign investors, especially the famous +3 and what is the competitive advantage of PH within the region as an investment destination?

Emerico O. De Guzman:

One of our main advantages is our knowledge of the English language. Our schools have recently been revitalized with the K to 12 program. We feel that this is the right approach to make us competitive with the rest of the world in terms of our educational system. Therefore, there is going to be that supply needed for us to be able to confidently say that we can man whatever industry that might have be to be developed to fuel the economy.

Various skills are sought to be developed as well through this program. The last two years of the program are meant to allow students to develop interests and skillsets that will prepare them for a university education. Hopefully, this will catch the growing population and enhance the demographic status and picture of the Philippines that has a very young workforce compared to the greying and elderly population of Japan. We can service the needs of the Japanese investors who might come here to the Philippines as well as probably even address the needs of various countries that might have a need for our skillsets.

That is how we feel about it. There is the attraction of our facility for the English language, a good educational system that was recently revamped, and a young population that is of working age at least for the next two to three decades. The only challenge to that is the need to address the nutritional needs of our children as they grow up. There are also hurdles though in constitutional and legal restrictions for the areas that might be open to investments from abroad. We have quite a number of industries that are in the negative list as to how big an equity that investors can be able to bring over. We have several aspects of attractiveness, but there are certain challenges that hopefully this government will be able to address by not just focusing on the drug menace.

Eusebio V. Tan:

Among the ASEAN nations, the Philippines is perceived to be very stable politically. Growth has been ongoing for several years and, even now, the economy has been growing at a very respectable rate.

Emerico O. De Guzman:

Another attraction here is the relatively cheap labor consisting of a very young population—they are easy to train and speak in English. When foreign investors come in and set up shop, it is easy and cheaper for them to train and communicate. There is also a growing demand in local consumption brought about by the growing BPO industry and the regular substantial inward remittance of OFWs. You see that even Japanese retailers like Family Mart are coming in now. They see that there is a growing retail market.

Talking about demographics, I was told that the average age of Filipinos is 23.1. You compare that with Thailand’s 34.7, Vietnam’s 28.2, Japan’s 45.4—there is a basis Japanese companies and other foreign investors to go to the Philippines and take advantage of our facility in English and demographic sweet spot.

On the other hand, what do you see are the biggest challenges for the Philippines to catch up with its ASEAN counterparts like Malaysia, Singapore, and Thailand?

Eusebio V. Tan:

The main challenge would be infrastructure; we are far behind our ASEAN neighbours. Singapore, Malaysia, and Thailand. I have always believed that the single biggest component to speedy economic growth is infrastructure, which the Philippines has little of. That is one of the biggest drawbacks. Otherwise, we are perceived to be relatively stable even in politics.

 

When we look at ASEAN, we can see that there are three categories of countries. There are those that are very advanced like Singapore and Malaysia, those that are still emerging, including the Philippines, Vietnam, and Indonesia and the less developed countries including Cambodia, Myanmar, and Laos. Meanwhile, the Japanese are integrating these countries into their global supply chain. In that sense, how do you evaluate the importance of legal services here in the Philippines and how do you see the sector develop up to 2022?

Emerico O. De Guzman:

We are growing—just look at the law schools. Many people congregate to law schools; it is not just because of the allure of the profession. There is economic sense there too, and it is a growing profession.

We have a big supply of lawyers. The existing democratic space and the kind of government that we have would support the continued practice of the profession. We would like to believe there is still rule of law in the Philippines and so law firms abound. We are one of the many law firms in the Philippines. ACCRALAW, however, happens to take pride in being the biggest right now in terms of number. We have grown to more than 150 lawyers from a group less than 10 in 1972, and we are a full-service law firm. Many of the big law firms around have established networks beyond the Philippines. Any cross-border issue that arises may be addressed readily using that network.

Recently, regional law firms have also been scouting in the Philippines. These firms have been projecting their vision and looking forward to an integrated ASEAN. We have not opened up like Singapore did, because the Supreme Court has yet to review the rules for the practice of law firms and lawyers coming from beyond the Philippines. There are currently possible arrangements as to the sharing of responsibilities between and among partners to a probable cross-border project.

The Worldfolio: What services from law firms do you think are the Japanese in need of in the ASEAN region?

Eusebio V. Tan:

The ASEAN economic community was established in December 2016. Countries in ASEAN are supposed to try to work together. I am sure that all the ASEAN countries will try to utilize whatever benefits that they can get under the AEC to move forward.

Emerico O. De Guzman:

The common areas on which foreigners come to work with us together are intellectual property (because all of them want IP rights that are registered or protected), investment law and corporate/regulations. The Japanese, for instance, need advice and assistance in terms of the requirements for foreign investments. We also provide litigation support when the need arises.

As Japanese SME’s are also involved in manufacturing, although not in that scale as Mitsubishi, they need to establish factories in the Philippines. Therefore, there is a need for them to be assisted in locating ecozones. There is that prevailing practice of compliance with ecozone rules—that is an area of practice for law firms. That area of compliance practice will probably grow on top of the other areas. Tax compliance is another one, because they have to comply with our tax laws and they have to know if there is a tax treaty they need to avail of.

Eusebio V. Tan:

The rules in PEZA locations are typically straightforward. Tax and duty free importation of machinery and equipment and raw materials, for example, is allowed.  Japanese investors need to understand those things, as well as the appropriate corporate structure to establish in order to properly establish their business in the Philippines.

In that regard, corporate law advice and assistance is needed, for example, the minimum number of members of a corporation’s board of directors and their qualifications. There is a need for a corporate secretary (who must be a Philippine citizen and resident) and a treasurer (who must be a resident). Such rules need to be complied with, as they establish Philippine corporations.

Some Japanese investors may have taken a look at the renewable energy sector. This might be attractive to the Japanese as well.

 

One thing that is clear in the Philippines is that the bureaucracy is different compared to Japan, and this can be a challenge for investors. In this regard, how can ACCRALAW help Japanese companies that are looking to set up shop here?

Eusebio V. Tan:

We advise them on the requirements of law, as well as what they should or should not do as stipulated in the law.  We find solutions for them. For instance, Sumitomo Mitsui Banking Corporation (“SMBC”), the second biggest bank in Japan, came to see us a few years ago, because they wanted to upgrade their local presence to full banking status. They wanted to own 100% of their operations. We advised them then that current legislation limits foreign ownership in banks to 60%.

There was a law in 1995 which opened a window and allowed only 10 foreign banks to come in, but the window was already closed.  At that time, I helped the Bank of Tokyo become the first foreign bank to come into the country under that law. The only other new way to enable SMBC to establish a branch in the Philippines with full banking powers was to amend the existing law. SMBC asked us: “Can you do that?” We did it in 6 months.  We drafted the appropriate bill and husbanded it until it passed into law, the Foreign Banks Liberalization Act.  It opened up the Philippine banking sector to foreign banks. It is a classic case of us advising and assisting a client achieve its goals. We closely associate with Japanese investors and companies, and we constantly try to help them further improve business relations with their counterparts.

 

How would you evaluate the strengths of ACCRALAW? What do you think makes you a partner of choice of so many Japanese companies?

Eusebio V. Tan:

It is very well acknowledged that we provide quality, reliable, and timely legal service. Even the Japanese Ambassador to the Philippines is aware of this fact. In relation to the Foreign Bank Liberalization Act, we advised our clients as to who are the people we needed to convince, and the arguments we could use, so that a new law could be passed to allow foreign banks come into the country.  

 

How would you evaluate ACCRALAW in terms of being able to attract and produce all these Filipino talents who also have a significant background in the government?

Eusebio V. Tan:

We are probably the Philippine law firm with the most personnel contributions to government, because we encourage our lawyers to also do their share in national building. As you can see, many of our lawyers graduate into government positions to share their talent and expertise to help improve the state of our nation. We have had our lawyers become senate presidents, senators, congressmen, and lead us in private organizations like the Philippine Stock Exchange.

We are very involved with the Philippine-Japan Society and the Philippines-Japan Economic Cooperation Committee. With respect to Japan, the Embassy of Japan is a long-standing retainer client we support closely. When we were working on Foreign Banks Liberalization Act, I thought of it as not only helping Japanese clients and businesses, but also the Philippine economy itself. One of the main justifications we raised when we discussed the matter with Philippine government officials is that, if you allow major foreign banks to come in, they will encourage many of their Japanese clients/customers to invest in the Philippines. Such Japanese clients/customers will be more comfortable and confident if they are able to get their financing from their friendly banks from their own countries, rather than coming in and talking to Philippine banks who they are not very acquainted with.

I personally talked to the Central Bank Governor, the Secretary of Finance, the Senate President, the Speaker of the House of Representatives, and the Heads of the Committees on Banking of both the Senate and the House of Representatives and explained to them the benefits to the Philippines of allowing foreign banks to come into the country.  Those banks who are allowed entry into the country have complied with their commitment to bring in more Japanese investments.

 

What competitive advantage do Japanese investments have within the Philippine market and how would you evaluate the added value their investments might bring?

Emerico O. De Guzman:

Technical expertise and financing are their biggest advantages. The Japanese are far more advanced in terms of these two aspects.


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