Fiscal incentives, despite what the finance people may think, are not or at least, should not be the main drivers for business establishment. They are an upside bonus which, depending where you happen to be in the world, may or may not be realised.
A good example here in the Philippines is within the Renewable Energy Law, in which it is clearly stated that the renewable energy developer is entitled to a “cash incentive” payment which is, in broad terms, half the difference between the cost of fossil fuel power and renewable energy in the area in which it is to be developed. In the off-grid areas when the oil price is high, this could be a significant amount of money, increasing the chargeable tariff and thus the renewable energy developer’s income by anything up to 50 percent. But the incentive can only be applied for after commercial operation of the new facility, and in the way in which the Philippine regulatory environment operates, it would be unwise for a potential investor to count on ever actually receiving such a “cash incentive”. Fiscal incentives are a potential upside and are only as valuable as the regulatory environment will allow them to be, thus, the potential cash incentive, even though clearly provided for within the law, is not a factor to be given any weight in making an investment decision. We could also cite the recent Malampaya tax claim, which now appears to be commencing international arbitration, because one government department thinks that another government department made an incorrect interpretation of the SC38 service contract – another example of the uncertainty of the Philippine regulatory environment. Then there is the Terminal 3 debacle and, more recently, the private sector water companies claiming that consumers should pay the tax on their profits. Not a good idea for any investor to depend on incentives promised as a factor in their investment decision-making. The regulatory environment of the Philippines is unpredictable, unstable and heavily politicised.
So if you happened to be in control of a Western company, from Europe or North America, say, which had some product or service it could offer to the Southeast Asian market of 600 million people, and you were in a position to select an investment destination in order to set up some sort of of facilities in the region from which to serve this market, where would you establish? Some people do consider the Philippines; English language, superficially Western life and business style, skilled people and believed to be a fairly cheap place to operate. Expat managers can rent big houses with “servants,” go to some of the world’s best beaches, and “shop till they drop” for the latest designer items and gizmos. The number of expat managers who retire in the Philippines is quite high – not a bad place to jump ship or retire to, and with good quality medical and dental services, provided that you’ve got the money to pay for them.
There is much well-justified criticism of the Philippines’ underdeveloped infrastructure, but Indonesia, Vietnam, Cambodia, Burma and Laos also have underdeveloped infrastructure. It is a normal symptom of a less developed economy, but it depends if you have the apparatus to do anything about it. Whilst the Philippines has the means to do something about it, national development has been encouraged by government to be the preserve of the local land-owning oligarchy who, due to either a lack of imagination or knowledge, or just greed, have simply leapfrogged the normal cycle of development – agrarian to industrial to service-oriented, missing out on the industrialisation phase and its companion, infrastructural development [you need good transport systems and logistics facilities in order to support an industrially based economy]. Government appears to have abrogated its responsibility for economic development and allowed a powerful monopolistic private sector to grow yet more powerful and use that influence to restrict foreign direct investment, both in law and in practice, within a regulatory environment which, due to their almost unassailable power, the oligarchy can control.
The infrastructural challenges of getting your goods or services to market, or getting raw materials to your manufacturing facilities would be a problem for an investor. Exporting and importing are difficult and fraught with bureaucratic obstacles. Setting up is subject in most cases to the 60/40 ownership rule and the restrictions on foreign decision makers controlling their own invested funds. Travelling to visit markets in the region is a nightmare through Manila’s airport, always provided that you can actually reach the airport in time for the flight. Electricity costs are high and the cost of living in general is comparable to Europe for an expatriate manager. And then there is the unpredictability of the regulatory environment and the hand of the oligarchs locking up the local market over all.
No need to wonder why it is that the Philippines, with its many advantages, doesn’t attract the level of foreign direct investment being experienced by its SE Asian peers. The way things are going, together with the adverse publicity gained internationally through inefficient disaster responses, high-profile regulatory issues and the presidential election circus will continue to leave the Philippines behind other regional nations. It is to be hoped that from somewhere will come a saviour to get things on the right track and make the Philippines the rising economic star that as yet it can only pretend to be.
Mike can be contacted at email@example.com