MANILA, Philippines - Finance Secretary Cesar Purisima talks with ANC's Coco Alcuaz on first-quarter fiscal performance, his differences with the stock exchange on REITs and the stock transfer tax, and the pace of the government's Public-Private Partnership program.
On first quarter budget performance:
We're very proud of what we've accomplished so far, our revenues are up on average 21.5%. Our expenses are also up if you remove interest. Our interest expenses are down. This is partly because of the low interest environment but also the swaps we did. We retired higher-cost debt and replaced it with lower-cost debt. So we have an aggressive liability management program to lengthen our
maturities as well as reduce our costs, reduce the bunching ups but at the same time, we have an aggressive revenue enhancement program. I think we're gaining momentum.
On whether the full-year deficit can be narrower than target:
Our goal is 3.2% (of GDP) and I don't think we'd like to veer away very much from that although we can actually go way below. At our stage of development, we still need to spend on infrastructure, on social services and therefore when there's extra money Secretary Butch Abad and I are coordinating very closely. We will push for additional investment in infrastructure, additional services for our people. That's the reason why our target is not to balance the budget but really just bring it down to 2% of GDP because at that level even though may deficit we can continue to reduce debt in relation to GDP.
On whether they'll spend savings rather than narrow the deficit more than planned:
Yes, because we believe that we need to improve infrastructure in order to attract more investors, have a larger tax base, have more jobs for our people, increase the economic activity. We're still a developing country and therefore we need to invest in our economy.
On whether moving SEC to DOF from DTI will help in dealing with the PSE, with whom he is debating some tax-related issues:
The PSE is an organization that we're working closely with. I meet regularly with the Capital Markets Development Council of which President Sicat (PSE President Hans Sicat) is a part and he actually agrees with me that the amount of shares available for investors is very limited and therefore there's really a need for the companies to meet the minimum required by the PSE, which is 10%, below
the 20% original listing requirement. So we agreed that if they don't meet the timetable set by the PSE themselves, which is December 2011, then we'll talk about how to deal with those companies that do not meet the minimum float requirements. When you're listed, you get incentive, in effect. You get 1/4 percent final tax on transactions involving your shares when normally, that's subject to capital gains. But if you're not meeting the minimum requirement, then there's the question of whether you're really publicly listed or not.
On whether there's legal basis for withholding the capital gains exemption from listed companies:
If you look at it, the law is even stricter. When they go public for the first time they're required to sell 20% to the public and it's their going public that entitles them to this incentive so if they don't meet the requirement, already then there's a question if they're still entitled to that incentive. We realize the administrative issues and therefore we're not going to do anything unilaterally. We will work closely with the PSE. We have the same interest of developing our capital markets and making sure it's efficient, that we attract foreign investors as well as domestic investors.
On whether the government can make PSE listing rules the basis for withholding the exemption from capital gains tax:
The relationship is very clear. All stock transaction are subject to capital gains, unless you're listed, so the link's established.
On whether the government wants to impose VAT on the transfer of assets to real estate investment trusts, offsetting the exemptions granted by the REIT law:
The law is silent on it and in fact we're consulting with legal experts in the country and there are many opinions. More think if the law is silent the general law will apply, which is that it is subject to VAT, and therefore these are things that we need to resolve. I'm a big believer in the real estate investment trusts as a way of recycling capital and accelerate development of commercial buildings, even schools, and really accelerate economic growth in our country. That's why, for example, in the US, you have small hotels before like Marriott that suddenly is worldwide. They took advantage of REIT rules in the US. In their case, they sold 95% of their assets, just retained management control, because that's how you maximize recycling. Now If you're only going to sell 30%, there's very little recycling. You can do that now through the stock exchange. Without getting the tax incentive.
On whether taxing the transfer of assets into a REIT will kill incentives in the REIT law:
It definitely will be a friction but i don't think it will kill. As your know the VAT works on an input-output basis so if you have an input then you can offset it with an output and therefore that should reduce the friction. But definitely it will be a friction and that's why we're working closely with the Capital Markets Development Council in trying to resolve this issue. In fact, I've asked them to take the lead. We're going to meet next month, in May, and we'll update you.
On how many percent of REITs should be owned by public:
I've left it to the committee led by Mr. Ed Francisco of BDO (Eduardo Francisco, BDO Capital president) who's now working with the group. Clearly, I believe the REIT must live up to the spirit of the law: that's capital recycling. And therefore, as much as we can, in substance, reflect that in the IRR (internal rules and regulations), that would be ideal for our country. Because remember, we're giving up taxes so we must gain the benefit and the benefit is the recycling. If there's no recycling, we gave up tax, we just lost revenue.
On whether developer can own majority of REITs:
I think at the start, given the realities of the market, the market may not be able to absorb everything. But there must be a program to accelerate the recycling of capital because the logic for the creation of the REIT is not the elimination of income tax. It is the recylcing of the capital. The elimination of the income tax is just to give them the incentive to recycle capital. If they get the incentive, and they don't recycle, then, ang taong bayan ang lugi. Ikaw ang lugi. (It's the people, you, who are short-changed.)
On how many percent of REITs should be publicly owned over how many years:
I have stated my position before publicly so I don't want to state a position now until I hear from the committee. (He has said his position is 67% in three years.) I don't want to preempt their work because basically we assigned it to them so they can come back with an objective view of the situation and then make a suggestion. So right now I have open ears, open mind and I'd like to make sure that we have a capital market is healthy, that is comparable to our neighboring countries, that encourages capital formation, capital recycling. At the same time also encourages the generation of taxes. We can't have a situation where it's only business that wins. If we don't have taxes, we can't help the poor. The key challenge of any country is to alleviate the situation of the poor, reduce poverty.
On when the first public-private partnership project be bidded out and how many will be offered this year:
The first one was already announced and they're already in discussions with the 45 that have expressed interest for the first one and I think that bids will be required by July and results will be by July also, or within a month. So I think they'll be given four months to prepare for the bid, then there's going to be a bid date sometime in July. We hope to get a minimum of 10 projects in a state ready for bidding.
On why the government hasn't had actual biddings in the first half, as projected earlier:
One of the things that we changed is the focus on solicited (bids). In the past, anyone, any Tom, Dick and Harry can go to the government and make a proposal and they would be the one doing the feasibility study so the government is normally at a handicap in those situations: the private sector did their homework, we didn't do the homework. One of the changes we've done: we will do the homework, we're doing the feasibility study and therefore one of the things that's taking time is the feasibility study. But we assure everyone that it's on track. We're confident we will have 10 in a state ready for bidding and several completely done and then next year at least 10 more, in fact, maybe more. There's an outside chance that in 2011, we'll get the Department of Education and the Department of Health to bid out some lesser projects in size.
On whether he was surprised with how difficult it is to get a project ready for bidding:
Just like in any plan, you have to continue to make adjustments. You never see the future perfectly. So the challenge really is to make sure you make the right adjustments so that you can take advantage of the situation you're in. I'm really very happy. All the departments are working hard, working well together. We're confident we're right on track.