Easing the nationality requirement in the construction sector is one solid indication that the Duterte administration is really serious in pursuing its P8-trillion “golden age of infrastructure” program, the Joint Foreign Chambers (JFC) said.
By relaxing the current 60-percent Filipino-equity requirement in the sector, the JFC said President Duterte will also gain more support from international investors for his grand infra push.
“Given the focus of the administration of President Duterte on infrastructure development, which is fully supported by the business community, it will be necessary to create an environment in which infrastructure projects can be implemented effectively and timely,” the JFC added in the statement.
The JFC said fair competition in the construction and engineering sectors is currently being undermined by the Philippine Contractors Accreditation Board (PCAB).
“One of the agencies that has undermined fair competition is PCAB, which is limiting accreditation of foreign contractors to 40 percent, despite the fact that there is nothing in the Philippine law that restricts the ownership of foreign contractors,” the foreign chambers noted.
PCAB rules
The contractors license law, or Republic Act (RA) 4566 as amended by Presidential Decree 1746, makes it mandatory for all contractors in the country to first secure a PCAB license before engaging in construction contracting in the country.
But in the latest Foreign Investment Negative List, while some limitations are imposed on construction contracts, they are only for the construction and repair of locally funded projects and contracts for construction of defense-related structures.
The foreign business association has long been at loggerheads with the accreditation body for contractors, which operates under the auspices of the Department of Trade and Industry (DTI).
The JFC has sought clarification on RA 4566 in the past, including the implementation of the Quadruple A, or AAAA, category for foreign contractors to be licensed as regular contractors.
The AAAA category requires investment of at least P1 billion to allow foreign contractors to come in with 100-percent foreign equity.
Other than this category, foreign corporations cannot get a license from PCAB, as it requires an applicant-corporation to have at least 60-percent Filipino equity. The DTI has tried to amend the implementing rules and regulations of the contractors Llcense Law, to allow the participation of 100-percent foreign-led contractors in private construction, but has failed to gain any headway so far.
PCC weighs in
Even the Philippine Competition Commission (PCC), in a comment sent to the Supreme Court recently, highlighted the importance of having a level playing field among contractors in the construction industry.
“It is a settled principle in economics that, if there are many players in the market, healthy competition will ensue. Competition results in better quality products and competitive prices that will benefit the public,” the PCC said in its brief. Competition in the construction industry would result in improvements in production processes, leading to economic benefits for the country.
At present, PCAB, the authorized licensing body, issues two types of licenses to contractors—Regular and Special Licenses. Local firms can be granted a regular license, which gives them continuing authority to engage in many contracting activities throughout a one-year period. Foreign firms can only be granted a special license, and they need to have a separate license for each contract activity.
These conditions create a substantial difference in cost between foreign and local firms for securing licenses from PCAB.
Under the current PCAB rules, foreign firms can only be granted a special license. Thus, a foreign contractor would have to spend 12 times more for license applications compared to a domestic contractor in a typical year. “These conditions are not very encouraging for foreign contractors intending to participate in the construction industry,” the PCC said.
“The nationality requirement [by PCAB] puts a substantial barrier to the entry of foreign contractors in the construction industry,” the PCC argued. “Ease of entry into an industry is a positive sign of competitiveness.”
PHL has highest cost
At present, the Philippines has the highest average cost of construction in certain classified projects when compared to its Asean counterparts, according to the PCC.
“For standard high-rise apartments, it costs $900/square meter (sq m) in Manila, $ 773.5/sq m in Bangkok, $707/sq m in Jakarta, $665/sq m in Vietnam and $465 in Kuala Lumpur.”
“For standard high-rise offices, it costs $870/sq m in Manila, $757.5/sq m both in Kuala Lumpur and Jakarta, $750/sq m in Vietnam and $727.5 in Bangkok,” the PCC noted.
For standard shopping centers, it costs $815/sqm in Manila, $750.5/sqm in Bangkok, $740 in Vietnam, $690/sq m in Kuala Lumpur and $594/sqm in Jakarta.
For prestige shopping centers, it costs $1,115/sq m in Manila, $885/sq m in Kuala Lumpur, $882/sq m in Bangkok, $649/sq m in Jakarta and no updated data in Vietnam.
Result is low FDI
“When compared to Asean counterparts, the Philippines’s regulatory framework is characterized as ‘restrictive’ due to its limited construction activities and equities available to foreign firms. In contrast, Vietnam, Malaysia, Cambodia and Singapore are considered ‘liberal,’ mostly with uniform licensing requirements for both domestic and foreign companies,” the competition body added.
The liberal countries registered higher foreign direct investment (FDI) rates compared to “restrictive” countries, such as the Philippines, Indonesia and Thailand. In particular, Philippines barely has 1-percent FDI rate in the construction industry.
Thus, the PCC said the Philippines is missing out on investment opportunities and is potentially deprived of the considerable benefits gained from more competitive key economic sectors.
Image credits: Nonoy Lacza