Investments and stability of contracts

Much has been said about the need to attract more investments to our country. While we are slowly catching up in terms of foreign direct investments, it is a fact that compared to other countries in the Asia Pacific region, we are less than stellar.

Accepting our mistakes or limitations, recognizing their negative impact and beginning a brutal self criticism as a nation can actually liberate us from the “puwede na” or “maayos pa naman” mentality in terms of assessing whether we have indeed attracted the right level and amount of investment in our country.

BINDING CONTRACTS
Key to this discussion is the issue of our country’s respect for stability of contracts entered into with foreign or transnational corporations. This issue is particularly unique to those projects where the initial investment involves huge amounts because of the kind of technology, expertise, and capital needed, and when the return for such investments takes a longer period.

The oil and gas, mining, power and energy industries are perfect examples of these types of ventures. Normally, investors would expect that contractual stability clauses (especially those related to fiscal terms) find their way to the relevant agreements. Stability, in practical terms, involves stipulations such as profit sharing, tax regime, payment processes like cost recovery, reimbursements, and governing law and dispute resolution, to name a few. The legitimate expectation of parties in an international contract is that it will be respected, regardless of a change in government structure, socio-political system, or political leadership.

LOCAL LAWS
And while there are investment treaties between a country and an investor which ensure adherence to contractual terms, local law also supports contractual compliance. No less than our Constitution’s Bill of Rights guarantees equal protection under the law. It simply expects parties to act fairly, equally, and in good faith. Add to this the non-impairment of contract clause which is a protection against contractual breach by the government. These rights are not limited to private persons or entities. They apply to government and the way it conducts its business activities with local and international investors.

Our basic law guarantees due process and freedom from discrimination even in the area of contracting. So if our nation’s decision makers change the rules in the middle of the game, short change the investor by resorting to different interpretations, come up with conflicting ordinances, laws or interpretations, or unduly interfere with the judiciary, no reputable or good investor would dare stay or even enter the country in the first place.

In the absence of fraud, intimidation, or patent unfairness, the government and foreign investors should abide by agreements they freely entered into. Otherwise, this factor alone, can tremendously bring down our “ease of doing business” scores in the international community.

A case in point is the suit filed by Shell Philippines Exploration BV, Chevron Malampaya LLC against the government on May 2015 in the International Chamber of Commerce in Singapore. The complaint was filed because Shell was being asked to pay an additional $2.9 billion because of an alleged under-collection of taxes from them. This additional payment was a result of a different interpretation of a tax clause in an existing contract that was approved by our agencies back when the project was executed.

Billions of pesos later, our government’s reputation for reliability in honoring contracts was the collateral damage suffered when we lost in the case in April this year with a vote of 3-0. The international business community is now watching how our local courts will have this decision enforced in favor of a consortium that already contributed at least $11 billion to our treasury.

CORPORATE IMAGE
The Philippines has a “brand” to protect. Any dispute that springs from allegations that the country has used misplaced nationalism or politics in order to breach its obligations repels foreign investments. In recent years, many legal suits have been filed on such issues and it is troubling that the government has chosen to spend millions in legal fees to fight a painful court or arbitral battle that should not have been waged at all if only we had stuck to our promises.

When the overall investment risks are so high, no one would dare to do business. They would shop for other countries where the offer is good, the relationships are positive, the commercial environment is fair but competitive, and the political climate progressive, forward looking and respectable.

Ariel F. Nepomuceno is a management consultant on strategy and investment.