An interwiew with attorneys Gil Roberto Zerrudo, Dennis A. Quintero, Bienvenido A. Marquez lll and Alain Charles J. Veloso, of Filipino law firm Quisumbing Torres
An interwiew with attorneys Gil Roberto Zerrudo, Dennis A. Quintero, Bienvenido A. Marquez lll and Alain Charles J. Veloso, of Filipino law firm Quisumbing Torres
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 on infrastructure. How important is it for these policies to be inclusive and decentralized to create a sustainable economic expansion?
Most of the foreigners coming into the Philippines look at the domestic consumption. There is a very big market consumption here—100 million people, a growing middle class, and highly skilled workers. Among the areas of growth that we see in the Philippines are the BPO sector, mining, tourism, infrastructure, agriculture, and small and medium enterprises. We see that trend continuing if government policies will focus on equitable distribution of economic activities across social classes, and to the countryside, which increases people's purchasing power. The policies embodied in the 10-point economic plan, such as progressive tax reform, ease of doing business, accelerating infrastructure spending, social protection programs, human capital development, and rural development, will lead to inclusive and decentralized economic expansion.
The government is planning to decentralize from Metro Manila. In line with this, many companies are disappointed with the performance of the local government units. How do you think the ten-point socioeconomic agenda will contribute to the development of the local government units?
In the Philippines, local governments have different requirements on doing business and taxation. One of the ten-point socioeconomic agenda is increasing competitiveness and the ease of doing business, which will draw upon successful models used by some local government units (e.g., Davao) to attract business. This will allow the national government to provide more direction to LGUs so that there will be more consistent requirements nationwide. With the right leaders and strong political will to implement this plan, LGUs are expected to become more competitive.
To support this, one of the mandates of the Department of Interior and Local Government (DILG), an agency under the President, is to supervise local government units across the country. The DILG supports the initiative to conduct a competitiveness survey of LGUs. The program monitors, evaluates and ranks the LGUs according to competitiveness on an annual basis.
In other words, through the 10-point socioeconomic agenda, the national government and LGUs are envisioned to be more harmonized, with regulations more consistent across the country.
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. How would you define the current investment climate of the Philippines for foreign investors, especially the famous ASEAN+3?
The current investment climate of the Philippines for foreign investors is generally positive. There is now greater interest in the Philippines, especially within the ASEAN+3, because of the policies of the administration.
Some Japanese investors left the Philippines during the financial crisis a few years ago. But many of these Japanese firms are now coming back and are already doing a number of projects for the Japanese companies here. Korean companies are also active, even during the last administration through public-private partnership (PPP) projects. Meanwhile, what we are seeing now with China is that they are looking more into the energy sector with particular interest in coal power plants.
If you look at the Philippine foreign policy for the past three or four presidents, it has been two-dimensional: Europe and North America. What we are seeing from the current president is a multi-dimensional approach to foreign investment with the end in view of achieving several strategic goals for the Philippines.
In the past, there was a trend of rising regional tension, which if maintained, would have been bad for business for everyone. The first front was easing regional tension, specifically by improving the Philippines' relationship with China, while maintaining its close ties with Japan.
Second was for the Philippines to have a more independent role in determining its foreign policy. To attract more investments and sustain its growth, it is imperative for the Philippines to pursue alliances that were not pursued before.
Third is that it is important for the Philippines to have a much needed introspection. President Duterte wants Filipinos to look at other countries in the world, and realize that the future lies not too far from our shores. If you look at the kind of relationship that countries like China, Russia, and South Korea are pursuing in the region, it is not that different from the kind of relationship we have with some European countries, the United States, and Japan. These countries provide foreign aid with strings attached, and that is expected. If you are getting the same deal anyway, why not expand it? Go out, look, and see what kind of relationships can be pursued. You will generally see positive reactions from Filipinos about our closer relationship with China, Russia, Japan, our ASEAN neighbours, and our redefinition of our relationship with the US.
Our foreign policy is critical in sustaining the country's growth. The improvement of our ties with other countries also translate to more foreign direct investments from these countries. For example, our friendlier ties with China has the potential to bring in billions of dollars of aid and investments into the Philippines, and the prospect of more Chinese tourists coming into the country. This would not have been possible if we pursued the line of confrontation in connection with our claims over the West Philippine Sea.
In your opinion, what are the things that the foreign policy of the Philippine government should do to take advantage of the ASEAN sphere and become more competitive? Where should they keep on investing?
First of all, the vision for ASEAN integration is slightly different from the EU model. It is not so much of a super national territory, but it is envisioned as an economic and socio-cultural community with a platform to facilitate openness between borders, and free movement of people, capital, and products, to take advantage of the closeness of the countries between each other. ASEAN, as a bloc, does not adopt a common foreign policy and implements the principle of non-interference, but it strives to resolve issues that affect the region peacefully and diplomatically.
As a founding member of ASEAN, the Philippines is uniquely situated. The country offers a highly-skilled, English-speaking population of almost 100 million people, mostly comprised of young people who are engaged and technology-savvy. Education is top quality, and the cost of labor is still relatively low. While the Philippines has this distinct advantage, many companies, especially the local conglomerates, are mindful of the threats of bigger companies coming into the Philippines.
To take advantage of the ASEAN community and become more competitive, the Philippine government looks at its foreign diplomatic and trade policy as the most important aspect of the Philippine-ASEAN relationship. For example, the Philippines eliminated tariffs on almost all goods from ASEAN trading partners as a commitment under the ASEAN Free Trade Area (AFTA) agreement. Another example is in the IT sector: the Department of Information and Communication Technology was created and the Philippines adopted a hybrid data privacy law partly based on EU legislations. This makes it easier for cross border transfer of data, making the investment climate especially for BPOs more attractive.
In the area of Intellectual Property, the ASEAN states created the ASEAN Working Group (AWG) on Intellectual Property Cooperation (AWGIPC) in 1996 to develop and implement all IP-related programs and activities. Since then, the Association has had several Action Plans which dictated its goals and obligations. In 2016, the IP Strategic Action Plan 2016–2025 was launched. The Plan has a number of major goals, including strengthening the ASEAN’s IP offices, building IP infrastructure, and establishing regional IP platforms. One of the core aims of the ten-year IP plan is the accession to the Madrid Protocol of all the ASEAN Member countries. The Philippines should continue to leverage on this as it is currently taking the lead in several areas of IP including enforcement and trademark examination. A strong enforcement and IP protection will encourage more investments in the ASEAN region.
Another significant action that the administration has done to take advantage of the ASEAN economic integration is the adoption of a comprehensive competition law, i.e., the Philippine Competition Act ("PCA"), and a progressive national competition policy (NCP).
The PCA can be characterized as ambitious and far-reaching. It contains broad prohibitions on anti-competitive agreements, abuse of a dominant position, as well as anti-competitive mergers and acquisitions. It also creates a new quasi-judicial administrative agency, the Philippine Competition Commission (“PCC”), which has primary and original jurisdiction over all matters related to competition, and armed with extensive powers to investigate anti-competitive agreements and abuse of dominance, review mergers and acquisitions, issue injunctions, require divestment and disgorgement of excess profits, and impose penalties on companies violating the PCA.
In addition to consumer welfare and efficiency, the PCA also adopts social development goal as part of the policies of the law. In its declaration of policy, the PCA cites the constitutional goals for the national economy to attain a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged. Accordingly, the PCA contains unique provisions aimed at protecting the marginalized sectors of society, and promoting economic development.
Th NCP aims to steer regulations and administrative procedures of government agencies toward promoting competition, as well as to strengthen the enforcement of anti-trust laws and effectively ensure competitive neutrality, review laws and regulations that affect free and fair competition in the market. The NCP recognizes that challenges to market competition do not only come from market actions by private firms, it may also come from government corporations, policy actions of the government, and structural constraints. For example, if the government engages in business directly, through a government-owned enterprise that competes with private undertakings, it has a distinct advantage from a regulatory perspective and may potentially abuse its position. To address these challenges, the strategies under the NCP include reviewing the mandate of state-owned enterprises to ensure that they compete on equal terms with private enterprises.
To attract more investments, the administration needs to review the current restrictions on foreign ownership in certain industries. For example, public utilities, which include telecommunication and transportation, and the renewable energy sector are still partly nationalized, so a company has to be at least 60% Filipino-owned to engage in this business. Pursuant to the NCP, there are initiatives in Congress to limit the term "public utility" to the following industries: electricity transmission, electricity distribution, water pipeline distribution systems, gas or petroleum pipeline distribution systems, and, sewerage systems, and lift out telecommunication and transportation from the definition. This will allow foreign companies to invest in telecommunication and transportation in the Philippines.
Another growth area for the Philippines is tourism. Despite having over 7,000 islands with pristine beaches and spectacular diving spots, the Philippines still lags behind Thailand and Malaysia in terms of visitors.
As one of the most highly mineralized countries in the world, the development of the mining sector has the potential to significantly contribute to economic development. In terms of mineral potential, the Philippines has similarities to Chile, now a member of the Organization of Economic Cooperation and Development, principally made up of high income economies. In Chile, mining contributes to 51% of total exports and contributes around 8% of total Gross Domestic Product.
Another area where the Philippines has a competitive advantage is in human resources and services. We have a huge pool of talent in law, medicine, accountancy, engineering, education, and architecture. We need to push for more mutual recognition agreements where countries align qualification standards for certain professions. So far, the requirements for accountants, medicine, architects, and civil engineers are already aligned. The Philippine Regulatory Commission still continues to work on the other professions.
How can the program of the administration tackle the eminent problems of infrastructure, high electricity prices, etc. and what expertise and technologies can Japan companies bring in to help the Philippines?
The Philippines' problems with infrastructure and high electricity rates ultimately boil down to lack of capital investments in these areas. In infrastructure, the past administrations have not prioritized substantial spending on infrastructure projects, as a percentage to GDP, compared to our ASEAN neighbors. The public private partnership model adopted by the preceding administration has not also been very successful in light of bureaucracy and slow implementation. The current administration plans to address the country's infrastructure problems by embarking on a massive public spending program focused on big infrastructure projects, such as railways, airports, highways, and bridges. Government spending on infrastructure is expected to rise from 5 to 7%of GDP by the end of the President's term. The projects will be funded through a combination of tax reforms, public-private partnerships, and foreign loans. To succeed, the Philippines will need foreign investors, such as Japanese companies, that have the technical and financial capacity to undertake, operate, and maintain these infrastructures.
High electricity rates in the Philippines is due, to a large part, to the sins of past. During the energy crisis in the early 90s, in order to attract investments in electricity generation, the government has entered into onerous agreements with independent power producers that required the government to purchase all their electricity supply and guaranteed their profits, which has resulted in government losses. The state-owned National Power Corporation, that used to monopolize power generation and transmission, was also inefficient, and has incurred massive debts. These losses and debts are still passed on to the consumers as part of electricity costs.
In 2001, the Electric Power and Reform Act (EPIRA) was introduced to address these issues. Under the EPIRA, NAPOCOR's monopoly was abolished, and electricity generation, transmission, and distribution were unbundled and privatized. The EPIRA aims to drive down electricity costs through competition in the supply and purchase of electricity through the wholesale electricity spot market (WESM). However, WESM has yet to result in the lowering of electricity costs because there are still only a few power generation players, and current power plants are not generating enough electricity to make trading at WESM truly competitive. To lower the cost of electricity in the Philippines, the government needs to encourage more investors to build more power plants in the country. Japan companies, which have the financial and technical strengths in the power industry, can help in addressing the country's high electricity costs, by investing in more power plants in the country and making them more efficient.
Your company has been in the country for more than 50 years. What are the strengths you have that would attract the eyes of investors?
Our greatest strength is the fact that while we have an international network and adhere to international standards, we also have local expertise. As a member firm of Baker & McKenzie International, we are able to bring in our intimate relationship with our other offices globally to assist in cross-border transactions. This allows us to assist our clients in transactions that cover several jurisdictions, seamlessly. As a full service firm, we are also able handle all issues that investors encounter in establishing their business or in their various transactions in the Philippines, such as M&As. For many multinational companies, in general, more premium is placed on responsiveness, relationship, accessibility, convenience, and consistent quality all throughout.
Ours is an organization which supports investments. As the world of business becomes more complicated, our practices become complex and sophisticated. We are not stagnant, we are evolving as well in our approach to our clients.
We have talents that grow together. Our lawyers enjoy a culture of friendship across the different offices across the world. We carry this strength per region and sub regions. When you ask us how we support our clients, our clients have the same challenges—they have a global strategy where they want to grow out their headquarters and go out somewhere else. Who else is best positioned to help them than us who is similarly set up? We evolve with them. They have outsourcing strategies, and they have to put up backroom offices so that they leverage on certain advantages in the business side. We do the same thing so we know what they feel; we know their challenges. That is what we carry to this day. We are organized in industry groups, which is what our clients are looking at so that we know the depth of the issues in their business.
What framework does Quisumbing Torres bring to the Japanese companies that help them invest in the Philippines? How do you work with them?
Some Japanese companies approach us directly. Our other Japanese clients are referred to us by Baker McKenzie's office in Tokyo. Clients who approach us directly are usually companies that would want to set up their own presence in the Philippines (e.g., manufacturing companies). Manufacturing in the Philippines is not subject to any foreign equity limitations, except for land ownership. We have experience advising Japanese companies in setting up these manufacturing plants and structuring the land use agreements to comply with Philippine laws.
With respect to joint ventures, for instance, there is a developed energy sector in Japan particularly in LNG. The LNG companies are looking at investing here in the Philippines because they have the financial capacity and technical expertise in these areas and due to the enhanced relationship between the Philippines and Japan. A number of the prospective investors in the energy sector here plan to participate in LNG projects.
There may be a language barrier with some of our client contacts that are Japanese nationals, so our Baker McKenzie office in Tokyo can communicate directly with them, while we discuss internally with our colleagues in Tokyo. As a result, there is a seamless rendering of services.
Our set-up allows us to provide an additional value to our services because we are not only legal advisers—we also bridge that cultural gap. For example, if we encounter differences between the parties,we endeavour to address these issues internally. Our colleagues in the offices elsewhere is able to provide context of the issues and the particular circumstances of the Japanese company, which allows us to communicate more effectively with the Filipino partners in the Philippines and their counsel.
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