"This is Fitch Solutions’ conclusion regarding the government’s actions on the water concession agreements."
Though there are numerous investment-related factors that make it better than most other countries in this part of the world—a mainly young and efficiently educated workforce, familiarity with Western culture and traditions, a political history generally characterized by democracy and the rule of law and a citizenry that is adaptable and resilient, among others—the Philippines has long been one of the East Asian countries not successful in attracting a high level of FDI (foreign direct investment). It has consistently been one of the less-favored destinations for FDI, faring far less well than the likes of Thailand and Vietnam and doing a little better than countries like Laos and Cambodia.
Two of the major causes of the Philippines’ poor FDI performance have long been identified: governmental corruption and an inadequate infrastructure. To be sure, this country has no monopoly of corruption but there is no gainsaying that FD investors would rather place their money in countries that are less corrupt than others. A country cannot be said to be only slightly corrupt when 2,000 container vans leave the Bureau of Customs (BOC) zone without a trace or when P6 billion worth of methamphetamine (shabu) manage to elude the supposed-to-be-watchful eyes of BOC personnel.
The extent of this country’s infrastructure deficiency is best illustrated by the fact that the Duterte administration’s Build, Build, Build program comprises 75 infrastructure projects described as flagship projects. The revelations in the recent Senate hearing on the program’s progress told FD investors that the Philippines’ infrastructure gap is not likely to be bridged soon.
A third—and arguably the most powerful—cause of this country’s consistently poor performance in the FDI area was re-highlighted recently by a report by Fitch Solutions, an affiliate of the famed international credit rating agency, on the regulatory situation in this part of the world. Fitch Solutions maintains a Project Risk Index (PRI) that measures the financing, construction and operational risk of carrying out an infrastructure project. In its latest PRI report, Fitch Solutions stated that the Philippines had “one of the biggest regulatory risks” compared to the other countries of this region. In the Regulation sub-component of the PRI rating the Philippines scored 48.2—a score lower than those of Malaysia (70.2), Vietnam (59.4) and Indonesia (49.1).
What does Fitch Solutions refer to when it speaks of regulatory risk?
“(T)he risks of retroactive changes in government and, more particularly government intervention in deals that had previously been signed between public and private stakeholders are comparatively higher in the Philippines,” Fitch Solutions said. “These risks can undermine investors’ confidence, especially the confidence of foreign companies that are less familiar with the business environment, leading possibly to a higher cost of doing business and deterring inflows of foreign direct investment.”
Fitch Solutions pointed to the current issue of the Philippine government’s water concession agreements with Manila Water Co. and Maynilad Corporation as cases in point. The government has ordered the renegotiation of the agreements, citing alleged “onerous” provisions, and has rescinded the 25-year extension of the agreements. “(S)imilar agreements signed between the government and private companies could come under the spotlight,” the Fitch Solutions report warned. “(T)he water concession revocation case paves the way for the review of other possible ‘disadvantageous’ agreements, putting (at risk) the long-term financial viability of companies relying on such contracts.” Fitch Solutions went on to say that the government’s actions “(have) derailed the long-term planning and created a high degree of financial difficulty—in aspects such as borrowing (funds) and attracting new capital—due to revenue uncertainty.”
And what is Fitch Solutions’ conclusion regarding the government’s actions on the water concession agreements? “We believe investors will be concerned over the possibility of similar instances of government intervention, which would create uncertainty for their business operations ….. There is a possibility that foreign direct investment may take a hit in the short term.”
After reading the Fitch Solutions report and learning of its low PRI rating, there no longer is reason to wonder why the Philippines continues to perform badly in the FDI contest.