Sunday, January 31, 2016

“Behold the turtle . . .”

(Published in the ECCP Business Review, 2013)

FIRST THINGS FIRST. A HEARTY “Hurrah!” must go to President Benigno Simeon Aquino for staunchly championing integrity and clean government. These virtues have since become the foundations of the current economic renaissance that saw growth climb to 6.6% in 2012, and have set in train events that might yet alleviate the decades’ long illnesses afflicting the “Sick Man of Asia.”

The President’s staunch support for the aims of the Integrity Initiative, the key transformational initiative championed by the European Chamber of Commerce of the Philippines (ECCP) and the Makati Business Club (MBC), is a critical reason why much of the progress in fighting corruption over the past year has occurred in government.

“At the bottom line of our strategy is ensuring a level playing field, one that is stable, rules-based and whose outcomes are predictable,” the President said during the 2nd Integrity Summit co-organized by ECCP and MBC in September 2012.

The best laid plans, he noted, can be derailed when rules change and decisions are based on whims to benefit a few.

“This is what we are trying to change since we took over office,” he emphasized. “This is the rationale behind our agenda of integrity-based governance.”

The “Tone from the Top” has also pervaded the bureaucracy to such an extent a growing number of businessmen perceive the Philippines as a more honest and better place for business. Remarkable progress was made in just over two years in the fight against corruption, both in the public and private sectors and mainly because of the “Tone from the Top”, in government departments and in corporations.

The 2012 Survey of Enterprises on Corruption by the Social Weather Stations revealed that business executives who saw “a lot” of corruption in the public sector fell to 42% in 2012 from 64% in 2009 after having been at 60% or more since 2000. 

The “Tone from the Top” has also infected the legislature. Without doubt, the recently ended 15th Congress was far more productive than the 14th Congress convened from 2007 to 2010. But more important than the sheer quantity of legislation it passed is the quality of the laws enacted.

Speaker Feliciano Belmonte Jr. said the 15th Congress was instrumental in restoring investor confidence, achieving growth and reducing poverty over the past three years. He noted that the 15th Congress enacted a total of 219 laws. Of the 36 priority bills listed by the Legislative-Executive Development Advisory Council (LEDAC), 11 have been enacted.

“We will be remembered as the House that passed the most number of historic and game-changing laws with less histrionics,” Belmonte boasted.

“From reproductive health to sin taxes to human rights compensation, long given up for dead for fear that they will disturb the status quo, these bills now end up as banner legislation for change.”

Belmonte said the House enacted the sin tax reforms; the GOCC Governance Act of 2011; the Act Further Strengthening the Anti-Money Laundering Law; the Data Privacy Act and the Act Rationalizing the Taxes on International Air Carriers, among other key legislation.

In this context, however, actions of the Supreme Court need to be watched, as the Tribunal is interfering more and more in actions taken by the Executive and the Legislative branches of government. Also of concern are the TROs regarding the Reproductive Health Law and the Cybercrime Law; decisions undermining the delivery of fiscal incentives and retroactive rulings on the 60:40 ownership provision, to name a few.

The record of purposeful action exhibited by the 15th Congress should be carried into the 16th Congress that will convene in July 2013. The President’s party and its allies are expected to maintain their control of both houses of Congress during this year’s national elections.

Eagerly anticipated by the business community, especially investors, are the enactment of vital bills that almost made it during the previous Congress. Should all go as the President wishes, this year could see low hanging fruit that have been ripening on the vine for a decade finally become laws of the land.

The more attainable seem to be the Rationalization of Fiscal Incentives Bill or House Bill 4935 and the Philippine Fair Competition Act or House Bill 4835. Both bills could see the President’s signature within the year. But let’s keep our fingers crossed. Both bills support the attraction of productive investment, inclusive growth and a level playing field.

It will still be an uphill fight before House Bill 4788 or the Customs Modernization and Tariff Act becomes a law within this year or the next. House Bill 4667 that aims to create the Department of Information and Communications Technology has been banished into the wilderness for lack of a champion among the administration.

The Foreign Investment Negative List (FINL) is expected to remain true to its name, Negative, in the next two years after the President last year expanded the list of investment areas and economic activities reserved for Filipinos. The Joint Foreign Chambers (JFC) are in touch with the Administration to at least improve those areas in the FINL that can be improved without legislation and amendments to the Constitution.

Investors hoping for an easing of the strict Constitutional prohibitions on ownership will have to wait that much longer before any meaningful change occurs. Malacanang has announced there will be no review of the economic restrictions imposed by the Constitution in this administration.

A long, straight road
A lot was accomplished by the 15th Congress but a lot more needs to be done by its successor, however.

ECCP has identified four areas that need to be addressed to create the level playing field: clean business or ethical business practices; fair competition protected by anti-trust laws; equal taxation (remove unfair taxation on foreign-owned businesses) and equal opportunity for all investors (remove economic provisions in the Constitution that limit foreign ownership).

President Aquino’s “Daang Matuwid” (The Straight Road) that leads to this level playing field, however, is still marred by a few stubborn bumps that need to be smoothed out. Among the more intractable are those limiting the inflow of foreign direct, productive investments.

As someone concerned with this problem commented,” You can’t win playing football uphill.” Playing fair and competing fair should be the name of the game.

What makes enacting a single competition law or anti-trust law such a tough job is treading the fine line separating anti-competitive behavior, monopolies, the vested interests of a few and combinations in restraint of trade from legitimate business behaviors such as efficient production, aggressive marketing, technological innovations and other honest means that lead to competitive advantages.

Anti-trust or competition laws regulate and maintain market competition by prohibiting or regulating anti-competitive behavior. Three actions that anti-trust laws normally seek to prohibit are monopolies, cartel-like behavior and abuse of dominant market position. Anti-trust laws are needed to promote a freer market and more open trade and, in a Philippine setting, are key to dismantling existing dominant market positions in key industries such as telecommunications, energy, banking, media, retail, and a few others.

The century-old Sherman Anti-Trust Act and the Clayton Act are the U.S.’ premier anti-trust laws and are uncompromising in their prohibitions against business activities federal regulators deem anti-competitive.

The Philippines does not have a comprehensive anti-competitive framework similar to these two laws. What it has is an alphabet soup of laws beginning with the Constitution that address the anti-competition problem piecemeal. None of thenine existing laws dealing with anti-competitive acts provide a comprehensive solution to this problem.

The Senate in the just ended 15th Congress had five anti-competition bills on its plate, none of which passed into law. Of this number, Senate Bill No. 123 authored by Senate President Juan Ponce Enrile is considered most likely to be enacted.

But more support has been received by House Bill 4835, otherwise known as the Philippine Fair Competition Act or the Competition Policy Antitrust Act that almost made it into law during the 15th Congress.

The failure by President Aquino to certify as urgent this anti-trust bill that seeks to penalize anti-competitive agreements and mergers was seen as a key reason for the bill being carried over into the 16th Congress.

The bill intends to establish the Philippine Fair Competition Commission to help ensure that businesses do not enter into anti-competitive agreements and anti-competitive mergers and abuse their dominant position.

“This would hit big businesses, definitely, but this would also help improve the business climate and encourage more foreign investors,” said Cagayan Representative Rufus Rodriguez.

The bill covers cartelsthat are defined as a “. . . combination of firms, providing goods in relevant markets, acting or joined together to obtain a shared monopoly to control production, sale and price, or to obtain control in any particular industry or commodity, or a group of firms that agree to restrict trade.”

The Fair Competition Commission will have the power to investigate “. . . on its own initiative or upon the complaint of any person, any and all violations of this act and other competition laws and cause the issuance of a cease and desist order prior to the commencement of a preliminary inquiry, and/or the institution of a civil or administrative action.”

Under the bill, anti-competitive agreements could be either horizontal or vertical. The former refers to agreements entered into between two or more enterprises operating at the same level in the market.

On the other hand, vertical agreements cover those at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.

Another provision penalizes price fixing or the agreement among competitors to raise, suppress, fix or otherwise maintain the price at which their goods and services are sold.

A single competition law should assist immensely in leveling the uneven playing field advantages enjoyed by those with the resources to effect anti-competitive behavior. It could also whittle down somewhat the enormous business advantages enjoyed by the 40 richest families in the Philippines, many of them Chinese, which together control 76% of the country’s gross domestic product.

The House passed the fair competition act on third check -- second reading only -- while the Senate was working on a modified new bill, but did finish this legislation in the 15th Congress. The Senate version will have to be reintroduced in the 16th Congress that convenes in the second half of 2013.

Fortunately, however, President Aquino signed Executive Order 45 creating a Competition Office within the Department of Justice. Heading the Competition Office is Assistant Secretary Geronimo Sy who is creating the organization and is involved in capacity building. Working groups focusing on various regulatory areas have been created and sector studies are being undertaken that focus on sectors such as telecommunications and power distribution dominated by a few players.

ECCP is liaising with the Competition Office regularly to see to it that competition policy is fairly applied. It is also working closely with the Competition Office and both Houses of Congress to institutionalize completion policy through legislation. ECCP is reiterating that the Office for Competition needs to be institutionalized before 2016, in case no Anti-Trust law is passed.

Belmonte is confident the 16th Congress will pass the bill in order to ensure healthy competition in all sectors.

Customs modernization
A notably notorious roadblock to fair competition is the Bureau of Customs. By engaging in patently illegal activities, some bureau personnel do serious damage to the economy by increasing the cost of doing business; depriving the economy of vital tax income and fostering an anti-competitive image of the Philippines as a haven for corruption.

The intractable and systemic corruption infesting the BOC has led its current Commissioner, Rozzano Biazon, to suggest the bureau be abolished and replaced by a professional institution run by private officials and employees.

Short of this radical step, however, the government is left with the option of pushing through with the long delayed plan to enact into law House Bill 4788 or the Customs Modernization and Tariff Act.

In an April 2012 letter to Ralph Recto, Chairman of the Senate Ways and Means Committee, the Joint Foreign Chambers of Commerce of which ECCP is a member, noted the Philippines is committed to bring its customs procedures in line with the 78 other members that have ratified the Revised Kyoto Protocol of the World Customs Organization. This has not happened.

JFC continued its constructive approach and provided the Commissioner of Customs and the former chair of the Senate Ways and Means Committee, Senator Ralph Recto, with requested changes to the CMTA very recently.

CMTA aims mainly to enhance the government’s collection of revenues through taxes and duties; provide more safeguards against smuggling or fraud and promote international trade by making import trade transactions faster, more predictable, efficient and transparent.

House Bill 4788 that seeks to prescribe the Customs Modernization and Tariff Act of 2011 was approved by the House of Representatives on Aug. 15, 2011 and was transmitted and received by the Senate on Aug. 18, 2011. It was not enacted into law during the 15th Congress and its benefits have again been deferred.

Despite this, Customs still hopes to complete the national single window (NSW) network project in 2013 to comply with the country’s commitment to become part of the ASEAN Single Window by 2015. The ASEAN single window is an initiative to establish electronic windows that will facilitate international trade and investment through faster clearance by Customs.

The bureau is now working on the second phase of the NSW that will integrate data and services into a single portal in which 40 government regulatory agencies are connected to a network linked to the BOC.

NSW allows electronic transfer of data and documents relevant to the processing of imports between partner agencies, making it easier for traders to transact business with the government.  It eliminates the need for importers to bring documents from regulatory agencies such as import permits and clearances, the processing of which usually adds to the time and cost borne by businesses.

Biazon said the system minimizes opportunities for graft since the transfer of information is electronic.  The system also prevents the use of forged or recycled permits and clearances, a common practice under the existing system that relies on the submission of physical documents. Biazon said his goal to fully computerize and modernize Custom’s operations to curb smuggling and corruption.

DICT: sidetracked
It took an entire decade, but the Senate and the House finally passed their respective bills on third reading in February 2012 that would create a Department of Information and Communications Technology or DICT. The authors of both bills were ready to convene in bicam, but Malacanang halted the process.

President Aquino dashed hopes for the bill’s passage into law by relegating the principal tasks of a DICT (or the expanded Information and Communications Technology Office or ICTO) under the Department of Science and Technology (DOST).

He also discarded a provision of the Philippine Development Plan (2011-2016) that calls for the creation of a DICT. According to the plan, “The DICT should result in a thorough implementation of the national e-strategies cutting across other critical sectors such as e-education, e-health, and the country’s representation in international and regional ICT bodies.”

The President’s reason for putting the DICT on ice echoed those of the critics of a separate department: it would be an “unnecessary bureaucracy” in a bureaucracy with too many departments, most of which have their own ICT units.

It will be essential that the advantages accruing from a DICT are implemented by ICTO, which is expected to serve as the primary policy, planning, coordinating, implementing, regulating and administrative entity of the executive branch of the government that will promote, develop, and regulate integrated and strategic ICT systems and reliable and cost-efficient communication facilities and service.

As in the case of the Office of Competition, it will be essential that offices created by the President under an Executive Order will be institutionalized before this Administration bows out in 2016.

9thFINL: not exactly helpful
The Foreign Investment Negative List is now more negative than before. Much to the surprise of the foreign investor community, President Aquino on October 29, 2012 signed Executive Order 98 expanding the list of investment areas and economic activities reserved for Filipinos under the 9th Regular Foreign Investment Negative List.

The latest FINL now considers real estate and psychological and respiratory therapy as professions where foreign practice is not allowed or is limited. It replaces EO 858 or the 8th Regular Foreign Investment Negative list signed in February 2010.

Executive Secretary Paquito Ochoa, Jr. said the addition of real estate, psychology and respiratory therapy is based on foreign practice limitations imposed under several newly legislated laws: the Real Estate Service Act of the Philippines (RA 9646), the Lending Company Regulation Act of 2007 (RA 9474), the Philippine Respiratory Act (RA 10024) and the Philippine Psychology Act (RA 10029).

Ochoa said that except for RA 9474 that allows foreign ownership of up to 49% in lending companies, the three others limit the practice of non-Filipinos in the areas of real estate and health care such as respiratory therapy and psychology, unless there is a reciprocity arrangement prescribed by a law.

The FINL consists of sub-lists A and B. List A specifies areas of economic activity where foreign ownership is prohibited or limited by the Constitution or by laws. These includemass media,the practice of all professions, advertising, small-scale mining and ownership of private lands.

List B enumerates limitations on economic activities regulated by law such assmall-and medium-scale domestic enterprises, defense-related industries andbusinesses that have implications on public health and morals such as gambling and massage clinics.

"For now, List B stays while the changes to the negative list covers only List A," Ochoa pointed out.

The dismay of foreign investors at the expanded 9th FINL was revealed in a letter sent by the JFC to the government a week after the new FINL was announced. JFC urged the government to review its FINL to make it "less negative" for foreign investors.

In a joint statement, JFC said the government should review the FINL to determine whether the existing restrictions are in the national interest.

"Year after year, government departments passively apply the same legal restrictions and add new ones when Congress creates them. A review is overdue. This could be done by an inter-agency team instructed to review various restrictions on foreign equity investment in the participation in the Philippine economy of foreign equity, taking into consideration whether restrictions impede investment, job creation, and competitiveness," JFC said.

JFC noted that the Philippine economy remains more closed to foreign investments compared to its Southeast Asian neighbors.  It cited the World Bank's Investing Across Borders 2010 report that showed the Philippines and Thailand having some of the strictest foreign equity rules among the 87 countries surveyed.

"Restrictions in legislation and/or in interpretations of what should or should not be in the FINL should be easier to liberalize. Restrictions are scattered through various laws, some quite old, and most have rarely been reviewed to determine whether they remain in the national interest, especially whether they stand in the way of creating jobs.”

One of the changes to the FINL being advocated by the JFC is the removal of the restrictions on practice of all professions. JFC maintains that foreign investors can own companies that provide services covered by the Professional Regulatory Commission (PRC) as long as the services are provided by licensed Filipino professionals.

Foreign direct investments in the Philippines remain low, which could be partly attributed to a "Negative List that is too negative," said the JFC.

The Philippines received a trickle of Foreign Direct Investments or FDIs from 2001 to 2011. In these 11 years, only US$16.7 billion in FDIs flowed into the Philippines. In contrast, Thailand took in US$77.8 billion; Indonesia, US$64.7 billion; Malaysia, US$58.2 billion and Vietnam, US$49.4 billion.

In 2011 alone, the first full year of the Aquino administration, total FDI inflows were a puny US$1.3 billion. In this same year, Indonesia attracted US$18.2 billion; Malaysia, US$16.6 billion; Thailand, US$9.6 billion and Vietnam, US$7.4 billion.

JFC expressed hope the government would make changes to the next FINL due out in 2014.

"Throughout 2012 we have been encouraged by consistent reports of manufacturing firms of several nationalities relocating from China, Japan, and Thailand because of rising costs, floods, and political risks. Vietnam, Indonesia, and the Philippines – the so-called VIP economies – are being considered by these firms for new and expansion manufacturing investments," the JFC said.

"The Philippine government can build on the growing optimism about improved opportunities to invest in the Philippines by making a serious effort to make the Negative List less negative."

Hopes for a more positive FINL in 2014 during the 16th Congress seem to be dim, however.

Socioeconomic Planning Secretary Secretary Arsenio Balisacan, Finance Secretary Cesar Purisima and Trade Secretary Gregory Domingo said they have agreed to consult stakeholders in a government review of the FINL.

Purisima said, however, there will be no review of the economic restrictions imposed by the Constitution.

"We will not be reviewing lifting economic restrictions in the Constitution. That is currently off the table,” he said. “Limiting the items on the FINL will allow the Philippines to be more connected to the global economy, which will result in more business and employment for Filipinos.”

Balisacan said the Philippines needs to enhance the competitiveness of key sectors to ensure it benefits from ASEAN integration in 2015.Trade Secretary Gregory Domingo said the review of the list would help the country attract more foreign direct investments.

"This process is a crucial step to attract more foreign investments that will create more quality jobs for our people and strengthen our country’s trade negotiations strategy," Domingo said.

Fiscal incentives: the pressing need for clarity
The Rationalization of Fiscal Incentives Bill pending for over a decade has to again wait in line to be enacted by the incoming 16th Congress. The chances of this occurring look encouraging.

The bill seeks to rationalize and simplify the grant and administration of fiscal and non-fiscal incentives to promote foreign and domestic investments. Its swift passage, however, has been hamstrung by conflicting proposals from the Department of Finance (DOF) and the Department of Trade.

There are also multiple versions of the bill before the Committee of Ways and Means: the DOF version; SB 2755, authored by Sen. Edgardo Angara; SB 2379 by Sen. Manny Villar and SB 2142 by Sen. Ralph Recto.Then there is House Bill 4935 supported by the JFC and the ECCP.

The Senate bill proposed by the DOF relegates the Board of Investments into a pure investment promotions agency, giving up the power to administer incentives to the Philippine Economic Zone Authority (PEZA).

House Bill 4935, however, establishes the BOI as the central power for industry development, investment promotion, investment facilitation, policy formulation and administration of incentives that will be implemented by all other investment promotion agencies, including the Philippine Export Zone Authority.

ECCP and the JFC have always held the passage of House Bill 4935 is critical to the government’s aim of increasing Philippine competitiveness in terms of attracting foreign investments.

JFC has suggested to the Ways and Means Committee further refinements to the House of Representatives’ Substituted Bill. Among the JFC recommendations are the retention of the income tax holiday given the fierce tax competition to lure foreign investors and the granting of incentives for strategic projects.

JFC supports a draft bill presented by Sec. Purisima in March that will force incentives-giving agencies to budget incentives and argue the relevance of making incentives available.  There was not enough time to file this bill in the 15th Congress. The bill is going to be filed early in the 16th Congress and has a good chance to be approved.

FOI: a test of Presidential resolve
Transparency International estimates that corrupt public officials, employees, contractors and suppliers abscond with some 20% of the Philippines’ annual budget because of lack of transparency in government contracts and transactions. The country’s national budget for 2013 is P2.06 trillion and some P400 billion in public revenues will likely be lost to corruption this year.

This economic rationale for the Freedom of Information (FOI) bill failed to sway the President, however. His inaction in not certifying the FOI as urgent before the 15th Congress ended is seen by his critics as a reflection of his ambivalent attitude towards the bill.

MalacaƱang confirmed the President had no plans of certifying the FOI bill as urgent. Spokesman Edwin Lacierda said the President would rather see the measure debated fully, regardless of whether it is passed in the current or the next Congress.

“We want a healthy debate. . . That’s what we want and in fairness to all constituents, let’s have a healthy debate,” he said

Some analysts, however, believe the “death” of the FOI in the 15th Congress was due more to Congress running out of time. Belmonte said the FOI was one of the priority bills of the House when Congress resumed session on January 21 but noted that mustering a quorum in the nine session days before Congress recessed proved an insurmountable challenge. The need for Congressmen to attend to their re-election bids made sure of that.

Quezon Representative Lorenzo TaƱada, one of the FOI’s champions, said in December 2012 he hoped the House would at least tackle the bill in the three remaining weeks of session. The FOI bill is still in the period of sponsorship.

Once sponsored, the bill will go through the period of debate and amendments before the second reading vote. Unless certified as urgent by the President, the measure will wait for three days before it can be taken up for third reading.

Critics said the 15th Congress’ decision not to enact the long-overdue FOI bill gives credence to suspicions the House is insincere in its support for the government’s anti-corruption campaign, and Congressmen do not truly support the “Daang Matuwid” crusade.

FOI advocates, however, can take heart in President Aquino’s statement he will strive for the passage of the FOI within his presidency.

In the end, the President and his allies are to be commended for their courage in pushing forward—albeit gingerly—with legislation heavy with long-term and true transformational benefits.

For as that old adage goes, “Behold the turtle. He makes progress only when he sticks his neck out.”