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Nothing but a company name and a logo

by Ken Fuller, Tribune (London)

Ken Fuller observes that history appears to be repeating itself in the Philippines

Tuesday, January 11th, 2011




When, in 1967, Filipino writer Hernando J Abaya remarked: “Where before we were fried in American lard, we now fry in our own fat”, he was referring to the tendency of foreign investors to raise their capital on the local market instead of bringing it with them.




This tendency was intensified in the 1960s by the United States’ balance of payments problems occasioned by the war in Vietnam. Further, US companies were under instruction from Washington to borrow locally and to remit as much of their earnings as possible. As one example, the Ford body-stamping plant in the Bataan export-processing zone was established at a cost of $22 million, every cent of which was raised locally. In 1966, while American companies invested $9.2 million abroad, the capital outflow from the US was only $2.7 million. In the Philippines, the net outflow of capital reached $1 billion a year in 1966.




In 1977, when the Philippine Central Bank attempted to impose debt-to-equity ratios on foreign companies seeking peso loans, US Ambassador William H Sullivan gave the game away by protesting with remarkable frankness that such a scheme “would work against multinationals who come to the Philippines with nothing but a company name and a logo”.




History now seems to be repeating itself. On November 18, formally launching his “public-private partnerships” project, President Aquino announced that the Bangko Sentral would raise the limit on the amount a bank is permitted to lend for a single project. It would seem, therefore, that foreign investors in the 10 infrastructural projects announced by Aquino – $3.414 billion worth of upgrading for roads, railways and airports – are being practically encouraged to raise their investments locally. Thus, the Development Bank of the Philippines, the Government Service Insurance System, Land Bank and the Social Security System have established a Philippine Infrastructure Development Fund, financing it to the tune of 200 billion pesos (of which there are currently 70 to the pound).




These four institutions are in the public sector. It seems entirely possible that the public role in these “public-private partnerships” will consist – apart from the 12.5 billion pesos proposed budget allocation for 2011 and, presumably, similar amounts thereafter – merely of loaning investors the cash with which to make a killing. It’s true that funds and “expertise”  have also been promised in the form of official development assistance and loans from the Asian Development Bank, the World Bank and the Japan International Cooperation Agency. But will those loans be repaid by the private “partners” or by the Filipino taxpayer?




All this calls into question the argument frequently advanced by opponents of the nationalist economic provisions in the 1987 constitution. The Philippines, they say, is unable to raise sufficient capital and therefore must resort to foreign investment in order to “develop.” Here, the capital being raised appears to be not only Philippine but also public – only to be handed over to those “with nothing but a company name and a logo”.




The projects offered next year will operate under the “build-operate-transfer” (BOT) system. Thus, an expressway will, for example, be constructed by the private “partner” (probably using money raised locally and certainly using Filipino labour). Once completed, the toll road will then be operated by that “partner”, who will take all or an agreed percentage of the proceeds for a specific period, after which the project will be transferred to the government.




The “operate” phase of some BOT agreements can be as long as 25 years, during which time the foreign investor may remit the profits to their home country. This arrangement has consequences: local business may find itself crowded out from the loans market and, resulting from the net outflow of capital from the Philippines, the foreign debt (currently $57 billion) will expand.




By the end of a lengthy “operate” phase, it is possible that the road, railway or airport will be in need of


further “upgrading,” thus opening the possibility that the cycle will commence anew.




It is also possible that at some point Filipinos may wake up to the fact that they are being disadvantaged. Such a realisation might lead to calls that the situation is addressed by the Supreme Court or the legislature. But investors can sleep soundly, because the president has promised to provide them with protection against “regulatory risk”.




“If”, Aquino said on November 18, “private investors are impeded from collecting contractually agreed fees


by regulators, courts, or the legislature, then our government will use its own resources to ensure that they are kept whole.”




It may be early days, but such an undertaking seems to have “constitutional crisis” written all over it.



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