SC decision on construction regulation: A win for competition advocacy

Recently, while most of us have been glued on the ubiquitous news of the pandemic, competition advocacy quietly chalked up a milestone in the country. This came via a gamechanging ruling of the Supreme Court on the Philippine Contractors Accreditation Board v. Manila Water. The SC has deemed unconstitutional PCAB’S nationality distinction in the classification of contractors applying for licenses.

To give context, prior to the SC decision, PCAB, the authorized licensing body, issues two types of licenses to contractors—regular and special licenses. Regular licenses are given to local firms, authorizing them to engage in several contracting activities for a year. On the other hand, foreign firms or companies with more than 40% foreign ownership may only obtain a special license and must have a separate license for each project. The Philippine Competition Commission (PCC) estimates that this policy increases the latter’s application expenses by 12 times.

Recognizing this policy’s negative impact on the competition landscape of the construction industry, PCC presented itself as amicus curiae (‘friend of the court’) to the SC in 2016 as it heard the above-mentioned case. In its brief, PCC argued that the nationality-based restriction significantly hinders entry of players in the construction industry and that it violates the State’s policy against unfair competition as enshrined in the Constitution. The high court concurred with PCC’S arguments, thus its ruling against PCAB.

Why is this ruling of importance to the country?

The construction sector occupies a significant part in the Philippine economy. It employed more than 2.71 million Filipinos in 2015, representing 7 percent of total employment in the country. Its gross value increased by 40 percent between 2010 and 2015. Public construction grew by 8 percent, while private construction swelled by a whopping 58 percent!

Despite the industry’s rapid growth, out of 1,600 special licenses issued in 2015, only 20 were to foreign firms and 4 to joint ventures or consortiums with foreign participation. PCC also noted that only a few new licenses were issued, and that three-fourths of the total licenses issued were merely renewals or amendments. These observations imply that the construction industry has remained structurally unchanged and insulated from the dynamics of global competition. When we examine the World Bank’s Product Market Regulation indicators, we find that often, stateenabled restrictions or policies are misinformed and lead to unintended consequences that distort the incentives of players in the market. It is highly likely that the unequal treatment has been discouraging the entry of new players into the construction industry.

Comparative data show that restrictive policies translate to lower levels of foreign direct investment inflows. More restrictive countries such as the Philippines and Indonesia have lower FDI as a percentage of GDP compared with more liberal ones

like Vietnam and Malaysia. Particularly in 2014, FDI in the Philippine construction industry was barely 1 percent of the GDP. This not only dampens capital accumulation but also hampers technology transfer, sharing of best practices, and access to international networks, which benefit the construction industry.

Already, the Philippines suffers from significantly higher construction costs relative to its comparable peers in the Asean. Arcadis Philippines Inc., a design and consultancy firm, reports that in 2020 the average construction costs in Manila are higher than in Bangkok, Ho Chi Minh, and Kuala Lumpur by 17 percent to 145 percent, depending on the type of structure. This is likely brought about by having fewer, less innovative players in the market than what is optimal, as well as the ineffective weeding out of inefficient firms.

The high prices hinder the construction sector from maximizing the potential economic activities it could generate both as provider of inputs to production and as consumer of services and products from other sectors, such as electricity, telecommunications, transport, and logistics. In this regard, the SC ruling is expected to yield significant positive spillover effects within and across sectors.

Moreover, the SC ruling acquires tremendous significance in view of the national government’s ‘Build, Build, Build’ program. By further enabling foreign participation in the construction sector, more likely every peso that goes into infrastructure projects becomes more efficiently spent. In other words, Filipinos obtain more value from taxpayers’ money.

Healthy market competition entails fair participation of foreign players, as these firms have the potential to increase competitive pressure on domestic incumbents and the capability to bring in new technology and improved business processes. It cannot be overemphasized—more competition provides consumers a wider access to cheaper and higher quality goods and services.

In policy design, it is paramount for the whole government architecture to be guided by competition principles. Having a culture of competition helps us achieve our shared goal of inclusive growth and sustainable development.

Dr. Arsenio M. Balisacan is the chairman of the Philippine Competition Commission. Prior to his appointment to the Commission, he served as socioeconomic planning secretary and, concurrently, director general of the National Economic and Development Authority. He also served as dean of the School of Economics in UP Diliman and directorchief executive of SEARCA.