Friday, Sep 22, 2017
Government | Asia-Pacific | Philippines

Invest in the Philippines

Leveraging on the Philippines investment potential


3 months ago

Mr. Guillermo M. Luz, Private Sector Chairman of National Competitive Council
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Mr. Guillermo M. Luz

Private Sector Chairman of National Competitive Council

Guillermo M. Luz, Private Sector Chairman of the Philippines’ National Competitive Council, speaks to The Worldfolio about new government reforms to improve the business climate, infrastructure development and why the Philippines is an attractive destination for Japanese companies looking to tap the ASEAN market

The current administration, under the leadership of President Duterte, aims to assume a bigger and a more significant role in the ASEAN economic community. The 2016 GDP growth of 6.8% and the expected growth of up to 7.5% in 2017 provides a very good starting point for this objective. The Philippine economy aims to leverage on this projected growth through implementing various programs such as the 10-point socioeconomic plan, the new 2017 budget, and the tax reform. In consideration of the plans and activities of the private sector, what is your opinion on these programs and what possible impacts do you expect on the investment climate?

These programs of the administration help in facilitating the economic activities in the country. Given this, the private sector is fully behind the 0+10-point socioeconomic plan of the government. In particular, the private sector likes the emphasis put on the aspects such as infrastructure, tax reform, ease of doing business, and simplification.

This economic plan has also provided momentum for increasing support to small and medium-scale enterprises (SMEs). It is what we refer to as the “inclusive business model”. There is a very large movement to foster this model and much of the team for ASEAN integration is devoted to working on this aspect reflecting prosperity for all programs. The public-private sector partnership (PPP) has also been one program that we have been supportive of. There is an ongoing review and rebidding of projects and the sector will continue its support to the extent that this pursues.

There is no question as to the support given by the private sector in the administration’s quest to improve economic standing. The challenge boils down to the manner of execution. The sector is supportive of the programs and asks how we can help in the execution side. As for this matter, we can help in numerous things such as in promoting inclusive business since we are direct participants in the economy. As for the tax reform, at the end of the day execution is reliant on the congress. The bill has to be passed and our participation for now is limited to expressing support for the tax reform program.

Another emphasis is put on infrastructure wherein the government aims to fund most of infrastructure-related projects through the national budget. If the government is able to do so, well and good. The private sector is hopeful to have this done as immediately as possible. However, we acknowledge the fact that there is a bureaucratic maze that has to be surpassed, yet the sector remains confident that the government can push through with it.

 

Infrastructure is among the more emphasized points in the current economic plan. It represents a large portion of the budget which is the equivalent 5.3% of the GDP. The department of budget also plans to allocate the equivalent of 7.1% of GDP solely for infrastructure projects. What do you think this would bring forth with regard to the competitiveness of the country and the ease of doing business for risk-averse countries like Japan?

Infrastructure is one of the key influencers to increase the country’s competitiveness. Since the Philippines significantly lacks infrastructure across many fronts (i.e. roads, rails, ports, and airports), the execution of such budget allocation will be beneficial. People are going to appreciate this.

Currently, there are five to six regional airports and a decision has to be made about the Manila International Airport. We would like to think that there are at least two international airports in the country. I am surprised that people of authority are still having a discussion given that we had very early on thought of where these airports should be and when they should have started being built. However, unsolicited proposals have been entertained and the process takes longer. Clearly, we need two international airports and there is no debate on this – at least for the private sector. This is a matter of an execution issue, and the same goes for the other fronts of infrastructure in the country.

If the government can increase the budget to 7.1% of the GDP, it will certainly do the country good.

In order to do this, our economy will have to be open to allow foreign contractors participate more heavily in projects because there will be an absorptive capacity issue once infrastructure projects start pouring in. The country may have all the money but lack contractors to do the work or do sufficient work.  Thus, procurement must also be streamlined. The bidding process and disbursement of funds must be at pace to keep the infrastructure progress running.

One of the issues encountered in this context is the right of way acquisition. We have a fairly new acquisition law and its implementation can help the contractors move faster. The biggest hindrance is that contractors are ready to move but the land for development is not turned over to them. Take for example the airport expressway that connects terminals 1, 2, and 3. It is a public-private sector partnership project that is being built by a private contractor (San Miguel). The delay in its construction involved the right of way has not been turned over to the contractor immediately.

On the business side, streamlining is currently the focus. Among many others, we are working to reduce, streamline, and eliminate unnecessary processes. There are big projects in varying levels to address this. We have it at the local and national government levels and at a congressional level. One of the most significant of these is project repealing. This involves revoking unnecessary rules and regulations. After repealing, whatever is left of the process must be automated. We need to put in a lot of information technology and take most of the interactions online. As to date, this is gradually taking its place but will still require several months to a year for automation depending on the process involved. This will involve the Securities and Exchange Commission, the Bureau of Internal Revenue, and Local Government Units as we are trying to turnout as many portals and online apps as possible for both local and national government units.

Once these issues have been eliminated, the country can move faster on developing its infrastructure. The country will be more competitive in this aspect.

 

The Philippines is currently refocusing its energies towards deeper regional integration. The shift in policy has allowed the administration to acquire money inflow from neighboring countries to fund infrastructure and other projects. Around $19 billion dollars have already been sourced as official development assistance (ODA) from China and Japan alone. FDI in 2016 also recorded an impressive 22% growth from 2015. The largest source was Japan which is also the second biggest trading partner for the Philippines. What do you expect out of the increasing level of regional integration among the countries in the region?

If you see the country’s sources of money, like the large ODAs from Japan and China, it becomes a matter of concluding the deals and taking financing into place. Now, we need the projects to be funded.

When the country goes into the global market, the credit ratings remain at a fairly good level. The bond offerings are also well funded and have good rates. We are able to meet the targets as we have been able to do so in the past. In my opinion, the country will continue to be oversubscribed and that is not going to be an issue.

The challenge on moving forward is attracting foreign direct investments (FDI). The world has become a tougher place. What people fail to realize is that from the trade point of view, there are more possible impacts on investments as the world gets more protectionist. If people refuse to trade, people will typically refuse to invest in certain places. The impact is on investment thinking and behavior.

Should Mr. Trump and company continue in their protectionist perspective, an impact on trade flows will be experienced over time. It is important to take note that other countries are also beginning to consider and adopt the same thinking. This presents challenges for everybody. For a small country like the Philippines, it is even more challenging.

 

In relation to acquiring more foreign direct investments, the major companies of Japan have recently pledged a $3.9 billion investment into the Philippines. In your opinion, what drives or attracts Japanese companies to invest in the country?

One factor that drives Japan into the Philippines is their search for a single market in the ASEAN region. There are around 600 million people in the region and the Philippines offers a good location with the second largest population.

Technically, investing in the Philippines means having the second largest workforce in the ASEAN. We have a fairly educated workforce with high English literacy. Another factor is the long history of Japanese investments – many of which are still doing well. The Japanese companies can leverage on these long-existing relationships. If their companies can produce here, another plus is the possibility of being able to export to neighboring ASEAN countries.

Among others, the need to diversify their own investment location drives Japanese companies into considering the Philippines. They have been heavily investing in China and are looking for opportunities outside as an alternative. While the Japanese companies remain in China, they are not going to keep investing in the same place. The search is who will be the plus one or the alternative location? The Philippines happens to be a good candidate as an investment destination.

These are key attractions as to why they come here. In addition to these, I find that the Japanese feel very at home in the Philippines. The school system, lifestyle, and hospitality of the people add to the drivers of investment.


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