The STUPIDITY of Insisting that Equity Restrictions in the 1987 Constitution of the Philippines Exist for "National Security"

As the call for economic charter change goes on, I feel the need to educate some people with common sense. I'm reading comments on Facebook that 60-40 (or any similar ownership restrictions) is for the "security of the Philippines" or that certain sectors can't be allowed 100% ownership on the part of the MNC. Once again, do I need to remind people for the nth time that 100% FDI ownership is all about share ownership? Sadly, many Filipinos misunderstand what 100% FDI means (read here). What 100% FDI ownership means is that MNCs don't need to look for a Filipino partner, only to be burdened with having to give up 60% (or more) of the net profits after taxes and they only keep 40% (or less). That's why I called such an arrangement as overpriced rent (read here).

Some of these people I ran into on Facebook (of all places) are too beholden to Atty. Hilario G. Davide Jr. It was last 2018 when Davide Jr. also said that the Philippines may become a "colony of businessmen". One of Davide Jr.'s words was this:

Davide said the 60-40 foreign equity ratio should stay also because the Philippine population is growing annually and they should have food security.

"What will you feed the people afterwards if all our assets here, natural assets, would be [granted] to foreign investors?...Congress should stick to it [60-40] and fully implement the same," he said.

The Constitution restricts ownership of certain areas of investments to firms with at least 60-percent Filipino capital.

The restriction also covers exploration, development, and utilization of natural resources through co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations.

However, as they keep mentioning Davide Jr., I fire shots at them with Singapore's very own Kishore Mahbubani, founder of the Lee Kuan Yew School of Public Policy (LKYSPP) in the National Unversity of Singapore (NUS). I could imagine what if Mahbubani and his friends decided to vacation in Cebu City and ran into Davide Jr. Mahbubani might say, "Hilario is that you?" Davide Jr. may say, "Long time no see. I'm glad you remembered me. We met at the United Nations." Mahbubani may say, "Too bad you never joined the World Economic Forum. Unfortunately, I must disagree with your statements. So you say it's for security reasons? I'm sorry but I have to disagree."

Let's compare FDIs to tenants who invest in the space and the Philippines to any form of commercial space (hence why I'm still opposed to letting foreigners buy spaces). If we're going to make the comparison, let's say that I opened a shopping mall in a downtown area. However, before one can rent in my shopping mall, they must sign a waiver that says that the lessor must let me own 60% of their business for that branch, located in my shopping mall. Certainly, no sensible businessperson would agree to such a stupid deal. I'm pretty sure none of the shopping mall groups such as Ayala, Robinson's, and SM ever put such a ridiculous clause in their contracts! 

I bet a lot of the families who run the malls will laugh at me. Just think if I wouldn't allow a tenant to rent a space unless the person agreed to give me 60% ownership of that space. Tenants want to keep 100% of their profits. Unfortunately, most people operate with the idea that profits are what you own for the day. Never mind that simple mathematics says that the profit is computed by the selling price less the cost price. 

Image by Sabrina Jiang © Investopedia 2020

In accounting, we have to focus on this cost accounting statement. I'd like to tell people to notice that we have revenue less COGS equals gross income. Gross income is then deducted from all expenses which results in Earnings Before Tax. After that, Earnings Before Tax is deducted from taxes. All that's left is the net income, which the investor wants to keep at 100%. Expenses would include the monthly rental aside from utility expenses. If one wants sot reduce the prices of goods, it should be because some (or all) areas of related costs have been reduced. If utilities are cheaper, increasing the salaries of employees while having a certain reduction of the overall price of the goods or services is possible. However, simply increasing salaries without considering all other factors will be inflationary. 

Basically, as a lessor, I collect the rentals every month. If the tenant can't pay the rent in two consecutive months, it's a ground for lawful eviction. The rent is part of the list of expenses. If I say that I'm going to require 60-40 for "security purposes", it's a very flimsy excuse. It's not as if I can't add certain restrictions to the clause such as no subleasing without permission, no immoral activities, no damage to property, no consecutive two months of non-payment, no one is allowed to live in the commercial space, etc. These restrictions are reasonable compared to when I require the tenant to give 60% of their net income after taxes. Getting a profit isn't an easy thing. The businesses should be allowed to keep 100% of what's left of the net income after taxes.

It may sound nice to say that it's all about "security". However, any shrewd businessperson who will read my contract will not buy the garbage I just spewed at the person. They would see that my requiring them to give 60% of their net income is nothing more than my own selfish agenda. Requiring MNCs to split 60-40 (or even higher than 60%) of the net income is all about the Filipino partner trying to get rich fast. That's why the late Carlos P. Garcia's "Filipino First Policy" caused the Philippines to fail. True, the Philippines may not be a totalitarian or Communist state. However, more businesses have chosen Communist Vietnam instead as a place to invest. 

The idea that only Filipinos should hold the majority of the economic activity is obsolete. It's not that we disregard the locals. If Filipino businesses can do good then they will survive the influx of FDIs. If they see the FDIs as opportunities for better connections then they will grow. Jollibee is an example of how the Philippines can survive against foreign businesses (read here). Garcia's third-world mentality only kept the Philippines stuck. It's a shame Filipinos tend to quote the great Lee Kuan Yew on the Marcoses but refuse to accept his helpful advice on other things. Some would even say, "It's just LKY's opinion!" or "It's just Mahathir Mohamad's opinion!" All the while, they treat the constitutionalists of the Philippines as "overly beholden". 

The big question is what has being "overly beholden" to people like Davide Jr. done for the Philippines? Vietnam and China both learned from Singapore how to improve their economies, even if they remain as Communist countries. Why has the Philippines been so stuck with the Marcos narrative (even still blaming it for problems not caused by it) instead of fixing the effects of the Marcos Years? The idea that 60-40 exists for "security reasons" is nothing more than a flimsy excuse that may have some hidden agenda.