The supply chain sector is set to benefit greatly from new legislation further opening up the Philippines to foreign investment
Written by Henrik Batallones
For the past few years the Philippines has stepped up efforts to encourage investment in the country, spurring economic growth and bringing prosperity to more Filipinos. The impact of the COVID-19 pandemic has upped the stakes, as the country seeks to regain lost ground and take advantage of new opportunities brought to the fore by the so-called “new normal”.
In recent months several pieces of legislation were signed that present a significant step in these efforts. It is hoped that, in tandem with a streamlined tax regime, strengthened protections and improved access, it will encourage more foreign investments in the country, particularly in sectors that play a key role in our supply chains. As for the logistics services sector itself, these laws provide a glimpse at new opportunities and a greater potential for growth.
Opening up transport
Perhaps the most important of these laws is Republic Act 11659, which amends the Public Service Act, originally enacted in 1936. In a nutshell, it overhauls what the law defines as a “public utility”, limiting it to sectors where “the market demand for a commodity or service can be supplied by a single entity at a lower cost than by two or more entities”. Thus, sectors such as electricity, water, petroleum, seaports and public utility vehicles will remain subject to the 40% limitation on foreign ownership.
This means sectors such as telecommunications, railways and airlines – which are previously also subject to the limitation – can now be 100% foreign-owned. This could pave the way for companies such as logistics firms, airport operators and airlines to either establish operations in the country, or buy into local firms.
To address potential security concerns, the new law provides several safeguards. These include a restriction on foreign state-owned enterprises from owning capital in what is deemed as a public utility or “critical infrastructure” (referring to any public service operating vital services, including telecommunications); a restriction on foreign nationals from owning over 50% of capital in the operation of critical infrastructure; and the ability to prohibit or suspend investments in certain sectors in the name of national security.
The law hopes that the lifting of these restrictions would lead to improved service levels, greater job generation and the exchange of skills and technologies from foreign partners. Albay representative Joey Salceda, who co-sponsored the bill in the House of Representatives, estimates that the law will bring in PHP 299 billion in new investments in the next five years.
Business groups and industry associations have welcomed the law. SCMAP, for one, believes it will encourage innovation and foster stronger competition in the supply chain sector, and also spur much-needed investment in physical infrastructure.
Even more opportunities
Two other laws recently signed by President Duterte further efforts to welcome more foreign investment into the country. The first is Republic Act 11647, which amends the Foreign Investment Act, addressing concerns over the country’s restrictive foreign investment environment compared to its neighbors.
Among others, the law now allows foreign nationals to own a micro-, small- and medium-sized enterprise with a minimum capital of only USD 100,000, down from the previous minimum of USD 200,000. However, these companies must utilize “advanced technology”, is endorsed as a start-up or a start-up enabler in accordance with the Innovative Startup Act, and employ at least 15 Filipino employees (the minimum was previously set at 50). These businesses should also put in place a skill development program that benefits Filipino workers, institutionalizing skills and technology transfer from their foreign colleagues.
This law, alongside the Innovative Startup Act, could prove to be a boon to the country’s burgeoning start-up scene, and further encourage the growth of local firms whose technological impact will be felt outside the country’s borders.
Also recently signed into law are amendments to Republic Act 11595, or the Retail Trade Liberalization Act. The law, first passed in 2000, led to the entry of major foreign retailers such as Uniqlo, H&M and Ikea to the country. The new law further reduces and simplifies restrictions, allowing more foreign companies to enter the Philippine market. This includes a reduction of the minimum capital requirement to PHP 25 million (from the previous USD 2.5 million for companies not specializing in luxury items), the removal of pre-qualification requirements, and the removal of the obligation to offer a minimum of 30% of equity to the public. The law still mandates foreign players to hire Filipino workers and to carry locally-made products.
The amendments are timely considering the boom in e-commerce the country has seen in the past couple of years, as well as increasing interest in foreign brands from consumers which have been evident even before the pandemic.
Supply chain implications
The new laws provide a wealth of opportunities for the supply chain sector. Obviously, the entry of new foreign players, particularly in retail, would lead to new business opportunities for logistics providers and other allied industries. Apart from the movement of goods, established players, both local and foreign, would also see the need to step up and improve their own supply chain networks, providing a window for further collaborations.
For logistics service providers, the lifting of some foreign ownership restrictions would allow them to better weather any disruptions that would impact their capitalization. It would also facilitate the transfer of technologies and innovations that would elevate operating processes and make our supply chain networks more competitive.
Already we have seen increased interested from foreign players in entering the Philippine logistics space, whether through partnerships (as is the case with DHL and JG Summit’s joint venture) or through direct investment (as is the case with CVC Capital buying into Fast Logistics). Consolidation and acquisitions among global players could also leave a mark in the country, as it loosens restrictions.
There could also be an impact on the development and operation of infrastructure critical to our supply chains, both physical and virtual – the latter being a particular sore spot as businesses embark on digitalization in response to the pandemic’s challenges.
In addition, several start-ups in the Philippines and neighboring countries are seeking to address various supply chain issues and bottlenecks, whether it be on financing, trade facilitation, or last mile logistics. The new laws allow them to enter the Philippines much faster than before.
A major concern is whether these laws would lead to markets dominated by foreign players. Speaking to BusinessWorld, the Philippine Retailers Association’s vice chair Roberto Claudio expressed reservations that MSME retailers would be edged out, and hopes for a clearer implementing rules and regulations that would prevent this.
The Philippine logistics sector is also comprised of smaller regional players providing services to both large manufacturers and logistics providers. One can imagine these provide an opportunity for foreign players looking to enter the Philippine market, with the potential for consolidation. However, local knowledge would remain critical in ensuring competitive supply chains in a country of over 7,000 islands, and it would be foolish for these foreign players to not take advantage of it.
Finally worth watching is how Filipino workers would be uplifted by these new laws, both in remuneration as well as in transfer of expertise. While Filipino supply chain leaders across the globe are not unheard of, the opportunities for going up the ladder have been few and far between. One hopes that further opening up the country to foreign investors would not just benefit consumers through innovation, competition and more optimal prices – but would also provide Filipino supply chain managers more opportunities to make their mark in the world.