Improving the Philippine investment climate

A series of reforms to address investment constraints and enhance the Philippines’ business climate have been passed into law in 2022. These include the Foreign Investments Act (FIA), amendments to the Public Service Act (PSA), and the Retail Trade Liberalization Act (RTL).

The FIA granted access to foreign professionals in investment areas previously reserved for Philippine nationals. Meanwhile, the amended PSA eased foreign equity restrictions in key sectors, which have been protected for over 85 years, and revisions in the RTL lowered the capital requirement for foreign investors in retail trade from $2.5 million to $500,000.

Several reforms have also been accomplished in the past few years. The Corporate Recovery and Tax Incentives for Enterprises Act, signed into law in 2021, lowered corporate income tax (CIT) rates. Prior to this tax reform, the Philippines had one of the highest CITs in the Asean region at 30 percent, higher than Thailand’s 20 percent, and Vietnam and Indonesia’s 25 percent.

The Ease of Doing Business Act standardized deadlines—three days for simple transactions, seven days for more complex ones, and 20 days for highly technical ones—for government transactions and business permits processing. It also created an Anti-Red Tape Authority to oversee national policy on anti-red tape issues.

Recently, the renewable energy sector was also liberalized through an executive action amending the implementing rules and regulations of the Renewable Energy Act of 2008, allowing 100 percent foreign capital in renewable energy projects.

What are we missing?The Philippines ranked last among the Asean-5 economies in total foreign direct investment inflows from 2010-2020. The following are some reasons that continue to constrain the Philippines in attracting more investments:

Some foreign ownership restrictions were retained. Despite amendments to the PSA, 40 percent of foreign equity restrictions were retained for the following: distribution and transmission of electricity, petroleum and petroleum products pipeline transmission systems, water pipeline distribution systems, seaports, and public utility vehicles.

Supply chain service delivery. The last Logistics Performance Index, in 2018, ranked the Philippines in 60th place, while Thailand ranked 32nd, Vietnam 39th, and Indonesia at 46th place out of 160 countries.

High power costs and low power grid integration. Aside from having one of the highest power rates compared to its Asean peers, PH power grids also have a lower ability to switch to alternative energy sources.

Relatively slow broadband connection. Internet speeds in the Philippines have significantly improved over the past years. From ranking last among Asean countries in 2014, Philippines now has the fifth fastest internet speed in the region. However, as of end-2021, average internet speed in the country (50.26 Mbps) remains lower than the Asean average (69.18 Mbps).

In terms of broadband infrastructure, the Philippines has 22,834 cell sites compared to Vietnam’s 70,000, Thailand’s 60,000, and Indonesia’s 36,700 sites as of 2021.

Corruption. Data from Transparency International’s Corruption Perceptions Index shows that corruption in the Philippines is seen to be increasing. From ranking 95 out of 180 countries (with rank 180 having the highest perceived corruption) in 2015, the Philippine’s ranking has steadily declined to 113 in 2019, 115 in 2020, and 117 in 2021.

What else can be done?We need the outright removal of the restrictive economic provisions mentioned above to be more competitive and attractive to foreign investors. Liberalizing the distribution and transmission of electricity will help lower power costs and improve energy efficiency through increased competition. Doing the same for seaports would also increase the efficiency of Philippine’s trade logistics.

To do this, both houses of Congress can pass a joint and concurrent resolution on amending or outright removing restrictive economic provisions in the 1987 Constitution, upon a vote of three-fourths of its members. The amendments shall then be valid when ratified by a majority of the votes cast in a plebiscite. It should be noted that this can be done without having to touch other areas of the Constitution.

The Philippines also needs to strengthen its infrastructure to lower the input costs in doing business. The previous administration’s “Build, build, build” program is a step in the right direction, and the current administration should continue accelerating infrastructure development by engaging in more public-private partnerships given the country’s tight fiscal space.

The liberalization of the telecommunications sector through the PSA must be accompanied with expansions in broadband infrastructure. To complement RTL, our manufacturing and logistics supply chains should be strengthened to be able to reap the full benefits of liberalization.

We should also enhance our digitization initiatives to increase transparency on government transactions and processes, and help substantially curb corruption. Two priority bills, the E-Governance Act and E-Government Act, can help ramp up these efforts.

A better and cost-efficient infrastructure, reasonable energy cost, along with a freer market can continuously and significantly improve the investment climate in the Philippines. It will also accelerate and sustain the country’s economic recovery to achieve the target 6.5-7.5 percent GDP growth per annum to make economic growth and development more inclusive.

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Gary B. Teves served as finance secretary under the Arroyo administration.