VII. INVESTMENT CLIMATE A. Openness to Foreign Investment The Philippine Government has taken important steps in recent years to welcome foreign investment. However, the Constitution, statutes and administrative regulations continue to limit or exclude foreign ownership in a number of industries/activities. Rural banking, mass media, retail trade, and licensed professional services remain reserved for Philippine nationals. For financing companies, public utilities, domestic air transport, educational institutions, and private domestic construction, foreign ownership is limited to 40 percent. Effective October 24, 1994, there will be no restriction on foreign equity in insurance companies. In advertising, savings and loan associations and pawnshops, the limit is 30 percent, while it is 25 percent for private overseas construction and employment recruitment agencies. Filipinos must own majority of the voting stock of an investment house. In certain specific cases, current laws also reserve executive and management officer positions for Philippine citizens. While foreign equity is allowed in advertising and public utilties, for example, the Constitution explicitly states that all executive and managing officers of such entities must be citizens of the Philippines. Land ownership in the Philippines is constitutionally restricted to Filipino citizens or to corporations with at least 60 percent Filipino ownership. Foreign-owned firms may obtain the use of land through long-term leasing arrangements or by renting facilities in industrial park complexes. In June 1993, the land lease period allowed foreign investors was extended from 50 years to 75 years. The exploration, development and utilization of natural resources must be undertaken through production sharing agreements or similar arrangements with the Philippine Government. In general, entities seeking to engage in such activities must be at least 60 percent Filipino-owned. This requirement has been relaxed for oil exploration activities (considered high cost and financially high risk), where the Government may enter into contracts with foreign-owned companies. Foreign Investment in Preferred Activities: Incentives are offered to registered companies both foreign and domestic, which seek to invest in activities designated by the Government. (The rules are more stringent for non-Filipino companies i.e. those more than 40 percent foreign-owned.) A list of activities for which incentives are available is prepared annually by the Board of Investments. -- In general, foreign-owned firms producing for the domestic market must engage in a pioneer activity to qualify for incentives. Non-pioneer activities are generally opened up to foreign equity beyond 40 percent only three years after domestic capital proves inadequate to meet the desired industry capacity. -- Export-oriented foreign and domestic firms may also qualify for BOI registration and incentives. The export requirement is higher for foreign-owned companies (70 percent of production should be for export) than for domestic companies (50 percent of production for export). -- Foreign-owned companies must agree to attain Filipino status (i.e., divest to maximum 40 percent foreign ownership) within thirty years from registration with the BOI. Exempted from this requirement are foreign firms which export 100 percent of production. Foreign Investment in Non-Preferred Activities: Foreign investments in activities not eligible for incentives are governed by the Foreign Investments Act (FIA) of 1991. The FIA allows foreign equity beyond 40 percent, provided the activity is not on the "negative list". (Note: The FIA negative list does not cover banking and other financial institutions under the jurisdiction of the Bangko Sentral.) The "negative list" has three parts: -- List A: Activities reserved fully or largely for Philippine nationals by the Constitution or specific laws; -- List B: Defense-related activities regulated by law, activities with implications for public health and morals, small and medium-sized non-export enterprises with paid-in equity of less than the equivalent of $500,000, and export enterprises utilizing raw materials from depleting natural resources with paid-in equity of less than the equivalent of $ 500,000 (the foreign equity limit for list B enterprises is 40 percent); -- List C: Areas in which existing enterprises already serve adequately the needs of the economy. Under implementing rules and regulations to the Foreign Investments Act released in October 1991, investments under the FIA are currently governed by a three-year "transitory" foreign investment negative list, which expires on October 24, 1994. The Philippine Government released its first "regular" negative list in June, 1994. Thereafter, amendments to List A may be made by the Philippine Government at any time to reflect changes in law. Changes to List B can be made only every two years upon recommendation of the appropriate government agencies. Changes to list C will be considered every two years upon application by a domestic industry. Unlike Lists A and B, however, inclusion on List C automatically lapses every two years unless a petition for re-inclusion is filed and justified. The criteria for inclusion under List C, if followed conscientiously, would make it difficult for industries to qualify for protection against greater foreign participation. For the three-year transitory period, which will expire on October 24, 1994, List C consists of: -- Ownership, operation and management of cockpit and cockfighting activities (no foreign equity allowed during transitory period); -- Import and wholesale activities not integrated with the production of goods; -- Services requiring a license or authorization from government agencies other than the BOI and Securities and Exchange Commission which, at the time the FIA came into effect, were restricted to Philippine nationals by existing administrative regulations and/or practice of the concerned regulatory bodies (for example, travel agencies, conference and convention organizers, tourist lodging services, insurance companies); -- Enterprises majority-owned by foreign licensors engaged in the assembly, processing or production of goods for the domestic market. The last three List C categories are limited to 40 percent foreign equity participation during the transition period. The filing deadline (August 1993) for inclusion under the FIA's first regular negative List C passed with no applications submitted. Accordingly, President Ramos issued an Executive Order on June 22, 1994 that revokes List C, effective October 24, 1994. Build-Operate-Transfer (BOT) Arrangements: Because of inadequate public sector resources to finance growing infrastructure requirements, the Philippine Government laid down the legal framework for build-operate-transfer (BOT) and build-transfer (BT) arrangements in 1990. Under a BOT arrangement, a contractor builds an infrastructure facility, owns and operates the facility for a fixed term (not to exceed 50 years) while collecting rentals, fees or appropriate charges, and then turns over ownership of the facility to the Government. In May, 1994 the law was amended to expand to nine the number of BOT variations; simplify rules and regulations; permit negotiations on unsolicited proposals (i.e., for private sector-initiated projects not necessarily in the government's priority list); allow more flexibility in determining reasonable rates of return, including adjustments to tolls, fees, rentals and charges during the life of the contract based on a predetermined formula; and to permit projects valued in excess of one billion pesos to apply for government incentives. Export and Import Policies: Foreign investors doing business in the Philippines generally receive national treatment in the application of import restrictions and trade-related incentives. An exception is the requirement that a higher level of production (70 vs. 50 percent) be exported to qualify for investment incentives. Recent Reforms/Pending Investment Legislation: In May 1994, the commercial banking sector was opened to up to 10 new foreign entrants on a branch basis, with up to six branches per new participant. This is the first time for new entrants since 1948. The new law continues to limit foreign voting stock in existing or new domestically incorporated subsidiaries, although the ceiling has been raised to 60 percent from the previous 30 percent. Other investment-friendly legislation is in different stages of congressional deliberation. These include: the universal application of certain investment incentives such as net operating loss carryover and accelerated depreciation for capital equipment; foreign ownership of land in industrial estates; and further liberalization of foreign investment entry under the 1991 Foreign Investments Act. B. Conversion and Transfer Policies There is currently no difficulty in obtaining foreign exchange, and in general, it may now also be freely bought and sold outside the banking system. The Government has phased in reforms since 1992, liberalizing trade and non-trade foreign exchange rules and regulations. Philippine branches of foreign banks report that forex liberalization has shortened the processing time for transfering capital, profits and dividends, royalty, lease and foreign debt payments to less than a week. The regulations also lifted mandatory forex surrender requirements previously imposed on export earners. Repatriation and Remittances: Foreign investments requiring foreign exchange sourced from the domestic banking system for the eventual repatriation of capital or remittance of profits must be registered with the Bangko Sentral or with the investor's designated custodian bank. The investor seeking registration must show proof that the foreign exchange funding the investment has been sold to the banking system for pesos or that there has been an actual transfer of assets (such as machinery and equipment) to the Philippines. Under liberalized foreign exchange regulations phased-in since January 1992, there are currently no restrictions on transferring funds associated with a registered investment. Without prior Bangko Sentral approval (formerly a source of bureaucratic delays), banks are now authorized to sell and remit the equivalent foreign exchange at the market- determined rate prevailing at the time of actual repatriation of capital and/or remittance of profits, interest or dividends. Previous rules required the repatriation of capital staggered depending on the type of industry, sectoral priorities and the size of the investment. Debt-to-Equity Conversions: Investments involving debt-to-equity conversions are covered by a different set of repatriation and remittance regulations (per Bangko Sentral Circular No. 1267), depending on whether the investment is classified as preferred or non-preferred under Bangko Sentral guidelines. Repatriation of capital for investments in Bangko Sentral-determined preferred industries may be effected only three years after the investment is made, with no more than 20 percent of capital to be repatriated yearly for the fourth through eighth years. For transactions in non-preferred activities, capital repatriation is allowed only five years after the investment is made, with no more than 20 percent to be repatriated yearly from the sixth to tenth years. While remittance of profits on debt-to-equity projects in preferred industries is allowed immediately after the investment is made, profits in non-preferred activities may be paid out only after four years. Under a Brady plan deal, the Philippines restructured $ 3.2 billion of commercial debt in December 1992. News of this deal caused discounts on Philippine debt paper to decline, so that the the Government decided to suspend temporarily the debt-to-equity program after the October 1993 auction (except for transactions involving socially-oriented activities). Intellectual Property Agreements: Payments of royalties, rentals or fees for intellectual property agreements are allowed without prior Bangko Sentral approval, at the market-determined exchange rate at the time of actual remittance, provided that the agreement has been registered with the Bureau of Patents, Trademarks and Technology Transfer. Foreign Loans: The Bangko Sentral regulates foreign currency loans to ensure that payments can be serviced in an orderly manner and with due regard to the economy's overall debt servicing capacity. As a general rule, all public sector and government-guaranteed private sector loans must be approved by and registered with the Bangko Sentral. Most private sector loans to be serviced from foreign exchange purchases from the banking system should also be registered. There are no current nor foreseen impediments to servicing foreign loans as they fall due. Import Payments: Under more straightforward and liberal regulations introduced in mid-1992, import payments may be made through direct remittances, letters of credit (L/C), documents against payments (D/P), documents against acceptance (D/A) and open account arrangements (O/A). Importations under D/A and O/A arrangements must be registered with the Bangko Sentral in order for import payments to be made using foreign exchange purchased from the banking system. Current regulations also allow import arrangements not involving payments using forex purchased from the banking system, such as no-dollar imports and importations on consignment basis. U.S. Government Currency Requirements: The estimated annual dollar value of expenditures in Philippine pesos by U.S. government agencies is roughly $ 55 million. The exchange rate is not fixed and varies daily in relation to the demand for dollars. In the past year, the Bangko Sentral has intervened on some occasions to prevent the peso from dropping too rapidly because of speculative pressures. Current purchases are made as needed by soliciting competing quotes from U.S. and Philippine banks, including the Bangko Sentral. There is currently no downward pressure on the forex rate. The peso/$ rate ended 1993 at 27.74 and has since appreciated to an early June level of just under 27 pesos, attributed by Bangko Sentral officials to substantial forex inflows from, among others, contract workers' remittances, tourism and portfolio investments, as well as to a surge in foreign currency deposit accounts. In contrast to 1993, the Bangko Sentral has been intervening to stem the peso's appreciation, due in part to concern over export competitiveness. For macroeconomic planning purposes, the Government forecasts a forex depreciation of between 3 to 4 percent in 1995. C. Expropriation and Compensation Philippine law guarantees investors freedom from expropriation, except for public use or in the interest of just national welfare or defense, and upon payment of just compensation. In such cases, foreign investors shall have the right to remit sums received as compensation for the expropriated property in the currency in which the investment was originally made and at the exchange rate at the time of remittance. D. Investment Disputes/Dispute Settlement For the most part, there have been no major investment disputes involving U.S. and other foreign investors in the last several years. The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID), and accepts binding international arbitration. One U.S. firm has been involved in a protracted dispute over a major investment since 1986. Although it remains unresolved, both parties have, by and large, attempted to reach solution through appropriate methods. The U.S. firm has been compensated for its work on the project. In a second case, a U.S. firm was accused of winning an overly-advantageous contract. The dispute was resolved promptly and the project successfully completed. E. Political Violence Politically motivated attacks against American business firms or U.S. government facilities have declined markedly in recent years. The last major incident was the January 1992 kidnapping of an American CEO by a breakaway faction of the Philippine Communist Party's military arm. (This individual was rescued two months later by the Philippine National Police.) During public protests against a proposed oil price hike in January 1994, another communist group took credit for detonating explosive devices in the offices of two multinational oil companies in Manila, but there were no casualties and property damage was light. In separate incidents in 1992 and 1993, two American missionaries in the southern Philippines were kidnapped and held for ransom for several months by groups claiming affiliation with Muslim insurgents. They were released unharmed. Overall political stability has improved significantly with the declining strength of communist insurgents and the neutralization of military coup plotters, both of whom had posed serious threats to the Aquino Government. Soon after taking office in June 1992, President Ramos initiated a domestic peace process with rebel groups, including Muslim separatists in the south. He won broad public support for this initiative as well as his announced goal of transforming the Philippines into a newly industrialized country (NIC) by the year 2000. Ramos has formed a working majority in the lower house of Congress, but the enactment of his legislative program has been impeded by opposition control of the Senate. Crime remains a national problem, particularly kidnappings-for-ransom of wealthy Chinese-Filipinos in which elements of the police are widely believed to be involved. The Philippines faces no serious external security threat, although the vulnerability of its claim on the disputed Spratly Islands in the South China Sea is a source of concern. The U.S. departure in November 1992 from Subic Bay, the last U.S. military base in the Philippines, shifted the emphasis in our bilateral relations to economic matters. The Philippines and the U.S. remain treaty allies, however, and security cooperation continues under our Mutual Defense Treaty. F. Performance Requirements/Incentives BOI-registered firms are entitled to the following general incentives: -- For registered new firms: pioneer firms receive a tax holiday for six years on income from commercial operation; for non-pioneer firms, the holiday period is four years; -- For registered expanding firms: exemption from taxes for three years on income from commercial operation (firms shall not be entitled to additional deductions for incremental labor expenses during this period); -- For the first five years from registration, an additional deduction for incremental labor expense (equivalent to 50 percent of the wages corresponding to the increment in the number of workers), if the project meets the benchmark capital equipment-to-workers ratio set by the BOI; -- Tax and duty exemption on imported capital equipment until December 1994; Tax credit on domestically sourced capital equipment (equivalent to the taxes and duties which would have been waived had the equipment been imported) until December 1994; (Note: Although capital equipment incentives granted to BOI-registered firms expire after 1994, Republic Act 7369 provides for the duty-free importation of certain capital equipment for a three-year period beginning January 1995. For that three-year period, Republic Act 7369 also allows tax credits for purchases of such equipment manufactured locally, equivalent to the duties which would have been waived for imported machinery. The privileges under Republic Act 7369 will be universally applied, i.e., whether a firm is registered for incentives with the BOI or not.) -- Within ten years from registration or commercial operation, exemption from taxes and duties on imported breeding stocks and genetic materials; Within ten years from registration, a tax credit on domestically sourced breeding stock and genetic materials (equivalent to the taxes and duties which would have been waived had these items been imported); and -- For a period not exceeding five years from registration (extendable for limited periods at the discretion of the BOI), the employment of foreign nationals in supervisory, technical or advisory positions. The positions of president, treasurer and general manager (or their equivalents) may be retained by foreign nationals beyond the stipulated period when the majority of capital stock is owned by foreign investors. In addition to the above-mentioned general incentives, export-oriented BOI-registered firms are entitled to the following: -- Tax credit for taxes and duties on raw materials. -- Exemption from taxes and duties on imported spare parts (for firms exporting at least 70 percent of production); -- Exemption from wharfage dues and from any export tax, duty, impost and fee for exports of non-traditional products; and -- Access to bonded manufacturing warehouses. Effective May 28, 1994, the VAT was expanded to include many more transactions and the rate was increased. These changes do not affect the incentives enjoyed by firms registered with the BOI prior to May 28 (the law's effective date). However, firms which register with the BOI on or after May 28 will be required to pay VAT on their capital equipment imports. They will no longer be eligible for tax credit on domestically sourced capital goods equivalent to the taxes which would have been waived for similar imported items. To encourage the regional dispersal of industries, BOI- registered enterprises which locate in less-developed areas are automatically entitled to pioneer incentives (which, i.a., allow up to 100 percent foreign ownership). In addition, they are entitled to deduct from taxable income an amount equivalent to 100 percent of outlays for infrastructure. Subject to certain conditions, Book III of the Omnibus Investment Code grants incentives for the establishment of regional or area headquarters in the Philippines. To qualify for the incentives, regional headquarters should limit their activities to supervising and acting as communications and coordination centers for their subsidiaries, affiliates and branches. They should not derive any income from Philippine sources or participate in the management of any subsidiary or branch office located in the Philippines. Incentives to the regional or area headquarters include exemption from income tax and from local licenses/fees/dues, and tax and duty-free importation of training and conference materials. Privileges extended to foreign executives include tax and duty-free importation of household effects, multiple entry visas (for the excutive, his/her spouse, and unmarried children under 21 years of age), as well as exemption from various types of government-required clearances and from fees under immigration and alien registration laws. Under Book IV of the Omnibus Code, multinationals establishing regional warehouses for the supply of spare parts, manufactured components or raw materials for their foreign markets also enjoy fiscal incentives on imports which are re-exported (imported merchandise intended for the Philippine market are subject to applicable duties and taxes). Performance Requirements: Performance requirements are established for individual investors at the time incentives are granted, and vary from project to project. Performance benchmarks are usually based on the proponent's approved project proposal. In general, the BOI and proponent agree on yearly production schedules and, for export-oriented firms, export performance targets. The BOI requires registered projects to maintain at least a 25 percent equity component. The BOI is not overly strict in enforcing individual export targets, provided that performance does not fall below the minimum requirement needed to qualify for BOI incentives. The BOI generally sets a 20 percent local value added benchmark when screening applications. The BOI is not strict in enforcing local value added ratios committed in the registrant's approved project proposal, provided that actual performance does not deviate significantly from other participants in the same activity. Currently, the BOI strictly specifies industry-wide local content requirements only for participants under the Government's progressive manufacturing program for automobiles. Current guidelines also specify that participants in this program generate, via exports, a certain ratio of the foreign exchange needed for import requirements. The Government's commitment under the last Uruguay Round (UR) accord includes phasing out certain trade-related investment measures (such as local content and trade/forex balancing requirements) within a five-year period from the agreement's ratification. G. Right to Private Ownership and Establishment The Government welcomes free enterprise, provides incentives to needed investments, and respects the private sector's right to freely acquire or dispose of its properties or business interests. Foreign investors, however, are subject to certain restrictions, such as nationality caps in specified areas and more stringent requirements to qualify for incentives in government-preferred activities (Refer to B1). Acquisitions, mergers and other combinations of business interests involving foreign equity must also comply with foreign nationality caps specified in the Constitution and other laws. There are few activities completely closed to private enterprise (rice importation, which is the monopoly of the Government's National Food Authority, is one such exception; imports of certain commodities -- such as explosives, certain drugs and narcotics, gambling paraphernalia -- are prohibited for various reasons of security, health and public morals). The Government generally does not prevent a private firm from entering the Philippine market based on size or market dominance per se, but reserves the right under the Constitution to interfere in cases where unfair trade practices (such as cartelization, price and production manipulation) adversely affect public interest. There are several industries in the Philippines dominated by a few large firms (i.e., beer, cigarettes, soft drinks and dairy products). Private and government-owned firms generally compete equally, although there are exceptions. Government-owned banks hold the bulk of public sector deposits, the National Food Authority is the sole importer of rice, and the country's government-owned fertilizer firm enjoys tariff protection for its products. There are also cases where existing regulations specifically favor Philippine over foreign-controlled firms, i.e., government procurement guidelines for rice, medicines and infrastructure projects. To demonstrate its resolve in getting government out of private sector activities, the Government launched a privatization program in 1986, targetting 130 state-owned corporations for sale. As of the first quarter of 1994, the Government's stake in about 82 firms had either been partially or fully disposed. There have been recent successes in the disposition of larger assets, including the privatization of 40 percent of Petron (one of the three oil companies in the Philippines, the other two being Caltex and Shell) to ARAMCO. Foreigners are welcome to buy into firms slated for privatization, subject to nationality caps specified in various laws. H. Protection of Property Rights The Philippine Government is a party to the Paris Convention for the Protection of Industrial Property, the Patent Cooperation Treaty, the Berne Convention for the Protection of Literary and Artistic Works, and is a member of the World Intellectual Property Organization. The Philippines is a party to the trade-related intellectual property rights (TRIPS) agreement as part of the Uruguay Round global trade agreement. The Philippines was moved from the U.S. Trade Representative's special 301 "priority" watch list to the "regular" watch list following an agreement signed in April 1993, in which the Government committed itself to significantly strengthen protection of intellectual property rights in the Philippines. Official responsibility for enforcing intellectual property right (IPR) laws is shared by a number of Philippine Government agencies, including the Department of Trade and Industry (through the Bureau of Patents, Trademarks and Technology Transfer); the Department of Finance's Customs Bureau as well as the Economic Intelligence and Investigation Bureau; the Department of Justice, local courts and police departments. In February 1993, President Ramos created the inter-agency oversight committee on intellectual property rights as the body charged with recommending, coordinating, enforcement oversight and program implementation. This committee is composed of representatives from the Trade and Justice Departments, the National Bureau of Investigation, the Videogram Regulatory Board (VRB), the Bureau of Customs, other pertinent government agencies and two private sector organizations. Administrative enforcement has improved through joint government and private sector efforts. However, when IPR disputes must be referred to the courts, enforcement is slower and less certain. Patents: Naturally occurring substances (plants or cells, for example) are not patentable. Licensing is required if, after two years from registration, the patented item is not being utilized in the Philippines on a commercial scale or if the domestic demand for the patented article is not being met to an adequate extent and on reasonable terms. Effective March 15, 1993, royalty payments not exceeding five percent of net sales will be granted automatic approval, provided the arrangement involves the transfer of technology. Royalty rates higher than five percent may be allowed in meritorious cases. The life of a patent ranges from five to seventeen years, depending on the type of patent registered. Inventions are protected for seventeen years. Utility model patents and industrial design patents are protected for five years, extendable for another two terms. While the Government has had little experience in granting protection for the lay-out design of semi-conductor chips, prospective registrants could seek protection under the Philippines' patent law. Trademarks: Trademark protection is granted for 20 years, extendable indefinitely for succeeding twenty-year terms. Every five years the trademark owner must file an affidavit of use or justified non-use to avoid cancellation of registration. Non-use of a mark should be for reasons totally beyond the control of a registrant. Government restrictions, such as import bans, constitute justified non-use. Current practice dictates that internationally well-known marks should not be denied protection because of non-registration or lack of use in the Philippines. Pending legislation seeks to incorporate this practice as a specific provision under the Philippines' IPR laws. Trademark protection is limited to the manufacturing or marketing of the specific class of goods applied for, and to products with a logical linkage to the protected mark (for example, trademark protection for a watch would extend to watch straps). Trademark counterfeiting is widespread and remains the most serious violation of intellectual property rights in the Philippines. Many well-known international trademarks are copied, including denim jeans, designer shirts, women's handbags, personal beauty and health care products, and auto parts. The U.S.-Philippine IPR agreement calls for amendments to the Philippine trademark law to provide protection for internationally well-known marks. Copyrights: Philippine law is overly broad in allowing the reproduction, adaptation or translation of published works without the authorization of the copyright owner. A Presidential Decree allows the reprinting of any textbook or reference book required by the curriculum and certified by a school registrar if the material is actually retailing at 250 pesos or above or, if not actually retailing, the foreign list price converts to 250 pesos or above. Video piracy is a problem, but the Motion Picture Export Association of America reports continuing cooperation with the Government's Videogram Regulatory Board. Computer software is pirated, prompting software owners to organize to protect their rights in the Philippines. More recent issues involve copyright infringement complaints against cable TV stations which retransmit copyrighted works without due authorization from or payment to the copyright owners. Trade Secrets: While there are no codified rules on the protection of trade secrets, existing civil and criminal statutes protect trade secrets and confidential information. I. Regulatory System: Laws and Procedures As noted throughout this report, over the past few years, the Philippines has taken several significant steps to reduce bureaucratic regulations and to foster competition. Still, the perception remains that to do business in the Philippines one must overcome substantial bureaucratic redtape. New reforms are aimed at further reducing the time needed to fulfill bureaucratic requirements. The Securities and Exchange Commission has instituted an "express lane" where documents are processed within twenty-four hours, the Board of Investment has set up a "one-stop-shop" which centralizes all the government agencies involved in registering BOI-preferred businesses. However, for all these reforms, considerable further reform and streamlining remains to be done. The Philippines has tax, labor, health and safety, environmental and other laws and policies with the aim of efficiently regulating industry and investment. The impact of these laws is skewed, however, by the inability of the government to effectively and uniformly enforce its laws. The selective enforcement of these policies often reduces their intended benefit to the country and is a risk of doing business for the foreign investor. J. Capital Markets and Portfolio Investment Domestic Capital Market: Longer-term commercial loans at relatively more attractive rates are generally available to more established borrowers with proven track records. The stock exchange provides an alternative source of long-term capital, although the Philippine securities market remains small and narrow in comparison with those in neighboring countries. The long-term bond market is underdeveloped and is not a major source of private capital. Venture capital corporations and government banks cater more readily to small and medium enterprises, but resources are limited. There are a number of special credit programs specifically intended for smaller borrowers. A "Magna Carta for Small Enterprises" requires both public and private lending institutions to set aside 5 to 10 percent of loanable funds for small borrowers for a six-year period which began in 1991. Peso Borrowings by Foreign Investors: Foreign investors (defined as partnerships or corporations with more than 40 percent foreign equity) may borrow pesos from the banking system, subject to certain debt-to-equity ratios which must be maintained for the term of the debt. Firms engaged in government-promoted activities (such as enterprises registered with the BOI and Export Processing Zones) are subject to a 60:40 debt-to-equity ratio; other manufacturing firms must not exceed a 55:45 ratio; and firms engaged in non-manufacturing activities are subject to a 50:50 debt-to-equity requirement. Foreign Borrowings: Public sector foreign currency borrowings from foreign creditors, offshore banking units (OBUs) or foreign currency deposit units (FCDUs) require Bangko Sentral approval. The following private sector loans should also be approved by and registered with the Bangko Sentral: government-guaranteed private sector debt; loans covered by foreign exchange guarantees issued by local commercial banks; loans obtained from FCDUs funded or collateralized by offshore loans or deposits; loans with maturities in excess of one year obtained by commercial banks and financial institutions for relending to the private or public sector; and other private sector loans if to be serviced using foreign exchange purchased from the banking system. The following loans do not require prior Bangko Sentral approval: private sector loans from FCDUs/offshore sources to be serviced using forex obtained from outside the banking system; short-term loans of private and public financial institutions for normal interbank transactions; short-term loans to the private sector in the form of export advances from overseas buyers; and, subject to certain provisions, short-term loans from FCDUs of private sector borrowers such as commodity and service exporters, producers/manufacturers, oil companies and public utility concerns. In approving foreign currency borrowings, the Bangko Sentral gives priority to government-promoted sectors such as export-oriented projects and to projects listed under the Government's Investment Priorities Plan and Medium-term Public Investment Program. Medium and long-term loans approved by the Bangko Sentral may be used to finance both foreign and local cost components of an eligible project, while short-term loans are to be used exclusively for foreign exchange requirements. Portfolio Investments: Foreigners may purchase public or privately-issued domestic securities, invest in money market instruments, and in peso savings and time deposits. Hostile Takeovers: Hostile takeovers are rare in the Philippines, and defenses such as stable shareholder or cross-shareholding arrangements are uncommon. The more common measure adopted by corporations to protect against hostile takeovers is to incorporate provisions in their by-laws declaring stockholders with majority ownership in competing firms as inelegible for election as directors. This measure is directed at all potential hostile takeovers, whether initiated by domestic or foreign parties. K. Bilateral Investment Agreements The Philippines has bilateral investment agreements with the following: People's Republic of China, United Kingdom, Northern Ireland, Italy, Netherlands, Spain, Korea and Vietnam. The general provisions of the bilateral agreements include reciprocal protection and non-discrimination; the free transfer of capital, payments and earnings; freedom from expropriation and nationalization; and recognition of the principle of subrogation. L. OPIC and Other Investment Insurance Programs The Philippines currently does not provide guarantees against losses due to inconvertibility of currency or damage caused by war. However, a full Overseas Private Investment Corporation (OPIC) agreement is in effect and U.S. investors may contract for coverage under this arrangement. As of 1993, active contracts in the Philippines for coverage against currency inconvertibility, expropriation and losses due to war/political violence accounted for over five percent of OPIC's worldwide exposure. The Philippines is a recent member of the Multilateral Investment Guaranty Agency (MIGA), which also provides coverage against non-commercial risks. Basic protection provided by MIGA include guarantees against currency inconvertibility and transfer restrictions, expropriation, war and civil disturbances, and contract repudiation by host country governments. M. Labor Labor Availability: The Philippine labor force is characterized by its relatively high level of education, youthfulness, versatility, and fluency in English. A key (if unorthodox) measure of these characteristics can be found in the two million Philippine "Overseas Contract Workers" (OCW's) who occupy jobs covering the skills spectrum in countries around the world. Their overseas employment is the consequence of job shortages at home and high demand abroad for qualified Philippine workers. Labor-Management Relations: General labor-management relations in the Philippines reflect the maturing understanding of both labor and management that economic success depends on mutual cooperation. The turmoil of the post-Marcos years has been replaced by an emphasis on dialogue, involving unions, employers, and government, and the trend of workdays lost to industrial disputes consequently has been steadily downward. Protecting Workers' Rights: Philippine laws provide a range of worker rights protections. Implementing legal guarantees, however, remains a problem. The central government's authority tends to wane in rural areas, and local officials do not always enforce laws that conflict with local vested interests. Wages: Legislation enacted in 1989 transferred wage-setting authority to tripartite regional wage boards, whose most recent round of wage scale reviews took place late in 1993. Acting on the basis of multiple and conflicting criteria, inadequate economic data, and sheer inexperience, the wage boards produced a confusing welter of orders (and exceptions). The highest current regional minimum wage is that of Metropolitan Manila (145 pesos) which, at current exchange rates, approximates $5.40/day. (The wage-setting authority of the boards is ill-defined and has been subject to court challenge.) Employment of Foreign Nationals: Given an acute shortage of job opportunities for Philippine nationals, the employment of foreigners is discouraged, unless they possess skills that are not widely available among Filipinos. N. Foreign Trade Zones/Free Ports Export Processing Zones: The Philippines has four government-run Export Processing Zones, located in Cavite, Bataan and Baguio City on Luzon Island, and Mactan in the Visayas (near Cebu). Investments in the export processing zones fall under the jurisdiction of the Export Processing Zone Authority (EPZA). There are about 250 registered companies in these EPZs, mostly involved in the manufacture and export of electronics, garments, rubber products, fabricated metals, plastics, electrical machinery, transport equipment and industrial chemicals. Ten other industrial sites have also been designated by EPZA as "special export processing zones" (in Cavite, Batangas, Laguna, Zambales and Tarlac on Luzon Island, and Leyte in the Visayas). This allows them to offer incentives similar to those available to regular EPZs. Seven of these are multiple firm EPZs (located mostly in the Cavite-Laguna-Batangas-Rizal-Quezon, or "Calabarzon", area), and the rest, single firm special EPZs located in strategic parts of the country. Book VI of the Omnibus Investment Code provides incentives for EPZ firms. Imports by EPZ enterprises are tax and duty-free. EPZ firms are also entitled to all other incentives granted to BOI-registered companies, plus additional benefits such as exemption from local taxes and licenses (with the exception of real estate taxes). EPZA-registered firms are required to export 100 percent of their production, although up to 30 percent may be sold domestically with prior EPZA approval and payment of applicable taxes and import duties. Subic Special Economic and Freeport Zone: Republic Act 7227 ("Bases Conversion and Development Act of 1992") provided the legal framework for the conversion of the former U.S. naval reservation and adjacent areas in Subic, Zambales into a self-sustaining industrial, commercial and investment center. Infrastructure left by the U.S. Navy includes an airport, ship repair facilities, public utilities (power plants, water and sewerage systems), buildings (warehousing, offices, sports and medical facilities) and residential amenities (housing, schools and recreational facilities). Overall responsibility for developing the Subic Base Freeport (SBF), including the acceptance of local and foreign investors, lies with the Subic Bay Metropolitan Authority (SBMA). Basic incentives for SBF-registered firms include tax and duty-free importation of raw materials, supplies and capital equipment. In lieu of paying regular national internal revenue or local taxes, SBF enterprises pay a tax of 5 percent on gross income earned. To qualify for tax incentives, SBF-registered firms must export at least 70 percent of production. Articles for household and personal use may also be imported by SBF residents tax and duty-free. O. Capital Outflow Policy Under more liberal foreign exchange regulations introduced in 1992, capital investments outside the Philippines by Philippine residents no longer require prior Bangko Sentral approval in each of the following cases: a) the investments are funded by withdrawals from foreign currency deposit units; b) the funds to be invested are not sourced from the domestic banking system; or c) if sourced from the banking sytem, the funds to be invested should be less than $ 1 million per investor per year. P. Major Foreign Investors The following list was generated by identifying companies with foreign investments included in the Philippines' top 1,000 Corporations listing in terms of gross revenue for 1992. Those corporations were then ranked in descending order in terms of total stockholders' equity per balance sheet as of 1992. The top 40 companies, their respective stockholders' equity and the nationality of the foreign participant are listed below: Largest Multinationals in the Philippines (Amounts in $ Millions) A/ Corporation Nationality Equity 1. Pilipinas Shell Petroleum Corp. Dutch/U.K. 485.0 2. Phil. American Life Insurance B/ American 203.2 3. Coca-Cola Bottlers Phil., Inc. American 197.6 4. Matsushita Electric Phil. Japanese 171.3 5. Caltex (Phil.), Inc. American 144.6 6. Nestle Phil. Inc. Swiss 92.5 7. Phil. Petroleum Corp. C/ British 78.1 8. Wyeth-Suaco Laboratories American 64.2 9. Procter and Gamble Phil., Inc. American 62.3 10. Uniden Phil., Inc. Japanese 61.0 11. Eastern Telecom Phil. British 60.6 12. Del Monte Phil., Inc. Mexican 58.2 13. Republic-Asahi Glass Corp. Japanese 58.2 14. Phil. Automotive Mfg. Corp. D/ Japanese 54.3 15. Phil. Refining Co., Inc. E/ Dutch 45.3 16. Bank of Tokyo, Ltd. Japanese 45.0 17. Sun Life Assurance Co. Canadian 44.6 18. Texas Instruments (Phil.) American 44.5 19. Philtread Tire and Rubber F/ American 41.4 20. Granexport Mfg. Corp. American 37.9 21. Toyota Motor Phil. Corp. Japanese 37.4 22. Colgate-Palmolive Phil. American 37.3 23. Goodyear Phil., Inc. American 36.8 24. Citibank, N.A. American 36.5 25. Motorola Phil., Inc. American 35.7 26. Reynolds Phil. Corp. American 35.2 27. Phil. Sinter Corp. G/ Japanese 34.2 28. Consolidated Industrial Gases H/ American 33.9 29. Kimberly Clark Phil. American 33.7 30. Rohm Electronics Phil., Inc. Japanese 32.3 31. Armco-Marsteel Alloy Corp. American 31.7 32. Abbott Laboratories (Phil.) American 31.6 33. Dole Phil., Inc. American 31.0 34. Bank of Commerce I/ American 30.4 35. Jardine Davies, Inc. British 30.1 36. Amkor/Anam Pilipinas Inc. Amer/Korean 29.0 37. Intel Phil. Mfg., Inc. American 28.1 38. IBM Phil., Inc. American 25.5 39. Phil. Global Communications J/ American 25.0 40. California Mfg. Co., Inc. American 24.9 A/ Original values given in pesos. Converted to U.S. dollars based on 1992 average peso/$ rate of 25.512. B/ Foreign Investment by Shell Petroleum Co. C/ Foreign investment by American Insurance Co. D/ Foreign investment by Mitsubishi Motors E/ Foreign investment by Mavibel NV F/ Foreign investment by Firestone Tire and Rubber Co. G/ Foreign investment by Kawasaki Steel Corp. H/ Foreign investment by Commonwealth Industrial Gases I/ Foreign investment by Bank of Boston; sold in April, 1994 J/ Foreign investment by RCA Global Communications