• ‘But there are no serious investors . . .’



    The statement above on investor interest is often heard these days although I’m not sure how anybody would differentiate a ”serious” investor from a non-serious investor. It must be connected with that Filipino panacea for all ills, cash in your pocket.

    Investors would normally assess the potential of their investment, how it is to be used, what is to be done or developed and any risks that threaten the potential for gaining the anticipated return on the investment.

    A professional investor would consider many things before committing too much money to any business prospect but would be prepared to put out some money on minimizing future risks. It would be investing lunacy to sink several million dollars into building something for which there were no proven markets, for example.

    The SC38 consortium (Malampaya) led by operator Shell Philippines Exploration, a very professional investor, assessed the investment risk of the development very carefully. Future risks were covered in part by the issue of several Presidential Administrative and Executive orders as well as much time, effort and money that were spent in trying to assure as far as possible that technical, commercial and political risks were reduced to the achievable minimum before it was decided to invest nearly US$2 billion in field development.

    The investment decision was made, and the Philippines has benefited from the utilization of indigenous natural gas for the past 13 years and has received a royalty of 60 percent of the net income from gas sales after recovering its exploration and development costs.

    Then 13 years later along comes the Commission on Audit (CoA) and “discovers” that tax should have been paid in addition to the royalty, rather than that the royalty included the necessary tax. Is it a coincidence that this discovery is made at just about the same time that people are again trying to find the Malampaya funds, or is it just another instance of political grandstanding?

    Investment by Philippines business in the Philippines appears to depend heavily on an ability to work the system with the use of strong personal contacts and lots of mutual back-scratching and in many cases use of regulatory and political capture. Financing is frequently by banks, which are connected with the proponents of the proposed investment. These facilitating factors are not generally available to foreign investors who have to depend on the law for protection. And that does not always work in the way that people expect.

    Local investors can therefore take “risks” that could not be contemplated by foreign investors. The playing field is thus far from level and skewed even more by the need for investors from advanced economies to conform with laws on ethical business practice of their home countries.

    Whatever the outcome of the reported COA findings in respect of SC38 gas sales and the production sharing contract will send signals to the international professional investing community that investing in the Philippines carries a high level of political risk.

    That is not a good message particularly at a time when Southeast Asia as a whole is perceived as an area in which political risk is on the increase–the Philippines seems to be blazing the trail.

    There are proposals to relax the constitutional 60/40 ownership restrictions. This is not a magic formula that will introduce an avalanche of foreign direct investment, although politically it may be portrayed as such.

    People who invest money in foreign countries must of necessity evaluate the investment and the risks to its returns in a thorough and professional way, after all they have to secure the value of their asset in the best way that they can in an unfamiliar environment and depend on an even- handed application of the law lacking the ability to fix things up as a well connected local investor could.

    So, there are lots of professional international investors around and many who see Asia and Southeast Asia as the world’s most attractive growth areas. They will look at opportunities in the Philippines, in Myanmar, Vietnam, Thailand and Malaysia and they will look for risk/return combinations that suit them. It will be rare that even the most outrageous returns will tempt them to take too many risks.

    All Southeast Asian countries have risks for foreign investors as well as their own ways of doing business, but the track record of the Philippines in attracting foreign direct investment has been for many years one of the very poorest in Asean and with the recent COA reported claim together with the nationalistic sentiments over the rather covert-looking Indonesian incursion into electricity distribution and telecommunications, it can be expected that the Philippines will have to continue to depend on its domestic capital market in order to develop, thus sustaining Philippine business as usual !

    Mike can be contacted at mawootton@gmail.com.


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