On the proposed lifting of the constitutional foreign ownership restrictions

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Raul V. Fabella-125



The lifting of constitutional limits on foreign ownership proposed by Resolution 2 of both Houses has now been approved by the Lower House committee on constitutional change. Resolution 2 proposes to add the phrase “unless otherwise provided by law” to every restrictive provision.

It has two separate parts:

a.) Substance — will the lifting raise foreign investment inflow and by how much?

b.) Process — could it be implemented in a fashion that keeps political provisions out?

I agree with the substance of Resolution 2 that the lifting of the constitutional limit on foreign ownership will make the Philippines more foreign investment-friendly; but “more” should be understood with caution. The evidence on the response of foreign investment to the lifting of restrictive ownership provisions is still largely cross-country and directional (positive) but not on how much. There is however evidence that for one particular case, the restriction has proven very costly (case below).


By itself alone, the lifting will not create a tsunami of inward foreign investment as often vehemently but gratuitously asserted. The reason is that attracting foreign investment is like attracting hotel clientele: clients are always comparing packages of offerings. If your package is multiply inferior, say, “dirty toilets” on top of “bad air conditioning” on top of “poor safety,” solving just “dirty toilets” will not bring about a flocking of clients. It is only one among the many steps toward a competitive package of features. Advocates of the lifting sometimes treat the public like they were born yesterday by unfounded overselling.

One observation is highly relevant. The investment rate of the country is and has been very low in the past two decades (at best 22% of GDP (gross domestic product) vs. 25-35% among our neighbors). And the Government Capital Outlay (GCO) is lowest in the region (2-4% of GDP vs. 7-10% of GDP among our neighbors). If we are not investing more in our own country, it’s hard to see why foreign investors will do so. That local investors are not “gung ho” though unhampered by the restrictive provisions suggests that other hurdles are as, or even more, important.

The problem of being bottom of mind as an FDI (foreign direct investment) destination in the region has many fathers — foremost among them being: the high cost of power, the high cost of logistics, the number of signatures required and time delays in applications, the uncertainty of the regulatory environment, the weakness in the judicial system and the unsettled peace and order — no question but these concerns come higher in the minds of investors than foreign ownership restrictions. These hurdles will not go away with the lifting.

Furthermore, in the Philippines, the problem of mixed messaging is acute: first, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill as approved by Congress will increase the effective income tax on foreign investment because the 5% gross income tax (GIT) to be displaced is equivalent to 17% corporate income tax (CIT) by Department of Finance (DoF) calculation while CREATE proposes a shift to 25% CIT and further on perhaps to 20% CIT. By the way, 17% CIT is the offering to foreign investors in Vietnam.

The appreciating peso (10% in 2020) hit Philippine manufacturers and exporters in 2020 which starkly contrasts with the stability of the Vietnamese Dong to the delight of its export locators. Imposing price controls on pork speaks of the knee-jerk anti-market tendency of the government. Mixed messaging is very damaging to our cause.

That said and to follow up on item 2(a), I will instance, following R. Landingin’s (2007) narration of facts, the cost of Article XII, Section 11 limiting foreign capital of firms to minority status. Arguably the most insidious of red flags about the Philippines as a foreign investment destination in the last two decades starting in 2002 was the PIATCO (Philippine International Air Terminals Co., Inc.) fiasco involving the contract to build Terminal 3 of NAIA (Ninoy Aquino International Airport).

Fraport, the foreign partner in PIATCO, allegedly ponied up most of the money but was relegated by the constitution to minority ownership. For decades after its 2002 delivery, NAIA Terminal 3 was a spanking new $370-million facility lying idle, gathering dust, and earning zilch because it was embroiled in a lawsuit involving the ownership of the facility. No matter who owned the facility, the Coasean bargain would have been to run the facility and focus the legal dispute on its earnings, precisely the recommendation of the Canlas ad hoc committee headed by then-National Economic and Development Authority (NEDA) Secretary Dante Canlas. But then-President Gloria Macapagal Arroyo decided to nullify the contract, handing the matter over to the lawyers. The protracted dispute between the Philippine government and Fraport effectively red-flagged the Philippines as a foreign investment quagmire. Had Section 11 Article XII not been there, Fraport would have had controlling interest and the PIATCO fiasco would not have arisen. In 2013 the Court of Appeals awarded PIATCO $371,426,688 as just compensation. In 2015, the Philippine Supreme Court affirmed the Court of Appeals award which, with interest, had ballooned to P24 billion by 2016. The known cost of Article XII Section 11 on PIATCO alone is staggering. Somebody should have gone to jail.

On Article XII, Section 3 proscribes foreign ownership of land. My personal belief is “To him who can make the land flower best belongs the land.” Citizenship alone does not equip one to make the land flower. Worse, the rape of our national patrimony is the handiwork not only of foreign but also of local passport holders. But foreign investors are not that interested in land ownership; a secure long-term lease is just as good.

Resolution 2 introducing the phrase “unless otherwise provided by law” into specific restrictive provisions makes Congress the final arbiter! This modality is thus contingent on action by Congress which may or may not act. Rep. Edcel Lagman also raised a valid issue on the signaling value of Resolution 2 modality and I paraphrase: This seems a signal of frailty rather than one of resolve. For a stronger signaling, for one more apropos foreign investment and very much less politically contentious (note, no mention of “land”), the Philippines’s cause may be better served by a one-line amendment: Section 11 of Article XII is hereby deleted.

On the process of lifting, the most asked question is: How do the advocates deliver on its promise to insulate the lifting process from non-economic provisions? Rational distrust is the currency of the land at the foothills of another election. As it is, many vocal advocates of the lifting are also lead ideologues of some constitutional political change.

One way to sidestep rational distrust is to offer a “credible commitment” that this won’t happen. A credible commitment is a pledge that is very costly for the offeror to break. An example of credible commitment is the one required by the Mafia of prospective members: Assure us that you will never rat on this family: commit murder. At any rate, anything less will amount to what game theorists call “cheap talk.” Beware of cheap talkers.


Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from bicycling and tending flowers with wife, Teena.