SC decisions on 60-40 rule make Charter change more pressing

July 2, 2014

The mounting jurisprudence on the country’s foreign-ownership restrictions is making the move to amend the Constitution more pressing, as foreign firms are now also being left with fewer legal and corporate options to go around the 60-40 rule, thus, further hindering the flow of foreign direct investments (FDI) into the country, economists belonging to the Eagle Watch said.

Dr. Alvin Ang, a senior fellow of Eagle Watch, the macroeconomic research and forecasting unit of the Ateneo de Manila University Economics Department, said foreign firms, with the help of Filipino partners, are able to find ways to circumvent the provisions prohibiting foreigners from owning more than 40 percent of companies in the country in certain sectors.

“Even with the existing constitutional restrictions, we know for a fact that a lot of the firms have already gone around and they are doing business, not necessarily 60-40 in the sense of the word but they are able to do business using a lot of legal structure without directly violating,” Ang told the BusinessMirror.

This, however, is about to change with the growing Supreme Court (SC) decisions on the 60-40 rule, including the recent SC rulings on the cases of three mining firms and the Philippine Long Distance Telephone Co. ownership.

“If we now have jurisprudence on the matter, all the more you want it to be very clear. You want to look at what’s in the Constitution. Since there is jurisprudence, those who are planning to enter through the legal remedies will have second thoughts about it,” Ang further said.

The BusinessMirror reported on Monday that the SC has barred Narra Nickel Mining and Development Inc., Tesoro Mining and Development Corp. and McArthur Mining Inc. from operating in the country for attempting to go around the 60-40 rule through corporate layering. The three are owned and controlled by Canadian firm MBMI Resources Inc.

“A grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our noses through a myriad of corporate layering under different, allegedly, Filipino corporations,” the SC said.

The said provision states: “The exploration, development and utilization of natural resources shall be under the full control and supervision of the state. The state may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 percentum of whose capital is owned by such citizens.”

As such, Ang said the growing number of cases may prove to be a barrier for the already lagging FDI inflows toward the country.

“Constitution restricts future signals or potentials, it is the issue of locking the door other than leaving it very open,” he said.

Fellow Eagle Watch Senior Fellow Fernando Aldaba was also in the view of giving flexibility to the economic provision of foreign ownership soon to keep up with the changing economic environment of the region, especially with the upcoming Association of Southeast Asian Nations (Asean) integration.

“The constitution must not be too specific on economic restrictions to give flexibility to the government, especially with the changing economic environment. If you fix and put details in the constitution and it will be a change toward the more general economic provisions, it will give flexibility and specific provisions will be made through regulator- agencies,” Aldaba said.

“Many of the countries in Asean have no restrictions on their constitution but they do have restrictions in the regulatory level. If we bring it down to the regulatory level, that would be better,” Ang added.

House Speaker Feliciano Belmonte Jr., the main proponent of Charter Change (Cha-cha) in Congress, agreed that the rulings of the SC on ownership restriction have made Cha-cha more pressing.

“With this, I think it’s obvious that we really need Cha-cha if we are to entice FDI for long-term investments,” Belmonte said in a text message to the BusinessMirror.

Signal needed from local investors

Aside from opening the doors to foreign investments through the liberalization of the constitutional provision on foreign ownership, Aldaba said domestic investors should also take the lead in ramping up job-generating investments in the country.

“If you are a foreign investor, you will try to look at what is happening domestically and unless domestic investments really increase at a very high rate, then they will not follow suit,” Aldaba said.

Aldaba said while local investments are already picking up in the past four to five years, further acceleration is still needed to convince the foreign investors that local firms also believe in the macroeconomic story of the country.

He also said foreign investors would see past foreign-ownership limitations and agree to the constitutional provision of 40-percent foreign ownership and 60-percent local ownership of firms in the country if they see that domestic investors are actually hiking their capital to invest in long-term projects in the country.

The moral hazard of remittances

Ang also said the strong support of remittances in the Philippine economy posts a “moral hazard to the economy,” as government officials tend to rely more on remittances to fuel the economy and be lax on putting up more policies to pull more FDI into the country.

“If we compare the remittances to the foreign direct investments, we have more remittances; and the only thing is how to convert that to productive investments,” Ang said.

Ang also said foreign investors are waiting for the next signal of whether or not the reforms being put up by the Aquino administration will be sustainable.

“So if that will be very clear, that will be a good vote of confidence,” he said.

Latest data from the central bank showed that FDI toward the country hit $1.85 billion in the first quarter of the year, slowing down by 11.6 percent from the $2.1 billion seen in the same period of the previous year. With Jovee dela Cruz


By Bianca Cuaresma
July 1, 2014 
Business Mirror
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