60-40 Foreign Direct Investment Ownership is Nothing More Than OVERPRICED Rent

I'm amazed that there are some people who still insist that the Philippines should retain the 60-40 investment scheme or even lesser shares ownership for foreign investments. The argument always goes such as (1) Filipinos must be the majority shareholder because it's their country, (2) only foreign investors will get rich if you let them invest in here 100%, and (3) you're basically selling land. This is the problem when people can't tell the difference between shares ownership and land ownership. Shares ownership means owning a percentage of the company. Land ownership is where the land is leased upon. This is where I would like to argue why easing certain foreign investment restrictions is necessary.

An illustration that will help see why 60-40 is nothing more than overpriced rent

I would like to give this picture. Let's imagine you're a businessman and you're looking for a space to rent. Not everyone is willing to sell their commercial space but there are those more than willing to rent it. Some just refuse to sell their commercial space because selling is a one-shot deal. Now, you found a good space. It's a very nice neighborhood, with clean fresh air, good peace and order, and then here comes the property holder. You're so excited to look at the place. The property holder gives you a tour around the commercial building. It's in a very nice location. You really feel you get a good place.

It's now time to sign the contract. You feel you found the best place you could start a business. You decide to ask for the rental fee. You know you can't buy the place but you can rent it, right? The property holder then presents the contract of lease. You start reading the provisions. However, one provision starts to tick you off. What's this provision you may ask? It might go something like this, "The tenant, therefore, shall agree to pay 60% of his/her net income to the property holder on a monthly basis." That would definitely be a tick-off now, wouldn't it? The property owner is demanding all who lease the commercial property should give him at least 60% shares of ownership for that branch. Who in the right mind would ever want to rent that kind of space?

For one, I definitely would refuse such a landlord. I would have probably said, "No thanks! The fees are too high!" I couldn't imagine how the business will be if I had to give up 60% of my net profits to the property holder. The whole thing is just unjust. Yet, that's what the Philippines has been doing for some time--giving overpriced rent to multinational corporations (MNCs). What happens during the 60-40 shares arrangement is this--foreign investors only get to keep 40% of their net income. Who in the right mind would want to invest if you can't keep 100% of your net profits after taxes?

Why removing the 60-40 arrangement in regards to net profits will be more profitable

Now, let's move to another scenario. You're so sick and tired of that property owner you met. However, another landlord in that area showed up and said, "Why don't you take a look at my space?" You get a tour around the next commercial area. It may not look as good as the previous one but it's still in good condition. This property owner then says, "You're looking for a space, right? I did some computations and maybe you might need to pay me at least PHP 20,000.00 for the first few years. We can negotiate the increase later if ever it's needed."

This would be a completely different scenario. The property owner says, "You can continue to do business here but you have to pay me at least PHP 20,000.00 per month. Failure to pay in two consecutive months means you're out." This is really much better. It doesn't matter how much net profit you make--all the owner asks is the rightful amount of rent. The property owner reserves one's right ot kick the tenant out only if violations were committed. The tenant can keep 100% of his net profit after taxes. However, this net profit only comes after the payment of rentals, government fees (which include taxes), and compliance with law and order. This becomes the better arrangement.

This is what the 100% shares ownership would do. MNCs wouldn't need a Filipino partner to do business. However, land ownership is more or less out of the question to control the supply and demand. After all, MNCs are there to rent and the country they're renting in is like the shopping mall. No mall owner will ever sell their space. The MNC can do business all it wants in the Philippines without a Filipino partner. However, the restrictions imposed on them are (1) they can't buy land, (2) they have to pay rentals to the property holders, (3) they need to pay government fees which include taxes, and (4) following the laws of the Philippine government. If they won't pay rent then they're out. If they don't pay government fees then consider the possibility of imprisonment and deportation. If you commit a crime then you do the time. Follow all of them and you can continue getting rich but only from net income after taxes.

It's true that the money won't come so easily. However, because of the ease of doing business (with reasonable restrictions) then more money will come in. What happens next is that when there will be more MNCs--there will be more income eventually. I may not get rich fast without not having a 60-40 arrangement with tenants. However, having just rental fees will be one of the reasons why more tenants will move into my commercial space. It wouldn't flow in big (at first) but having the right price to earn a profit (not too high nor too low) will encourage more people to do business. It wouldn't be so fast but it will be more sustainable in the long run. After all, sacrifices need to be made to make a sustainable flow of money such as investing in environmentally friendly business practices, ethical treatment of workers, having a good supply chain, and the like. It might cost more money (now) but the returns will be much higher in the future.

Besides, the more competition there will be, the better the Philippine business environment becomes. Filipino businessmen will have to get creative on how to face threats and opportunities. They will have a lot of competition to deal with. However, their customers' new competitors and their service providers' competitors are opportunities for growth. Sugar farmers in Negros Occidental may think of selling raw sugar to Taiwanese milk tea owners looking for fresh sugar. Local Filipino businessmen may want to avail themselves of better transportation services. Banks may want to make way for more clients. Meanwhile, local businessmen may consider investing in one local bank and another foreign bank. Local banks would still benefit from foreign investors who'd approach them first because they're the most readily available. In the end, it's all about delivering quality services regardless if the investor is local or foreign.

References

"Duterte signs law amending Public Service Act" by Azer Parrocha (March 21, 2022)

https://www.pna.gov.ph/articles/1170293

"Glocalization" by Adam Hayes, reviewed by Gordon Scott (Updated: March 26, 2020)

https://www.investopedia.com/terms/g/glocalization.asp

"SINK OR SWIM: CHANGING THE 60-40 RULE ON FOREIGN OWNERSHIP AS KEY TO SURVIVING GLOBALIZATION" by Glenndale Cornelio

https://cpbrd.congress.gov.ph/152-blog/constitution/196-16k-purged-from-poorest-of-poor-list

"The Philippines Readies Public Services for 100 Percent Foreign Ownership" by James Guild (December 29, 2021)
https://thediplomat.com/2021/12/the-philippines-readies-public-services-for-100-percent-foreign-ownership/

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