Professional Documents
Culture Documents
Catching up
Page 29
The Philippine economy is seeing rapid, broadbased growth as BPO and rising remittances
from overseas workers drive consumer industries and construction. Real growth, despite
slowing in 2014 to 6.1%, still outdid regional
peers and is expected to hold near 6% for the
rest of the decade. Infrastructure bottlenecks
are a key challenge as the government pushes
to aid sectors with potential in outlying regions.
BANKING
67 Positives abound: Sector expansion continues as
SNAPSHOT
The Philippines in figures
COUNTRY PROFILE
79
14
16
17
22
26
CAPITAL MARKETS
82 Climbing higher: The market shows a strong
Exchange
88 Interview: Eduardo V Francisco, President, BDO
ECONOMY
29 Catching up: There are signs that the recent high
Department of Finance
36 Viewpoint: Ramon R del Rosario Jr, Chairman,
37
39
42
44
89
90
91
92
92
94
INSURANCE
96 Steady through the storm: The industry expands
ISBN 978-1-910068-26-7
Editor-in-Chief: Andrew Jeffreys
Managing Editor, Asia: Paulius
Kuncinas
Editorial Manager: Rodrigo Diaz
Group Managing Editor: Alistair Taylor
Chief Sub-Editor: Barbara Isenberg
Deputy Chief Sub-Editor: Martin
Stegman
Senior Sub-Editor: Jennie Patterson
Web Editor: Lorraine Turner
Sub-editors: Usman Ahmedani,
Abraham Armstrong, Danya Chudacoff,
Sean Cox, Karla Green, Sam Inglis,
Krystell Jimenez, Laura Nelson
Contributing Sub-editor: Miia
Bogdanoff
Analysts: Jon Gorvett, Tom Warner,
Paige Aarhus, Joe Wilcox, Greg Harris
Senior Editorial Researcher: Susan
Manolu
Editorial Researchers: Sara Costa, Billy
Fitzherbert, Souhir Mzali, Jenna
Oelschlegel, Teresa Meoni
Creative Director: Yonca Ergin
Art Editor: Meltem Muzmuz
Graphic Assistants: Glhan Atba,
Arzu imen
Illustrations: Shi-Ji Liang
Photographer: Mourad Hammami
Additional Photography: Ricardo
Antunes
Production Manager: Selin Bolu
Operations & Administration Manager:
Burin Ilgaz
Logistics & Distribution Coordinator:
Esra Sezgin
Logistics Executive: znur Usta
TOURISM
Department of Tourism
143 Looking up: Increasing connectivity and
ENERGY
104 Watts next?: With oil production set to remain
BPO
188 The multiplier effect: The sector creates jobs and
Global
193 Going to the countryside: BPO firms are
TELECOMS & IT
196 Keeping up with expansion: Demand and
AGRICULTURE
210 On the right track: Several segments show
HEALTH
220 Onwards and upwards: The universal health care
On the up
Page 150
Government spending on public infrastructure projects will rise to 4.1% in 2015
and 5% in 2016, with improvements focusing on the road network. With vehicle
ownership increasing by 29% in 2014,
urban congestion remains a priority. Meanwhile, the development of roll-on/roll-off
ferry services will provide an alternative
to long-distance, inter-island shipping.
Thriller in Manila
Page 170
Making up around one-fifth of GDP and
7% of employment, the construction and
real estate sector has expanded rapidly,
spurred by growth in remittances, inbound
investments, tourist arrivals and state
infrastructure spending. Big-ticket and
strategic PPP projects are being awarded, while positive economic indicators
have motivated banks to finance them.
EDUCATION
232 Change for good: The government works to
MINING
244 Waiting game: Murky regulatory environment
LEGAL FRAMEWORK
SyCip Salazar Hernandez & Gatmaitan
254 By the law: Important legal and regulatory
developments
256 Interview: Rafael A Morales, Managing Partner,
TAX
Punongbayan & Araullo
259 In detail: A look at the key elements of the tax
regime
264 Interview: Marivic C Espao, Chairperson and
CEO, Punongbayan & Araullo
THE GUIDE
266 An enchanted land: There is something to suit all
SNAPSHOT
10
80
6
4
2
0
64
48
32
16
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Exports
SOURCE: Philippines Statistics Authority
Imports
05 06 07 08 09 10 11 12 13 14*
Revenues
1. Accenture
32.43
19.83
13.06
11.79
5. Telephilippines
8.72
8.08
7. Hewlett-Packard
7.08
150
40
120
90
60
30
0
12 12 12 12 13 13 13 13 14 14 14 14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
www.oxfordbusinessgroup.com/country/philippines-2015
32
24
16
SOURCE: ITU
SOURCE: NSCB
8
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
SNAPSHOT
2000
1600
1200
2014
2015
2016
2017
12,634.06
14,069.03
15,432.05
16,929.27
126,496.31 138,716.69
SOURCE: NSCB
400
21.1
20.0
21.4
21.9
22.3
22.6
23.5
23.4
06
07
08
09
10
11
12
13
Life
600
400
200
0
2012
2013
24.2
Japan
22.3
Others
11.8
Singapore
11.4
US
9.1
Netherlands
7.6
Germany
UK
Australia
3.5
7.977
8.107
6.427
6.528
6.057
5.974
6.8
6.8
6.7
6.6
2,404.54
2,637.96
2,899.80
3,188.54
18.865
18.75
18.791
18.834
2,447.92
2,778.28
3,060.49
3,363.08
19.205
19.748
19.832
19.865
-43.384
-140.322
-160.697
-174.547
-0.34
-0.997
-1.041
-1.031
4,623.11
4,769.15
4,945.74
5,124.28
36.271
33.898
32.048
30.269
9.184
8.548
7.636
6.336
3.17
2.588
2.068
1.535
2011-12
2014 Q3
3.5
8.91
Non-life
800
3.9
8.032
4.1
Q1
9.6
Q2
8.3
2012-13
Q1
9.2
Q2
8.8
Q3
Q4
7.1
Q3
9.4
7.7
Q4
Q1
7.9
9.7
Q1
8.7
Q2
8.1
Q2
9.8
Q3
9.9
Q3
8.9
Q4
9.4
Q4
10
2013-14
SOURCE: NSCB
2.0
1.5
2.7
SOURCE: NCSB
1.0
SOURCE: BSP
05
149,172.27 160,436.20
800
0.5
0.0
15
Mar.
2013
Jun.
2013
Sept.
2013
Dec.
2013
Mar.
2014
Jun.
2014
Sept.
2014
Dec.
2014
12
Location
Makati CBD
SOURCE: PSE
6
3
0
Rockwell
End-2013
2014F
2015F
2016F
2017F
Total
17,656
454
4608
2017
1485
26,220
3718
441
346
4505
Fort Bonifacio
17,585
2222
5125
4895
2979
32,806
Ortigas
18,188
11,921
1711
2756
1227
573
Eastwood
6830
718
988
8536
Total
57,710
5546
12,489
9127
5383
90,255
SOURCE: Colliers
Revenues
11
Country Profile
Efforts to stamp out corruption by current government
Presidential elections due to take place in 2016
Around 12m Filipinos presently live and work overseas
Reforms resulted in upgrades to countrys credit rating
12
Got to be real
With its favourable demographic profile and improving governance,
the Philippines is a market that investors should watch closely
13
The Philippines is the worlds 12th-most-populous country with an estimated 101.2m people as of 2014
14
Avenues of reform
OBG talks to President Benigno Aquino III
How can the Philippines institutionalise ongoing
reforms and good governance efforts beyond 2015?
AQUINO: From the moment we stepped into office, our
goal was to change the face of the Philippine government and show our countrymen what it is like to have
a government that truly works for them. This is, after
all, the key to ensuring the permanence of our efforts,
and is why, from day one, our administration has worked
to enact and accelerate reform. One can already see
the profound effect of our efforts in every sector.
The Department of Public Works and Highways, for
instance, has long been known as a hotbed of corruption and crooked contracts. Today, under the leadership of Secretary Rogelio Singson, it has become one
of the best-performing agencies in government. Secretary Singsons strategy was simple: the five Rs. They
implement the right projects, built by the right people,
for the right quality and the right price, to be finished
right on time, if not earlier. Through this, they have
been successful in rehabilitating and expanding our critical infrastructure in a manner that is both quick and
efficient, all while saving the government P39bn
($877m) as of October 2014.
One can also look at how we undertook large-scale
reform of our Bureau of Customs, another agency that
was reputed to be among the most corrupt. We formed
offices tasked with optimising and modernising Customs policies. We gave the agency a clean start by
appointing a new commissioner, six new deputy commissioners and 40 other individuals to enact our reforms
for the agency. We sent all employees back to where
they were supposed to work, removing inefficient and
suspicious practices, such as security guards and warehousemen acting as cashiers or examiners. Results
were almost instantaneous. From January to November of 2014, collections have increased by 16% compared to the same period in 2013.
We have also taken measures to spend taxpayers
money more wisely. We have implemented a zero-based
budgeting system, which ensures that all state projects
www.oxfordbusinessgroup.com/country/philippines-2015
15
16
An alliance to last
US President Barack Obama on the signing of the Enhanced Defence
Cooperation Agreement with the Republic of the Philippines
I would like to reaffirm the enduring alliance between
the Philippines and the US. I thank President Aquino
for his partnership and the deeper ties that we have
forged. I am especially proud to be here as we remember one of the defining moments of our history, the
70th anniversary of the battle of Leyte during the Second World War and the beginning of the liberation of
the Philippines. Together, Filipinos and Americans put
up a heroic defence, at Bataan and Corregidor. Together, they endured the agony of the death marches and
the horror of the prisoner of war camps. Many never
made it out. In those years of occupation, Filipino resistance fighters kept up the struggle and hundreds of thousands of Filipinos fought under the US flag.
I see the spirit of these veterans their strength, their
solidarity in you as well when you train and exercise
together to stay ready for the future, when our special
forces advise and assist our Filipino partners in their
fight against terrorism, and when you respond to crises
together, as you did after Hurricane Haiyan. Along with
your civilian partners, you rushed into the disaster
zone, pulled people from the rubble, and delivered
food and medicine. You showed what friends can do
when we take care of each other. During my visit, President Aquino and I agreed to begin a new chapter in
our alliance. Under our new agreement, US forces can
begin rotating through Philippine airfields and ports.
We will train and exercise together more to bring our
militaries even closer, and to support your efforts to
strengthen your armed forces. We will improve our
ability to respond even faster to disasters like Haiyan.
Deepening our alliance is part of our broader vision
for the Asia Pacific. We believe that nations and peoples have the right to live in security and peace, and to
have their sovereignty and territorial integrity respected. We believe that international law must be upheld,
that freedom of navigation must be preserved and
commerce must not be impeded. We believe that disputes must be resolved peacefully and not by intimidation or force. That is what our nations stand for. That
www.oxfordbusinessgroup.com/country/philippines-2015
17
Ready to vote
As the Philippines gears up for elections in 2016, voters are keenly
discussing the major issues of the day
With presidential, congressional and local elections
all scheduled for next year, 2015 looks set to be a
time of heated political debate in the Philippines.
Issues such as constitutional reform, good governance and the perennial battle against corruption are
likely to dominate discussion, alongside continued disagreements over how best to share the proceeds of
economic growth. Meanwhile, recent advances in
ensuring internal stability, following the signing of a
peace agreement with militant rebels in the southern region of Mindanao, have come against a background of growing international tension with Beijing
over disputed sections of the South China Sea (known
locally as the West Philippine Sea).
2015 is also set to mark the beginning of the ASEAN
Economic Community, with the Philippines playing an
integral role in the foundation of this ambitious
regional venture. Other international trade negotiations, such as the Trans-Pacific Partnership, as well
as a host of other regional agreements, are also likely to occupy minds in Manila. While none of these
issues is without its various controversies and disagreements, on one point there is general agreement: that the Philippines is today a more politically and economically secure country than it has been
for many years, playing an increasingly influential
role in regional and international affairs.
UNITY & DIVERSITY: An archipelago consisting of
some 7107 islands, the Philippines fragmented geography has contributed to a history characterised by
ethnic, religious and cultural diversity. Waves of settlement have been traced back some 67,000 years,
with the country ruled over time by a range of maritime kingdoms, rajahnates, sultanates and empires.
By the time of the arrival of Portuguese explorer Ferdinand Magellans Spanish expedition in 1521, Islam
was, alongside Hinduism and various native religions,
firmly established in the Sultanate of Maguindanao,
which ruled Mindanao, and the Sultanate of Sulu,
which ruled Palawan and much of the north-east
coast of Borneo. Further north, the Kingdom of Tondo was based around Manila, while two other key
states were the Rajahnates of Butuan and Cebu. In
the Visayas, the Confederation of Madja-as was founded by exiles from the Sumatran Srivijaya Empire.
The long period of Spanish colonisation began in
earnest in 1565, with the arrival of Miguel Lopez de
Legazpi from Mexico. In 1571, Manila was occupied
and established as the capital of the Spanish East
Indies. In subsequent years, the remainder of the
archipelago was conquered by the Spanish, with many
of the inhabitants converting to Catholicism. Even so,
right into the late 19th century, Spanish troops continued to fight against the Moros the Muslim inhabitants of Mindanao and the islands of the Sulu Sea
in an effort to fully subjugate those territories.
FROM WAR TO FREEDOM: That conflict was interrupted by the outbreak of the Philippine Revolution
in 1896 and the Spanish-American War of 1898. Joining the side of the revolutionaries, led by Emilio
Aguinaldo and Mariano Alvarez, US troops landed in
the Philippines to help defeat the Spanish. The subsequent Treaty of Paris in 1898 ended centuries of
Spanish rule, yet did not end the conflict, as the US
moved to establish its own control over the country,
sparking the 1899 Philippine-American War.
The first, independent Philippine Republic was thus
defeated and US colonial rule established over the
country. While the Philippines would not attain independence until 1946, the US had promised it eventual independence from 1916 onwards, establishing
the Commonwealth of the Philippines in 1933 as a
transitional stage towards this end. However, the Second World War interrupted this process, and the
islands were occupied by the Japanese following a brutal military campaign. US troops re-occupied the
Philippines in 1945, although much of Manila was
destroyed in the fierce fighting. After the war,
the Philippines won independence in 1946, and
Manuel Roxas became the states first elected president.
THE REPORT The Philippines 2015
18
21
The next presidential, congressional and local elections are all scheduled to take place in 2016
22
in international governance and competitiveness surveys. Those indices from the World Banks Ease of
Doing Business Survey to the World Economic Forums
(WEF) Global Competitiveness Index tell a story of
steady improvement. Even so, the Philippines continues to lag behind its ASEAN neighbours. In both the
World Bank and WEF surveys, for instance, it ranked
only sixth out of 10 ASEAN states. Indeed, when it came
to indices related to innovation and logistics its overall performance had actually declined.
TACKLING CORRUPTION: Most importantly, corruption remains an urgent obstacle to the governments
agenda. As President Aquino himself put it in his 2013
State of the Nation address, in reference to the notorious Bureau of Customs, instead of collecting the
proper taxes and preventing contraband from entering the country, they are heedlessly permitting the
smuggling of goods and even drugs, arms and items
of a similar nature into our country. The public shaming of the service underlined Aquinos determination
to reform the agency, widely blamed for hampering the
growth of trade and investment in the Philippines.
Demonstrating his resolve, the president replaced
the agencys top leadership, redeployed intelligence staff
and restructured the organisation to limit opportunities for graft. The authorities also initiated investigations into those suspected of illegal dealings.
At the same time, the authorities introduced a series
of efficiency initiatives designed to streamline import
23
24
1990s, but successive governments have found it difficult to pass a competition law. As a result, the Philippines remains the only founding member of ASEAN
without clear laws to counter unfair trade practices and
monopolistic activities. Given that such a legal framework forms part of the Philippines commitments under
the AEC, President Aquino has championed proposals
for a Fair Competition Law. However, as political allegiances begin to shift in the run-up to the 2016 elections it is by no means certain the bill will become law.
Further to this, the 1987 Constitution sets out strict
limits on foreign participation in the economy the negative list includes mass media, engineering and professions such as medicine with the cap set at 40% in
many other industries. The Philippines attracted just
$3.86bn of foreign direct investment (FDI) in 2013, a
tiny fraction of the $122bn invested in the ASEAN
region as a whole. Despite these challenges, Aquino has
had some success in bringing down barriers, for instance
passing legislation to enable foreign investment in the
domestic banking sector in the middle of 2014. There
has however been little progress in opening other sectors to foreign investors.
ENERGY WOES: Although the countrys electricity
network was privatised after a major crisis in the 1990s,
the law was not fully implemented, Prices remain high
and service is erratic. Power prices are among the most
expensive in Asia at $0.22 per kWh. Under the Philippine Energy Plan 2012-30, capacity is expected to rise
to 25,800 MW by 2030, from 16,250 MW in 2012, but
demand is projected to rise to 29,330 MW over the same
period. The extra capacity will require major improvements in infrastructure for distribution and transmission. At present, power grids across the archipelago are
not connected, according to business advisory firm
KPMG. It estimates the energy sector will require investment amounting to $25bn by 2030. The firm notes that
Philippine power companies which are mostly drawn
from the countrys dominant conglomerates could
learn from the examples of more competitive markets
elsewhere. Manilas dominant power company Meralco, for instance, has a 70% stake in an 800-MW combined cycle gas plant in Singapore in a joint venture with
Hong Kongs First Pacific.
REGIONAL CONNECTIONS: The Brunei-IndonesiaMalaysia-Philippines East ASEAN Growth Area (BIMPEAGA) is designed to deepen cooperation between the
neighbouring regions of the four ASEAN nations and
to share natural resources in addition to infrastructure.
The Malaysian state of Sarawak has invested heavily in
controversial hydropower in the past two decades and
is likely to have far more electricity than it needs.
The BIMP-EAGA has already had some success in
improving connectivity. A more direct shipping route
between the Mindanao cities of Davao and General Santos with Manado in Indonesia began operations on
August 31 2014 a few months later than anticipated reducing costs by more than half and cutting the
journey time by a third. This is expected to be useful
for the Philippines food exporters. Authorities are also
looking at a route connecting Palawan with Sabah and
www.oxfordbusinessgroup.com/country/philippines-2015
26
27
Economy
Rapid, broad-based growth continuing apace
Government looking to create PPPs in infrastructure
Improved emergency services to help development
A large qualified workforce key to continued expansion
New impetus to use growth to address wealth inequality
ECONOMY OVERVIEW
29
Catching up
There are signs that the recent high growth rates may be sustainable
The Philippine economy continues to enjoy a period of
rapid, broad-based growth as the business process outsourcing (BPO) sector and growing remittances from
overseas workers drive growth in consumer-oriented
industries and construction. Although real growth decelerated in 2014 to 6.1%, it remained higher than Southeast Asian peers, and it is expected to remain near 6%
for the remainder of the decade.
The economy is overly concentrated in the Metro
Manila region, and major challenges lie ahead in overcoming long-standing infrastructure bottlenecks, and
developing stronger energy and manufacturing sectors.
Yet the government is increasing its efforts to spread
manufacturing and BPO growth across the country,
and clear obstacles to developing other sectors where
outlying regions have strong potential.
LAGGARD TO LEADER: The Philippines emergence as
a growth leader has been building gradually since the
1990s, after a long period of low growth and political
upheaval during which Philippine economists began to
refer to their own country as the sick man of Asia, borrowing a label originally applied to 19th-century China. Until the early 1990s the Philippines was dogged
by persistent high inflation, which averaged 14% in the
1980s, according to the IMF. Real growth averaged just
2% in the 1980s, while peers Malaysia, Indonesia and
Thailand all grew at average paces of more than 5.5%.
A breakthrough came in the 1990s as the central bank,
Banko Sentral ng Pilipinas, gained greater independence and inflation slowed to single digits. Some of the
large foreign investments flowing into South-east Asia
started to reach the Philippines, and the country began
to develop into a significant player in manufacturing
of parts for the globalising electronics industry. As
domestic money flowed into the banking system, growth
gained momentum and averaged 2.75% for the decade.
The Asian financial crisis of 1997-98 was a setback but
less of one than for other South-east Asian countries.
During the 2000s the Philippines found itself in the
middle of the pack of South-east Asian middle-income
countries in terms of its pace of growth, which averaged 4.5% over the decade, but failing to close the gap
that had opened during the long period of slow growth.
During this decade the Philippines growth model of
domestic consumption driven by labour exports began
to emerge as overseas workers moved into higher-paid
professions and Philippine call centres overtook their
Indian competitors in the US market.
In the 2010s improved governance under the administration of President Benigno Aquino III has helped to
further accelerate foreign direct investment (FDI) in BPO
while reviving FDI into the manufacturing sector. That
and a demographic bulge in the young adult bracket
helped bring the average pace of growth in the first
half of the 2010s to 6.3%, beating all of the countrys
main South-east Asian peers. That compares to 6%
average growth in Indonesia in 2010-14, 5.8% in Malaysia
and Vietnam, and 3.6% in Thailand. Across Asia, only three
countries with higher GDP per capita than the Philippines China, Mongolia and Sri Lanka grew faster.
CONSUMER-DRIVEN: Consumer-oriented sectors are
the largest and fastest-growing, reflecting the economys dependence on labour exports through BPO and
overseas workers. Household consumption came to
72.5% of GDP in 2014, according to the Philippine Statistics Authority (PSA), an extraordinarily high number
for an emerging market economy. The trade sector
produced P2.2trn ($49.5bn) or 17.8% of GDP at current prices in 2014, with real growth of 6%, after 5.7%
growth in 2013.
In other mainly consumption-oriented service sectors, transport and storage accounted for P445bn
($10bn) of gross value added or 3.5% of GDP in 2014,
with real growth of 10.9%, after 6.6% growth in 2013.
Growth has slowed, however, in the communications
sector, which had P343bn ($7.72bn) of gross value
added or 2.7% of GDP in 2014 and real growth of
4.1%, following 5% growth in 2013.
Food processing is another major growth sector as
rising incomes and urbanisation fuel purchases of packTHE REPORT The Philippines 2015
30
ECONOMY OVERVIEW
2014
2015
2016
2017
11,548.19
12,634.06
14,069.03
15,432.05
16,929.27
160,436.20
117,611.54
126,496.31
138,716.69
149,172.27
22.2
21.1
20.0
21.4
21.9
26.2
22.3
22.6
23.5
23.4
3.0
4.1
3.9
3.5
3.5
-0.651
8.032
8.91
7.977
8.107
0.308
6.427
6.528
6.057
5.974
7.1
6.8
6.8
6.7
6.6
2136.30
2404.54
2637.96
2899.80
3188.54
18.499
18.865
18.75
18.791
18.834
2,151.68
2447.92
2778.28
3060.49
3363.08
18.632
19.205
19.748
19.832
19.865
-15.377
-43.384
-140.322
-160.697
-174.547
-0.133
-0.34
-0.997
-1.041
-1.031
4514.60
4623.11
4769.15
4945.74
5124.28
39.094
36.271
33.898
32.048
30.269
9.423
9.184
8.548
7.636
6.336
3.463
3.17
2.588
2.068
1.535
www.oxfordbusinessgroup.com/country/philippines-2015
ECONOMY OVERVIEW
31
32
ECONOMY OVERVIEW
$3.4bn worth in 2013, according to figures from Comtrade. Plantation forestry and wood products are also
significant, and the latter is growing very quickly. Furniture and other manufactured wood and paper products accounted for P98bn ($2.21bn) of gross value
added, or 2.7% of GDP, and recorded 24.5% real growth
in 2014 and 24% in 2013.
The Aquino administration has been widely commended for its efforts to improve business conditions
and reduce corruption, while a relatively conservative
fiscal policy has helped boost the economys credibility and steer investment into the private sector.
The national government deficit has dropped from
2.0% in 2011 to 0.6% in 2014, which has helped reduce
national government debt from 51.0% in 2011 to 45.4%
in 2014. However, when computed at the general government level, general government debt to GDP declined
from 41.4% in 2011 to 37.3% as of end-September
2014. The IMF in October 2014 forecast general government debt to drop to 27% by 2019. Even compared
ECONOMY OVERVIEW
33
(FDI) as global financial investors fled beginning in mid2013 from the emerging market asset class. Investment
inflows other than FDI averaged $8bn a year from 201012, but dropped to $758m in 2013 and a $1.8bn outflow in 2014, according to BOP data. Those include
foreign holdings of Philippine equities and bonds, and
foreign bank credit to Philippine banks and companies.
FDI: Strategic foreign investors, however, are increasing their commitment to the Philippines, lifting FDI
from $3.2bn in 2012 to $3.7bn in 2013, and to $4.9bn
in the first nine months of 2014. The Philippines had
long been the least successful major South-east Asian
economy in attracting FDI, due in large part to legal
restrictions, including a 40% cap on foreign investment
in companies that own land. The acceleration of FDI
in 2014 brought the Philippines up to a pace that is
now comparable relative to population with Indonesia, but still behind Malaysia, Thailand and Vietnam.
Growth of GNI & GDP by sector, 2013-14 (%, at constant 2000 prices)
2013 Q4
2014 Q4
2013
0.9
4.8
1.1
1.9
2.3
4.7
1.2
2.3
Fishing
-4.4
4.8
0.7
0.3
Industry
7.6
9.2
9.3
7.5
-2.5
-3.2
1.2
3.5
2014
Manufacturing
12
7.3
10.3
8.1
Construction
-5.2
20.5
9.6
8.5
3.2
6.3
4.9
6.7
7.2
8.1
6.3
5.6
6.6
6.4
5.3
5.7
Financial intermediation
10.7
6.6
12.6
6.7
8.1
Service sector
Transport, storage & communications
7.6
8.3
8.7
-2.3
10.9
3.8
3.5
Other services
6.4
2.5
7.1
4.2
GDP
6.3
6.9
7.2
6.1
GNI
7.2
6.3
7.5
6.3
SOURCE: NSCB
ECONOMY OVERVIEW
34
The pesos relative stability against the US dollar contrasts with most Asian currencies, and largely reflects
the Philippines large trade exposure to the US and China, which also has not devalued. China is the main market for the Philippines merchandise exports, taking
together with Hong Kong a 32.7% share of the total in
2013, Comtrade data shows. The US took some 12.9%
of merchandise exports in 2013, according to Comtrade,
and the US takes approximately 80% of BPO exports,
according to industry estimates.
INFRASTRUCTURE GAP: The main disappointment in
recent years has been the slow pace of investment, especially in infrastructure, which has long been one of the
economys weakest points and a major problem for
global supply chain manufacturers. Public sector construction accounted for P279bn ($6.28bn), or 20% of
the P1.4trn ($31.5bn) of gross value added by the construction sector, in 2014, according to PSA data.
Low public investment is one of the main reasons
why overall investment is persistently low, although it
is gradually rising. The share of fixed capital formation
in GDP reached 20.5% in 2014, up from 19.6% in 2012.
Expenditures
2000
1600
1200
SOURCE: NSCB
800
400
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
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ECONOMY INTERVIEW
35
Window of opportunity
OBG talks to Cesar V Purisima, Secretary, Department of Finance
To what extent has good governance translated
into strengthened economic fundamentals and
improved revenue collection?
PURISIMA: Good governance lies at the heart of the
economic success of President Benigno Aquino IIIs
administration, having enabled us to create the fiscal
space to invest in infrastructure, social services and
our people. And due to the resulting confidence in the
financial markets, our interest expenses as a percentage of our budget decreased from more than 20% to
about 15%, allowing us to maintain our investment
grade and reduce borrowing costs. Good governance
has also reduced the cost of loans for corporate players, allowing them to cut down expenses and create a
stable platform for longer-term investments. Our citizens also have more confidence to make financial commitments in the form of housing or vehicles.
The best way to encourage the private sector is to
adhere to good governance to create a more stable
macro-economic environment. We are also using technology to improve the ease of doing business in the
Philippines; however, ultimately the major incentives will
be business opportunities and good returns, both of
which the Philippines can offer. To institutionalise good
governance it is essential to introduce meritocracy. In
the civil service, we now have performance-based budgeting, which requires a performance evaluation of
requests for funds. We are also introducing performance-based incentives to ensure that good governance
lasts beyond the current administration.
36
ECONOMY VIEWPOINT
Integrity matters
Ramon R del Rosario Jr, Chairman, Makati Business Club, and President
and CEO, PHINMA, on transparency and accountability
Good governance and transparency are driving the
change in the international perception of the Philippines and the resulting positive economic outlook. To
strengthen this agenda we have been strong advocates of the Freedom of Information (FOI) Act, which
will foster government transparency and accountability by allowing the disclosure of public documents and
holding officials accountable for their actions. Although
President Benigno Aquino IIIs administration has
adhered to these values, legislation would serve to
institutionalise these gains for future administrations.
While government mechanisms are important, the
private sector also needs to play a meaningful role. In
that spirit, the private sector has worked to complement these efforts by developing the Integrity Initiative, which seeks to improve the business culture of the
Philippines by establishing accepted and recognised
standards. Participation in the initiative begins with
signing a pledge, in which the signatory promises to be
a good corporate citizen and behave in an ethical manner, with around 3500 signatories to date. The initiative also requires a self-appraisal system that measures
compliance and adherence to a code of conduct that
is both universal and particular, depending on the industry. In addition, we have engaged third-party enterprises to support companies that are working to improve
their compliance and performance. Eventually, we want
to move towards a scenario where we have the equivalent of an ISO certification for compliant firms.
In order for the pledge to serve as a meaningful
mechanism for good governance, it needs significant
government cooperation and support. A successful
example of this is the Department of Public Works and
Highways, which now requires contractors that want
to do business with the government to sign the pledge
and actively participate in the initiative. Similarly, the
Department of Education and the Philippine Economic Zone Authority also require their suppliers and locators to participate in the initiative, demonstrating the
kind of support and recognition we hope will become
www.oxfordbusinessgroup.com/country/philippines-2015
ECONOMY ANALYSIS
37
vulnerability rating of 53.85% is still below the median, and compares to ratings below 30% for most
high-income countries. The result is an overall natural disaster risk rating that stands out over other
major countries. In the UNU-EHSs World Risk Index,
a composite of exposure and vulnerability, the Philippines was rated 28.25%, well above the next highest-rated countries, Guatemala and Bangladesh, with
ratings of 20.68% and 19.37%, respectively. Overall
the Philippines had the second-highest risk in facing natural disaster behind Vanuatu.
The difficulties that the Philippines faces and its
lack of preparedness for the worst were made devastatingly clear in November 2013 by Typhoon Haiyan,
one of the most powerful tropical cyclones in history with the highest sustained wind speeds at landfall of any cyclone ever recorded. Typhoon Haiyans
combination of intense winds and storm surges over
low-lying areas laid waste to large areas of the Western Visayas, killing 6300 by a conservative official
count and around 7500 when including people who
went missing. The worst hit areas were the island of
Leyte and Tacloban, a coastal city of more than
200,000 people that was largely flattened by a stormsurge flood with waves as high as 7 metres.
AGENCIES IN CHARGE: The tragedy of Haiyan has
led to a broad-ranging re-examination of disaster
management policies by the government, media and
civil society. The Commission on Audit (CoA), a constitutionally mandated government watchdog, has
produced multiple reports reviewing response and
disaster management policies generally. It mostly
praised the governments efforts, but pointed to
bureaucratic red tape holding up disaster relief. The
report said, The bureaucratic structure and reliance
on written guide permeate the difficult situation of
being able to respond immediately.
Disaster management is coordinated by the National Disaster Risk Reduction and Management Council, which has the authority to direct government
THE REPORT The Philippines 2015
38
ECONOMY ANALYSIS
From 1980 to 2010 natural disasters killed an average of 1000 people per year in the Philippines
Convincing people to
evacuate and assisting
those who lack the
resources are key factors
that could help to reduce
fatalities.
initial plans for outright evictions drew international condemnation. A second plan to entice people
away from slums with housing subsidies paid in cash
was protested by some locals who felt that rewarding illegal squatters would only exacerbate the problem. The governments latest plans include working
with international charities, such as Habitat for
Humanity, to move people into cheaply built, medium-rise buildings in the outer district of Metro Manila. The government pays the up-front costs of
P400,000 ($9000) per apartment which the new
owners must repay over 25 years.
TACKLING HURDLES: As the CoA stressed in one
of its reviews, the most important shortfall is the
Philippines lack of a comprehensive emergency management system that allows it to deal with a catastrophic disaster on the scale of Haiyan. In its 2014
report, Disaster Management Practices in the Philippines: An Assessment, the commission said disaster management agencies had limited capacity in
terms of staff, equipment and other logistics such
as warehouses, delivery vehicles, lack of a systematic distribution system, and an inadequately trained
and equipped response team.
Although typhoons on the scale of Haiyan are relatively rare, so-called super typhoons equivalent to
American category 4 or 5 hurricanes hit the Philippines regularly. Haiyan was the fifth typhoon to kill
more than 1000 people in the Philippines since 2006.
The north-west Pacific consistently has the worlds
largest and most powerful cyclones, and the Philippines and Japan are on the front lines of super
typhoon landfalls, where most of the damage is done.
On top of that, the Philippines is prone to powerful
earthquakes. The Bohol earthquake of October 2013
in the Central Visayas just a month before Haiyan
killed 222 people and displaced some 360,000,
according to the UN. The countrys deadliest quake
was in 1976 on the southern Moro Gulf, which killed
at least 5000 people, mostly in a resulting tsunami.
There is also the danger presented by volcanic
eruptions and mudslides. Eruptions themselves are
rarely deadly, with the exception of the 1991 eruption of Mount Pinatubo, near Clark and Angeles,
which killed 847 people in one of the biggest eruptions globally in recorded history. The massive ash
fallout also devastated the agricultural sector. However, the more frequent threat from volcanoes is
mudslides, known locally as lahar, in which heavy rains
break loose old deposits of ash from the sides of volcanoes that can then come sliding down valleys as
giant walls of mud. The worst recent lahar was set
off by a typhoon in 2006 on Mayon Volcano and
buried whole villages, killing at least 1000.
Overall the UN International Strategy for Disaster
Relief counted 363 natural disasters in the Philippines during 1980-2010 that annually affected an
average of 3.8m people and killed an average of
1000 per year. Storms accounted for about threequarters of damages and casualties, while mudslides,
floods and earthquakes accounted for 7-8% each.
ECONOMY DIALOGUE
39
A careful balance
OBG talks to Doris Magsaysay Ho, President and CEO, A Magsaysay, and
Jaime Augusto Zobel de Ayala, Chairman and CEO, Ayala Corporation
How can the Asia-Pacific Economic Cooperation
(APEC) and economic integration be leveraged to
boost emerging economies competitiveness?
MAGSAYSAY: The goal behind the formation of an
integrated economic bloc is the lowering of barriers and
impediments to giving businesses greater access to
larger markets. One great example is New Zealand a
country with a small population but with the capacity
to produce goods and services beyond its needs. New
Zealand businesses and policymakers are major proponents of free trade as one of the founders of Pacific 4 which was the precursor to the Trans-Pacific
Partnership with the goal of increasing exports of agricultural and other products and services.
Thus economic integration through APEC, ASEAN
and trade agreements offers us significant opportunities if businesses look outward beyond our domestic
markets. However, I believe we must have a strategic
plan identifying sectors where we have a unique selling proposition and competitive advantage. One such
area is trade in services, where technology provides different sectors, like business process outsourcing and
creative industries, with amazing growth opportunities.
With inclusive growth being a theme for both APEC
and the APEC Business Advisory Council (ABAC) in 2015,
we also hope to develop the capacity of small and medium-sized enterprises to sell products and services
through the internet. Another strategy is to help young
Filipinos to be the best and brightest creators of innovative digital products. This convergence of global markets with technology is making it possible for anyone
to benefit from global trade, but we must focus on
building the systems to support them. This includes
having an elementary educational system that emphasises science, technology, engineering and mathematics (STEM) fields since the opportunities are changing
so quickly, and we must ensure our next generations
have a chance to participate and benefit.
The talent in the Philippine diaspora also offers us
another great opportunity to focus on certain sectors
40
ECONOMY DIALOGUE
Improving mass transit, whether via a robust road network or increasing the capabilities of our railway system, in order to decongest our highways will be very
important. A transparent, efficient and centralised public-private partnership (PPP) process, such as the one
being conducted by the current administration, would
best facilitate the development of the necessary infrastructure capacity. Indeed, the countrys PPP programme
has served as an enabling framework that has attracted many new private sector applicants to invest in our
national infrastructure.
MAGSAYSAY: A major factor for connectivity is transport and logistics for both exports and imports and for
domestic distribution. It is important for policymakers
to understand, however, that shipping and logistics follow trade. So strategic plans to develop manufacturing and agriculture are key for our competitiveness.
Developing these production clusters around hub ports
for our exports, and ports to serve cities and communities around the country to handle imports and domestic trade, will also allow us access to lower priced goods
and commodities. Because of the relatively small trade
volumes, the country is a feeder economy. This means
that we have an added cost of trans-shipment and do
not benefit from the lower cost of larger ships that serve
large economies. Other feeder economies in Asia are,
including Vietnam and Indonesia, working very hard to
increase ready trade to lower the cost of logistics all
around. One of the primary challenges for the Philippines is that it is relatively farther away geographically from markets so we must be even more aggressive
in our plans. Another thrust should be to develop production clusters and hub ports around the country so
we create wealth everywhere. One thrust of APEC and
ABAC in 2015 is to develop our ability to build imbedded services into the global value chain of companies
around the world. There is also a great role that bigger
business can play to develop value-driven partnerships
with smaller businesses so that we have more people
both participating and benefitting from global trade.
ECONOMY DIALOGUE
In what ways can skilled labour mobility in the AsiaPacific region be encouraged, and what value proposition does the Philippines offer?
MAGSAYSAY: ABAC Philippines has been promoting
the need for a regional framework for labour mobility.
The initiative, called Earn, Learn and Return aims for
policies that are fair for sending countries, like ours,
receiving countries and the worker. Overseas workers
must also be briefed on the Philippines strategy, so that
they work abroad with the goal of learning global standards and practices and the aim of returning home to
participate in our economy. Sectors such as tourism,
health care and others are growing as key drivers of
our economy and are great sectors for overseas Filipinos
to return to as entrepreneurs or professionals.
The ideal future would be for this incredible talent
to form the foundations for us to offer services instead
of people. In shipping, Philippine companies are moving out of manning and crewing to ship management
services, for example. Whatever the case, the governments implementation of the K-12 programme, which
seeks to extend the length of public education, will be
a significant step towards giving future generations
the opportunities brought about by regional integration and global trade. There are a few easy just-do-it
action plans. For instance, let us capitalise on our bilingualism and require Philippine movies and TV shows
to have subtitles. This will also make them marketable
abroad. As part of APEC, there is a thrust toward regional harmonisation and recognition of skills, in addition
to the development of vocational learning. While the
41
Philippines has been historically US-oriented in its educational system, the country is increasingly looking
towards European models of vocational training. And
as I mentioned above, we must accelerate the focus on
STEM fields because that will be the way of the future.
ZOBEL: Labour mobility is a tricky issue. While allowing workers to move more freely across countries generally has a positive impact, this type of policy has historically been a target for citizens and politicians,
especially in countries where a significant portion of
the labour force stands to be displaced by cheaper or
more skilled foreign workers. I believe mobility of skilled
labour should be encouraged given that the benefits,
which include greater motivation among employees and
firms having a broader pool of talent to select from,
outweigh the costs. Governments across the region
need to enact policies that provide for the free movement of talent, while initially protecting (in the right
ways) the more vulnerable sectors of the labour force.
More importantly, countries should invest in the education that prepares young people to compete in this
new regional and global context. The Philippines, with
its service-based economy and its strong overseas
labour base, represents a rich source of skilled workers for the region. Other countries have long benefitted from the skilled, English-speaking workforce that
we continue to send abroad a workforce that now
numbers over 10m. In turn, we receive more than $22bn
in remittances per year, which has helped to fuel growth
at home. Within ASEAN, there is even more room for
Filipino worker employment to grow, as most overseas
workers, some 67% of all deployments, go to the Middle East. However, I believe such an arrangement has
a natural ceiling. If too many workers leave the Philippines, it puts a dent in the countrys potential for further economic growth, which has long been described
as brain drain. Meanwhile, in the countries that receive
large volumes of Filipino workers, a similar backlash may
also occur, as the influx of foreign workers could be
perceived as taking jobs away from qualified citizens.
THE REPORT The Philippines 2015
42
ECONOMY ANALYSIS
ECONOMY ANALYSIS
43
44
ECONOMY ANALYSIS
ECONOMY ANALYSIS
45
The Philippine government has been urged to step up its commitment to infrastructure expenditures
poor, with elementary school completion rates rising slightly from 72.1% in 2010/11 to 73.7% in
2012/13, and rates for secondary school dropping
from 75.1% in 2010/11 to 74.8% in 2012/13. Those
ratios do not include children who do not enrol.
NEW SOLUTIONS: The World Bank also urged the
government to further accelerate public spending,
which lagged in 2014 largely due to a Supreme Court
challenge that delayed new packages for government
spending on reconstruction infrastructure in regions
hit hard by Typhoon Haiyan. The report recommended that the government aim to boost investment by
6.8% of GDP, with 2.5% of GDP going to infrastructure and 4.5% to social services. According to the
World Bank, tax administration reforms could generate an additional 3.8% of GDP of fiscal space in
the medium term, while tax hikes would be required
if the government is to generate the other 3% of GDP.
The banks report also recommended raising levies
on gasoline and eliminating any unnecessary tax
incentives, while simplifying tax procedures for smaller enterprises. It also urged acceleration of the
awards of public-private partnership (PPP) infrastructure projects, which have lagged behind the
governments announced plans, to reach 5% of GDP.
The World Bank also urged the government to
push for more comprehensive regulatory reforms,
while continuing to improve its revenue collection
systems. The report noted a range of obstacles to
trade, investment and new PPPs, while pointing to
liberalisation of telecoms as a catalyst that facilitated rapid development of business process outsourcing (BPO). The World Bank report also said, The success of the BPO industry highlights the large dividends
that can be gained from liberalisation. Going forward,
non-traditional and non-captured industries with
very large growth potential, such as tourism and
outsourcing of higher-value manufacturing, such as
design of electronics, could become key growth and
employment drivers if supported by a freer market.
THE REPORT The Philippines 2015
Education is an area of
particular focus. The
government is targeting
99% enrolment in primary
education and 71% in
secondary education by
2016.
47
49
The central bank has dipped into its reserves to stabilise the peso
Aiming higher
Gradual market reforms should see exports and investment rise
After years of lagging behind its South-east Asian peers,
the Philippines is seeing a long-awaited awakening of
foreign direct investment (FDI). Although FDI volumes
are still smaller than what countries in its peer group
attract, the Philippines has been catching up at an
impressive pace. Although many of the challenges that
impeded investment in the past have yet to be overcome, the faster economic growth of recent years and
stronger efforts to attract investment have improved
perceptions of the countrys prospects.
Human capital, young demographics and consumerist
culture are the countrys key strengths in both investment and trade. Growth has been led by investment in
the business process outsourcing (BPO) sector, but
recently investment in manufacturing has begun to
pick up after a long period of stagnation. Large numbers of Filipinos who leave for higher-paying work
abroad still contribute to the local economy by sending money home to their families worth more than 10%
of GDP, which supports a healthy consumer market
and a current account surplus.
LAGGING LEGACY: The Philippines comparatively low
FDI performance is a legacy of growth rates that were
well behind regional peers, especially before the 1990s.
It also reflects traditionally high obstacles to investment,
including a corrupt and slow-moving bureaucracy and
a somewhat more protectionist legal climate. Foreign
investment is restricted in many business areas, and the
countrys constitution bans foreigners from owning
land or from holding more than 40% of a company that
owns land. The Philippines has also struggled to compete as an export-oriented manufacturer due to its
paucity of domestic energy resources and chronic
underinvestment in infrastructure.
The discrepancy is most visible in the accumulated
stock of inward FDI, which is a long way behind other
large South-east Asian countries. The Philippines
$32.5bn stock of FDI at the end of 2013 was equal to
12% of GDP or $333 per capita, according to UN Conference on Trade and Development and IMF data. By
50
The Philippines has seen its sovereign rating upgraded in recent years
Exports
64
48
32
16
2005
2006
2007
2008
2009
2010
2011
2012
2013 2014*
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52
on these extensively to draw in both BPO and manufacturing investors. The availability of such enticements
has become so widespread that virtually every major
foreign investment receives incentives. The system is
complicated, with seven different investment promotion agencies offering a variety of tax exemptions and
other benefits, such as greater leeway to hire foreigners. The most active of those has been the Philippine
Economic Zone Authority (PEZA), which was originally intended to attract export-oriented investment to
high-priority areas and then created hundreds of socalled ecozones all over the country.
PEZA has been especially active drawing in BPO firms,
sometimes even creating a zone specifically for a particular investor. Since 2012 PEZA has stopped issuing
most privileges to new locations within Manila in an
effort to push investment out into less developed
regions. PEZA locators are required to export at least
70% of their output to receive incentives.
First Philippine Industrial Park operates a popular
industrial park in Batangas, south of Manila, which is
designated by PEZA as an ecozone. The company would
like to see PEZAs mandate changed to encourage
investment that initially targets the local market. In the
first stage of development businesses naturally want
to sell the domestic market. Its harder to make exports
work if access to the local market is restricted, Coseteng
told OBG. The idea is to structure the incentives to create jobs, and not just move them from a higher cost
base to a lower cost base.
The next-biggest investment agency is the BOI, which
offers incentives to invest in priority business sectors.
These include BPO, manufacturing, exports of any kind,
infrastructure, agriculture and fisheries, green initiatives,
research and development, tree plantation, printing,
waste management, disaster prevention or mitigation,
and creative businesses. Generally, BOI incentives are
less generous than those offered by PEZA. The BOI also
has a branch covering five regions of Mindanao that
offers somewhat better incentives.
MONETISING THE MILITARY: There are two agencies
that promote investment in projects converting former
military bases. The Clark Development Corporation
(CDC) is tasked with developing a 44-sq-km area called
the Clark Freeport Zone, including the 24-sq-km Clark
International Airport, although that is managed separately, and 20 km of land to the west of the airport. The
area was formerly Clark Air Base, a US military facility,
until 1991 and is located about 100 km north-west of
Manila near the city of Angeles.
The CDC is a subsidiary of the Bases Conversion and
Development Authority (BCDA), which is in turn a unit
of the armed forces and helps fund its budget. BCDA
is best known for the very successful Bonifacio Global
City and Newport City developments in Metro Manila,
which were previously parts of Fort Bonifacio and Villamor Air Base, respectively.
Near the Clark Freeport Zone the BCDA is taking on
a more ambitious, longer-term project to create what
it hopes will be the largest industrial and BPO centre
outside Metro Manila. Within a 315-sq-km area of
53
54
17.4%, metal and mineral products for 11.7% and agriculture-related products for 9.1%.
Import growth is mainly of consumer goods, automobiles, construction materials and fuels. As with
exports, China is the largest source of imports, accounting for 19.5% in 2013, according to Comtrade, or 35.8%
including Hong Kong and Taiwan, which largely reexport mainland goods. About 20% of imports came
from ASEAN, led by Singapore with 6.6% and Thailand
with 4.9%. Japan, the US and Korea were also major
sources of imports, accounting for 9.5%, 8.7% and 8.6%,
respectively. About 8% of imports came from Europe.
BALANCING ACT: When calculating the merchandise
trade balance, the BSP makes large adjustments to the
PSA trade data to conform with other financial flows
in the overall BOP. The BOP data shows a substantial
merchandise trade deficit of $17.7bn or 6.5% of GDP
in 2013, compared to $14bn or 9.4% of GDP in 2007.
Comtrade data, however, shows a much larger merchandise trade deficit of $27.3bn or 10% of GDP in
2013, and there is good reason to believe that figure
could be more accurate. The BSPs BOP data have two
major discrepancies that are probably explained by
undercounted imports. First, the data show a $5.1bn
inflow into foreign reserves in 2013, although the BSPs
separate count of its stock of foreign reserves shows
they shrank by $600m. The BOP data also include $3.2bn
of unclassified items. If both those discrepancies were
added to the imports line, it would reduce the reported 2013 current account surplus from $10.4bn or 3.8%
of GDP to $1.5bn or 0.6% of GDP.
STRONG IN SERVICES: In services trade, the growth
of the BPO sector has sustained a substantial positive
balance, which came to $6.4bn in 2013, according to
the BSP. Counted as other business services and computer services in BOP data, the BPO sectors contribution to exports grew from $6.6bn in 2007 to $15.2bn
in 2013 an average growth rate of 15% a year. Exports
of service categories associated with BPO were up a
further 11.3% year-on-year in the first nine months of
2014. The rapidly growing BPO sector is in turn the
main driver of the construction industry and its demand
for imported building materials. About 80% of BPO
service exports go to the US, according to an industry
estimate. Services exports came to $22.6bn in 2013,
with travel and transport services the other major contributor at $6.6bn. Services imports have also grown
quickly, from $7.5bn in 2007 to $16.2bn in 2013, driven by booming outbound travel. Combining Comtrade
data on merchandise trade with BSP data on services
trade, total exports in 2013 came to $97.4bn or 35.8%
of GDP, while total imports were $118.3bn or 43.5% of
GDP and the trade deficit was $20.9bn or 7.7% of GDP.
INVESTMENT INCOME: In addition to the trade deficit,
the Philippines runs a substantial investment income
deficit. Income earned on outward investment came
to $1.3bn in 2013 and $1.1bn in the first nine months
of 2014, while income paid on inward investment stood
at $7.5bn in 2013 and $6.2bn in the first nine months
of 2014. However, the trade and investment income
deficits are funded by huge inward remittances from
55
The Philippines largest export destination is China, followed by the US, Japan and ASEAN countries
56
If anyone else in the Philippines had a plan as ambitious as Clark Green City, it would probably be regarded as unrealistic and unlikely to happen. Clark Green
City is a dream to create an entirely new planned city,
about 130 km north-west of downtown Manila.
Although near the twin cities of Angeles and Mabalacat, Clark Green City will be visually isolated from them,
over a river and in the foothills. Its backers are hoping
it will become one of the largest centres of business
process outsourcing (BPO) and manufacturing in the
Philippines outside of Manila.
Similar big ideas have gone nowhere, as investors are
typically reluctant to be the first to move to an empty
locale and public backers typically lack the resources
to fund up front the large investments in infrastructure needed to encourage private investment.
But this is a project backed by the Bases Conversion
and Development Authority (BCDA), the same body
behind Bonifacio Global City (BGC), where a new second central business district of Metro Manila has sprouted up where 10 years ago there were mostly fields. Still
swarming with cranes and only about half-built, BGC is
already rivalling the older business district of Makati
for the title of most desirable Manila business address.
The simple formula to BGCs success, all too rare in
Asian cities, is smart urban planning. The streets are a
sensible grid, walkable and wide enough for taxis to stop
without impeding traffic. Shopping and dining districts
are attractively laid out in a park setting.
ARMY BASE: For the BPO industry, locating in BGC has
been the obvious choice. About 50,000 sq metres of
floor space are being built every month, according to
BCDA, which developed BGC in a joint venture with private builders Ayala Land and Evergreen Holdings. That
does not include the ring of nine satellite projects developed by BCDA and various private builders. Altogether BGC and its satellites occupy about 4.5 sq km of land
formerly belonging to Fort Bonifacio, the national headquarters of the Philippine Army. The BCDA is a unit of
the armed forces, which helps fund the military by
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Bouncing back
The local electronics industry is benefitting from higher global demand
The turnaround of the
countrys electronics
industry started in late
2013, and in the first nine
months of 2014 electronics
exports recorded a 7.4%
increase year-on-year.
Although global
semiconductor sales grew
by 9.9% in 2014, demand
growth has been forecast
to slow to just over 3% per
year in 2015-16.
After many years of struggling, the Philippines electronics industry appears to be finally making a turnaround,
thanks to an improving investment climate and strengthening global demand. Bankers, economists and business executives who follow the industrys fortunes say
the turnaround began in late 2013 and has been gathering pace since. The crucial question, which will only
be answered in time, is whether the Philippines is beginning to overcome the problems that have caused its
electronics industry to lose ground against competitors, or if it is merely enjoying a short-term bounce from
stronger global markets.
Trade data from the Philippines Statistics Authority
(PSA) showed electronics exports growing by 7.4% yearon-year in the first nine months of 2014, on track for
the best annual performance since 2010, when the global industry bounced back from a disastrous 2009. Even
more hopeful, Hong Kong, a major market, reported that
its imports of electronics from the Philippines were up
31% in 2014, according to the UN Comtrade database.
Japan reported that its imports from the Philippines were
up 5.1% in 2014, according to Comtrade, a decent performance considering the yens weakness. The electronics industry is a major component of the Philippines
economy, and its weak performance has been a significant drag on growth. According to the PSA, its export
earnings fell from a peak of $32.2bn, or 21.6% of GDP,
in 2007 to $26.6bn, or 9.8% of GDP, in 2013. Other
countries reports of their electronics imports from the
Philippines, drawn from the UN Comtrade database,
show that the Philippines electronics industry is much
bigger but fell even faster, from $47bn, or 31.5% of GDP,
in 2007 to $37.6bn, or 13.8% of GDP, in 2013. Even after
that decline, electronics exports still accounted for
53% of merchandise exports in 2013 using Comtrade
data, or 47% using PSA data. By comparison, the business process outsourcing sectors export receipts came
to $15.2bn in 2013, according to central bank data.
LOW VALUE ADDED: However, the Philippines electronics industry is mostly not high value added, and its
www.oxfordbusinessgroup.com/country/philippines-2015
What reforms would promote trade and complement ASEAN integration and trade agreements?
YAO: Full integration of the ASEAN Economic Community (AEC) in 2015 offers a golden opportunity to institutionalise reforms that will enable the Philippines to
maximise the benefits from trade and investment liberalisation and expansion. The adoption of trade facilitation measures, which aim to reduce transaction costs
associated with unnecessarily complex Customs and
border procedures and inefficient transit arrangements,
is paramount for the country to effectively utilise the
AEC and other economic partnership agreements, and
to fully participate in regional and global markets.
As a strong supporter of key trade reform initiatives,
PCCI urges the adoption of trade facilitation measures
such as the immediate automation of Customs procedures, the implementation of both the National and
ASEAN Single Window, and compliance with the Revised
Kyoto Convention, as well as other related protocols
through the passage of the Customs Modernisation Act.
To what extent can the advocacy for Philippinemade products strengthen domestic industry?
YAO: Under our Proudly-Philippine Made advocacy
and work programme, PCCI will craft the roadmaps to
provide small and medium-sized enterprises (SMEs)
with access to technology, common service facilities,
financing and other support to not only foster a competitive mindset, but help them find more niches for
further value and supply chain participation. This will
also facilitate the expansion, upgrade and meaningful
participation of SMEs in ASEAN integration.
59
60
In the zone
OBG talks to Arthur P Tugade, President and CEO, Clark
Development Corporation; Deogracias G P Custodio, Chairman
and Administrator, Freeport Area of Bataan (FAB);
Following the formation of export-processing clusters, how can economic zones transition into alternatives for urban and leisure development?
DE LIMA: In the past, the dominant trend has been
migration to urban centres and cities due to limited
job opportunities in the provinces. With our economic zones spread all over the country, we are bringing
jobs to the people, encouraging them to stay within
their provinces. As the population of people working
in economic zones expands, more areas become an
attractive market for various businesses and establishments such as restaurants, hotels, schools, commercial centres and other service providers, which in
turn creates more jobs.
This stimulates economic activity in an area, thus
uplifting the standard of living for the population.
Former third-class municipalities have evolved into
first-class municipalities because of these clusters of
development created by the presence of economic
zones throughout the country.
To complement this growth, PEZA has the flexibility to create economic zones (ecozones) anywhere in
the country, generating private sector-developed,
operated, and maintained areas, which in turn act as
pockets of development. The 314 existing PEZA ecozones throughout the Philippines operate at no cost
to the government, freeing limited public resources
to be used for other infrastructure projects that will
help to strengthen the viability of ecozones as an
investment alternative to urban centres.
We also promote the Philippines not just as a place
to do business but also a place of relaxation and enjoyment, where you can mix business with pleasure. This
is why many of our ecozones are surrounded by world
class recreational areas like gold courses, country
clubs, entertainment and commercial centres.
GARCIA: The main strategy of most ecozones has
been centred around attracting more industrial presence to fully maximise use of available land. Even so,
we recognise the potential of leisure centres, particwww.oxfordbusinessgroup.com/country/philippines-2015
61
62
equipment to multinational companies at a competitive price and faster than it would take to import the
products. The multiplier effects of locators within an
ecozone are not limited to SMEs, but also include
expanding the human capital pool, which will grow
and be developed through skills training and in partnership with the government.
For example, working alongside TESDA and partnering with the Commission on Higher Education, ecozones and their locators can work to improve existing curricula to fit current and future employment
needs, especially in high-growth areas such as shipbuilding in the case of Subic. Locators can also supply mentors or training programmes to these schools
and their students so as to improve the quality of
human resources in any ecozone.
CUSTODIO: The ongoing concern that exists about
the AEC is centred on the viability of SMEs, which
could be marginalised as the lager players stand to
benefit most from integration. However, the Authority of the Freeport Area of Bataan supports SMEs finding niches in the sectors least served by the bigger
players in order to also experience the benefits of liberalisation, which in the case of the FAB is higher-end
products at the right price, where the Philippines does
have a competitive advantage compared to other
countries in the ASEAN community.
For example, as a result of the manufacturing activities going on within the FAB, SMEs are looking into
the possibility of supplying domestic producers, such
as zippers and other necessary components for highend bags and purses. Additionally, a large number of
brands are already operating in the freeport due to
economies of scale, which is increasing the opportunities for new players to come in and take advantage
of a ready market. Similarly, small- and medium-sized
packaging companies are already in high demand,
and although Chinese locators continue to source
their packaging from China, as demand grows, it will
be more feasible for local suppliers to participate.
THE REPORT The Philippines 2015
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65
Banking
Peso-denominated deposits have doubled since 2008
Consolidation of smaller banks continuing apace
Key restrictions on foreign banks have been lifted
Basel III implementation taking place ahead of schedule
Target date for ASEAN banking integration set for 2020
Minimum capital requirements increase for small banks
BANKING OVERVIEW
67
Positives abound
Sector expansion continues as deposits and lending increase
As banks expand credit in the domestic economy, the
sector is enjoying a period of rapid catch-up growth. A
positive feedback loop is at work in which banks are
increasingly driving economic growth, supported by
inflows from foreign investment and Filipinos working
abroad, while growing trust in the banking system is
drawing greater volumes of savings.
Peso deposits have more than doubled since 2008,
rising from P3.2trn ($72bn) to P6.6trn ($149bn) in September 2014, according to the Bangko Sentral ng Pilipinas (BSP) the Philippine central bank. This has helped
bring down inflation even as the BSP has expanded the
monetary base. Bank lending has risen nearly as quickly, but at P5.5trn ($123.8bn) in September 2014 was
equal to just over 43.5% of GDP. That is about half the
level in Thailand and a third of the level in Malaysia, leaving considerable room for further expansion.
A changing financial climate in 2014 brought both
benefits and risks. The strength of the US dollar led some
to keep their savings in dollars as a precaution, even
though the peso held steady against the dollar, and the
economy and banking sector were not heavily dependent on foreign debt. The collapse of energy prices is
putting strong downward pressure on inflation, which
should further support the peso and sustain the trend
of growing trust in the banking system.
The Philippine banking system is currently the only
one of Moodys 69 jurisdictions with positive outlook.
The outlook represents Moodys forward-looking assessment of credit conditions that will affect banks creditworthiness over the next 12-18 months. It provides
the view of how the operating environment for banks,
including macroeconomic, competitive and regulatory trends, will affect asset quality, capital, funding, liquidity and profitability, and it also considers Moodys
forward-looking view of the systemic support environment for bank creditors.
POSITIVE FEEDBACK: The recent history of the banking sector is a demonstration of the kind of long-term
benefits a developing country can enjoy in the wake
BANKING OVERVIEW
68
1.5
SOURCE: BSP
1.0
0.5
0.0
Mar.
2013
Jun.
2013
Sept.
2013
Dec.
2013
Mar.
2014
Jun.
2014
Sept.
2014
Dec.
2014
www.oxfordbusinessgroup.com/country/philippines-2015
2.0
BANKING OVERVIEW
tions on new branches in areas that had been designated as having a sufficient number of branches, which
serves to undermine some consolidation benefits.
Since branching was fully liberalised we do not
acquire purely for branch networks. Unless the branches are accompanied by an established deposit base, it
is easier for us to start from zero, Louis S Reyes Jr, the
senior vice-president and head of investor relations at
BDO Unibank, told OBG, Similarly, Mapa of Metrobank
told OBG. We opened 71 branches in the past two years.
That is the size of a number 12 to number 18 bank.
The most recent large merger was between the Philippine National Bank (PNB) and Allied Bank, which took
four years to clear regulatory hurdles, including those
of foreign regulators. PNB is now the fifth-largest bank,
with P581bn ($13.1bn) in assets, or 5.6% of the sector,
in September 2014, including its subsidiary Allied Savings Bank. The banks already had a common controlling shareholder, the LT Group, prior to the merger.
Number seven China Banking Corporation (Chinabank) could eventually be a merger target, as control is currently split between the SM Group and the
Yuchengco Group, which control the number one and
number seven banks, respectively. In January 2015 it
was in the process of acquiring its second savings bank,
Planters Development Bank. All told, Chinabank had
P389.1bn ($8.8bn) in assets, or around 4.1% of the sectors total, as of September 2014.
The number eight bank is Rizal Commercial Banking
Corporation (RCBC), with P365.6bn ($8.2bn) in assets,
equal to 3.9% of the sector, including RCBC Savings
Bank. RCBC is controlled by the Yuchengco Group in
an alliance with Taiwans Cathay United Bank. Cathays
parent, Cathay Financial Holding, signed a deal in December 2014 to pay P17.92bn ($403m) for a 20% stake in
RCBC. Cathay Financial has said it could increase its stake
to 30% by buying from the stock market.
Number nine was Security Bank, with P356.4bn
($8bn), or 3.8%, of sector assets, and number 10 was
Union Bank, with P334.8bn ($7.5bn) in assets, or 3.6%
of the total, including their respective subsidiaries, City
69
70
The government is
proposing to merge two
large state-owned universal
banks, arguing that it would
reduce duplication and
increase efficiency.
BANKING OVERVIEW
in return for control of revenue streams such as highway tolls. The major private conglomerates that own
large banks have so far been the main bidders.
FOREIGN BANKS: Foreign-owned banks also have a substantial presence, and look set to grow after a major
liberalisation of foreign access in 2014 following the
enactment of Republic Act No. 10641, also known as
the Amended Foreign Banks Law. According to BSP, 19
foreign banks controlled 10.4% of sector assets as of
September 2014. Most foreign banks specialise in corporate lending or capital markets, with many focused
on serving foreign investors from their home countries. Most of these banks hold charters as branches
of foreign-owned banks, which limit them to a maximum of six locations, and these are the only variety of
new charters that the BSP will issue to foreign banks.
They had been unavailable for many years because the
total number of them was capped by law at 10 (not
including four branches of foreign banks present prior to 1948). However, the 2014 reform eliminated this
quota, and is expected to draw new foreign applicants.
Foreign-owned banks can also be chartered as subsidiaries of foreign banks. Such charters are crucial for
breaking into the retail banking market, as they do not
limit the banks number of locations. However, they
can only be obtained by acquiring an existing bank. That
said, most of the nine foreign banks that have ever
obtained such charters ended up selling out to locals
or not taking advantage of the branching privilege.
BANKING OVERVIEW
Four banks still hold such charters, but only two had
more than six branches as of January 2015: Malaysias
Maybank with 79 and Taiwans CTBC Bank with 24.
HSBCs subsidiary bank had six locations, while a subsidiary bank of Singapores United Overseas Bank had
just one after selling a 66-branch network to BDO in
2005. For their part, Banco Santander, GE Money and
Citibank sold their subsidiary banks to BDO in 2003, 2009
and 2013, respectively. Singapores DBS Group and
Hong Kongs Dao Heng Bank merged their subsidiary
banks in 2001 with BPI and BDO, respectively, and then
later sold their resulting minority stakes.
The 2014 reform, aimed at preparing for ASEAN
banking integration, seeks to revive broader foreign
investment in the sector by easing other obstacles that
have disadvantaged foreign banks. For example, the
reform introduced a mechanism through which foreignowned banks can foreclose on land, despite the constitutional ban on foreign ownership of land.
In terms of assets, the largest foreign banks are those
that have had the most success in corporate banking,
investment banking and/or capital markets. Citibank
is the leader, with P283bn ($6.4bn), or 2.7%, of sector
assets, as of September 2014. HSBC comes second, with
P186.5bn ($4.2bn), or 1.8%, of sector assets. By comparison, Maybank had just P74bn ($1.7bn), or 0.7%.
HUNDREDS OF SMALL BANKS: Consolidation is proceeding at a relatively fast pace among the smaller
domestically owned banks. Larger banks are strongly
encouraged to buy small banks, especially when the BSP
determines that a smaller bank is undercapitalised and
unable to raise financing except via a sale.
Recently, banks have been coping with two major central bank regulatory reforms: implementation of Basel
III, which is not scheduled in most countries until 2019,
and stress test limits that further tighten control of exposure to real estate, which became effective in July 2014.
Universal and commercial banks are required to adopt
capital adequacy standards under Basel III, while the
smaller banks including rural banks, cooperative banks
and stand-alone thrift banks are under Basel 1.5, a
simplified risk-sensitive capital adequacy framework.
Diwa Guinigundo, the BSPs deputy governor for
monetary stability, told OBG that Basel IIIs tighter riskweighting standards would bring down banks average
capital adequacy ratios by 100-200 basis points to
between 14% and 15%, compared to the standard Basel
III minimum of 10%. Most of our banks are already compliant, so why postpone it?
Many banks, however, are being forced to raise capital, and a niche business has emerged in arranging
Basel III issues of Basel III-compliant Tier 2 capital
instruments. Fitch Ratings wrote in July 2014 that there
had been P50bn ($1.1bn) of such issues to date, with
more expected in the future. For many smaller banks,
not meeting Basel III requirements will likely mean
greater pressure to merge. BSP has been busy arranging mergers among rural banks where it deems a combined bank would better weather stress (see analysis).
Excluding the 15 savings banks owned by universal
banks or foreign banks, there were another 54 savings
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BANKING INTERVIEW
BANKING INTERVIEW
financial products that can be accessed by non-traditional customers. These regulations have earned international recognition for the Philippines for having one
of the best enabling regulatory environment for financial inclusion. Some of the most recent regulations
toward this end are the following:
Waiving of the processing fees for banks that will
put up branches in unbanked areas.
Expansion of the: (a) list of approved activities for
MBOs. Previously, MBOs can extend only microfinance loans, but now they are allowed to offer other types of loans, such as health and emergency
loans, among others; (b) definition of low-income
households and micro deposits so that banks can
offer microfinance products to a wider segment of
the population; (c) list of identification cards considered valid for making bank transactions to now
include those issued by private institutions registered with or supervised by the BSP, Securities and
Exchange Commission, and Insurance Commission,
among others.
Enhancement of the procedures that banks should
observe in approving microfinance loans, with the
aim of increasing accessibility of this type of loans.
Establishment of regulatory framework for the use
of electronic money (e-money). The BSP is promoting the use of technology, such as mobile banking
and use of e-money, to more easily expand the reach
of financial institutions to unserved and underserved
areas.
These are just some of the regulations that the BSP
already has issued to enhance financial inclusion. Moving forward, the BSP will continue to review the regulatory environment to identify further measures that
can help enhance access to financial products and
services. Meanwhile, as the BSP pursues this goal, it also
understands that unrestricted innovation can pose
risks that may affect the publics trust in formal financial services. Therefore, side by side with BSP regulations that promote financial inclusion are regulations
73
74
BANKING INTERVIEW
Broad reach
OBG talks to Hikmet Ersek, President and CEO, Western Union
As one of the largest recipients of foreign remittances, what role might the Philippines play in new
technological concepts like digital money?
ERSEK: The large and growing remittance market in
the Philippines is inspiring a lot of innovation from
industry players. The Filipino diaspora are known to
keep in touch with their recipients back home via new
technologies smartphones are their primary tool to
access the web, followed by laptops. This provides a
robust platform and an accepting environment for new
innovations. Like Turkey, the Philippines has a very
young population 35% are under 15. Filipinos spend
an average of 6.2 hours a day online via desktop or laptop, and in 2013 they spent some $1.3bn online. In addition, the number of mobile phone subscribers in the
Philippines has topped 100m, and more than 8m of them
have signed up for a mobile money service. Clearly Filipinos are comfortable with new technology, opening
the door to new innovations like the movement of
money online and via mobile platforms.
In what ways can technology help small and medium-sized enterprises (SMEs) in emerging markets meet the challenges of expanding abroad?
ERSEK: Technology can help SMEs in many ways. In
more developed countries like the US, SMEs often
import goods and thus need to make payments in
several different currencies. They need access to a
variety of tools to help them pay online, track their
payments and manage foreign-exchange risk. SMEs
in emerging countries are often on the receiving
end of cross-border transactions. They need access
to technology that allows them to receive payment
in whatever currency they want, and also transparency in transactions so that they can be sure
they receive the amount they are supposed to. Not
just SMEs can benefit from these services; so can
entities like NGOs for example, Mercy Corps, which
needs to get funds to rural areas after a disaster. Technology can help them do that delivering funds in
minutes from around the globe for payout in cash.
BANKING ANALYSIS
75
In October 2014 the BSP raised capital requirements for small banks
Size matters
With increasing competition and tighter requirements, the number of
rural banks is in decline
As the countrys largest banks expand into ever more
remote areas, hundreds of small banks are wondering
if they have a future. Most of these small banks spread
across the country are tiny and operate in rural areas
mainly the product of a 1950s drive to bring basic
banking services to the countryside, by encouraging the
establishment of rural banks with low capital requirements and limited bank charters. These so-called rural
banks are a precursor to microfinance, similarly targeting farmers, fishers and merchants with small and relatively high-interest loans, albeit through the formal
institution of a traditional deposit-taking bank. According to the Philippine central bank, Bangko Sentral ng
Pilipinas (BSP), there were 514 rural banks as of January 2015, along with 30 similarly small cooperative
banks and 69 savings banks, which are larger on average but include many small banks serving remote areas.
CONSOLIDATION: This is down from 778 rural banks,
51 cooperatives and 117 savings banks in March 1999.
Their numbers are shrinking, as small banks face increasing competition from bigger players on the one hand,
and from non-bank microfinance and non-profit lenders
on the other. This is largely due to consolidation, a trend
that has been accelerating of late as the BSP has reacted to numerous small bank failures by tightening capital requirements and essentially arranging mergers
among small banks that cannot clear the new hurdle.
Consistent economic growth and liquidity allows
breathing room for domestic mid-sized banks, however, whenever growth slows down, the stricter regulations will weigh in more heavily and competition will
intensify, leading to consolidation, Roberto F de Ocampo, chairman of Veterans Bank, told OBG.
In October 2014 the BSP announced large, acrossthe-board increases in minimum capital requirements
for small banks. For rural and cooperative banks, minimum capital was raised from P5m-100m ($112,5002.3m) to P20m-200m ($450,000-4.5m), depending on
location and branch numbers. Minimum capital was also
increased for most savings banks, formally called thrift
76
BANKING ROUNDTABLE
incentivise Philippine banks to expand their operations and offerings beyond domestic opportunities.
Similarly, ASEAN integration will not confer any particular advantages on regional banks, as they will still
have to establish themselves to create scale, differentiate and compete with more established industry players. Likewise, it is difficult to see foreign
banks willing to participate as universal banks, which
would require massive capital investment even if
they were still unable to compete effectively with
more entrenched players. Unless one can bring something very specific, whether technical expertise,
product knowledge or new product offerings, it
would be difficult for a foreign bank to become relevant, particularly in the retail space.
BANKING ROUNDTABLE
77
78
BANKING ROUNDTABLE
but also to their ability to deliver the services needed at the grassroots level.
However, international banks can participate by
finding ways to fund microfinance institutions. Unlike
most economies in ASEAN, where big conglomerates
or multinationals do not drive the economy as much
as small and medium-sized enterprises (SMEs) do,
in the Philippines the SME sector is quite small. A
reversal of this may occur as multinationals bring
some of that ancillary industry into the Philippines,
making foreign banks want to work with mediumsized enterprises that they can help grow; however,
serving small companies will remain a challenge in
terms of reach and distribution.
SIANTURI: In 2015 the Philippines will have an ideal demographic window in which at least 64% of its
population will be within the ages of 15-64, representing an immense potential source of economic
growth. The key will be to provide jobs and support
for SMEs to grow into larger corporations that then
will require increased financing. The highly underpenetrated SME segment is an attractive opportunity given the liquidity of the domestic market.
Challenges for banks going into these areas lie in
improving credit bureaux and ensuring quality portfolios as banks compete to grow assets. Fortunately, the Philippine banking sector is well capitalised
to accommodate this growth.
VELOSO: At the end of the day, international institutions like us will not be able to cater to everyone,
primarily because of very rigid know-your-customer
rules policies that only aim to secure and protect
our valued clients. A foreign bank would need to be
able to establish that it is banking the right people
in the right segments. While there is a recognised
challenge in expanding penetration on the asset
side, foreign banks can further expand their reach
through credit cards, subject to and guided by the
same know-your-customer process and principles.
Outside of that, foreign banks will not have that kind
www.oxfordbusinessgroup.com/country/philippines-2015
BANKING ANALYSIS
79
Changes ahead
Foreign investment regulations are being relaxed in preparation for
further regional integration
In a move to open its banking sector to foreign investment in 2014, the Philippines eased or lifted key restrictions that had kept foreign participation at a stunted
level, with gradual investments from foreign players
expected over the course of 2015 and 2016.
STEP BY STEP: A law adopted in July 2014 and implemented in December 2014 reduces or removes most
of the prior restrictions on foreign investment. Foreign-owned banks can now control 40% of total bank
assets, up from 30% an ambitious signal, as they controlled 10.4% as of September 2014. Since 2008 virtually the only way foreign banks could enter the market
was by acquiring an existing bank. The number of chartered branches of foreign banks was also capped, at
14. While the creation of new banks is still suspended,
the cap on foreign banks branches has been eliminated. However, the cap on the number of sub-branches
of foreign banks branches remains in place, at 6.
Under previous regulations, most foreign firms and
individuals were allowed to own no more than 40% of
a Philippine bank, with qualified foreign banks able to
buy up to 60% since 2007. To qualify, the foreign bank
had to be among the five largest in its country or 150
largest in the world, and be government owned or publicly listed and widely owned. Now, thanks to Republic
Act No. 10641, qualified foreign banks can buy up to
100% of a Philippine bank, with three modes of entry
now open, and they do not need to meet any of the
ranking criteria. Other foreign investors can buy up to
60% of rural banks, and multiple non-qualified foreign
investors can now buy up to a combined 60% of thrift
banks. Lastly, the constitution forbids more than 40%
foreign ownership of any land-owning company. The
2014 reform addresses this by permitting foreign banks
to control land for up to five years after a foreclosure.
Amando M Tetangco Jr, governor of the central bank,
told local press in November 2014 that several foreign
banks from Asia, the Middle East and Europe had already
expressed interest in applying for licences. In February
2015 the BSP approved the application of Sumitomo
81
Capital Markets
Domestic liquidity and foreign investors boost the market
Completing major technical upgrades in 2015
The exchanges blue-chip index hits a new record high
A new body to ensure cooperation of financial regulators
82
Climbing higher
The market records a strong performance, with new trading options to
be introduced soon
83
The bourse monitors foreign ownership and must step in if the foreign stake in a company hits its legal limit
Fundraising in corporate
bond markets has recorded
significant growth, with net
issuance jumping to
$3.68bn in 2014 from
$490m in 2013 and
$2.89bn in 2012.
84
The Philippine Stock Exchange introduced an online trading platform, PSETradex, in 2012
Established in February
2014, the Financial
Stability Coordination
Council is meant to ensure
the various financial
regulators cooperate to
identify and address risks
to financial stability.
12
6
SOURCE: PSE
85
2008
2009
2010
2011
2012
2013
2014
86
Growth factors
Year 2014 sees a surge in corporate bond issuance
Opening doors
OBG talks to Jose Pardo, Chairman, Philippines Stock Exchange (PSE)
How can the ASEAN Corporate Governance Scorecard (ACGS) accelerate the establishment of an
ASEAN integrated market?
PARDO: The objective of integrating these economies
is not an easy task. With nearly 600m people, ASEAN
is indeed an attractive proposition. Over time, government functionaries and private sector business groups
have aligned themselves in terms of networks and trade
associations. This formation of ASEAN networks
inevitably creates standards to measure how one should
pursue work, and governance becomes a common
trend. One noteworthy initiative is ACGS, which enables
the formation of an integrated capital market by ranking the corporate governance of publicly listed companies within ASEAN and encouraging cross-trading
among investable firms.
In the case of the PSE, we are committed to the highest level of corporate governance, transparency and
integrity. We have also pushed for inclusivity so that
growth is not limited to one sector. In tandem with
higher levels of accountability and transparency, we are
now about to start our fourth year of the Bell Awards,
which identify companies, trading participants and
stockbrokers that excel. Within the next two to three
years, we will be able to identify companies that are
consistent in their standards and add them permanently to our corporate governance board.
87
88
Price
Index
54
PERFORMANCE
Price (P)
40.25
6750
45
12M High
42.16
5400
36
12M Low
31.42
296.18
4050
27
MARKET RATIOS
2700
18
1350
0
Oct-13
Feb-14
Jun-14
3M
12M
38.97
36.80
3,631,418
3,421,851
Oct-14
Aboitiz Power
Power generation
THE COMPANY: Incorporated in 1998, Aboitiz Power Corporation (AP) operates as the power unit of
the Aboitiz Group. As a publicly listed firm, AP is considered to be one of the leading local players in the
power industry, with interests in a variety of privately owned power generation companies and distribution utilities throughout the country. APs power
generation business accounts for the bulk of the
companys earnings, contributing some 82% of its
total income in 2013. AP operates 39 generation
facilities across the Philippines, with an aggregate
capacity of over 2300 MW. The company also runs
seven distribution companies including the second and third largest in the country that service
over 800,000 customers.
PERFORMANCE: Consolidated net income amounted to P8.95bn ($201.4m) for the first half of 2014,
down 6% year-on-year (y-o-y). Excluding non-recurring gains and losses, net income came to P8.6bn
($193.5m), 21% lower than during the same period
in 2013. While income from APs power generation
business declined, it remained the largest contributor, accounting for 84% of the companys bottom
line. The weaker performance of the generation business was due to lower spot market sales, down 13%
y-o-y, and low water levels at two of the companys
hydropower plants, which constrained operations.
As 88% of APs overall generation capacity is contracted, the company is working to shift its supply
portfolio to capacity-based contractors and bilateral contracts for more stable and predictable cash
flows. The performance of APs distribution segment was down 11% y-o-y, from P1.63bn ($36.7m)
to P1.45bn ($32.6m) during the first half of 2014.
APs net income has been lagging since 2012, primarily due to the expiration of income tax holidays,
pricing structure changes and lower income contribution from power distribution. This has occurred
against the backdrop of insufficient power supply
in Mindanao and a lag in recovery of power costs in
89
90
Price
Index
18
PERFORMANCE
Price (P)
15.14
6750
15
12M High
16.63
5400
12
12M Low
9.37
201.02
4050
2700
1350
0
Oct-13
0
Feb-14
Jun-14
MARKET RATIOS
3M
12M
15.52
13.59
8,662,597
10,036,183
Oct-14
DMCI Holdings
Construction & power
THE COMPANY: Incorporated in 1995 to consolidate
the Consunji familys businesses, DMCI Holdings (DMC)
is a holding company engaged in construction, real
estate, water services, mining (coal and nickel) and
power generation. DMC has five operating subsidiaries:
D.M. Consunji (DMCI), DMCI Project Developers, Semirara Mining Corporation (Semirara Coal Corporation),
DMCI Mining Corporation and DMCI Power Corporation; and two affiliates DMCI-MPIC Water Company and Private Infra Development Corporation.
PERFORMANCE: DMC reported consolidated core
net income of P5.13bn ($115.4m) for the first half of
2014, nearly unchanged year-on-year (y-o-y) from
P5.14bn ($115.7m). The companys mining activities
significantly improved y-o-y, fuelled by larger sales volumes and higher average prices. Coal and nickel mining activities posted income growth of 542% and
708%, respectively. Likewise, DMCs real estate business increased by 29% thanks to higher sales from completed projects in the year to date.
However, these robust performances were offset
by negative income growth at the companys construction, power and water subsidiaries. Extended power
outages at the Calaca power plant brought down net
income of the power business by 94% y-o-y, while
lower reported completion revenue from new projects resulted in an 11% decline in construction income.
Headline net income also decreased, by 62% y-o-y, as
the company recognised a one-time gain from the partial sale of its water business in 2013.
GROWTH DRIVERS: Robust economic growth has
provided conglomerates with the opportunity to
expand and diversify into the most promising sectors,
such as mining, infrastructure, gaming and tourism,
and power and utilities. Their diversification strategy
also stems from the fact that there are declining
growth opportunities in their traditional lines of business, which they already dominate. Going forward,
engaging in these high-growth sectors bodes well
for financial performance as well as shareholders.
www.oxfordbusinessgroup.com/country/philippines-2015
With over 40 public-private partnership (PPP) projects left to be tendered and the persistent need to
boost power capacity in the country, more Philippine
conglomerates are expected to get involved in these
activities, as they have the cash flows and financial
flexibility to take on capital intensive investments.
Projects in the pipeline include the construction and/or
rehabilitation of new or existing roads, ports, water
and power utilities, hospitals and transportation,
including rapid bus transit and elevated trains.
LOOKING AHEAD: DMC is reportedly bidding on the
LRT 2 PPP project alongside other conglomerates.
The winner would operate the existing 13.8-km LRT2 line from Recto Avenue to the Depot at Santolan
Street along Marcos Highway for 10 years, with a possible five-year extension. Furthermore, through its
subsidiary DMCI, the company aims to get involved in
construction and engineering for government PPPs.
Through Semiraras wholly owned subsidiary, Southwest Luzon Power Generation Corporation, DMC is
expanding its existing 600-MW Calaca coal-fired power plant in Batangas. The expansion will be carried out
in two phases, with the construction of two 150-MW
units during the first phase and two 350-MW units in
the second phase. This will bring the total expansion
of capacity to 1000 MW.
The operation of the plants first 150-MW unit,
which was originally scheduled to begin by December 2014, has been postponed until June 2015. In
spite of these delays, Semiraras medium-term outlook remains bullish, as it is one of the few power generation companies in the Philippines that stand to
benefit from the expected power supply shortage in
the Luzon area in the coming years.
In terms of its construction business, DMCs order
book as of end-June 2014 stood at around P20bn
($450m). Projects in the DMC pipeline include work
on the San Miguel Corporations NAIA Expressway
project, TPLEX Section 2, the NAIA Terminal 1 rehabilitation and two power plant projects in Batangas.
Price
Index
30
PERFORMANCE
Price (P)
25.65
6750
25
12M High
26.95
5400
20
12M Low
12.40
86.28
4050
15
MARKET RATIOS
2700
10
1350
0
Oct-13
Feb-14
Jun-14
3M
12M
24.60
19.47
3,921,853
3,929,070
Oct-14
First Gen
Power generation
THE COMPANY: Incorporated in 1998, First Gen Corporation (First Gen) has a portfolio of 18 power generation plants, which are predominantly contracted
for sale under long-term power purchase agreements or other energy sales agreements. First Gen's
power generation portfolio primarily relies on indigenous fuels or clean and renewable energy like natural gas, water, geothermal steam and wind.
The company is currently the leading clean and
renewable energy company in the Philippines, with
an installed capacity of 2948 MW. As of 2013, First
Gen accounted for about 17% of the total installed
capacity in the Philippines. Furthermore, according
to BusinessWorlds list of the top-1000 companies
in the Philippines in 2014, First Gen ranked 28th in
terms of gross revenue and 36th in net income.
PERFORMANCE: While revenues from the sale of
electricity in the first half of 2014 declined by 5%
year-on-year (y-o-y) to $935.47m, net income saw
robust growth of 32% y-o-y, to $102.59bn. The
decrease in revenues was mainly due to the lower
dispatch of the companys gas plants, a decline in
gas prices and reduced electricity generation following the temporary shutdown of Santa Ritas Unit 40.
First Gens strong profit growth is largely thanks
to the higher income contribution from Energy Development Corporation, FGP Corp and First Gas Power
Corporation, in addition to lower expenses of Red
Vulcan. This was partly countered by higher expenses incurred by First Gen coming from the interest
expense on its $300m fixed-rate bond issuance, as
well as the $7m expense on its various subsidiaries
due to the development of several projects.
After a challenging year in 2013, First Gen has
been in recovery in 2014, which will likely continue
in 2015. The companys weaker performance in 2013
was further aggravated by the impact of Typhoon
Hayain, which damaged some of the companys
assets. Over the medium term, First Gens share price
is likely to appreciate, driven by earnings growth
91
92
Price
Index
12
PERFORMANCE
Price (P)
9.41
2500
10
12M High
10.13
2000
12M Low
8.293
54.802
1500
MARKET RATIOS
1000
500
3M
Oct-13
Feb-14
Jun-14
12M
9.78
9.33
630,450
1,013,825
Oct-14
Lafarge Republic
Building materials
THE COMPANY: Lafarge Republic, Inc (LRI), formerly
known as Republic Cement Corporation, was incorporated in 1966 and presently engages in the manufacturing, development and sale of cement, marble and
other kinds and classes of building materials for industrial or commercial purposes. LRI is a member of the
larger Lafarge Group, a global leader in building materials headquartered in France. The group operates in
64 countries, generating $21.5bn in sales in 2012.
Lafarge has four cement manufacturing plants in the
Philippines, located in Bulacan, Batangas and Rizal.
LRI's subsidiaries include Fortune Cement Corporation, Lafarge Iligan, Lafarge Mindanao, FR Cement Corporation and Lloyds Richfield Industrial Corporation. LRI
manufactures mainly Portland, Pozzolan and Type IP
cements. Cement is sold in 40-kg bags or in bulk, loaded
in bulk carriers at 800 and 1000 kg-equivalent bags per
load. Of the total revenues of LRI, cement accounts for
approximately 96%, with aggregates at 4%.
There have been talks of a global merger between
Holcim and Lafarge to create the worlds largest cement
maker, with both companies to consider whether further divestments would be necessary in areas where
there are overlaps or to satisfy regulatory requirements.
As part of the completion of the global merger, Holcim
Philippines is proposing to acquire three companies
under LRI that are engaged in cement-making and
related businesses, as well as a port terminal facility in
Manilas Harbour Centre, in line with the global merger of their parent companies.
PERFORMANCE: Net sales were up 4.68% in first-half
2014, mainly due to higher sales volume and higher
average selling prices. However, the cost of goods sold
and operating expenses grew at a faster rate of 5.78%
and 7.17%, respectively. This resulted in a 9% decline in
net income to P2.15bn ($48.4m). LRIs outlook remains
bullish given the expansion of its plant capacity and the
surge in construction activities in the country.
GROWTH DRIVERS: In 2013 gross value added of the
construction industry amounted to P377.74bn ($8.5bn),
www.oxfordbusinessgroup.com/country/philippines-2015
Price
Index
18
PERFORMANCE
Price (P)
11.86
6750
15
12M High
14.30
5400
12
12M Low
11.30
111.19
4050
MARKET RATIOS
2700
1350
0
Oct-13
Feb-14
Jun-14
3M
12M
11.97
12.80
10,639,061
6,854,388
Oct-14
Petron Corporation
Oil refining
THE COMPANY: Petron Corporation (PCOR) was
incorporated in 1966, with a 68% controlling interest held by San Miguel Corporation. PCOR refines
imported crude oil and is involved in the marketing
and distribution of a variety of petroleum products
in the Philippines and Malaysia.
PCOR is the largest integrated oil refining and marketing company in the Philippines, maintaining its
industry leadership with a market share of nearly 37%
and supplying almost 40% of the countrys oil requirements. The company operates the largest oil refinery in the country, the Petron Bataan Refinery (PBR),
with a rated capacity of 180,000 barrels per day
(bpd). They also have 30 depots and terminals scattered across the country, as well as over 2200 service stations, supplying assorted petroleum goods to
resellers and industrial customers.
PCOR acquired ExxonMobils subsidiary and downstream business, Esso Malaysia, in March 2012,
renaming it Petron Malaysia Refining & Marketing
(PETM). It is the third-largest oil company in Malaysia,
with a market share of almost 17%, behind Petroliam Nasional and Shell Refining Company.
PETM operates the Port Dickson Refinery (PDR),
which has a rated capacity of 88,000 bpd and produces an array of petroleum products. They also
have seven depots and terminals across Malaysia,
with more than 560 service stations nationwide,
providing commercial, industrial and retail fuels.
PERFORMANCE: PCORs net income grew by a robust
168% to P3.14bn ($70.65m) in the first half of 2014,
driven by greater sales volumes, a higher average selling price, better margins and a reduction in non-operating charges. The sales volume of the companys
Philippine and Malaysian operations increased by
10% and 6% y-o-y, respectively, to 25.1m and 18m
barrels each, on stronger industrial sales and a widening service station network.
Meanwhile, the impact of non-operating charges
on the companys bottom line over the period was
93
94
Price
Index
24
PERFORMANCE
Price (P)
17.10
6750
20
12M High
19.58
5400
16
12M Low
14.10
12
475.71
4050
MARKET RATIOS
2700
1350
0
Oct-13
Feb-14
Jun-14
3M
12M
16.80
16.03
13,313,684
17,538,435
Oct-14
SM Prime Holdings
Mall operations
THE COMPANY: SM Prime Holdings (SMPH) is the
Philippines' largest mall operator. Publicly listed since
1994, SMPH owns and runs world-class malls all over
the country, providing millions of square metres of
floor area for fully integrated shopping, dining, and
entertainment experiences.
In 2013 SMPH was reorganised as the property
holding firm of the SM Group, absorbing SM Land,
SM Development Corporation, Highlands Prime and
SM Hotels and Convention Corporation, among others. The merged entity is better equipped to undertake integrated property developments or lifestyle
cities, which combine the offerings of malls, residences, offices, hotels, and convention and leisure
facilities. SMPHs total land bank now exceeds 900
ha. Over time the company aims to become one of
the largest property players in South-east Asia.
As of the end of March 2014, SMPH was 51.03%
directly owned by SM Investments Corporation (SM),
with another 25.72% held by the Sy Family. SM, effectively the parent company of SMPH, is a publicly
traded Philippine corporation, having listed its common shares in 2005. SM and its subsidiaries are
referred to as the SM Group.
PERFORMANCE: SMPHs net income grew by 11.72%
to P9.80bn ($220.5m) in the first half of 2014, mainly driven by a 7% increase in consolidated revenues
to P33.42bn ($751.5m). Rental revenues, which
accounted for more than half of the total, were up
12% to P17.67bn ($397.6m), thanks to the opening
of new malls and the expansion of existing facilities.
SMPH has a robust earnings outlook, as the property sector continues to benefit from the increasing affluence of Filipinos and strong business process
outsourcing growth, which fuels demand for housing, retail and leisure establishments. SMPHs residential segment is in recovery, while its investment
properties continue to provide steady growth.
GROWTH DRIVERS: SMPH unveiled a five-year
roadmap aimed at doubling its income from P16.2bn
www.oxfordbusinessgroup.com/country/philippines-2015
95
Insurance
Industry grows despite the effects of natural disasters
Microinsurance penetration the highest in the region
State-run insurance scheme expands coverage
Higher capital requirements encourage consolidation
A new insurance code passed in 2013 is implemented
Coverage schemes based on weather data gain traction
96
INSURANCE OVERVIEW
Insurance penetration as a
portion of GDP stood at 2%
in 2013, after the industry
expanded by a
region-leading 38% in
2012, driven by sales of
equity-linked variable
insurance products.
INSURANCE OVERVIEW
97
2013
2014 Q3
Total assets
750.42
891.8
1043.08
Total liabilities
586.39
718.65
806.42
164.03
173.15
236.66
35.95
37.33
39.49
Total investments
511.54
550.86
799.44
Total premiums
144.34
198.13
132.87
54.45
63.65
52.28
13.12
14.65
12.31
98
INSURANCE OVERVIEW
The government remains dedicated to its policy of extending health coverage to every citizen by 2016
28.42
26.46
12.89
7.82
7.59
3.53
2.87
2.6
2.44
1.54
INSURANCE OVERVIEW
Non-life
1000
market for microfinance products, including microinsurance. The National Strategy for Microfinance, formed
in 1997, kick-started efforts to promote microinsurance, which were formalised by an insurance circular
in 2006 and amended by a second one in 2010.
The first of these set initial microinsurance parameters, such as caps on daily premiums and guaranteed
benefits which were amended by the New Insurance
Code in August 2013. Today, premiums are limited to
7.5% of the daily minimum wage for non-agricultural
workers. Benefits are capped at 1000 times this figure.
The second circular made the insurance market more
accessible to the public, offering accreditation for life
and non-life microinsurers, cooperative insurance societies and mutual benefit associations to sell microinsurance products. New distribution channels were also
approved, including microinsurance agents and brokers,
rural banks, microfinance institutions, non-governmental organisations and cooperatives. Capital requirements for microinsurance providers were lowered.
Microinsurance has grown rapidly as a result of public and private sector efforts. According to a 2013
report by the Registered Financial Planners Institute and
German development firm GIZ, which partnered with
the government and the Asian Development Bank to
develop the nations microinsurance industry, there
were 35 commercial firms selling microinsurance products as of end-2012, including 17 life and 18 non-life,
while the IC had approved 80 new microinsurance products, including 54 life and 26 non-life products. Another 17 mutual benefit associations had been licensed
to sell microinsurance products, the report said.
The IC reported in November 2014 that 27.96m Filipinos had microinsurance coverage in 2013, with penetration rising from 7.22% in 2009 to 28.62% in 2013.
According to a separate 2013 report by Munich Re, the
Philippines has the highest microinsurance penetration
ratio in the Asia and Oceania region, at 21.35% of the
population, well above Thailand (14.02%), India (9.22%),
Bangladesh (6.2%) and Malaysia (3.84%.) In a February
2014 report, Fitch lauded the administration of President Benigno Aquino III for its progress in promoting
microinsurance schemes, forecasting that strong growth
for the segment would continue in the coming years.
CROP INSURANCE: Though agriculture and fishing
account for 15% of GDP and one-third of the workforce,
Filipino farmers remain vulnerable to crop damage
caused by natural disasters. In November 2013, the UN
Food and Agriculture Organisation reported that crop
losses caused by Typhoon Haiyan reached $110m. Total
damage to the agriculture sector was more than twice
that, while the typhoon destroyed an estimated 153,495
ha of rice paddy, maize and high-value crops including
coconut, banana, cassava, mango and vegetables. In
December 2014, tropical storm Hagupit Filipino for
whip made landfall four times in the Philippines. Crop
damage in the eastern Visayas region alone was estimated at P385m ($8.7m) by the Insurance Journal,
while total economic damages stood at around 0.5%
of GDP, spurring the government and private sector to
ramp up offerings in disaster crop insurance. One of
99
800
600
400
200
2012
2013
2014 Q3
100
INSURANCE ANALYSIS
102
INSURANCE INTERVIEW
Something to protect
OBG talks to Peter G Coyiuto, President and CEO, First Life Financial Company
What potential is there for growth in the life insurance segment, and how can penetration be raised?
COYIUTO: There is a strong positive correlation between
insurance penetration and per capita GDP growth.
Whatever the sophistication of products or strength
of distribution networks, for protection products to
become viable basic necessities first need to be covered and disposable income available. Once the population has protectable assets and income, insurance
can play a role in nurturing wealth creation. The Philippines is one of ASEANs most underpenetrated markets for insurance, whether measured by number of people insured or the ratio of premiums to GDP. Malaysias
per capita GDP of roughly $11,000 and Thailands of
about $6000 are reflected in their higher respective
insurance penetration levels.
Pushing financial literacy is one way to accelerate penetration, yet this will not generate significant results
unless people first have money to invest. In countries
like China, only once per capita GDP picked up did financial literacy have an impact on penetration growth. The
Philippines susceptibility to natural disasters has led
to some growth in overall awareness of the value of
protection products, in both the life and non-life segments, but not enough to create an inflection point in
insurance penetration. Even overseas Filipino workers,
despite their higher incomes as reflected in remittances, do not carry much weight in insurance companies premiums income. This remains a tough segment
to tap given regulations that make it hard for local
insurers to engage with overseas Filipinos. Traditionally, such workers are reached via manning agencies and
show the most presence in medical premiums.
A chief enabler of income growth is improved infrastructure, driven by both public and private spending.
If development of infrastructure is not pushed, GDP will
not grow more than 5-6%, whereas in a country like the
Philippines it should amount to 8% considering its population growth rate of 2%. Once per capita GDP is
improved, one can talk more about protection, as there
www.oxfordbusinessgroup.com/country/philippines-2015
is then something to protect. Otherwise, commoditised investment tools like variable unit-linked products
will dominate. Better infrastructure would strengthen
connectivity and unlock the potential of economic sectors that will then generate more wealth and more
insurable citizens. It would also enable the flow of capital from main cities into provincial areas, thus decentralising premiums from Metro Manila.
In what ways can ASEAN integration spur diversification and cross-border trade in the sector?
COYIUTO: The domestic insurance industry is preparing for ASEAN integration by sizing up and capitalising
on local networks to boost their competitive edge vis-vis foreign players. It is also asking for incentives from
the state to be able to compete with banks on trust
functions; currently non-banking institutions cannot
operate trusts. Although the sector has been largely
liberalised in the Philippines, ASEAN integration
will bring further imperatives for domestic companies.
103
Energy
Increasing reliance on foreign petroleum imports
Diplomatic tensions affect offshore exploration
Competing proposals to increase generation capacity
Incentives granted for renewable energy production
104
ENERGY OVERVIEW
Watts next?
With oil production set to remain flat, a shift to new sources is seen as
necessary to reduce dependence on foreign imports
The largest single consumer
of natural gas in the
Philippines is the electricity
generation segment, which
consumed 116,549 mmscf
of domestic natural gas
in 2013, equal to 97.7% of
the 119,250 mmscf
consumed over the year.
probable and possible estimates. Indeed, from February 2012 until the end of 2013, commercial production at the Libertad field totalled 151 mmscf of gas.
By far the largest single consumer of natural gas in
the Philippines is the electricity generation segment,
which consumed 116,549 mmscf of domestic natural
gas in 2013, good for 97.7% of the 119,250 mmscf consumed over the year. Industrial use of gas accounted
for another 2.23% (2665 mmscf), with the transportation sector using 35 mmscf, primarily in the form of compressed natural gas (CNG). Other proven reserves are
located in the Iloilo and Central Luzon basins, where
oil and gas resources were discovered in 1953 and
1979, respectively, but not yet been developed.
MALAMPAYA: The most significant energy project in
recent decades is the development of the Malampaya
natural gas field operated by a consortium of Shell
Philippines Exploration (45%), Chevron Malampaya
(45%) and the state owned Philippine National Oil Company (PNOC, 10%). Situated north-west of Palawan
Island at a depth of approximately 3000 metres below
sea level, Malampaya is a crucial contributor to the
countrys electricity production, supplying nearly half
of the Luzon power grids electricity requirements.
The total natural gas off-take dipped to 119.67 bcf
in 2013, down from 130.28 bcf in 2012 and the 140.37
bcf produced in the projects peak year of 2011. Condensate sales also declined from 4.58m barrels in 2013
to 3.82m barrels in 2012 due primarily to a 30-day
maintenance shutdown conducted from November to
December 2013. The gas raised from the Malampaya
field is used primarily to fuel three gas-fired thermal
power plants supplying the Luzon power grid: the 1200MW Ilijan power plant; the 1000-MW Santa Rita power plant; and the 500-MW San Lorenzo power plant. A
smaller portion is transported via pipeline to the Pilipinas Shell Petroleum refinery in Tabangao, while other
supplies are converted into CNG to be used as fuel for
a pilot phase of the CNG public transport project. So
as to maintain a sufficient number of supplies for these
ENERGY OVERVIEW
105
Production
Power
Industrial
Transport
2000
376
376
376
2001
4951
5551
5551
2002
62,205
56,270
56,270
2003
94,807
87,422
87,422
2004
87,557
84,344
84,344
2005
115,966
111,398
525
111,923
2006
108,606
103,217
2193
105,410
2007
130,211
123,203
3316
126,519
2008
137,073
129,044
2932
15
131,990
2009
138,030
130,653
3019
18
133,690
2010
130,008
121,924
3044
15
124,983
2011
140,368
133,226
3288
47
136,561
2012
134,563
127,765
2473
51
130,289
2013
123,944
116,549
2,665
35
119,250
2014*
30,943
28,937
838
29,778
Total
ENERGY OVERVIEW
106
2009
2010
Residential
16,644,230
17,503,744
18,833,007
18,693,546 19,694,896
20,613,717
Commercial
14,136,004 14,756,204
16,260,562
16,623,834
17,777,222
18,303,747
Industrial
17,030,903
17,084,427
18,576,307
19,333,954 20,070,972
20,676,799
Others
1,394,977
1,523,466
1,595,892
1,446,257
1,667,527
1,971,349
Total sales
49,206,114
50,867,841
55,265,769
56,097,591
59,210,618
61,565,612
Own-use
3,934,746
3,524,366
4,676,820
5,398,480
5,351,152
5,959,405
System loss
7,680,125
7,542,224
7,800,170
7,679,579
8,360,241
7,740,825
60,820,985
61,934,432
67,742,759
Total consumption
2011
2012
2013
www.oxfordbusinessgroup.com/country/philippines-2015
that will service commercial establishments in the Bonifacio Global City (2017); and the EDSA-Taft Gas Pipeline
Metro Manila city gas distribution network (2020).
The countrys first regasification project is expected to begin importing gas by 2015 as part of a new
600-MW gas-to-power project in Pagbilao, Luzon. Developed by Australian-headquartered Energy World Corp,
the $1bn project will have a capacity of 3m tonnes per
annum (tpa) and is being partially financed by the Development Bank of Philippines to the tune of $550m. Additional proposed LNG projects include Shell's 4m-tpa
floating storage and regasification unit, expected by
2016 in Batangas, and PNOC's 3.5m-tpa LNG hub in
Bataan, originally planned by 2018, but now on hiatus.
POWER SUPPLY: Due to the island geography of the
Philippines, electricity interconnection remains fragmented, with the majority of power allocated to three
main power grids: Luzon, Mindanao and Visayas. In
terms of capacity and demand, the largest is Luzon,
which remains chronically undersupplied, to the extent
that emergency measures are being implemented to
avert blackouts (see analysis). Accounting for roughly
three-quarters of the countrys total power output,
the Luzon network generated 54.82 GWh of electricity in 2013, or 72.8% of the total generated in the Philippines that year, according to the DoE.
Generators connected to the Mindanao grid supplied 11.1 GWh, 14.75% of the domestic total, with
power producers in Visayas accounting for the outstanding 9.35 GWh (12.42%). The country had a total combined installed capacity of 17,325 MW at end-2013,
though the actual amount of dependable power is in
fact significantly less, as many older plants have less
dependable and efficient equipment, prone to both
scheduled and unscheduled maintenance stoppages.
Traditional coal-fired thermal power plants are the
largest contributor in terms of capacity, accounting for
32% (5568 MW) of the Philippines power supply, with
oil-fuelled power plants contributing another 19%
(3353 MW). Power producers have taken advantage
of the active geologic conditions within the country by
developing one of the most productive geothermal
networks in the world. The 1868 MW of installed capacity in 2013 accounted for less than 11% of all power
capacity, while large hydro power projects contributed
another 3521 MW, good for just over 20% of total
capacity. Natural gas-fired power plants have expanded over the past decade with the commercialisation of
the Malampaya gas to power project, which employs
a network of three gas pipeline-fed power plants: the
1060-MW Santa Rita power plant, the 530-MW San
Lorenzo power plant and the 1271-MW Ilijan power
plant. Coal was the predominant fuel in 2013 with
32,081 GWh produced, accounting for 42% of all electricity. Natural gas generators supplied another 18,791
GWh, good for 24.9% of the total, followed by hydro
with 10,019 GWh (13.3%), geothermal with 9605 GWh
(12.8%) and diesel generators with 3805 GWh (5%).
Much has been accomplished already to promote
investment in the sector. Most notably, the Electric
Power Industry Reform Act was passed in 2001 as a
ENERGY OVERVIEW
107
at each solar site, with the three power plants projected to combine for 70 MW of installed capacity, as well
as a 60-MW wind farm also slated for San Carlos in 2016.
A 40-MW rooftop solar farm developed by the Majestic Energy Corporation in Cavite province is also scheduled to begin operations in 2015.
Wind was a bright spot in the renewables segment
in 2014, with significant capacity coming on-line. The
race for feed-in-tariff eligibility saw several hundred MW
of capacity built with equity, with the 150-MW Burgos
Wind Project and the 81-M Caparispisan Wind Energy,
both in Illocos Norte, among the winners.
OUTLOOK: Crude oil production should stay relatively flat in the coming years, with marginal increases in
existing fields off-setting their decreased productivity,
while natural gas supplies from the Malampaya field
continue to decline over the next decade as it matures.
Exploration in new, primarily frontier areas could
mitigate the countrys increasing reliance on foreign
energy sources to some degree, although any significant reserves are likely to remain tied up in territorial
disputes for the foreseeable future. It is clear that several challenges remain with respect to the countrys
electricity supply in the short term, particularly in Luzon.
However, the implementation of new projects and
incentives should help to alleviate the shortfall in
the medium-to-long term, even as energy demand
continues to climb at a rate in excess of 4% per annum.
2008
2009
2010
2011
2012
2013
3353
3193
3193
2994
3074
3353
Hydro
3291
3291
3400
3491
3521
3521
Geothermal
1958
1953
1966
1783
1848
1868
Coal
4213
4277
4867
4917
5568
5568
34
64
73
117
153
153
2831
2831
2861
2861
2862
2862
15,681
15,610
16,359
16,162
17,025
17,325
108
ENERGY ANALYSIS
ENERGY INTERVIEW
109
Fuelling growth
OBG talks to Edgar O Chua, Country Chairman, Shell Companies in the
Philippines
How will a liquefied natural gas (LNG) import terminal help the Philippines meet its energy security goals and develop the local natural gas industry?
CHUA: Natural gas is abundant and is the cleanest-burning fossil fuel, emitting about 50% of the CO2 released
by coal-fired power generation and can be used across
multiple sectors, ranging from road transport to the
marine industry, residential and power. Based on International Energy Agency (IEA) analysis, there are sufficient technically recoverable natural gas resources to
last for at least the next 230 years at current consumption levels, ensuring energy security and reliability. However, infrastructure challenges exist to exploiting gas.
For instance, we piloted a programme for the use of
compressed natural gas for government transport, but
the absence of a pipeline network in the Philippines
will continue to make the programme a challenging one.
For the country to attract investment in import and
regasification terminals, firm energy policies are needed. We need the government to implement a balanced
energy mix policy consisting of coal, renewables, natural gas and other sources to ensure that one type of
fuel does not dominate. The challenge with crafting an
energy mix policy lies in balancing the competing policy objectives of affordability, supply security and sustainability. A recent Department of Energy study shows
that if we do nothing, coal would account for up to 70%
of the power mix by 2030. Without policy change that
encourages investment in gas-fired capacity, in a high
coal scenario, coal plants would operate in both the
base load (~80% load factor) and mid-merit (~40% load
factor) space, despite gas being more efficient at midmerit. Coal plants are not designed to be load-following and this mode of operation affects their reliability.
Moreover, the higher capital associated with coal means
that higher utilisation is required for the investment to
pay for itself. So at mid-merit, where utilisation is in
the range of 40% to 50%, gas-fired generation would
be cheaper than coal on a long run marginal cost basis.
In 2011 researchers from the Harvard Medical School
How can the Philippines meet higher fuel standards and boost value-added downstream output?
CHUA: The growth of the Philippine economy is a major
catalyst for rising energy demand. For every 1% increase
in GDP, demand for fuel and energy grows by 0.5%.
Additionally, new developments in the mining sector
or other energy-intensive industries produce a higher
rate of demand growth. There is a lot of potential for
organic growth in the downstream segment, as demand
for products is driving smuggling that accounts for
20% to 30% of sales. It is unrealistic to aim for no smuggling, given that the Philippines is an archipelago, but
this poses challenges to under-resourced authorities.
Still, the level can be brought down to 10% or less.
The two oil refineries in the country are capable of
meeting the Euro IV fuel compliance requirements by
2016; however, due to smuggling, there will be no additions to capacity, only facilities upgrades. The main
entry points for smuggling have been the special economic zones (SEZs). Manufacturers pay taxes on imports
of crude oil and can claim refunds when they export
refined products, while importers with no value-added
activities do not pay taxes, as their imports are presumed
to be used in an ecozone or are re-exported. In 2012
a value-added tax for finished petroleum products,
even in SEZs, was imposed. This leveled the playing field
among oil players and significantly reduced smuggling.
THE REPORT The Philippines 2015
110
ENERGY INTERVIEW
In a sustainable fashion
OBG talks to Francis Giles B Puno, President and COO, First Gen Corporation
To what extent will the award of the feed-in-tariff
(FIT) encourage investment in renewable energy?
PUNO: As a country, the Philippine needs to acknowledge it is not rich in fossil fuels, but in renewable energy, and promote an environment where renewables
play a greater role in the energy mix. The DoEs approach
in awarding the FIT on a first-come-first-served basis
was unconventional, as it generated a race to build
capacity by those hoping to receive the FIT. The new
regime attracts investors with the capability to push for
renewable energy. Solar energy was one of the energy sources that benefitted from the FIT scheme, with
interest set to rise as the cost of panels and installation decreases. Conversely, hydroelectric presents more
challenges for execution, so racing for FIT allocation
can pose a risk to the projects bankability. The Philippines is also home to the worlds second-largest geothermal company, Energy Development Corporation
(EDC), a subsidiary of First Gen. Geothermal plants are
used as base loads, which can compete effectively
against coal generation while still being more environmentally sustainable. To develop more geothermal
domestically, it may be good to introduce a FIT for this
technology as well. Given its vast experience, EDC is now
venturing overseas to pioneer in the geothermal industry in countries like Peru, Chile and Indonesia.
ENERGY ANALYSIS
111
Power outage
Generation capacity has not kept pace with economic growth, leading
to potential shortfalls
As the economy has continued its robust growth over
the past decade, and spending among the expanding
middle class has increased, demand for electricity has
risen accordingly. However, while sales have gone up
by an annual average of 3.89% from 2001-13, according to the Department of Energy (DoE), power generation capacity growth has lagged far behind, at 2.2%.
CAPACITY CONCERNS: Taking into account DoE
assumptions of electricity demand-to-economy elasticity in Luzon of 0.6, the countrys GDP growth rates
of 6.8% in 2012 and 7.2% in 2013 equate to an estimated average rise in consumption of 4.1% and 4.3%,
respectively. These estimates are within a percentage
point of power consumption figures recorded by the
DoE. These trends are widely expected to have serious
consequences for the sector beginning in 2015. Most
concerns are focused on the island of Luzon, which
accounts for around 70% of electricity consumption.
The peak demand season starts in March and lasts as
late as July. Current projections by the DoE for this fivemonth period indicate that there will be 14 weeks out
of 22 where available capacity will be less than the
Luzons contingency reserve of 647 MW (4% of peak
demand), with the system peak demand during the
first two weeks in April expected to actually exceed available capacity. As a result, load shedding and brownouts
have become a very real possibility for the Luzon grid
during peak demand, and emergency measures are
being explored in order to best combat the situation.
On paper, the Luzon grids installed capacity of 12,769
MW easily outpaces estimated system peak demand in
March 2015 of 8201 MW. In reality, however, much
official installed capacity is offline or unreliable due to
planned maintenance and antiquated facilities. Around
89% of installed capacity, or 11,389 MW, are rated as
dependable. The major culprits include fossil fuel-fired
thermal power plants, the largest being the 350-MW
unit 1 at the Malaya thermal power plant, considered
unreliable since March 2014 due to high turbine vibrations. Malayas 235-MW unit 2, on the other hand, is
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ENERGY ANALYSIS
thereby be reduced to a more manageable level, helping ensure the availability of supply during peak demand
season. In return, participating generators would be
compensated by the government according to a formula that pays 0.34 litres of diesel per KWh (prices were
around P40 [$0.90] per litre in late 2014), along with
a maintenance stipend of P0.32 ($0.01) per KWh. Fuel
costs are based on litres, as fuel prices fluctuate. Similar programmes have been employed in Mindanao and
Cebu, where there were significantly fewer ILP participants, but also lower peak demand. An economic
advantage of this scheme is that the generators are
only run and paid for during peak demand times. As
such, while overall reserve capacity will remain relatively low, generators will only be used for short durations
during the crucial summer period, rather than acting
as a standby sunk cost throughout the whole year.
NEGOTIATIONS: As of October 2014, Luzons primary
power provider Meralco had registered 155 MW of ILP
participants and was continuing negotiations for another 81 MW of capacity operated by 57 other customers.
However, as the majority of these self-generating facilities (SGF) are limited to a four-hour operational span,
the ILP power to the grid at any one time is likely much
lower than Meralcos planned 236 MW, with conservative DoE estimates placing it at 118 MW. These figures do not, however, take into account other potential ILP sources, such as contestable customers within
the Philippine Economic Zone Authority, the Semiconductor and Electronics Industries in the Philippines
Incorporated and the Retail Energy Supply Association,
and 319 MW of potential SGF capacity from the Subic,
Cavite and Baguio ecozones. Some 60 MW of SGF power located in Batangas, Labuna and Pasig City has also
been committed by the domestic conglomerate JG
Summit, which also owns a 27.1% stake in Meralco.
While the ILP should provide the Luzon system some
relief for its impending power supply shortage, uncertainty over the exact levels of power committed to the
grid in times of crisis could also increase the possibility of unstable voltage and frequency levels within the
system, particularly if an SGF were to experience an
unexpected failure of its generator. Whether the government ultimately decides to go the ILP route or contract additional emergency generation units directly,
the problem will likely extend beyond 2015 alone.
ENERGY ANALYSIS
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Opening up
Renewable energy has enjoyed its most productive year to date
Forces coalesced in 2014 to grant the Philippines
renewable energy industry its most productive year to
date. Spurred on by mounting concerns over the looming energy shortfall, the Energy Regulatory Commission
(ERC) has opened the sector to investment by boosting the renewable capacity approved for the renewable energy incentive scheme ten-fold in many cases.
However, with solar, wind, biomass and small hydro
contributing only 153 MW of installed capacity at end2013, further investment will be needed to achieve
the governments target of 15,304 MW of by 2030. As
Ernesto B Pantangco, executive vice-president of the
Energy Development Corporation, told OBG, The energy sector does not have subsidies, but the government
can target priority areas, like export-oriented firms,
with subsidised rates to maintain competitiveness.
GRANTING INCENTIVES: Originally passed in 2008,
the Renewable Energy Act grants incentives to renewable projects through a feed-in-tariff (FIT) system that
provides approved producers an additional revenue
stream for each hour of renewable energy produced.
The act also established the Philippines' National Renewable Energy Board (NREB), tasked with the administration, regulation and promotion of renewable energy
resources development in the country. Broken down
by generation technology, the act targets a 75% increase
in geothermal capability, along with a 160% boost in
hydropower capacity by 2030. The less well-established
technologies of wind and solar are projected to add
2345 MW and 1528 MW, respectively, alongside an
additional 277 MW of biomass power plants and the
countrys first ocean-powered generation facility.
Since being established in 2010, FIT rates have fluctuated as the ERC performed an ongoing balancing act
to find the optimal price points to create investor interest while keeping a lid on consumer prices. Rates were
reduced significantly from the early levels projected by
the NREB in 2008 to the first implementation in 2012.
When the scheme finally commenced operations, the
rates were P9.68 ($0.22) per KWh for solar, P8.53 ($0.19)
per KWh for wind, P6.63 ($0.15) per KWh for biomass
off-take and P5.9 ($0.13) per KWh for hydropower. Other caveats restricting FIT eligibility include stipulations
that hydropower projects must be run-of-river plants
(as opposed to impoundment facilities) with installed
capacity of 1-10 MW; solar projects must be ground
mounted with 500-KW capacity or greater; and biomass
power plants must be powered by solid, not liquid fuel.
Large-scale, reservoir-based hydropower projects
are omitted from the scheme due to their ability to compete head-to-head economically with conventional
power generation. Rates are expected to be further
adjusted by the ERC in early 2015, with new solar FIT
rates projected to be reduced to P8.5-9 ($0.18-0.19)
per KWh. Another measure is the decline in FIT value
over time. This is meant to protect consumers and
encourage investors to focus their efforts earlier, thereby avoiding speculators. This provision progressively
reduces the tariff rate to ensure that rapid movers benefit more than slower-developing projects.
CONSUMER COSTS: Due to the continued revision of
FIT rates and the cap on eligible capacity, some unpopular consequences, such as excessive rates of return
and spiralling consumer cost, have largely been avoided. The total impact of FIT is only around 1-2% of the
wholesale price on the Wholesale Electricity Spot Market, said Don Mario Dia, director of renewable power
developer Bronzeoak Philippines. In fact, the price
should decrease in the long run if you replace all the
dirty and expensive diesel power with renewable. Other incentives include a seven-year income tax holiday
followed by a 10% corporate tax rate, duty-free imports,
a special real estate tax rate of below 1.5%, accelerated depreciation of assets, tax exemption on carbon credits, and tax credits on domestic capital equipment and
services. Generators are also assured priority access to
grid connections, and the purchase and transmission
of their electricity by the grid-system operator.
FIT SCHEME PARTICIPATION: Participation in the
scheme was initially capped for each technology due
THE REPORT The Philippines 2015
114
ENERGY ANALYSIS
The Philippines commissioned its first solar photovoltaic farm in 2014, with 22 MW of installed capacity
to concerns that excessive uptake could lead to unacceptably steep price spikes in the consumer market.
These ceilings limited competing developers to a total
of 250 MW each for run-of-river hydro and biomass,
200 MW for wind farms, 50 MW for solar farms and 10
MW for ocean thermal energy conversion power.
However, strong developer interest and the growing
power shortage prompted the ERC to rethink its position in 2014. Proposed solar photovoltaic projects that
exceeded 1 GW in combined capacity were planned as
of early 2014, and several FIT-approved projects came
on-line in the beginning of the year. With the original
50-MW threshold to be abolished by mid-year, the ERC
(following NREBs recommendation) moved to boost
this figure to 500 MW through end-2015. This was followed by a decision by NREB in October 2014 to expand
the wind power cap from 200 MW to 500 MW. With
these obstacles now removed, developers are rushing
in to fill the gap and take advantage of the numerous
incentives available to qualified power producers.
Even so, many small developers have found it difficult to obtain financing from local banks given reluctance to lend money for projects in a relatively untested market, particularly for smaller players. A significant
impediment arises from the act, which requires that
80% of the facility be built before the owner may even
apply for the FIT, after which the FIT could still be denied.
This uncertainty leads to considerable variation in initial business plans and the return on investment projections. As a result, the majority of projects have been
funded by other means. Awarding the FIT once almost
80% of a renewable project has been completed allows
for the real players to come in and develop projects,
K. K. Ralhan, the group chairman of Kaltimex Energy,
told OBG, However, banks need to understand that they
need to finance projects under these conditions to
really create the opportunities to develop projects.
MOVING QUICKLY: Although progress in the sector has
been moving at a fairly slow pace since the incentives
were first proposed in 2008, clarification of secondary
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115
116
INDUSTRY OVERVIEW
Recording an average
growth rate of 5% between
2010 and 2013, food
manufacturing is
responsible for around 45%
of output, and makes up the
largest production segment.
INDUSTRY OVERVIEW
555
Beverages
59
Tobacco
Textiles
26
Wearing apparel
33
13
77
13
Medium-technology manufacturing
Petroleum & other fuel products
43
23
41
31
14
High-technology manufacturing
Chemical & chemical products
184
21
21
33
262
Transport equipment
27
Misc.
40
SOURCE: NSCB
117
target set out and was lower than the 7.6% growth
posted in 2012. The drop-off could be attributed to a
slowdown in expansion in China and the US, two key
trading partners, as well as a 2.5% decline in electronic exports. Electronics exports constitute around 45%
of all exports, and the industry is currently undergoing
a trying period as it adapts to a shift in demand for component parts away from laptops and towards tablets
and smartphones (see analysis). Looking forward, factors that could impact export swings in 2015 include
Japans quantitative easing and a further depreciation
of the yen, as the Philippines is a significant supplier
of parts to Japanese exporters. The performance of
the peso may also play a role too. Following a marked
appreciation in 2012 that negatively impacted exports,
however, the peso has since held relatively steady within a comfortable band relative to the dollar.
LABOUR ABSORPTION: The population has a median
age of 23, according to the 2010 census, and 34% of
Filipinos are under the age of 15. Accordingly, the Philippines youthful make-up could prove to be either a
major asset or a significant burden, with much riding
on the degree to which its future graduates can find
adequate employment. Formal unemployment for the
country is measured at around 8%, with approximately 3m Filipinos considered jobless and an additional 7m
deemed to be underemployed. Of the 500,000 college
graduates coming to the labour market each year, manufacturing is said to absorb just around 20,000. It is estimated that in total for the country, an additional 14.6m
jobs will need to be created by 2016.
In the WEF competitiveness rankings, the Philippines
ranked 91st in the labour market category. While faring relatively well in the assessment of wages and productivity, rigid labour regulations are considered to
hamper its overall labour competiveness and deter
some prospective investors from labour-intensive industries. Another challenge facing the labour market is that
the countrys reputation for good workers results in a
large number of the more talented Filipinos opting to
work overseas in countries where they can earn higher salaries. When the AEC happens, the brain drain could
be even worse, said SEIPIs Lachica, referring to the liberalisation of regional labour mobility that will come
about once ASEAN integration takes effect.
POWER PROBLEMS: Power and logistics are invariably
cited as the two primary concerns by manufacturers
OBG has spoken with, and President Aquino, in a speech
delivered at the 40th Philippine Business Conference
in October 2014, acknowledged that both inputs need
to be addressed going forward.
Electricity costs in the Philippines are among the
highest in the world, and its power rates are considered to be the most expensive in Asia. Electricity for
general use in Manila comes out to $0.23 per KWh, compared to $0.07 in Hanoi and Ho Chi Minh, $0.08 in
Bangkok and $0.11 in Kuala Lumpur. The higher rates
stem in part from higher production costs due to a lack
of domestic hydrocarbons resources, while they also
have to do with a conscious decision on the part of
the government not to subsidise tariffs for end-users.
THE REPORT The Philippines 2015
According to Deloitte,
manufacturing unit costs in
China have risen by 50%
since 2008 compared to 6%
in the Philippines. Wages in
China are expected to rise
by a factor of three until
2033 compared to a factor
of two for the Philippines.
INDUSTRY OVERVIEW
China
24.2
Japan
22.3
Others
11.8
Singapore
11.4
US
9.1
Netherlands
7.6
Germany
UK
Australia
SOURCE: NCSB
The government argues that offering energy subsidies provides industry with an artificial, unsustainable
advantage and would contribute to an unmanageable
current account deficit in the long term.
Advocates of a subsidy regime counter that the cost
has to be weighed against the benefits in terms of job
creation and the economic multiplier effect. Despite
some of the advantages of the Philippines, Samsung
recently chose Vietnam over us for a $2bn smartphone
manufacturing facility purely because of more favourable
energy costs, SEIPIs Lachica told OBG. Whether or
not you agree with governments rationale to reduce
electricity subsidies, Samsung is not here contributing
to the economy, and thats what matters.
In 2015, electricity availability rather than price is likely to dominate the narrative. A supply shortfall in the
most populated and main industrial province of Luzon
is expected to lead to rolling brownouts of one to three
hours a day from March to May. The president is seeking approval from Congress for emergency powers permitting the government to pursue power purchase and
generation deals for the first time since the power sector was privatised in 2001. As an interim measure and
a potentially more achievable solution, it has been indicated that large companies within the province will be
called to run their own stand-by diesel-fuelled generators to ease demand on the provincial grid, which is
responsible for supplying electricity for nearly half of
the countrys households (see Energy chapter).
LOGISTICS: The WEF index ranks the Philippines 91st
out of 144 countries surveyed for its infrastructure
competitiveness, with its airports (108th) and seaports
(101st) in the bottom third. The majority of cargobound imports and exports, which grew by 8.3% and
5.4%, respectively, through the first six months of 2014,
depart from the Port of Manila. With a utilisation rate
exceeding 100%, the gateway port is facing major strain.
Inefficiency is compounded by congestion, particularly given delays to an elevated road network connecting the ports to other parts of the capital. According
to a September 2014 article in The Wall Street Journal,
the Philippine Economic Zone Authority (PEZA) has
said that port congestion resulted in 20,000 private sector workers being laid off from economic zones around
Manila, while the Bureau of Internal Revenue attributes
falls in tax revenue to the same problem.
In February 2014, the mayor of Manila declared a ban
on heavy vehicles (those weighing over 4500 kg) from
driving on city thoroughfares between 5am and 10am
and from 3pm to 9pm on Monday to Saturday. While
intended to reduce gridlock on the road network, the
controversial truck ban, which was lifted in mid-September, came at a substantial cost for firms reliant on
in- or outbound shipments. The Philippine Franchise
Association stated that its members suffered P3bn
($67.5m) in losses as a result of having to pay more for
imported goods, while SEIPA reported that the disruption in the delivery of raw materials cost electronics
companies as much as $100,000 a day.
To ease congestion and migrate cargo traffic from
the Port of Manila to the nearby ports of Subic and
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2.7
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INDUSTRY OVERVIEW
Imports
Japan
5.72
2.06
7.78
US
3.43
2.51
5.94
China
3.2
3.85
7.05
Hong Kong
1.86
0.6
2.46
Singapore
1.84
1.79
3.63
Korea
1.12
2.32
3.44
Thailand
1.07
1.28
2.34
Germany
1.07
1.13
2.2
Netherlands
0.79
0.15
0.93
Total
24.36
26.63
51
Total trade
A market accelerates
OBG talks to Hikosaburo Shibata, President and CEO, Mitsubishi Motors
Philippines
The Philippines is among the fastest growing car
markets in Asia. What is driving this growth, and what
characterises the domestic market?
SHIBATA: Sustained economic growth and subsequent
higher disposable income for Filipino households has
generated significant growth momentum and opportunities for expansion in car sales. In 2014 the January
to October period saw total demand for car sales grow
by 28%, outpacing the performance of similarly sized
markets elsewhere. After Thailand, Malaysia and Indonesia, the Philippines is the next country in the region
undergoing motorisation, incentivising manufacturers
and car dealers to pursue expansion. Historically, countries have undergone rapid motorisation when GDP
per capita reaches $3000; in 2014 the figure for the
Philippines was estimated at $2913, according to the
IMF. While Manila and Luzon account for the majority
of new car sales, expansion into provincial and rural markets offer significant growth potential.
Whereas the large families and strong ties that
typically characterise Filipino households have led to
the popularity of seven- and eight-seater SUVs, demand
for A and B segment cars is also rapidly increasing as
higher disposable income translates into demand for
smaller and more fuel-efficient cars.
Environmental friendliness is another major global
trend for the car industry. However, the Philippines still
needs significant support, both legislative and infrastructural, to encourage the large-scale adoption
of environmentally friendly models. From the government standpoint, there has been an environmental
law drafted in Congress, that could boost developments in environmental sustainability and increase
awareness of pollution reduction.
part of Luzon, in Cagayan. In the past, there was a higher incidence of second-hand SUVs being imported from
Japan: however, Executive Order 156 and its ban on the
importation of used vehicles was able to curb this.
Nonetheless, around 40,000 to 50,000 second-hand cars
are imported from around the world. Given the fact
that new car sales are expected to reach roughly
260,000 by the end of 2015, the used car market
would still represent around 17% of the market. Unlike
in Indonesia, Malaysia or Thailand, where local car
manufacturing is protected from the used car markets,
there is still room for further strengthening the
implementation of the ban in the Philippines.
In addition, the Philippine second-hand car market
is not mature. Whereas dealers in neighbouring countries generally offer used cars and the option for consumers to trade in their used vehicles, in the Philippines
used car transactions still tend to occur outside of the
dealership businesses.
121
122
Experiential shopping
OBG talks to Ben Chan, Chairman and CEO, Suyen Corporation
How has retail liberalisation altered the domestic landscape, and what role has franchising
played in bringing foreign ideas to the market?
CHAN: The results of retail liberalisation have been
nothing less than dramatic. The retail landscape of
the Philippines is barely recognisable from the way
it was just 10 years ago. Whereas many Filipinos
used to travel to Hong Kong or Singapore for a global shopping, dining and leisure experience, now we
have all of that in Metro Manila.
The most striking feature of this liberalisation is
how global it is. The foreign retail market used to be
dominated by US brands and a handful of really wellknown European ones. Now we have Scandinavian,
Japanese, Australian, South American, Canadian,
Israeli and other foreign-owned franchises competing side by side in one mall.
Franchising has played a huge role in making this
happen. Our company both franchises its own brand,
Bench, and acquires foreign ones. This practice has
created a dynamic exchange of ideas within our
company, something that is replicated in the retail
market as a whole. Each franchise comes with its own
business model and its own point of view, so when
one franchiser or franchisee exchanges business
models with another, much growth and learning
comes as a result. The consumer benefits from this
immensely, as standards are raised, quality is
improved, and knowledge is shared and imparted,
which in turn fuels growth and more demand for other new ideas and concepts.
How has the proliferation of malls affected retailers? What are the challenges in further extending penetration outside Metro Manila?
CHAN: We are now very motivated to fill those new
mall spaces with the most exciting and inspiring
retail concepts we can find in the world. The new
malls are providing customers with a complete
lifestyle experience, where you can spend a whole
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day there and have all your needs met, from shopping and dining to lounging and entertainment. It is
completely aspirational. As a retailer, you have to
cater to that desire and take a lifestyle approach to
the way you do retail. You have to be very meticulous about the lifestyle message that your store
wants to deliver, because if it resonates with the
lifestyle to which your target customer aspires, then
you will have an increasingly loyal clientele who will
keep coming back for more.
Advancing outside of Metro Manila is an organic
process that will take more time, since customer
habits there are a bit slower to adapt. The malls in
the second and third biggest cities, Metro Cebu and
Metro Davao, will inevitably carry the biggest and
most successful brands already found in Metro Manila, and will usually follow the trends set by Manila.
INDUSTRY ANALYSIS
123
A steady drive
Establishing a stronger base for vehicle and components manufacturing
In 2013, the Department of Trade and Industry (DTI)
was allocated P2.3bn ($51.8m) from the Department
of Budget and Management towards its manufacturing resurgence programme. The programme will support the implementation of a number of industry road
maps that have been formulated by the Board of Investments (BOI) with input from technical working groups
including industry representatives. In all, 22 manufacturing road maps have been submitted to the DTI-BOI
so far. One stand-out programme is the Comprehensive Automotive Resurgence Strategy (CARS), which is
receiving attention in light of the multiplier effect a
strong domestic vehicle and components manufacturing base provides, and the market access and supplier integration opportunities set to come about via
ASEAN Economic Community (AEC) integration.
DEVISING A PLAN: Establishing an automotive manufacturing base is not without its challenges, and the
country has some catching up to do with the regions
more established vehicle producers. According to ASEAN
Automotive Federation data, the Philippines assembled 79,169 vehicles in 2013 compared to 2.46m in Thailand, 1.21m in Indonesia and 601,407 in Malaysia.
Thailand is the regions leader, a position that
observers attribute to the implementation of dynamic and focused industrial policy. Considering the extent
to which the automotive industry relies on global supply chains, as component companies cluster around their
original equipment manufacturer (OEM) customers,
the Philippines is looking to emulate the Thai example,
as well as those of countries such as South Africa and
Brazil that have emerged as regional production success stories by integrating into the networks of leading multinational automotive makers.
SEEKING DIRECTION: As part of the CARS programme,
the establishment of an industry support fund potentially totalling $600m is being considered. The final version of the industry road map has not yet been released,
but indications are that it will entail a combination of
income tax holidays and tax credits. Wooing OEM brands
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INDUSTRY ANALYSIS
Achieving a high volume of automotive production depends on having a strong local supply base
up substantially from $2480 in 2009 and almost treble the amount recorded in 2003.
More earnings, consumer confidence, low interest
rates and the increased ease of getting loans are generating new demand, Renato Pizarro, the senior vicepresident at Hyundai Philippines, told OBG.
According to the Chamber of Automotive Manufacturers of the Philippines, sales of passenger and commercial vehicles from January through September 2014
increased almost 30% year-on-year. In 2014 sales
increased by 29.5% to 234,747 units, while 272,000 units
are expected for 2015, a growth rate of 16%.
IMPACT POTENTIAL: A situational study included in the
road map proposal concludes that industry savings of
P759bn ($17.1bn) could be achieved by 2022 if 400,000
completely built units are made locally instead of being
imported. At the same time, an estimated 300,000 jobs
could be created domestically and the industrys contribution to overall GDP increased to 2.2%. A separate
study released by the University of Asia Pacific and referenced by the BOI reveals that every P100bn ($2.3bn)
in investment in the industry creates an estimated
170,000 additional direct jobs.
In 2013, employment in the industry was broken
down into 8000 workers directly employed in auto
manufacturing, 68,000 in the auto parts sector and
340,000 indirectly employed in supporting industries.
AEC: Any OEM brand evaluating between competing
investment markets within ASEAN will likely be assessing the regional market as a collective, as once the AEC
is formalised in 2015, intra-regional imports will be
subject to zero tariffs. Manufacturers will have to rethink their regional set-up, said Pizarro. Competing
Japanese brands that manufacture and import to the
Philippines from Thailand will suddenly become a lot
cheaper than European or Korean vehicles imported
from their home or a non-ASEAN country.
ASEAN pooled population of 600m people presents
attractive prospects for whichever members emerge
as net exporters. Deutsche Bank forecasts ASEAN car
www.oxfordbusinessgroup.com/country/philippines-2015
INDUSTRY ANALYSIS
125
126
INDUSTRY ANALYSIS
An electronics industry road map aims to boost annual exports to $37bn by 2016 and $52bn by 2022
tronics data. If they did, they would provide a rosier picture for the industry, with exports jumping 137% in
2012 and a further 5.7% in 2013. Recent investors in
the office segment include Epson, which opened a
$110m inkjet printer plant in 2011, and Brother, which
completed a $54m inkjet cartridge plant in August
2013 and is building a $62m inkjet printer and printer-copier-scanner plant. Canon announced in 2012 it
would spend $220m on a laser printer facility.
ON THE RIGHT PATH: Cheaper electricity and lower
wages make it difficult to compete with the likes of Vietnam and Indonesia in the lower-value assembly and
package space. Thailand, with strong inter-industry linkages, established infrastructure and a reputation for
quality, is positioned as the regions leader when it
comes to high-technology semiconductor activities.
For Lachica, this leaves the Philippines with little competitive alternative but to deliberately hone in on a
niche, similar to what Malaysia has done with wafer fabs.
In order to ascertain the product lines and technologies where the countrys electronics industry can carve
out an economically rewarding niche, Lachica believes
it necessary to study where the global industry is headed in terms of future end-product demand and identify a technological trend that the country possesses the
competencies to exploit. SEIPI has commissioned a
research assessment called Product and Technology
Holistic Strategy and is seeking funding and support
from outside parties such as the US Agency for International Development. It will also be calling on local government agencies to leverage the studys outcomes and
recommendations to guide investment promotion and
industry marketing as well as influence infrastructure
investment decisions. The education system, meanwhile, will be tasked with matching their science, math
and technology courses. Although the study has not
yet ended, areas of the electronics industry that are
earmarked for global growth include advanced robot
systems, an automotive electronics market that is moving towards autonomous driving systems, the smart
energy market, and connected devices and wearables.
RETAIL OVERVIEW
127
Good prospects
Rising incomes bode well for the sector, while mall expansion is shifting
out of the urban centres
With a young, rapidly growing and consumption-driven market of nearly 100m, an expanding middle class
and positive consumer sentiment, the Philippines
demographic and socio-economic status makes it one
of the regions more promising retail destinations.
Consultancy A.T. Kearney, in its 2014 Global Retail
Development Index, ranked the Philippines 23rd out
of 200 emerging economies evaluated, based partly
on expectations of retail sales growing 10% per annum
for the next three years. The report predicts another
five to 10 years before the market approaches maturation, making the coming period the optimal time for
new entrants seeking to gain a foothold and existing
retail groups looking to expand their presence amidst
more favourable trading conditions.
Adjusted for inflation, figures from the National Statistical Coordination Board show gross value added in
the retail trade expanded by 6.8% in 2013. This growth
is expected to continue as remittances from Filipinos
overseas and the business process outsourcing (BPO)
sector the two underlying factors driving the performance of the sector show no signs of slowing.
ADAPTING TO TRENDS: Going forward the retail landscape is expected to see greater competition and gain
in sophistication. A third of the countrys population
falls in the 20- to 30-year-old age bracket the socalled retail sweet spot and is considered more brandconscious and prone to adapt to and demand new
retailing trends. The population is young, the workforce is growing, and if you get it right as a retailer, you
will grow, Paul A Santos, the national vice-president
of the Philippine Retailers Association (PRA), told OBG.
The Philippines offers arguably the most Westernised culture and the strongest English language skills
in Asia, and as a result international brands and concepts have had a high success rate. However, taking
on the local retail incumbents, many of which are affiliated with large conglomerates, can prove a challenge,
especially when it comes to securing retail space in
the more sought-after malls and shopping districts.
GROWTH DRIVERS: Buoyed by an optimistic consumer outlook and strong consumerist culture, the
World Bank forecasts private consumption to contribute more than half of GDP growth in 2015. The
Philippines gross national income per capita totalled
$3270 in 2013, which is substantially up from $2480
in 2009 and almost treble the amount recorded in
2003. A second-quarter 2014 survey released by the
central bank, Bangko Sentral ng Pilipinas (BSP), reported consumer expectations for the next 12 months to
be upbeat based on improved prospects for job security and more investment in the country.
At any given time, it is estimated that approximately 10% of all Filipinos are working abroad as overseas
foreign workers (OFWs). The earnings they send home
make up around one-tenth of the economy, and a
large proportion goes towards retail spending. Cash
remittances increased 6.4% in 2013 to reach record
levels, and the BSPs Department of Economic Statistics predicts 2014 remittances to expand a further 5%
to reach $23bn for the year.
The BPO sector is the second-largest economic contributor after remittances. According to the IT and
Business Process Association of the Philippines, the
industry was responsible for $15.5bn in revenue in
2013 while employing 900,000 people a dramatic
increase from the $3.2bn of revenue and 240,000 jobs
it accounted for in 2006. According to BSP figures, the
average salary of a BPO worker in 2012 came out to
$8849, which is nearly triple the minimum wage in
Metro Manila. Most BPO workers are in their mid-20s
and early 30s, and many are living at home with high
disposable incomes. Retail is really feeling the effect
in a positive way, Christopher Po, president and CEO
of Century Pacific Group, told OBG.
As with OFWs and BPO workers, tourist arrivals, in
both the leisure and business segments, are also on
the rise, with the Department of Tourism reporting the
number of foreign visitors to have grown by 9.5% in
2013. This provides an additional budding shopper
THE REPORT The Philippines 2015
128
RETAIL OVERVIEW
In addition to becoming more competitive, the retail landscape is expected to gain in sophistication
By end-2014
Expansion target
7-Eleven
1300
2000 by 2017
Mini Shop
500
750 by 2016
FamilyMart
130
500 by 2018
All Day
100
400 by 2016
Circle K
10
TBD
Alfamart
TBD
Lawson
500 by 2020
RETAIL OVERVIEW
129
The country offers relatively affordable lease rates in comparison to more developed Asian retail centres
130
RETAIL OVERVIEW
As a substantial portion of retail goods are imported, logistics costs impact merchandise pricing
RETAIL OVERVIEW
131
The Philippines has an estimated 1400 franchise concepts representing some 125,000 franchise operations
mon. Even if the transactions are not done online, given the growing ownership of inexpensive smartphones
and the increasing access to the internet via 3G coverage, retailers are developing websites to showcase
their products for consumers who like to browse online
prior to making an in-person, brick-and-mortar purchase. A 2014 study carried out by On Device Research
estimated smartphone penetration in the Philippines
at around 15%, one of the lowest rates in Asia; however, growth is expected to be amongst the fastest in
the region, reaching 50% by 2015.
The biggest challenges for the development of
Philippine e-commerce are the transaction payment
and inadequate infrastructure, which affects the cost
of delivering goods. Filipinos shop by researching online
but transacting offline. However, e-commerce offers
huge potential if the payment scheme is improved,
especially as the current domestic credit card utilisation is low and many people still have trust issues with
credit card payments done online. The huge youth
demographic, which is technologically savvy, will be a
significant market for retailers to tap through e-commerce, Bernie H Liu, the chairman and CEO of fashion retailer Golden ABC, told OBG.
OUTLOOK: The Philippines demographic dividend, a
consumerist culture and economic expansion all add
up to positive signs for retailers. Although the retail
sector is relatively well developed, modern trade is
mostly concentrated in the province of Luzon and a
few other commercial centres, presenting retail chains
and franchises with the opportunity to expand their
footprint to smaller towns and secondary islands.
Despite some restrictions on foreign ownership,
international retailers are making the country a top
expansion priority and are often looking to partner with
established incumbents that can offer local insights
and access to store sites. The development of malls is
expected to taper off, but a thriving BPO sector and
provincial growth present opportunities for retail
property in new commercial and residential districts.
THE REPORT The Philippines 2015
E-commerce sales
expanded by 13% in 2013
to $247.5m. Low credit card
penetration has been a
barrier to growth; however,
online retailers are
circumventing this
challenge by accepting
cash on delivery.
133
Tourism
New investment focused on bringing in more visitors
Manila and other cities offer attractive MICE options
Transport infrastructure will need to be expanded
Ecotourism is set to be a major segment in the future
134
TOURISM OVERVIEW
foreign arrivals reach the country by air. As such, conversion of newly generated demand into actual arrivals
is constrained by a lack of adequate transport infrastructure. Airport handling capacity into and within
the country is insufficient, and the shortage of efficient sea and road connections between local destinations limits the ease of intra-country travel. This
places a strong impetus and sense of urgency on all
government departments to accelerate public works
on key transport projects and create a conducive environment for private sector participation considering
that public finances are strained. The DoT claims that
around half of all government infrastructure projects
are aligned towards improving access to the countrys
cluster tourist destinations.
A MATTER OF RANKINGS: According to the World
Travel & Tourism Council (WTTC), the direct contribution of travel and tourism to GDP in 2013 was P472.3bn
($10.63bn), making it the fourth-largest foreign
exchange earner after exports, overseas remittances
and outsourcing. This made up 4.2% of the total economy, a ratio that is forecast to remain steady, with the
WTTC projecting the sectors economic contribution
to increase by 5.6% per annum to reach P843.3bn
($18.97bn), or 4.3% of total GDP, by 2024.
The Philippines ranked in the top quartile (35th)
globally out of 184 countries surveyed in terms of the
absolute value of the tourism sector, but trails regionally behind Thailand (14th), Indonesia (16th), Malaysia
(19th) and Singapore (26th). In relative terms, it ranks
only 70th globally, and regionally falls behind Vietnam
and Cambodia, as well as Indonesia, Malaysia and Singapore. With the exception of Thailand, which faced
stagnant growth in 2013 due to political unrest, the
Philippines tourism industry experienced the lowest
growth rate in 2013 among ASEAN members.
In terms of employment generation, over the course
of 2013 travel and tourism directly supported 1.2m
jobs (3.2% of total employment). This is expected to
rise by 2.5% per annum to reach 1.6m jobs by 2024.
TOURISM OVERVIEW
135
According to the
Department of Tourism, the
average stay for long-haul
arrivals was 10 days for
January to October 2014,
which marked an increase
of two days over the same
period in 2013.
2012
2013
Share (%)
Growth (%)
2013
2014
Share (%)
1. Korea
1031.16
1165.79
24.9
13.06
489.39
453.28
21.99
2. US
652.63
674.56
14.41
3.36
306.06
327.7
15.9
3. China
250.88
426.35
9.11
69.94
168.88
198.95
9.65
4. Japan
412.47
433.71
9.26
5.15
179.98
188.94
9.17
5. Australia
191.15
213.02
4.55
11.44
88.19
96.66
4.69
6. Singapore
148.22
175.03
3.74
18.09
70.47
74.71
3.62
7. Canada
123.7
131.38
2.81
6.21
61.09
67.93
3.3
8. UK
113.28
122.76
2.62
8.37
52.38
60.31
2.93
9. Taiwan
216.51
139.1
2.97
-35.75
79.3
55.54
2.69
10. Malaysia
114.51
109.44
2.34
-4.43
45.45
54.42
2.64
Total arrivals
4272.81
4681.31
100
9.56
2011.52
2061.14
100
SOURCE: DoT
TOURISM OVERVIEW
and effectiveness. Marketing intelligence service company Warc awarded the initiative third place in its
ranking of the top 100 global campaigns for 2013, stating that using Filipinos themselves as the inspiration
for the campaign [it] captured the attention of the
whole nation and the world.
The second phase of the campaign, which took
effect over the course of 2014, transitions from national to destination-specific marketing. Boracay, Davoa,
Cebu and Manila are each receiving their own international television commercials that, while aligned to
the more fun theme, showcase and capture what is
unique about each destination. Boracay is being branded Asias 24/7 island; Davao is a place for nature,
eco-adventure, wellness and relaxation; Cebu is being
promoted for its pristine diving and musical heritage;
and Manila is being marketed as a Capital of Fun by
virtue of its cosmopolitan shopping, nightlife, art, culture and business features.
CONTINUING MOMENTUM: With 2015 having been
designated as Visit the Philippines Year, the DoT will
be hosting 35 events throughout the calendar year.
Festivities kicked off with a four-day visit by Pope
Francis in late January 2015 to coincide with World
Youth Day, and in November the country will be hosting the Asia-Pacific Economic Cooperation ministerial meetings and leaders summit. Scheduled for April
2015, Madrid Fusion Manila is being dubbed by the
DoT as the biggest culinary event in the world.
The success of the More Fun campaign, alongside
the Visit Philippines events being staged in 2015,
affords the private sector a real opportunity to piggyback on the momentum being created and to develop our own products and events that match up with
the themes and message, John Paul M Cabalza, the
president of the Philippines Travel Agency Association
(PTAA), told OBG.
MAKING A GAME OF IT: Within Manila, a substantial
portion of new stock will be dedicated to hotels in and
around newly established entertainment and gaming
districts. Entertainment City, a government-driven
project set on 8 sq km of reclaimed land, is expected
by Colliers to be the location for just over half (56%)
of the metropolis new rooms. Supplementing the
citys prospects of emerging into a premier regional
hub for gaming is City of Dreams. Undertaken by the
local subsidiary of Hong Kongs Melco Crown Resorts,
2013
2024
472.3
843.3
1288.90 2299.10
1227
4295
1595
5491
Visitor exports
221
455.7
Domestic spending
719.3
1200.70
Leisure spending
668.9
1198.50
Business spending
271.4
458
Capital investment
81.3
123.9
SOURCE: WTTC
137
TOURISM OVERVIEW
138
the rest of the country as part of each individuals contribution to nation-building, Cabalza told OBG.
Additionally, with more than 4m Filipinos living in
the US and Canada alone, there is a large segment
eligible for visiting friends/relatives visas that the DoT
is encouraging to spend more in and visit more of the
country. We tend to market to this segment in much
the same way as we do to foreigners, as most are now
second- and third-generation immigrants. Ironically,
the buzz and excitement generated by non-expatriate Filipinos oversees makes the expatriates appreciate their country of origin even more and they are
now staying longer and visiting destinations outside
of where their relatives reside, said Bengzon.
When assessing the split of tourism spending
between the leisure and business segments, the former accounts for 71.1% of receipts based on WTTC
figures. Both segments are expected to concurrently rise to match the pace of GDP growth estimated
to be between 6% and 7% as the country expands
as both a business and leisure destination.
SOURCE MARKETS: South Korea, responsible for just
under a quarter of foreign arrivals, remained the top
source market in January-October 2014, supported
by a new air service agreement between the two
countries. Next came the US (14.97%), followed by
Japan (9.67%) and China (8.95%), with Australia, Singapore, Hong Kong, Canada, Malaysia and the UK
rounding out the top 10. The prominence of visitors
from North-east Asia is partly to do with proximity. With
flight times from most major East Asian cities taking
Total
Northern Philippines
71,803
8215
80,018
3311
83,329
Central Philippines
61,978
5129
67,107
5146
72,253
Southern Philippines
28,622
1686
30,308
2061
32,369
Total
162,403
15,030
177,433
10,518
187,951
SOURCE: UNWTO
www.oxfordbusinessgroup.com/country/philippines-2015
TOURISM OVERVIEW
139
With plans to increase the number of arrivals, existing airport infrastructure must be better integrated
The sector has been looking to tap into the health tourism segment
THE REPORT The Philippines 2015
140
The government is
exploring potential for
education tourism,
particularly in
English-language
instruction. Many South
Koreans already choose to
send their children to the
country for language
instruction.
TOURISM OVERVIEW
TOURISM ANALYSIS
141
Lets meet up
The country offers an attractive proposition for the MICE segment
In the early 1980s the Philippines was considered Asias
undisputed leader when it came to hosting international events and conferences, with Metro Manilas 4000sq-metre Philippines International Convention Centre
(PICC), constructed in 1976, the first of its kind for the
region. In subsequent years, as other countries ramped
up their efforts to expand their share of the increasingly lucrative meetings, incentives, conferences and
exhibitions (MICE) market, due to a confluence of factors, the segment found itself slipping from the tourism
authorities priority list.
In 1982 Manila was rated as the top Asian city for
conventions by the Union of International Associations
annual listings. Over three decades later, in 2013 it
dropped to 18th on the International Congress and
Convention Associations (ICCA) latest rankings for the
region. As a country, the Philippines played host to 53
ICCA-certified conferences in 2013 and placed 49th
globally, trailing ASEAN leaders Singapore (175 events)
Thailand (136), Malaysia (117) and Indonesia (106), each
of which were the venue for more than double the
number of large-scale events that year.
GETTING BACK ON TRACK: Despite being one of the
pioneers in the region when it came to establishing a
body specifically tasked with bidding for events on a
national level, in 2009 the Philippine Convention and
Visitors Corporation was put under the purview of the
Tourism Promotions Board (TPB). When President Benigno Aquino III took office in 2010, it was announced that
the MICE market would be reprioritised as a key mandate of the Department of Tourism (DoT), and the TPB
is looking to ramp up its promotional efforts to once
again have the country positioned as a top MICE destination. This has coincided with an organisational
restructure under which a MICE and Business Development Unit forms is one of the TPBs three core divisions, along with the Tourism Promotion Department
and the Corporate Affairs Unit. The department has been
allocated a budget of P90m ($2.03m), and while indications are that it will eventually develop a brand and
campaign specifically focused on MICE, in the meantime it is piggybacking on the successful Its more fun
in the Philippines campaign by employing the tagline
Business meets fun in the Philippines.
BIG YEAR AHEAD: With 2015 being promoted as Visit Philippines Year, the initiative involves hosting several large-scale events throughout the year and will be
leveraged to showcase the archipelago as a viable MICE
market. The Asia-Pacific Economic Cooperation ministerial meeting and leaders summit is arguably the most
important event and will take place in November 2015.
According to Guiller B Asido, assistant chief operating
officer of the DoTs Tourism Infrastructure and Enterprise Zone Authority, the summit will be hosted at venues across the country to demonstrate the existing
MICE infrastructure in multiple destinations.
PLENTY OF OPTIONS: The PICC no longer holds the
exclusive position of the sole venue for international
events, with a number of private sector facilities popping up throughout the country. The Philippines real
estate boom is characterised by greenfield mega developments. Many of these budding mixed-use precincts,
in addition to office parks, condominiums and massive
shopping malls, contain a hotel, entertainment and an
events component. The 46,647-sq-metre SMX Convention Centre in Metro Manilas Pasay City is located
beside the SM Mall of Asia, which is among the worlds
largest shopping centres as measured by gross leasable
area. The SM Group, a large conglomerate with a strong
property portfolio, also owns convention centres in the
Manila suburbs of Taguig and Bacolod, as well as one
in Davao City. City of Dreams Manila and Resorts World
Manila, two newly constructed entertainment and gaming districts, also offer conference facilities. For more
exhibition-oriented venues within Metro Manila, the
World Trade Centre in the financial district Pasay, Blue
Leaf Filipinas in Taguig and the SM Megatrade Hall in
Ortigas each offer 4000 sq metres of hall and pavilion
space. Arenas and concert halls include the SM Mall
of Asia Arena and SMART Arenata Coliseum in Cubao.
THE REPORT The Philippines 2015
The Philippines
International Convention
Centre is no longer the
sole venue for large
international events in
Manila, as new greenfield,
mixed-use developments
are popping up all over
the country.
142
TOURISM INTERVIEW
What more can the Philippines do to improve its visibility as a meetings, incentives, conventions and
exhibitions (MICE) destination?
JIMENEZ: The MICE segment is higher yielding than the
bulk of the tourism sector: as such, it represents a priority for the domestic development of tourism. In the
Philippines, meetings, conventions and exhibitions tend
to take place in larger cities such as Manila and Cebu,
as this is where you are more likely to find large convention centres and the suitable infrastructure.
However, with regards to incentives, one finds that
the incentive groups are going to locations such as
Boracay, Bohol, Palawan and Davao. We have therefore
segmented MICE and developed a strategy to tap into
its markets. We must formulate a strategy that takes
into account that the people who come to the Philippines for meetings, conventions and incentives may be
looking for different attractions. For example, not all
of them may require large facilities. Indeed, most groups
are looking for a unique experience, which can only be
found in such tourist destinations as the Chocolate
Hills in Bohol or the Underground River in Palawan.
TOURISM ANALYSIS
143
Looking up
Increasing both connection options and accommodation will be key to
future growth
Upgrading and developing new transport and hospitality infrastructure is essential to unlocking the
Philippine tourism sectors undeniable growth potential. Without adequate infrastructure to move people into and within the country, and the hotel and
leisure offerings to accommodate and entertain them,
many of the attributes that make the industry primed
for sustained expansion could be negated. With public coffers strained and multiple sectors competing
for state funding, the government is looking to hand
over development, management and maintenance
responsibilities to the private sector.
And with a strong assurance of pent up demand,
there is a sound business case for prospective
investors. We are not interested in operating and
managing tourist facilities. We will provide support
infrastructure and incentives, but the push will come
from the private sector, Guiller B Asido, assistant
chief operating officer of the DoTs Tourism Infrastructure and Enterprise Zone Authority, told OBG.
ROUTES REVIVAL: Geographic barriers and infrastructure shortcomings are invariably sighted as the
main impediments to meeting the ambitious tourist
arrival growth target of 10m by 2016. And while
progress is being made to ramp up the required supply-side infrastructure, the to-do list will take some
time until completion. Some recent good news came
in April 2014, when the EU took Cebu Pacific Air off
its list of banned airlines. This move was followed by
the USs Federal Aviation Authority relaxed limits on
the number of flights from the country.
For several years, our airlines had limited direct
access to the EU and US. Being able to land in key
aviation gateways like London will make a huge difference in opening up hub and spoke traffic, Benito C Bengzon Jr, assistant secretary at the Market
Development Group at the DoT, told OBG.
In 2016 Manila will play host to Routes Asia. Dubbed
as the largest event of its kind, the conference focuses on the development of global air services and will
144
TOURISM ANALYSIS
TOURISM ANALYSIS
145
Natural beauty
Responsible development and protecting environmental attractions
will be a priority moving forward
The Philippines exhibits a marked discrepancy in
income, living standards and access to basic infrastructure between urban and rural locations, and
tourism has been identified as one means of helping to lift more remote regions out of poverty. When
considering that natural untouched settings and
traditional culture are some of the main drawing
cards for visitors to more isolated areas, the impetus is to manage development in a responsible and
sustainable manner through principles adhering to
the Ecotourism Philippines philosophy.
Indeed, the campaign features prominently in the
Department of Tourisms (DoT) National Tourism
Development Plan 2011-16 (NTDP) and is tapped to
play a significant role in helping to rebuild the areas
that were most devastated by the 2013 Typhoon
Haiyan and Bohol earthquake.
ZONING IN: To improve access among a captive visitor base, the NTDP has selected 20 clusters in which
more secluded areas possessing ecotourism potential will receive improved road links to established
tourism destinations nearby. In 2014 the government planned to spend more than P400bn ($9bn),
or 3.1% of GDP, on infrastructure. To support the
tourism industry, P14.4bn ($324m) worth of funding is being allotted to the Department of Public
Works to spend on the construction and maintenance of 679 km of access roads.
Guiller B Asido, assistant chief operating officer
of the DoTs Tourism Infrastructure and Enterprise
Zone Authority (TIEZA) the agency tasked with
identifying and facilitating investment into Tourist
Enterprise Zones (TEZs) referenced the example
of the municipality of San Vicente in explaining the
methodology being followed. Occupying 14 km of
unspoiled white sand beach, San Vicente is set to
have its own airport completed in 2015, as well as
a highway that should see the drive time to Puerto
Princesa the closest major city and a tourism
hotspot located 186 km away from four to two
146
TOURISM ANALYSIS
Around 67% of the archipelagos diverse flora and fauna are found nowhere else in the world
is endemic. Furthermore, its surrounding waters harbour over 300 fish species and is surpassed by only
Australia in terms of seagrass diversity.
In appreciation of the need for marine conversation and the tempering of man-made deforestation,
the DoT released a code of ethics for Ecotourism
Philippines in 1994, followed in 2012 by the formulation of Executive Order No. 111, an ecotourism
strategy that emphasises sustainable management
of destinations, education and awareness, involvement of local communities and development of
tourism products. The country has been working to
secure recognition as a leading player in the field,
hosting the 5th World Ecotourism Conference in
February 2014 in the island-province of Cebu.
A GREEN REBUILD: According to risk research firm
Maplecroft, the Philippines is the most at risk country in the world for natural hazards, and 2013 saw
the country hit extremely hard by devastating natural catastrophe. Typhoon Haiyan, which has been
labelled the worst recorded storm to ever hit land,
tragically brought about the loss of 7000 lives and
caused the destruction of 10,000 homes. It struck
areas in Cebus northern island where resorts were
heavily concentrated, in the process damaging a
number of historic churches and tourist sights.
Bohol Island, where tourism is estimated to contribute 20% to the local economy, also suffered the
misfortune of having its infrastructure and attractions severely damaged in 2013, this time by a 7.2magnitude earthquake that occurred in October.
Although the typhoon and the earthquake collectively affected only six of the countrys more than
7100 islands, the events lead to a number of holiday cancellations throughout the country shortly
thereafter. About 5% of the DoTs budget is going
towards Ecotourism Philippines development and
promotion, while a further 5% is allocated to the
rehabilitation and restoration of historic sights. We
are undertaking heritage reconstruction projects
www.oxfordbusinessgroup.com/country/philippines-2015
TOURISM DIALOGUE
147
Transforming tourism
OBG talks to Cristino L Naguiat Jr, Chairman and CEO, Philippine
Amusement & Gaming Corporation (PAGCOR), and Stephen Reilly,
COO, Resorts World Manila
To what extent will Entertainment City and the
expansion of leisure infrastructure enhance Manilas status as a regional destination?
NAGUIAT: Entertainment City looks set to transform
the face of tourism in the Philippines. While initial plans
anticipated the projects completion by 2018, all four
operators will not stop improvements to their projects
after this date, having already invested more than $1bn
above the figure stipulated in their contract. Although
most tourists have tended to overlook Manila as a business destination, Entertainment City and the integrated resorts it will host are set to complement existing
tourist sites in Manila, such as Intramuros, Corregidor
Island and the expected redevelopment of Roxas Boulevard. Alongside these developments, the Department
of Tourisms campaign will highlight activities, as
opposed to destinations: this is where the casino and
entertainment industry can play significant role.
REILLY: While prominent international players were
interested in investing in an integrated resort and casino complex when PAGCOR awarded the first licences
in 2008, the public was initially more reluctant. This was
primarily due to the decision to have Pasay and not
downtown Makati as the designated destination.
However, despite some initial uncertainty regarding
the viability of the project, the integrated resort complex has turned out to be a very attractive proposition
for visitors. Moreover, with the ongoing construction
of the NAIA expressway linking Entertainment City with
the airport terminals, Manila is in now in an excellent
position to become an international hub.
How can the Philippines boost its visibility as a gaming destination, and what benefits does this generate as compared to other parts of the sector?
REILLY: The integrated resort complex contains both
retail and theatre components, which are all interconnected. The concept is simple and reminiscent of a
cruise ship, where all components, namely leisure, retail,
entertainment and gaming, are all integrated in the
same structure, to cater to every member of the family. Indeed, the nature of tourism in the Philippines has
experienced dramatic changes in the past two decades.
It was initially difficult to attract visitors due to negative perceptions of the Philippines. Many visitors do
not expect the Philippines to offer high standards of
entertainment or hospitality, but are pleasantly surprised when they do arrive. Moreover, all the operators
will continue to benefit from each others operations
and the continued entrance of new players, given that
international tourists will not go to just one property
but instead to an overall destination.
NAGUIAT: Most large international hotel chains are
looking at the Philippines to consider investments not
only in Entertainment City itself, but also in the surrounding area. Indeed, Entertainment City will develop its
own ecosystem to diversify entertainment venues and
tourism products for Manila. Within Entertainment City,
9.6 ha will be set aside for a theme park called Nayong
Pilipino, which will showcase the diversity of local culture. Moreover, the casino and entertainment complex
enables us to complement gaming with theatre and
musicals, in this way turning Manila into the Broadway
of Asia. The operator, Resorts World, is looking at a
seating capacity of 4000 for its theatre while Solaire
has a 1700-seat theatre undergoing expansion.
On a nationwide level, many of the licenses for casino operators that are set to expire soon will be renewed
only if investment is increased to around $100m-150m.
We have created a frame of reference to encourage
other casino operators to adhere to higher standards
and guidelines, so they can replicate the model of
Entertainment City and develop their own sites.
How can investment in hotel infrastructure complement growth in tourist arrivals while at the
same time ensuring the quality of new players?
NAGUIAT: Entertainment City comprises a major part
of the goal of the Department of Tourism to attract 10m
visitors by 2016, as it will provide the necessary boost
THE REPORT The Philippines 2015
148
TOURISM DIALOGUE
What can be done to attract the best human capital to work in the Philippines tourism sector?
REILLY: The hospitality workforce in the Philippines
has traditionally been characterised by high quality,
with talented, English-speaking and well educated
employees. In addition to the availability of a talent
pool that could be trained quickly, overhead costs are
very competitive for the industry, enticing many international players to enter the sector.
Many of the regional tourism players and casino
operators have already been capitalising on Filipino
labour as part of their hospitality-related ventures due
to their reputation for discipline. Due to the construction and expansion of Entertainment City, many of
these workers have been absorbed by the domestic hospitality industry. At the same time, finding the volume
of labour that is required for an integrated resort complex is very difficult, and so we have also built training
camps at the Genting-Star Tourism Academy to build
the pipeline for culinary and gaming professionals and
feed our own needs. Operators have also partnered with
local universities to ensure a supply of qualified workers for high-growth areas within hospitality and to provide them with certifications. Entertainment City will
employ between 35,000 and 40,000 people. However,
it will also benefit all the supplier communities that provide the supply chain needed to support operations.
Moreover, many of the jobs in an integrated resort
do not require a college degree, thereby creating opportunities for unskilled or under-skilled workers to be
employed in different functions in Entertainment City.
NAGUIAT: The Philippines currently boasts excellent
human resources capacity: most of its staff have served
on the front lines in Macau and Singapore, and received
excellent training and are now returning home, given
the rapid growth of the domestic hospitality industry.
Entertainment City will thus not be a stand-alone project but rather a destination, providing a critical mass
for a range of different areas within the hospitality
and culinary industry, in addition to supplier industries.
149
150
On the up
Steady progress is being made and the sector is on its way to seeing
more rapid growth
Between 1998 and 2007,
private sector players
contribution to transport
infrastructure was 1.9% of
GDP, which was only slightly
higher than the public
sectors contribution of
1.6% for the same period.
The Department of
Transportation and
Communications is charged
with overseeing regulation,
planning and coordination
of the transport sector.
Though still trailing its neighbours, the transport sector in the Philippines is in the process of modernising
as the current government continues to fast track relevant infrastructure projects, while also taking modest
steps to improve inter-agency cooperation and good
governance. The sector is a key component of the
national economy, which will be better able to achieve
its potential through improved linkages between economic centres and cities on the archipelago.
Road transport remains by far the most dominant
mode of travel, and, according to the Asian Development Bank (ADB), road transport accounts for 98% of
passenger traffic and 58% of cargo traffic. However,
due to a lack of adequate financing, levels of servicing
have fallen behind. The World Bank has predicted that
the economy will grow 6.7% in 2015 although this
growth will depend on the governments ability to
improve spending and encourage public-private partnerships (PPPs). Regulatory uncertainty and convoluted bidding procedures have hindered the progress of
such projects so far and must be righted so that the
advantages of private sector interest can be realised.
GLOBAL PLAYER: In the area of logistics, the Philippines ranked sixth among ASEAN-6 countries and 57th
overall in the World Banks 2014 Logistics Performance
Index (LPI), which shows that there is still much work
to be done. Improvements within the maritime transport sector will be crucial to boosting these ratings, while
the building of secondary airports will also improve
economic potential. Such an overhaul will be key if the
Philippines is to realise its potential as an investment
destination and increase the cost-efficiency of its transport system. Nearly $3.9bn in foreign direct investment
(FDI) flowed into the country in 2013, the highest in
more than a decade. This indicates the depth of investor
appetite and the importance of creating an attractive
environment for investment. However, in the first nine
months of 2014 total approved FDI reached P91.8bn
($2.06bn), a 35.4% drop over the same period in 2013,
according to the Philippines Statistic Authoritys figures.
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151
The countrys
build-operate-transfer law
is aimed at tapping private
resources to finance the
construction, operation
and maintenance of
infrastructure and
development programmes
normally implemented by
the government.
152
PPPs. Furthermore, in mid-2014 the National Economic and Development Authority board, chaired by President Aquino, approved the Roadmap for Transport
Infrastructure Development for Metro Manila and Its
Surrounding Areas. The World Bank and ADB have also
participated in the creation of informative studies
specifically addressing domestic transport infrastructure needs, which remain the largest impediment to
more evenly distributed growth.
At the end of 2014, the Aquino administration and
PPP Centre were pushing to amend the BOT law with
the aim of attracting more investors to participate in
projects valued at over P200bn ($4.5bn). The proposed
PPP Act would strengthen the institutional and regulatory environment surrounding PPPs and lead to a
more accommodating environment for private sector
engagements in the long term.
ON THE ROAD AGAIN: As the dominant form of transport in the Philippines, covering around 98% of passenger traffic, roads are the most crucial aspect of the
national transport network and have been slowly, but
steadily, improving in quality. This has been evidenced
by a jump in the quality of roads ranking in the WEFs
Global Competitiveness Index from 100th in 2011-12
to 87th in 2014-15. A total of P230.4bn ($5.18bn) has
been budgeted for transport in 2015. The national road
network extends approximately 215,000 km, with 15%
of arteries classified as national roads and under the
jurisdiction of the DPWH. The remaining 85% are local
153
154
While users of
metropolitan rail lines have
long enjoyed the lowest
fares in South-east Asia, in
2015 LRT and MRT fees
were increased in order to
offset debt due to the
MRTs privatisation and
maintenance.
that serve areas such as Luzon south of Metro Manila. The Metro South Commuter Line extends as far
south as Calamba City, Laguna, and transports approximately 100,000 commuters every day. The popularity
of the line has increased in light of heavy road congestion caused by construction on the Skyway project
across Manila. The rehabilitation of the Caloocan-Alabang section of the commuter line, along with the
introduction of new rolling stock via development assistance financing, has helped mitigate the spike in ridership, but only for the time being.
The other main line operated by the PNR is the Bicol
Express, which links towns in the Bicol region with
Manila; however, the line has been plagued with difficulties. It was damaged by the typhoon in the 2006,
and after being successfully revived in June 2011, it suffered a train derailment in October 2012 that resulted
in services being suspended. In June 2014 trial runs
resumed on the 422-km line; however, a full reopening is yet to occur. As for future PNR plans, the DoTC is
focusing on reviving the long-defunct northern railway
line via the North Rail Project and expanding lines outside of Luzon. It has clearly communicated that it is looking to increase coordination with the private sector in
such development, as well as in other areas of freight
operation and maintenance. However, there has been
scepticism about new rail projects in light of the need
to upgrade existing lines and the lack of confidence in
the DoTCs bid and project management.
SAFE HARBOUR: Ports make up an essential part of
the Philippines transport network as connecting hubs
for the 3219 km of navigable water. There are currently nine major ports that handle the majority of domestic and international cargo: Manila, Subic, Batangas,
Cebu, Davao, Zamboanga, Cagayan de Oro, Iloilo and
General Santos. In addition, there are approximately
1300 ports of varying sizes, of which 1000 are government owned. Of the state-owned ports, about 140 fall
under the jurisdiction of the PPA and the Cebu Ports
Authority, while the remainder are the responsibility of
other government agencies or LGUs.
The Philippines is considered fairly well-connected
with the global container shipping services network. It
ranked 66th out of 159 countries in 2012, according
to the UN Conference on Trade and Developments Liner Shipping Connectivity Index (LSCI). The LSCI score
indicates how well countries are connected to global
shipping networks based on their maritime transport
sector. However, on a contextual level, according to the
WEFs Global Competitiveness Index, the Philippines
ports continue to rank lowest out of its 13 regional peers.
One of the main reasons for the low regional scoring is the high level of congestion at ports, which has
a knock-on effect for overall efficiency. Michael Kurt
Raeuber, group president and CEO of Royal Cargo, told
OBG, The problem with port congestion is that it generates a reduction in the productivity of trucks and
delays the moving of supplies in the Philippines. And
these problems in the Philippines supply chain will persist, and may even further aggravate in high trade seasons, if the root cause of the port congestion is not
155
recognised in a coordinated way. It is clear that the present situation is not a port capacity issue, but the confluence of a lack of proper coordination between the
national and local government, real time and misplaced
regulatory restrictions, and the absence of long-term
strategic planning and infrastructure development.
Clearance time with physical inspection was five days
in the Philippines compared to just two days in Vietnam, according to 2014 World Bank LPI data. Located
close to the busy metropolis of Manila, the Port of
Manila has been struggling to accommodate the flow
of cargo required to supply a country for which consumption amounts to 60% GDP.
Furthermore, a policy decision by Manilas government in February 2014 to ban trucks during certain
hours of the day to reduce the amount of traffic on the
roads during rush hour highlighted the urgent need for
the completion of port and road infrastructure upgrading if demand for consumer goods is to be fulfilled.
LEGISLATIVE HURDLES: In terms of the regulatory
landscape, the current administration is considering a
relaxation of cabotage law, which precludes foreignflagged vessels from serving domestic routes. The
rethink follows a study conducted by the Joint Foreign
Chambers of Commerce in the Philippines, which
showed the high cost of domestic shipping compared
with the cost of shipping via foreign trans-shipment.
The Department of
Transportation and
Communications plans to
revive the long-defunct
northern railway line via
the North Rail Project.
2008
2009
2010
2011
2012
Passengers (m)
142.8
149.5
Revenues (P bn)
1.72
1.85
151.9
153
159.8
174.5
1.87
1.90
1.96
2.14
Passengers (m)
118.6
Revnues (P bn)
1.71
138.1
149.4
155.9
156.9
170.7
1.96
2.11
2.23
2.29
2.51
Passengers (m)
Revenue (P bn)
52.9
58.6
62.1
63.4
63.8
70.3
0.75
0.82
0.84
0.86
0.86
0.94
SOURCE: NSCB
156
It is hoped that a relaxation would increase the industrys competitiveness, and therefore lower costs. Even
though the Philippines is the fifth-largest shipbuilding
country in the world, it is dominated by ships with a
capacity of 200- to 300-twenty-foot equivalent units
(TEUs), which are less cost-effective than the 5000-TEU
capacity typical of more modern ships.
Jose Go II, the president and CEO of Oceanic Containers Lines, told OBG, The local shipping industry relies
on 200- to 300-TEU ships, which cost a lot of money
to operate, and unfortunately local ports do not have
the equipment necessary to handle larger vessels.
These limitations reduce efficiency and mean domestic shipping liners end up having to charge higher tariffs to remain profitable.
However, a relaxation of the cabotage law would
increase the requirement for more accurate monitoring of vessels and smuggling activity, while some domestic ships could opt to reflag elsewhere in order to avoid
paying taxes. The Philippines only has 160 vessels in
the flag registry (it previously had 700), whereas landlocked Mongolia has 800 vessels. Mike Camahort, the
150
120
90
SOURCE: NSCB
60
30
2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
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157
Improvements to road
infrastructure, investment
in existing port facilities
and the construction of
new ports will take the
sector to the next level.
158
OPEN AIR: As of 2015 the Philippines had yet to commit to an ASEAN multilateral open skies agreement,
which would allow foreign carriers to introduce additional flights in the Philippines that would create a free
market environment in the airline industry to drive
tourism, increase competition and maintain lower airfares for passengers. However, the government has
stated that it is not ready and that further patience is
required. Local carriers in the Philippines continue to
oppose the agreement as it will not provide a level playing field for privately owned Philippine carriers that
would be going head to head with South-east Asian carriers that enjoy strong government backing and financial assistance. In terms of contextualising regional
growth, routes to, from and within the Asia-Pacific
region will see an extra 1.8bn annual passengers by 2034,
for an overall market size of 2.9bn, according to the
International Air Transport Association.
LOOKING TO ALTERNATIVES: However, regardless of
the current administrations reluctance to sign up to
the ASEAN Open Skies, progress has been made as
Philippine authorities have taken steps to gradually
open up the sector to an increased number of foreign
players over the years. In particular, it has been promoting the development of secondary international
159
The government is looking to expand rail line services to areas throughout the Luzon region
160
Island hopping
New port infrastructure and better domestic connections
The Philippine Ports
Authority has allocated
$2.7m for the expansion of
ports at Bohol, Iligan and
Butuan, with $1.37m set
aside for a new passenger
terminal building.
162
What role can foreign participants play in implementing and delivering PPPs through the transfer
of international expertise and competence?
CANILAO: Their role is twofold: first, through the PDMF,
we hire reputable international consultants and transaction advisers. These are then able to partner with
local advisers and contribute to the mutual exchange
of technology and specialist knowledge to help all parties concerned. Second, for PPP projects themselves,
foreign participants can contribute to the operation
and maintenance of our infrastructure or utilities, while
they can also participate in construction activities or
the transfer of technology and innovation.
How can local government units (LGUs) be encouraged to participate in PPP projects in a way that
could contribute to overall growth?
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163
The city of Manila temporarily banned trucks during rush hour in 2014
Stop and go
The removal of limitations on truck traffic eases port congestion
In 2014 stifling inner-city congestion cost the Metro
Manila area more than P2.4bn ($54m) per day,
according to a report by the National Economic
Development Authority Board of the Philippines. The
congestion was a result of poor city planning, delays
caused by the construction of elevated toll roads via
the new Metro Manila Skyway project and the reliance
of cargo-laden trucks on the citys surrounding road
infrastructure. The Port of Manila received over
900,000 containers in the first quarter of 2014, while
exports and imports rose 8.3% and 5.4%, respectively, in the first half of the year, according to the Philippine Ports Authority (PPA).
The congestion, also a result of spiralling motor
vehicle ownership, which is expected to hit 2.5m in
2015 in Metro Manila, led Manila Mayor Joseph Estrada to enact a blanket rush hour ban on trucks in February 2014. The ban prohibited eight-wheeled trucks
and vehicles weighing more than 4500 kg from driving on Manilas roads between 5.00am and 10.00am
and 3.00pm and 9.00pm between Monday and Saturday. Despite being subsequently revised to 6.00am
to 10.00am and from 5.00pm to 10.00pm following
the appeals of truckers, the impact of the ban
remained considerable and was adopted by neighbouring local government units.
HOLD UP: The effects of the ban were felt immediately at the Manila International Container Terminal
(MICT) and Manila South Harbour port. Raoul Santos, assistant general manager of operations for the
PPA told OBG, Before the ban, the Port of Manila
was receiving an average of 5000 containers daily,
while also being able to exit 5000. However, during
the ban we were only able to exit 3000 containers,
which resulted in a significant build up within the
port area and impeded efficiency.
The 100-ha MICT facility at the Port of Manila,
which is operated by International Container Terminal Services (ICTSI), handles over half of the countrys international freight. It was forced to operate
Inner-city traffic is
estimated to have cost the
Metro Manila area more
than $54m per day, with
congestion largely due to
poor city planning and
delays caused by ongoing
construction projects.
164
One of the positive effects of the truck ban has been an increased impetus to improve port efficiency
Following an intervention
by the Cabinet Cluster on
Port Congestion, which
worked with the Port Users
Confederation, dialogue
between stakeholders and
the authorities was
improved, allowing them to
address the gridlock
around Manila South
Harbour.
A new connectivity
OBG talks to William K Hotchkiss III, Director-General, Civil Aviation
Authority of the Philippines (CAAP)
What opportunities does the return to a Category
1 safety rating generate for the development of new
long-haul routes and tapping into new markets?
HOTCHKISS III: The expected benefit is increased connectivity between the Philippines and the US, enabling
Philippine airlines to fly to new destinations in North
America, either via new routes or by expanding existing ones. This will positively impact their profitability
with the potential influx of passengers and cargo, since
there is a sizeable Filipino community in the US. The
flow of trade and investments between the two countries can be expected to flourish given their history of
close, friendly diplomatic and commercial ties.
In connection with these developments, the Department of Transportation and Communication and CAAP
have engaged the US Federal Aviation Administration
through a Technical Services Agreement signed in 2013,
forming collaborative technical programmes to bolster
the CAAPs efforts towards compliance in aviation safety and to ensure the sustainability of the reforms it has
implemented. As for developing new routes, the CAAPs
main contribution is to ensure the airworthiness of
Philippine aircraft, by enforcing strict compliance with
the standards of the International Civil Aviation Organisation and by closely monitoring airlines implementation of good corporate governance principles.
To what extent has inadequate airport infrastructure in the Philippines affected domestic connectivity and the development of tourism?
HOTCHKISS III: The Philippines has 86 airports, five of
which have their own charters and operate independently except for air traffic and navigational services,
which the CAAP provides. The 81 airports managed by
the CAAP are in areas serving major cities and tourist
destinations, and have shown robust growth, in both
passenger and cargo traffic, domestic and foreign.
We are currently undergoing a rationalisation programme to determine the measures needed to expand
the capacity of our commercial airports and upgrade
165
166
Long-term investments
OBG talks to Ramon S Ang, Vice-Chairman, President and COO, San
Miguel Corporation
What has been the private sectors reaction to the
pace at which the public-private partnership (PPP)
programme has been implemented?
ANG: Infrastructure is a key sector that we need to develop if we are to accelerate the Philippines growth. We
are behind many of our Asian neighbours in terms of
infrastructure, and this is why our government is focused
on this area and also why companies like ours are bullish about pursuing such projects.
Power is also a perennial problem in the Philippines,
particularly in the countryside where many still do not
have power supply security. In order to meet our countrys growth targets, we need to meet first its power
requirements and have enough capacity for the future
growth. Again, this is why we have invested significantly in this sector. Currently, we are constructing two new
power plants that we hope will go a long way towards
providing adequate and consistent power supply in
Luzon as well as in the Mindanao and Visayas regions.
Such development of infrastructure and electricity will
benefit all economic sectors and spur further growth.
www.oxfordbusinessgroup.com/country/philippines-2015
What PPP projects present the greatest value proposition to improve infrastructure systems and attract
long-term investment in anticipation of the ASEAN
Economic Community in 2015?
How can coordination among government departments and central and regional governments be
improved to boost capacity among stakeholders?
ANG: The National Economic Development Authoritys
Long-Term Strategic Development Framework Plan
contains the physical development directions for the
entire country until 2020. Every administration also
has a Medium Philippine Development Plan that provides development directions for six years. These should
be cascaded to the national implementing agencies and
to various local governments which are the direct beneficiaries of these plans. Key to the recognition of various government sectors of these strategic plans
is implementation of these specific projects into law.
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Seafaring nation
Filipino workers have become an essential part of the global
maritime industry
Over the last 50 years, the Philippines has grown to
become a leading provider of maritime professionals and is subsequently considered by many to be
the seafaring capital of the world. The seafarer population in traditional maritime countries declined in
the 1970s, shifting supply to countries like India,
China and the Philippines. At present there are over
10.5m Filipinos living and working abroad, and in
2013 they sent total remittances of around $23bn
back home to the Philippines. The maritime industry is a major contributor to this: nearly 400,000 Filipino seafarers were working overseas in 2013, contributing a total of more than $5.2bn in remittances.
Globally, there are around 80,000 vessels of over
500 deadweight tonnes (DWT). Approximately 1.4m
workers are required at any given time on those
80,000 ships, and Filipinos occupy a large proportion of those positions. With shipping carrying over
90% of world trade, it can be said that Filipinos play
an extremely significant role in this industry. Maximo Mejia, administrator for the Maritime Industry
168
169
170
CONSTRUCTION OVERVIEW
Thriller in Manila
Projects in the capital are part of a host of schemes across the country
The sector has been
flourishing in a climate of
political stability and
upbeat business sentiment,
spurred by growth in
overseas workers
remittances, investments
into business process
outsourcing and
government spending on
infrastructure.
Public spending on
infrastructure as a
proportion of GDP has
consistently been below
3%, ranking among the
lowest in the region and
below the international
benchmark of 5%.
CONSTRUCTION OVERVIEW
171
2013
Public
113.34
137.81
21.6
Private
403.85
435.66
7.6
Gross value
517.18
573.48
10.9
Contribution to GDP
339.92
377.74
10.9
6.9
7.1
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CONSTRUCTION OVERVIEW
CONSTRUCTION OVERVIEW
firm Colliers predicts available office space for Manila to expand from 6m to 7.5m sq metres. A further
25,000 residential condominium units will be added
to the market by 2016, amounting to nearly half of
the 58,000 units constructed in the previous 40
years. The citys hotel stock, meanwhile, is anticipated to grow by 23% y-o-y, with an average of 3700
new rooms hitting the capital annually until 2017.
New mall construction, in contrast, is expected to
be concentrated outside the capital. Total nationwide shopping mall space at the end of 2013 was
measured by Jones Lang LaSalle at 13m sq metres.
By 2015 the property firm expects new supply of 1.4m
sq metres to hit the provinces, while Colliers projects new space opening in metropolitan Manila
which already accounts for half of the countrys
total stock to be 340,000 sq metres.
Despite inflationary pressures and an expected
run of rate hikes, long-term borrowing costs are likely to remain attractive, allowing firms to take on new
projects and carry out capital-intensive construction
work. According to a first-quarter 2015 report from
the PCA, y-o-y growth in borrowing from the construction sector was 44.2%, the highest of any industry. The Philippines banks are liquid and well capitalised, and those with proven track records are able
to borrow with relative ease.
MATERIALS: Although the heightened pace of construction activity is leading to a marked increase in
the importation of materials, so far materials prices
have been kept in check by a slowdown in regional
demand, especially from China. According to the
PCA, with the exceptions of cement, galvanised iron
sheet, tile works and plumbing works, price inflation
in the first quarter of 2014 for key inputs such as
concrete, galvanised steel and glass material were
below the overall headline inflation rate of 4%.
With the country a net importer of most categories of construction materials, capacity constraints
at the main ports make planning for and stockpiling
inventories essential. Cement, in particular, is running only a small surplus, prompting fears that unless
domestic output expands, a repeat of 2010 when
prices surged from P205 ($4.61) per bag to P270
($6.08) could occur. CeMap reports 2013 cement
sales of 19.45m tonnes, an increase of 6% on the
18.36m sold in 2012. Imports for 2013 were measured at 159,000 tonnes, a significant rise from the
39,000 tonnes arriving from abroad in 2012.
In view of the growing demand gap, local manufacturers are investing in new capacity. Lafarge Philippines has allocated P1.2bn ($27m) towards a new
mill in Rizal that should commence production in
2015, and has also announced that it will be reopening its plant in Cebu. Holcim Philippines, meanwhile,
has indicated that it is considering constructing a
$450m-550m brownfield plant in Bulacan, although
head office approval has been delayed due to a
restructuring of its regional operations.
Under the AEC, tariffs on construction-related
materials are expected to be dramatically reduced,
173
Cost (P bn)
Agency
2.01
DPWH
16.28
DepEd
15.52
DPWH
3.86
DepEd
5.69
DoH
1.72
DoTC
17.52
DoTC
64.9
DoTC
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CONSTRUCTION ANALYSIS
The housing shortage could reach 6.5m units by 2030 if not addressed
Back to basics
Increasing the supply of affordable housing is a top priority
Total residential licences
issued by the Housing and
Land Use Regulatory Board
were down by 4% in 2014,
with those for socialised
housing falling the most of
any grouping at 16%.
CONSTRUCTION ANALYSIS
deems it a lucrative market for developers to pursue so long as costs can be kept down to ensure
affordability. Our GNP has been steadily rising for
the past 10 years at 7%, generating enough of a
trickle-down effect to benefit most levels of the
socio-economic pyramid. As GNP trickles down to the
middle class, affordable housing becomes a beneficiary too, with prices for middle-class housing
increasing far less than for primary subdivisions or
condominiums, Atencio told OBG.
According to Colliers, the only segment to witness
an increase in residential licences issued by the Housing and Land Use Regulatory Board in 2014 was lowcost (+6.6%), with the firm attributing the rise to
more local developers venturing into affordable
housing to meet the huge supply backlog. While margins are tight and it is risky to maintain profitability,
developers are increasingly looking at the lowerincome market instead of the top-tier market, as it
offers far larger volumes and far greater growth
potential, Anthony L Fernandez, the president and
COO of construction firm First Balfour, told OBG.
MANAGING MARGINS: For a country that has suffered recurring natural disasters, enforcing minimum safety and design standards is critical, and
developers must adopt technology that enables reliable construction. Atencio also told OBG that affordable housing need not be high-risk, and that the
banking sector needs to serve the segment better.
175
Setting aside
government-backed funds
to guarantee fixed interest
rates for socialised housing
mortgages could help
first-time buyers.
176
CONSTRUCTION ANALYSIS
Green light
The adoption of environmentally friendly practices is gaining momentum
Advocates of sustainable
building techniques have
argued that the absence of
mandatory green building
standards has limited such
construction to the high
end of the market.
CONSTRUCTION ANALYSIS
on utility bills (mainly water and electricity) and revenue potentially generated from offloading waste for
recycling. The PHILGBC, meanwhile, has produced
studies which demonstrate that corporate tenants
and residents, out of an adherence to environmental responsibilities, are willing to pay a premium for
green-certified buildings. Higher productivity, garnered from fewer sick days and greater employee
satisfaction, can also be quantified. In all, the PHILGBC
states that investing in green building features usually entails a five-year payback period.
The PHILGBC expects the year-on-year growth in
new residential and office buildings to be around 6%,
and in an environment of land shortages and escalating land prices, the tendency is increasingly to
build vertically and with higher density, rather than
horizontally, in housing developments and office
parks. This is a trend that, if catered to more sustainably via deployment of rain catchment systems
and window solar panels, contributes to the preservation of open spaces amid rapid urbanisation.
REQUIREMENTS: The IFC has stated that, if implemented as planned, by 2030 the introduction of a
compulsory Green Building Code will reduce carbon
dioxide emissions by 1.9m tonnes, and result in annual energy savings of 3.9m KWh that would be equivalent monetarily to around P38bn ($855m). The
codes draft stipulates that it will initially be applied
to major building projects over a given size, requiring them to adhere to certain requirements before
a building permit is granted. Over time, depending
on the programmes success, the specifications will
be extended to smaller constructions.
VOLUNTARY ADOPTION: Regardless of the pace at
which the Green Building Code is applied, the voluntary adoption of greener practices should become
a self-fulfilling prophecy. As more and more green
buildings go up, and display a proof of concept in
terms of the cost savings, other developers will gain
the confidence to follow suit.
It seems likely that the office sector, driven predominantly by multinationals corporate social
responsibility commitments, will continue to account
for the greater proportion of green-certified properties. The residential market, meanwhile, will eventually catch up as younger couples and families, who
177
179
Home comforts
Matching supply with demand is a challenge as rapid growth continues
Favourable demographics, a solid macroeconomic outlook and a confluence of demand drivers are inspiring
bullishness in all property segments in the Philippines.
Motivated by some of the regions most competitive
rental rates and an attractive workforce, business
process outsourcing (BPO) firms are taking office space
in sought-after commercial areas. Traditional office
take-up is also rising as the economy grows at one of
the fastest rates in Asia, and confidence is being bolstered by investment rating upgrades and plaudits from
institutions like the World Economic Forum for the
improved business climate and political stability.
These same factors, along with system liquidity leading to historically low interest rates, are fuelling the residential segment. Expatriate and high-income earners
are moving into luxury condominiums in and around
central business districts, while the BPO sector workforce which is expected to double in size by 2016
and the relatives of overseas Filipino workers (OFWs)
are stepping onto the housing ladder and taking up middle- and lower-income units.
Increased purchasing power in an environment of
growing consumer confidence is motivating domestic
and global retailers to expand, boosting demand for retail
space. In addition, the hotel property segment is benefitting from increasing numbers of international business visitors to the capital and leisure travellers to
resort-oriented islands, while rising manufacturing output, trade flows and demand for logistics are driving
occupancy levels in industrial lots.
COOL HEADS: Although the signs point to buoyant
times ahead, there are also challenges related to land
acquisition and foreign ownership restrictions to temper any over exuberance, as well as risk factors that
could be brought about by external shocks.
This raises the need for property developers to rein
in their exposure and slow the pace of projects in certain segments and locations that could face saturation,
and is prompting the industrys regulators to impose
capital adequacy requirements and other control mech-
Increased purchasing
power in an environment of
consumer confidence is
motivating retailers to
expand, boosting demand
for retail space.
180
Around 25,000 residential condos are set to be built in Manilas three main commercial districts in 2013-16
and Ortigas Centre, a third financial and central business district that straddles the boundaries of Pasig,
Mandaluyong and Quezon City. Other master-planned
communities that have launched with similar aspirations to Bonificio Global City of becoming a site for
offices, residences, retail and entertainment include
Eastwood City Alabang and McKinley Hill.
According to second-quarter 2014 figures from CBRE,
the vacancy rate in Makati City stood at 1.4%, while the
average lease rate was the highest in the country at
P970 ($21.80) per sq metre. Fort Bonificio had average rates of P797 ($17.90) and its vacancy rate rose to
3.8%, up from 2.2% in the previous quarter. As most of
the districts stock comprises new buildings, rental rates
are considered to be stable compared to other more
fluctuating districts. Rates in Ortigas, at $12.87 per sq
metre, were the lowest of the three, and its vacancy
rate was the highest at 8.75%. In 2013 Manilas vacancy rate of 2.7% was measured by the World Property
Journal as among the lowest in Asia, with only Bangalore, New Delhi and a couple of areas in Beijing showing tighter occupancy rates.
Colliers anticipates the market to have absorbed
450,000 sq metres of new office space in 2014, with
Fort Bonificio and Ortigas the destinations for 55% of
new units delivered. By 2016 available office space in
Manila will have expanded by nearly a quarter on what
had existed in 2012, growing from just over 6m sq
metres to 7.5m. While CBRE estimates that 80-90% of
the fresh stock will be occupied by BPO operations, this
does not preclude other industries from searching for
new premises. As the economy expands, so does the
arrival of multinationals looking to establish country
headquarters, and the desire of local corporates to
relocate into upgraded facilities.
Under an initiative titled Next Wave Cities, the government is looking to offset rapid urbanisation by creating more BPO hubs outside of metropolitan Manila.
As offshoring, by its very nature, is an exercise in creating cost arbitrage, some clients are moving to areas
www.oxfordbusinessgroup.com/country/philippines-2015
181
End-2013
2014F
2015F
2016F
2017F
Total
17,656
454
4608
2017
1485
26,220
3718
441
346
4505
Fort Bonifacio
17,585
2222
5125
4895
2979
32,806
Ortigas
18,188
11,921
1711
2756
1227
573
Eastwood
6830
718
988
8536
Total
57,710
5546
12,489
9127
5383
90,255
SOURCE: Colliers
183
Seeking alignment
The last period of rapid growth provides lessons this time around
As property markets in South-east Asia absorbed
major hits following the last time they experienced
rapid growth in the late 1990s, questions inevitably
arise over the degree to which the Philippines ongoing surge in property value and activity is being driven by solid fundamentals rather than opportunism.
Rising household incomes combined with low interest rates and reduced downpayment requirements are
creating a surge in the number of first-time home buyers. Yet some analysts have expressed concerns over
a supply mismatch, with new developments being
geared towards luxury residences over more affordable options, for which there is clear pent-up demand.
Drawn by rising prices compared to the returns offered
by other asset classes, the wealthier segments of the
population could be tempted into purchasing property as a pure capital appreciation play, resulting in
those buying to live being priced out of the market.
URBAN COSTS: Vacancies are starting to rise in smaller condominium units (studios and one-bedroom
apartments), which could point to developers having
184
The dominance of the four main property conglomerates is a challenge for nascent domestic players
185
186
In what ways can developer participation in building health care centres catalyse medical tourism?
ANTONIO: Research shows that 70% of ailments can
be treated in an outpatient setting, and not exclusively in hospitals. However, two issues need addressing for
outpatient medical centres to serve the numbers
received by Thai hospitals namely, 1m patients a year,
of which half are foreigners. The first is connectivity to
source markets to attract more patients. The second
is to create a new culture of protocol. Our medical practices have been largely dictated by the domestic market, which is less demanding when it comes to service.
187
BPO
The nations global market share has grown exponentially
Companies are moving to second- and third-wave cities
Efforts to expand into higher-value market segments
Population demographics helping boost competitiveness
188
BPO OVERVIEW
The sector has had compound annual growth of 10% over the decade
BPO OVERVIEW
2011-16, while the later identified five priority areas within the Philippine ITBPO Road Map 2011-16
LOCATOR DRAW: As a prime driver of the trend towards
outsourcing offshore is a need for firms to seek cost
arbitrage opportunities in the face of global competition, a countrys wage structure and labour pool are
significant selection determinants. With a population
of 100m, half of whom are below the age of 25, and
widely spoken English, the Philippines holds a demographic trump card. In comparison, the median age in
Thailand is 36.2 and in Japan it is 46.1.
While less tangible to measure, the countrys labour
pool has garnered a reputation for displaying loyalty,
adaptability, empathy and delivering strong customer
service in an authentic and relatable way. For historical reasons, there is also a strong affinity for Western
culture, and as some of the heaviest social media consumers in the world, a significant exposure to Western
fashions and trends. The Philippines, relative to other
top offshoring destinations, is rated well in terms of political stability, and under the Benigno Aquino III administration the government is perceived as pro-business
and is implementing sound economic policies. This has
been evidenced in upward movements in the major
investment ratings indices (Standard & Poors, Moodys
and Fitch), and an improvement of 33 places on World
Banks ease of doing business rankings since 2010, the
largest leap of any of the countries surveyed.
SURMOUNTABLE CONCERNS: Compared to competing offshoring markets in Africa (South Africa) and
Europe (Poland), the country is at a time zone disadvantage when it comes to servicing European and North
American clients. This is not usually a deterring factor,
however, as the youthful workforce is quite willing and
able to work night shifts, and most BPO locales of size
and scope that cater to multiple destinations are
required to run 24/7, regardless.
While there are some apprehensions over intellectual property (IP), the legal regime and its enforcement
are considered sufficient for the BPO sectors needs
and judged to be continually improving. Because of
the strong trade relationship with US, the country is
taking IP very seriously, Donald Felbaum, the managing director of the IT consulting firm Optel, told OBG.
In April 2014 the US removed the Philippines from its
watch list of countries that do not properly protect IP
Revenues
1. Accenture
32.43
19.83
13.06
11.79
5. Telephilippines
8.72
8.08
7. Hewlett-Packard
7.08
6.92
6.59
6.31
189
Many BPO operations in the Philippines are catering to other time zones, so they operate around the clock
190
BPO OVERVIEW
Efforts are under way by the government to encourage growth outside of the main urban centres
since. While there are other competing offshore destinations where English, although not the first language, is commonly used in business, government, education and print media, the distinct linguistic advantage
enjoyed by the Philippines is accent neutrality and an
unmatched proficiency in terms of daily vocabulary,
grammar and idiom. This, in addition to the historic ties
to the West and a strong culture of customer service
generates confidence among firms in the US, the UK,
and Australia and New Zealand to contract out even
their most sensitive customer relations work.
Although English contact centre work is the mainstay in the Philippines and makes market sense, when
considering that the US alone accounts for 60% of
global voice outsourcing demand, having been colonised
by the Spanish and Japanese at various stages prior to
independence, there is further linguistic diversity in
the country to leverage. Realistically, however, winning
non-US-originating Spanish language work could prove
challenging as Central and South America have already
cornered the market. At the moment, the US accounts
for around 77% of all voice work, and to geographically diversify the country is looking to increase the contribution from Australia, New Zealand and also the UK,
which has traditionally relied on India.
ADDING VALUE: The DOST road map calls for the proportion of contact centre work to reduce to 40% over
time as higher value segments are promoted. Voice
work is becoming commoditised and there are replacement options for speaking to customers via machines.
Long term, the industry needs to move into KPO, Felbaum told OBG. Corporate services are the secondlargest BPO segment after voice, accounting for 20%
of the industrys headcount in 2013, according to IBPAP.
The segment is dominated by accounting and other
repetitive back-office work, but also includes some of
the more expert fields of outsourcing such as financial and market research, analytics and auditing that
are collectively known as KPO.
The KPO segment includes many GICs, which are not
technically outsourcers, but are counted as part of the
BPO OVERVIEW
BPO sector. GICs are estimated to provide a 10% contribution to IT BPM exports. According to IBPAP, there
are over 130 GICs in the Philippines, of which 65 constitute Fortune 1000 firms. The other non-voice categories in the Philippines BPO mix include IT services
and health care information management (HIM), each
of which was responsible for around 8% of the industrys headcount, followed by engineering (1%), animation (1%) and game development (0.4%).
People incorrectly think that we only handle transactional voice work, but this is far from the case. Voice
work, like other types of work, can be viewed as a pyramid of complexity with more complex work being done
by fewer, more specialised professionals. In the Philippines, we work in all levels of the pyramid in the voice
and non-voice sectors. A pyramid has a larger base. We
now need to widen the upper levels, said Virata.
COMMON KNOWLEDGE: Expanding into more knowledge-intensive BPO segments requires an upgrading
of the talent pool, as an addition to good communication skills, specialised qualifications in fields such as IT,
engineering, finance and design are needed. China and
India are said to have a larger and more technical skill
base, with a longer track record in the more complex
business processes. Filipinos are famous for their sense
of empathy, which bodes well for all service industries
like customer care and tourism, but they are for the time
being less math and science inclined, Cyril Rocke, the
CEO of cloud provider DataOne Asia, told OBG.
Compounding the challenge is that Filipino knowledge workers in fields like engineering and IT are heavily demanded throughout the Gulf as well as in nearby Singapore and Malaysia, leading to a brain drain
of the countrys technical talent. According to IBPAP,
only around 10% of applicants for call centre positions
qualify for hiring. As such, diversifying into more back
office functions provides an employment outlet for
those who may lack communication skills but compensate with a proficiency in more technical areas, such
as accounting, finance and design.
CAPTIVE MARKET: Multinationals are increasingly setting up GICs to handle in-house work, like finance and
accounting, and those with operations in the country
include Chevron, Shell, Maersk, Bechtel, Procter & Gamble, Henkel and Thomson Reuters. Some of the longerestablished BPO consultancies have expanded their
Philippines-based GICs to service third parties, particularly in financial services field, where JPMorgan Chase,
Deutsche Bank, Bank of America and AIG provide specialist outsourcing functions to firms in their vertical.
GETTING TECHNICAL: The Philippine Software Industry Association (PSIA) calculates that revenues from IT
and software development nearly doubled between
2008 and 2012, expanding from $600m to $1.16bn.
IBM, Dell, HP and Xerox are amongst the global tech
giants with operations in the country.
Along with the PSIA, two other tech related affiliate
associations under the IBPAP umbrella are the Game
Developers Association of the Philippines and the Animation Council of the Philippines. The global market
for the outsourcing of animation and gaming is esti-
191
There are over 130 GICs operating in the Philippines and 65 of them are Fortune 1000 companies
192
BPO INTERVIEW
How can the Philippines utilise outsourcing opportunities under the ASEAN Economic Community?
PAREKH: If the Philippines continues building on the
ecosystem it has created for this industry, the country
will be well poised as a destination of choice for the
regions outsourcing needs. It is remarkable how many
success factors have converged here: the large pool of
English speakers with accents that are easy for speakers from around the world to understand, pairs with
the customer-service-oriented culture. The country
also generates more college graduates than most in the
region. I believe it is time for the Philippines to look
beyond its traditional outsourcing markets the US,
www.oxfordbusinessgroup.com/country/philippines-2015
To what extent do new content and digital platforms offer opportunities for outsourcing?
PAREKH: The content industry is undergoing an incredible transformation, with three key trends that have created new revenue streams. First, content has gone
from location-specific to omni-present we can consume content anywhere via mobile devices. Content has
become dynamic, enriched through multi-media and
links. Finally, online search is becoming smarter and
faster it is taking less and less time to reach the information you are looking for. These trends are changing
business and our clients seek new partners to compete.
BPO ANALYSIS
193
The Philippines is 25% more expensive than its main competitor, India
630
Non-voice BPM
200
IT services
80
80
Engineering services
14
Animation
Game development
TOTAL
SOURCE: IBPAP
1017
2010, 10 locations, four of which constitute suburban extensions of metro Manila, were identified as
viable alternatives based on criteria related to worker supply, telecom infrastructure, a conducive business environment and risk management.
In order to raise awareness among companies that
are potentially interested in the Next Wave Cities, the
Department of Science and Technology - Information and Communications Technology office (DOSTICTO) has been collaborating with the IT and Business Process Association of the Philippines (IBPAP),
running roadshows and coordinating other promotional activities. So far, their efforts are bearing fruit.
Manilas share of Philippine BPO dropped from 83%
in 2006 to 70% by the end of 2013. By 2016, the government is targeting a 60:40 split between Manila
and the rest of the country, while aiming to put three
more cities on Tholons top-100 list.
However, the Philippines is not the only player.
China is seen as an emerging rival to the Indian-Filipino dominance of the sector, with three cities
ranked in the top 20 of Tholons list, while Malaysia,
a fellow ASEAN member, is raising its BPO profile.
CATCHING THE WAVE: Prospective investors relocating to the provinces are able to tap into locationspecific incentives as well as concessions offered by
IT parks accredited by the Philippine Economic Zone
Authority. Yet the primary motivating force tends to
come down to market realities. All things being
equal, incentives can come into play. But incentives
cannot sway a decision if the infrastructure and talent is not in place, Monchito Ibrahim, the deputy
executive director at DOST-ICTO, told OBG.
According to IPBAP, offshoring to the Philippines
is roughly a 25% more expensive proposition than
locating in India, where 80% of ITBPO growth is being
experienced in tier-two and -three cities. While the
Philippines overall value proposition can be swung
via offering superior quality and other desired attributes, as offshoring is by its very nature an exercise
THE REPORT The Philippines 2015
194
BPO ANALYSIS
As of mid-2014 it was
expected that Manila
would face a shortage of
some 80,000 sq metres of
office space, driving up the
cost of premium offices by
about 7%.
195
Telecoms & IT
Network operators expect higher demand for data
Improved connectivity making space for mobile money
New technologies to extend internet coverage
Public and private sector investing in infrastructure
Business incubators set to boost start-up culture
196
TELECOMS OVERVIEW
TELECOMS OVERVIEW
37
3.2
104.5
2.6
27.2
18.7
22.9
SOURCE: ITU
197
TELECOMS OVERVIEW
Jana report places Cherry Mobile as the third most popular smartphone brand (17% market share) while
MyPhone is fifth, with a 4% share. The positioning of
local brands, which offer Android-based devices at a
price point as low as $50, is not all bad news for the
established high-end foreign smartphone makers, as
the market as a whole is growing and early adopters
are expected to upgrade devices over time as their
usage requirements transition from more basic applications to video-streaming and mobile gaming.
NEED FOR SPEED: In anticipation of mobile data being
demanded at faster speeds, both Globe Telecom and
PLDT (through Smart), in addition to expanding their
3G network coverage, are devoting substantial capital
to installing 4G-enabled sites situated across the country. As screens and offerings on phones get better, this
will spawn a whole new way of consuming content on
mobile devices, and we are preparing our network to
cope with this growth, Ernest Cu, president and CEO
of Globe Telecom, told OBG.
A 2014 report by global market research firm Nielsen
on Filipino internet habits reveals that 33% of users are
online for more than two hours per day, 95% visit social
networking sites and 44% play online games. Filipinos
love videos and music, and we are a very social media
engaged country. Operators moving to 4G and longterm evolution (LTE) makes sense and will present a big
future market for mobile advertising and e-commerce,
Royeca said. Out of 34m Facebook accounts in the
country, only 20% were estimated to be accessed
through mobile devices in 2013, indicating high potential to divert traffic from fixed to mobile broadband.
MONETISING NEW TECHNOLOGIES: The rapid uptake
of smartphone applications and the countrys social
media savvy population is resulting in a high propensity for data users to take advantage of IP-based messenger apps like WhatsApp and Viber for their communication needs as a means of reducing expenses for
traditional voice calls and texts. Operators, accordingly, are grappling with this new reality and are strategising over how over-the-top (OTT) applications can be
leveraged to create, rather than erode, revenue streams.
We have opted to bundle OTT apps like Spotify as
part of our data promo offers to encourages more use
of the network. The alternative is to try and develop
competing apps ourselves, but we prefer to partner with
best in breed, as their developers have spent years perfecting their product, Fajardo said.
In a race to incentivise their subscribers to become
more accustomed and adept at accessing the internet
on mobile devices, promotional access to popular OTT
applications and social networking sites has resulted
in a case of one-upmanship that some observers have
dubbed the free internet war. At various points in 2014,
Globe Telecom has offered its subscribers free uncapped
Facebook access, while Smart has countered with promotional periods offering 30 MB worth of free daily surfing and unlimited access to select sites like Wikipedia.
In the past, most internet browsing was done at
internet cafes where you paid by time surfed. So we
have to educate consumers that if they do very basic
199
Country/region
South Korea
24.6
84
Hong Kong
15.7
18
45
Japan
14.9
1.7
23
21
Singapore
10.4
24
59
26
Taiwan
9.5
6.7
73
41
Australia
7.1
18
46
43
New Zealand
6.8
21
47
47
Thailand
6.3
22
42
69
Malaysia
4.3
21
37
73
China
3.7
18
32
90
Vietnam
2.9
42
73
101
Indonesia
2.5
5.1
44
103
Philippines
2.5
19
58
115
India
15
46
SOURCE: Akami
200
TELECOMS OVERVIEW
Local smartphone brands hold significant market share, with market surveys showing high demand
202
IT OVERVIEW
Extending connectivity
Building infrastructure with an eye for future growth
Encouraging demographics
and a well established BPO
industry suggest there are
strong opportunities for
growth and ways to expand
upon current operations in
the IT sector.
As an archipelago, the
Philippines faces a number
of geographical hurdles to
providing strong and fast
broadband connectivity,
which relies upon
submarine cables.
With a large, young and social media savvy population approaching 100m, a fast growing economy that
is forecast to become the worlds 16th largest by
2050, and a relatively affordable labour pool with
strong English proficiency, the Philippines boasts many
exploitable assets that could establish the country as
a regional IT powerhouse. One of the biggest opportunities is in the business process outsourcing (BPO)
space for which the country has gained global prominence and learning how to better leverage this
attribute to transition from lower-value call centre and
transaction offshoring to more IT-centric components
of the value chain. For the sake of diversification and
local capacity building, a more robust domestic market where both the government and private sector
invest in and exploit IT further is also needed.
A significant inhibitor is that Filipino consumers
and corporates are currently deemed to be paying
more for their telephony needs than elsewhere in the
region, while internet speeds are considerably slower. However, price and quality is improving as undersea cables continue to land and the providers invest
in network modernisation. Those in more remote
parts, meanwhile, stand to benefit from government
and NGO efforts aimed at exploiting unused TV white
space spectrum and other technologies to provide
connections in harder to access places. With ASEAN
integration expected in 2015, the poaching of top
Philippine talent will increase, as will the need for the
countrys IT ecosystem to match its regional peers to
ensure that its firms remain competitive.
CURRENT RANKINGS: In the International Telecommunication Unions (ITU) ICT Development Index for
2013, the Philippines placed 103rd globally. This was
a one-spot drop from the previous years survey in
which it placed 102nd. Despite the drop, the countrys score improved slightly from 3.91 to 4.02.
For comparative purposes, Denmark was the top rated country at 8.86, while the Central African Republic bottomed the table with a score of 0.96. Out of the
www.oxfordbusinessgroup.com/country/philippines-2015
IT OVERVIEW
32
24
16
SOURCE: ITU
Since Philippine law continues to regard the internet as a value-added service and not a necessity,
as was legislated with text messaging, the NTC does
not currently have the authority to intervene and
make peering mandatory. The decision to do so, therefore, is left up to the service providers commercial
discretion. We hope to be able to make a distinct ruling on peering in the near future, as addressing the
issue of slow internet speeds and high bandwidth
prices is now our top priority, Cabarios said. Traffic
is unnecessarily leaving and returning to the country,
which leads to excess bandwidth being used.
Compulsory peering is a cause being championed
by influential politician Senator Paolo Benigno Bam
Aquino IV, who has been particularly vocal in his disapproval of slow and costly internet and the detrimental impact this is having on the ease of doing business in the country. Over the course of senate hearings
in May 2014, Aquino stated that the average Filipino
consumer spends about P1000 ($22) a month on
internet service that receives speeds of up to only 2
Mbps. Whereas for the same cost outlay, consumers
in Thailand and Singapore receive 12 Mbps and 15
Mbps service, respectively.
CREATIVE SOLUTIONS: According to Cabarios, while
IP peering would certainly assist matters, there is no
one silver bullet when it comes to resolving the countrys internet woes. Peering would only address about
20% of the problem. Estimates are that as a country
we need to invest around P800bn ($18bn) on broadband infrastructure, and the private sector is only
investing P60bn-70bn ($1.4-1.6bn) a year, Cabarios
said. Unable to throw vast public expenditure at the
problem, interim solutions that the NTC is exploring
to free up bandwidth include encouraging particularly popular content to locate in the Philippines as a
means of reducing international traffic, as well as
moving government agencies onto a single network
to free up bandwidth for use by consumers.
WHITE SPACE: In lieu of the challenges and costs
associated with delivering last mile connectivity to
remote areas, Microsoft, in partnership with the
Department of Science and Technologys Information and Communication Technology Office (ICTO),
has been engaged in a trial to assess the viability and
commercial potential of unused TV white space.
Microsoft has been undergoing similar commercial trials in a number of African and Asian markets, and
according to Dondi Mapa, National Technology Officer at Microsoft Philippines, once the Philippines trial expands to other regions of the country beyond the
earthquake stricken island of Bohol, it will lay claim
to the largest deployment of white space of any country in the world. We will be sharing our results with
other developing countries looking to emulate our
approach, Monchito Ibrahim, deputy executive director at the ICTO, told OBG. We are pioneers for the
region and a lot is riding on the programmes success.
Although using TV white space makes some sacrifices in terms of speed, the pros associated with the
technology over deploying point-to-point fibre or 3G
203
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
204
IT OVERVIEW
There is an increasing focus on graduating more students with advanced IT skills to support sector growth
Construction of more
undersea cables to provide
broadband connectivity has
helped the country boost
internet speeds in recent
years, as well as reduce the
vulnerability of the
network.
however, additional sources that could become available to private telecoms firms.
Following PLDTs purchase of Digitel in 2011 and
Globe Telecoms takeover of Bayan Telecommunications in 2013, contestations have risen over what to
do with the acquired firms vacated spectrum. In PLDTs
case, the take-over approval was conditional on Digitels spectrum being re-auctioned by the NTC to outside parties. However, this has been delayed due to
an inability on the part of the NTC and PLDT to reach
an agreement over financial compensation. While
Globe Telecoms acquisition of Bayan did not include
a similar provision, the firm has so far not been able
to take ownership of Bayans spectrum measuring
around 50MHz following a restraining order filed
by PLDT to the NTC. With 2015 shaping up as an election year, it is unlikely both legal matters will draw to
a conclusion any time soon, and there is no clarity on
the bidding rules to be applied if and when any of the
spectrum is eventually put up for public auction.
UNDER THE SEA: When considering that demand
for ultra-high speed bandwidth is largely limited to
major urban centres where capacity rollout of LTE is
already taking place, bottlenecks in issuing further
spectrum are not considered a major impediment.
The Philippines internet speeds, while still lagging
others in the region, has been showing a steady path
of improvement in recent years, assisted by a slew of
undersea cable landings. In 2006 an undersea earthquake offshore of Taiwan severely disrupted internet
services for many countries in the region, demonstrating the vulnerability from an over-dependence
on only a few links. We now have eight undersea
cables serving the country, providing sufficient redundancy and alternate back up routes if needed, Donald Felbaum, managing director at ICT consulting firm
Optel, told OBG. Adding to the mix, PLDT is in the
midst of constructing a new 25,000 km line connecting Asia, the Middle East, East Africa and Europe, while
Globe Telecom has joined an international consortium
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that is constructing a $250m, 15,000-km system connecting South-east Asia directly with the US.
CLIENT MIX: Possessing robust and diverse cable
links is essential to the countrys ambitions of retaining its position as a top global offshoring destination.
BPO firms are major enterprise clients and have a lot
of connectivity requirements. Other big spenders are
financial service providers and retail chains, Jomari
Fajardo, investor relations director at Globe Telecom,
told OBG. In 2013 the BPO sector generated $9bn in
exports and made up 5% of GDP, according to the Information Technology and Business Process Association
of the Philippines (IBPAP). Gillian Joyce Virata, former
executive director at IBPAP, points out that a unique
trait of the Philippines BPO industry is that office
space is concentrated in compact commercial districts with firms co-locating in high-rise towers. This
helps ensure that companies are well served by network connectivity. The private telecoms firms tend to
focus their enterprise efforts on serving BPOs as they
demand good infrastructure and are willing to pay for
it. The government, under an initiative titled Next
Wave Cities, is looking to create more ICT hubs outside of Metro Manila. While IT-BPO firms are being
enticed by incentives, lower operating costs and available talent, insufficient access to the required telecoms infrastructure would likely prove a deal breaker for any firm considering relocation.
SME ADOPTION: As is the case in many developing
economies, there is a large chasm between the degree
to which blue chip corporates and small and medium-sized enterprises (SME) invest in and exploit ICT
within their operations. IT spending and the application of IT to improve productivity by Filipino companies is still lagging behind counterparts in Malaysia
and Indonesia, but rapidly catching up Rocke said.
According the Department of Trade and Industry (DTI),
SMEs account for as much as 99.7% of all registered
business establishments, pointing to a large untapped
opportunity should adoption rates increase. With
the ASEAN Economic Community (AEC) coming on
stream, Filipino SMEs will be forced to compete with
their regional counterparts and this will place pressure on them to become more efficient and cost
effective Mapa said. There is a lot of competition
for SME accounts, and SMEs can increasingly take
advantage of attractive packages.
INTO THE CLOUD: The advent of cloud-based technology allows SMEs to pay for server use on-demand,
rather than as a fixed expense. According to the Cloud
Readiness Index from the Asia Cloud Computing Association (ACCA), which measures 14 countries in the
region on their preparedness for cloud computing, the
Philippines improved from being bottom of the ranking in 2011 to 10th place in 2014. Three years ago
there was a reluctance to move into the cloud over
security concerns. Now, more companies realise that
it is safe and reliable, as firms like Google and Amazon offer it. Due to data sovereignty issues, local cloud
providers are picking up new business from organisations like law and accounting firms, Rocke explained.
IT OVERVIEW
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Cloud computing has the potential to significantly reduce IT costs for small and medium-sized businesses
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IT ANALYSIS
Assistance to start-ups
Public and private efforts to support local technological innovation
Despite lower overall
connectivity rates, internet
users in the Philippines are
highly active, with the
country ranked as having
the 10th-highest number
of Twitter followers in the
world.
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Analytics kingdom
OBG talks to Mariels Almeda Winhoffer, Vice-President for Global
Business Partners Asia-Pacific, IBM
How does ANALITIKA consortium plan to turn the
Philippines into a regional analytics centre?
WINHOFFER: The vision started as an IBM requirement, as we had identified analytics as a key growth
area to invest in. At that time the global analytics market was worth $176bn. Today, including services, software and hardware components, it is estimated at
$232bn, with the services component growing at 15%.
Business process outsourcing (BPO) is a $300bn market, but it is growing at only 5%. To lead and drive analytics, we needed resources and skills. Although the
Philippines was primarily a destination for BPO, application management or IT services, it also exhibited the
right context for analytics in the form of graduates
being groomed to move into the growing IT industry,
the prevalence of BPO, the existing services base, and
the understanding of processes and data.
In the shift to cognitive computing, one entity cannot do it alone. It needs a collaborative approach, an
ecosystem to enable the country to shift to this new
market that will deliver higher value services. ANALITIKA consortium emerged as a multi-sectoral alliance
aimed at transforming the Philippines into a global centre for analytics by defining future jobs and developing new skills. The aim is to execute on the roadmap
we are building and institutionalise it as an industry.
Can the responsibility for human capital development be addressed by cooperation with academia?
WINHOFFER: Everyone anticipates big data and analytics will be the next big thing, and is trying to understand what the new roles will be, as businesses will
need to compete. ANALITIKA consortium comprises
leaders of each industry working on three streams. The
first is job role creation, as so far the roles are largely
undefined though two are emerging in analytics: data
scientists and chief data officers, who will work with
and monetise data, creating new business models.
Second is skills development, having obtained the
support of the Commission on Higher Education and
brought experts to enable universities to provide training on how to use the tool and build competency based
on the as-yet undefined vision of an analytics professional. From July 2013, 12 universities offered business
analytics as part of their curriculum. Grades 11 and 12
also offer the opportunity to integrate analytics into
the curricula. What is continually underlined is that our
graduates are insufficiently qualified. Internships with
companies integrating analytics would also embed
them into these trends, making them more productive.
The third stream has to do with awareness as a way
of positioning the Philippines as an analytics centre. Education and awareness are important given our population of 103m with differing levels of education. We
must reach the least educated so they also benefit.
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IT INTERVIEW
A unique experience
OBG talks to Maria Rosario Santos-Concio, President and CEO,
ABS-CBN Corporation
How is the Philippines positioned as a location for
the development of media and entertainment content for the ASEAN region?
SANTOS-CONCIO: We have been successfully exporting content to the region for several years, with shows
having aired in Malaysia, Vietnam, Cambodia, Thailand,
Indonesia and China, and this has garnered various
awards at various festivals in the region. Beyond Asia,
content is being exported to Africa, particularly North
Africa and the Middle East. ASEAN integration creates
significant opportunities for the export of talent or
finished content products, whether through straight
syndication and licensing or co-productions. Given the
dearth of offerings in both the multichannel and
straight-to-TV environments, there are opportunities
across the whole spectrum of content, not only for television, but also for feature films, music, concerts, etc.
There have been talks about the possibility of an
open skies policy in ASEAN, namely the ability of foreign broadcasters to beam directly into a country. However, beyond regulatory and technical hurdles there
are local sensitivities and censorship issues as well that
would be a major consideration for the export of content. There are also issues related to intellectual rights.
Advertising issues could arise as a local advertiser may
not have cleared the rights to use the material in another country or the product may not be applicable there.
What opportunities does new mobile phone technology and ongoing convergence offer for media
content generation and delivery?
SANTOS-CONCIO: Our investment in a mobile operator is designed to allow us to remain in step with our
audience while still being differentiated by our core skills
as a content firm. Convergence will be about content
and what the platform can offer as far as content is
concerned. Technology should not be a distracting factor, but a means to an end, ultimately the final edge will
be based on content and user experience, while technology will remain invisible. Convergence offers the
opportunity to deliver unique content via mobile devices,
whether as media or as apps, and derive income. The
multi-screen experience is what will continue to provide value (and unique experiences) for each platform.
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Agriculture
The government expands crop insurance programmes
Fruit and vegetables drive the agricultural export market
Attempts to increase yields and modernise production
Fisheries exports recording significant expansion
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AGRICULTURE OVERVIEW
Still the countrys largest single employer, the Philippines agriculture sector continues to play a pivotal role
in the economy, even as the government looks to develop other modern industries to lead the way in the
future. Directly employing more than one-quarter of
all workers in non-services industries, more than 11m
Filipinos relied on agriculture for their livelihood in
2013, according to the Philippines Statistics Authority (PSA). Whatever the sectors importance to the population at large, the efficiency of production in the
Philippines still lags that of many regional competitors
due to the diffuse nature of its archipelagic geography; small average plot sizes that limit economies of
scale; a comparative lack of flat, arable farmland; and
susceptibility to unfavourable weather events like
typhoons. Agriculture, forestry and fisheries contributed
10.4% of GDP in 2013, with the sector posting modest
growth of 1.1%, down from 2.8% in 2012.
Despite these limitations, recent public and private
efforts to boost output and efficiency have led to promising improvements across several segments, including a drive for self-sufficiency in the staple crops of rice
and corn, an expansion of the sugar industry (including new downstream applications in biofuels and biomass power generation), and continued investment
and growth in export-oriented cash crops.
SNAPSHOT: The growth of the palay (unhusked rice),
poultry and livestock industries were the primary drivers in 2013. The segments continued to perform well
in the first half of 2014 as the agriculture sector overall grew by another 1.81% and grossed P776.5bn
($17.5bn) at current prices through June, according to
PSA data. In late 2013 typhoons did considerable damage, but they relented in the first six months of 2014,
allowing the crop segment to recover. The segment
expanded by 3.68%, contributing 52.72% of total agricultural production. The largest gainers within the segment were palay and corn, which increased output by
4.78% and 4.7%, respectively. Production increases were
also recorded for sugarcane, pineapple, mango, banana
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AGRICULTURE OVERVIEW
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AGRICULTURE OVERVIEW
effects of climate change. Even medium and large commercial farms are now buying insurance from us across
a growing number of sectors, Norman Cajucom, acting senior vice-president of the Philippine Crop Insurance Corporation (PCIC), told OBG. Forestry plantations,
livestock such as pig and poultry farms, palm oil plantations and banana plantations are all asking for special coverage, including typhoon and flood insurance.
Demand is also growing right now because of the
increase of government premium subsidies and provision of subsidies to additional agricultural insurance
lines, such as high-value commercial crops, livestock,
fisheries/aquaculture and non-crop agricultural assets,
rather than just rice or corn crops as originally offered.
After seeing its budget for premium subsidies balloon from P183m ($4.1m) in 2011 to P1.18bn ($26.6m)
in 2013 (excluding the addition of a special allocation
to support subsistence farmers in 2013), the PCIC
received the same amount in 2014. The majority of these
funds have been used to subsidise crop insurance for
some of the countrys poorest farmers, who would otherwise be unable to afford the safety net. The additional funding is being used in many cases to subsidise
100% of the insurance cost, rather than the 55% the
PCIC was able to provide previously to a much smaller
pool of recipients. The programme is a component of
the Agrarian Reform Plan, which targets beneficiaries
growing rice, corn, select cash crops, livestock and fisheries, as well as non-crop assets. As of October 2014,
the penetration rate for crop insurance stood at 8.51%
for rice, 2.31% for corn and less than 1% for other segments, according to the PCIC. Efforts to boost funding
further are being made via a number of different
avenues, including a bill to allocate a one-time P10bn
($225m) payment to the PCIC that is under review in
the Senate, as well as a separate initiative to further
increase the PCICs annual budget.
TYPHOONS: One of the strongest typhoons to hit the
country in 2013 was Typhoon Haiyan, which caused significant property damage. Fortunately, much of the
harvesting had already taken place by that point in the
season, resulting in relatively minimal crop damage
claims, although non-crop asset insurance (NCI) claims,
including for fishing fleets, were significant. Due to
these losses the PCIC board of directors approved a
100% subsidy for those in affected areas, supported
AGRICULTURE OVERVIEW
acreage continue to push up production. Cane production has increased in each of the last three cropping seasons from 23.88m tonnes in 2011/12 to 24.86m
tonnes the following season to 25.09m tonnes for
2013/14 (through August 2014), according to data
from the Sugar Regulatory Authority (SRA). The amount
of raw sugar derived from the cane has also increased
in recent years due largely to greater milling efficiency and improved cane quality as a curtailing of government subsidies for sugar farmers has led to a decline
in active sugar cane area from 424,132 ha in 2012/13
to 423,036 the following year. Gains in the first half of
2014 were attributed to the efficient use of fertilisers
in two major sugarcane-producing provinces, Negros
Oriental and Negros Occidental, along with the expansion of harvested area in Capiz, Cebu, Kalinga and Sultan Kudarat. Consumption of Philippine sugar is focused
almost exclusively on the domestic market (apart from
a trade quota deal with the US) as production costs
remain higher than other regional competitors, while
downstream applications for sugar, including its use in
energy, provide ample latent demand.
More important than the overall increase in output,
however, is the increased efficiency displayed over the
past three harvest seasons, during which sugar output
has risen from 5.31 to 5.82 tonnes per ha (reflecting
an increase in yield), while the number of 50-kg bags
of sugar per tonne of cane has also increased from 1.88
to 1.96 (reflecting an increase in mill efficiency and cane
quality). These encouraging trends bode well for the
sectors long-term outlook as the sugar industry looks
to make itself more competitive with its international
rivals. According the SRAs industry road map for 201116, the sector is looking to increase sugarcane area from
400,000 ha to 470,000 ha (423,036 ha as of August
2014); boost farm productivity from 55 tonnes of cane
per ha to 75 (it was 59.31 tonnes per ha as of August
2014); and boost sugar yield from 1.80 50-kg bag per
tonne of cane to 2.1 (it was 1.96 as of August 2014).
The road map outlines several strategies to achieve
these targets, many of which are being implemented.
On the supply side output is being improved by increasing acreage and boosting yields though a number of
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AGRICULTURE OVERVIEW
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Corn
20
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12
2005
2006
2007
2008
2009
2010
2011
2012
2013
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downstream applications, such as processed and prepackaged foods and beverages, as well as biomassfuelled power plants and the use of sugarcane and
molasses as feedstock for bioethanol use. A major factor which influenced investor interest was the passage
of the renewable energy policy in 2008 and the policy
issued by the DOE which mandated the optimisation
of locally produced bioethanol starting in 2011, Rosemarie Gumera, the manager of the SRAs Planning and
Policy Department, told OBG.
These compulsory blending requirements have moved
incrementally upwards since their inception, starting
from a minimum 1% biodiesel blend (B1) and 5%
bioethanol (E5) blend by volume in all diesel and petrol
fuels, respectively, being distributed and sold in the
country. Biodiesel blending was originally scheduled to
by upped to 5% (B5) by 2015, although the move is likely to be delayed pending a study on the potential price
impacts of the move, while the 10% ethanol (E10)
requirements have been fully implemented since 2012.
In order to ensure this biofuel supply benefits domestic farmers, the government has also stipulated that
oil distributors are barred from purchasing foreign biofuel unless the domestic market cannot produce an adequate supply to meet the mandate. These directives,
combined with the gradual lowering of trade tariffs as
mandated by ASEAN framework, have also resulted in
the conversion of existing potable ethanol factories from
producing distilled sugar-based spirits to bioethanol as
the price of imported alcohol began undercutting the
local market. With a captive domestic market guaranteeing off-take and the price of sugar declining, companies are making significant progress in terms of
boosting capacity. Four distilleries were operational in
2013 with a total combined capacity of 117m litres per
annum, according to SRA data.
Annual output for the year tallied around 72m litres,
up from 32m litres the previous year, putting capacity
utilisation at 61.5%. Another two distilleries began operating in 2014, boosting national capacity to 193m litres.
Capacity will be further bolstered in 2015 when five
more plants are projected to come on-line.
OUTLOOK: Although agricultures contribution to the
Philippines will likely be greater socially in terms of
employment and feeding the domestic market than economically in terms of its GDP and export contributions,
a number of segments are showing considerable promise for future development. One area that is expected
to remain a concern is the prevalence of inclement
and often devastating weather, which has an obvious
negative impact on the sector as a whole, as well as on
countless individual farmers. Determining the most
effective means of countering the effects of weather
will be a key concern going forward. Initiatives to boost
yields of staples such as rice and corn should reduce
the countrys food import bills in the future, even if the
stated goal of full rice self-sufficiency is not achieved.
The flourishing fisheries and fruits and vegetables segment is likely to continue to be profitable as well, as
international demand still significantly outpaces the
supply of Philippines-cultivated produce and seafood.
AGRICULTURE INTERVIEW
Shifting focus
OBG talks to Francis N Pangilinan, Secretary, Office of the Presidential
Assistant for Food Security and Agricultural Modernisation
To what extent can agricultural development reverse
rural unemployment and reorient focus toward
farmer-centred development?
PANGILINAN: As the Philippines is a largely agricultural economy, agricultural development plays a significant role in curbing rural unemployment. One-third of
the Philippine population is directly employed by the
agricultural sector; however, if one counts allied services, such as milling, post-harvest or transport, nearly
half of the countrys labour force would be directly or
indirectly employed in the agricultural sector. Similarly, if one counts the contribution of agricultural allied
services, whether manufacturing processes, industrial activities or services, in addition to agricultural production, estimates suggest that agriculture-related
activity accounts for up to 40% of GDP.
Considering that agriculture is the backbone of our
economy, in order to pursue modernisation in a sustainable way, we must invest in agriculture. Unfortunately, agriculture in the Philippines has been neglected
over the past three decades. Though the country led
the region in terms of agricultural development in the
late 1960s, the underlying structural reforms needed
to make its development sustainable were not established. As a result of this, at one point the average
farmer was 57 years old and only had a fourth-grade
education. Both indicators demonstrate the level of neglect and reasons for poverty evident in the country. Even
today, in terms of exports, the Philippines is a net
importer of agricultural products to the tune of $2bn,
whereas Thailand is net exporter at $18bn and Vietnam exports approximately $4bn.
Agricultural development can serve as a vehicle to
reorient focus toward farmer-centred development.
Such a development strategy needs to be incomebased to enable farmers to access markets, packaging,
value-added processes and post-harvest facilities. The
government and the private sector need to shift their
focus from yields to farmers incomes. The strategy of
regional agricultural powerhouse nations like Thailand,
What strategies can be employed to increase agricultural and economic output for farmers?
PANGILINAN: Per the theory of economies of scale,
cost advantages can be achieved as the size of an
enterprise increases. As such, creating agricultural clusters and building farming communities means not only
increasing outputs, but also reducing the cost of operations. The average size of a Philippine farm is around
1.5 ha, which is not viable for achieving economies of
scale and therefore clustering should be encouraged.
Overall, the best way to make farming more attractive, both for the farmers themselves and for private
sector investors, is to make it viable. This requires a
transformation of the countrys agricultural landscape
from subsistence farming into self-sustaining farming
enterprises. A wide range of agricultural interventions
are needed, such as approaching small farmers and
creating clusters; fostering viable farming enterprises;
providing government support; encouraging stronger
private sector partnerships; and mobilising resources
around farming communities.
On coconut farms, for example, greater use of intercropping can boost income and productivity. Fertilisation is also key, as it can increase the yield of a coconut
tree by 25-50% in the first year and 50-100% in the second. Replanting is another effective intervention, as
around 30% of the countrys trees are old. Lastly, there
needs to be a greater focus on enterprise development by engaging farmers in value-added processes.
THE REPORT The Philippines 2015
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AGRICULTURE INTERVIEW
Going bananas
OBG talks to John P Perrine, Chairman, Unifrutti Group Philippines
How will the Bangsamoro Basic Law (BBL) help
unlock Mindanaos agribusiness potential?
PERRINE: Political unrest in Mindanao has had a huge
impact on the nations perspective of the BBL, the
Moro Islamic Liberation Front (MILF), the Moro National Liberation Front (MNLF) and the countrys Muslim
minority. Whereas Manila has experienced continuous
economic growth, this has not been felt in rural areas,
particularly the Bangsamoro region. Luzon has many
regions, but when one talks about Mindanao the second-largest island in the country it is usually referred
to as a block. Only those who recognise the different
identities and socioeconomic realities within the regions
can work successfully in these areas.
Over 60% of Bangsamoros inhabitants live below
the poverty line, creating an environment with limited
means and many victims of decades-long neglect an
environment where extremism and insurgency can and
have originated. As administration after administration
has not delivered on promises to address abject poverty in Mindanao and its incidence worsens with population growth, communities have come to accept and
allow extremism, which fuels repercussions not only in
Mindanao, but also in the countrys capital.
Since the establishment of the La Frutera banana
plantation in Maguindanao in 1996, two expansions in
Lanao del Sur have been successfully completed both
completely within Bangsamoro. From the onset 60% of
the workers at La Frutera were former MNLF and MILF
fighters. The realisation was that the region could not
sustain peace without development. However, the question of how to replicate this business model remained.
The primary strategy is to look for an investment
area under the control of a single clan to avoid disputes.
The reality is that Bangsamoro has feudal conditions
that cannot be changed overnight. Second, investors
must find a clan with enlightened leadership, which can
be observed through the types of social services delivered. Lastly, investors should look at areas under MILF
control, as it acts as the only functioning police force
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in Bangsamoro. Once an investor enters an undeveloped area, it will cause major positive changes in the
community, as an important catalyst for sustainable economic development and thus, a key to lasting peace.
To what extent can the expansion of banana production encourage sustainable development?
PERRINE: Banana plantations once flourished in Mindanao because it was historically free of typhoons. In
2011 Typhoon Sendong affected Mindanao, and
Typhoon Pablo also devastated the area in 2012. As a
result, the banana industry cluster is working to adjust
to climate change, which has put Mindanao in the
typhoon belt. All the banana plantations operating in
Mindanao have acknowledged that the clock is ticking
and a typhoon could wipe out the area. The change in
agricultural conditions has brought flooding-originated Panama disease, which as yet has no cure and effectively wipes out plantations. Typhoons have facilitated
the spread of Panama disease and reduced the coverage of banana plantations from 80,000 ha to 65,000
ha as of 2014. The only remaining expansion area is
Maguindanao, in the middle of Bangsamoro.
A major competitor for Philippine banana exports is
Ecuador. The Philippines is a competitive source for
Cavendish bananas for the Asia region, but other markets the Philippines serves, such as the UAE, Iran and
Saudi Arabia, can be reached by Ecuador. In Asia the
Philippines has a natural competitive advantage, especially for serving Japan, which needs twice weekly deliveries on small vessels to ensure freshness.
To ensure agriculture expansion in Mindanao, the
cultural context must be appreciated. Women serve as
stabilising influences in the community, creating family businesses that generate high revenues. By partnering with small enterprises and womens businesses,
investors enable the entire community to grow. For
banana plantations, investment is $30,000 per ha, as
high-value plantation crops need greater investment,
and this has a multiplier effects in these communities.
AGRICULTURE ANALYSIS
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Seafood scene
Exports of fresh and processed fish products are expanding, with
aquaculture recording strong increases in output
One of the greatest benefits derived from the Philippines widely dispersed archipelagic landmass of more
than 7000 islands spread across 2.2m sq km of the Pacific Ocean is the abundance of sea life teeming beneath
the surface of territorial waters. Given the seafaring
nature, heavy reliance on seafood as a local dietary staple and maritime tradition of many Filipino people, the
commercialisation of the fisheries present off the Philippines 36,289 km of coastline seems all but preordained.
In all, the fisheries sector produced P244.55bn ($5.5bn)
worth of seafood in 2013, up from P232.61bn ($5.2bn)
the previous year and roughly double the output of
P112bn ($2.5bn) a decade ago, according to Philippine
Statistics Authority (PSA) data. Exports of both fresh
and processed products expanded dramatically from
2012 to 2013 on the strength of increased shipments
of seaweed and fresh or preserved fish to the US, Japan
and South Korea. Free-on-board seafood shipments
hit $1.16bn in 2013, up from $810.8m in 2012 and
nearly triple the $427.4m exported in 2003.
While many of the more easily accessible fishing
grounds containing more profitable commercial catches have declined in yield and quality over the past few
decades due to heavy fishing, the country still boasts
numerous productive fisheries. Fishing is broken down
into three modes of production for statistical and
administrative purposes: commercial fisheries, municipal fisheries and aquaculture.
AQUACULTURE: Aquaculture is the most productive of
the three segments and is enjoying strong growth from
production in ponds, pens, cages or on substrates such
as stakes, ropes, lines, nets, shells or other surfaces.
Aquaculture represents a significant potential for the
sector, with fish cage farming expected to grow dramatically in the coming 10 years, especially targeting
high-value fish like milkfish, Phillip L Ong, the president
of Santeh Feeds Corporation, told OBG.
Aquaculture production has increased from under
1m tonnes in 1998 to 2.37m tonnes in 2013, valued at
an all-time high of P93.73bn ($2.1bn) according to
PSA. The most valuable aquaculture species are milkfish, with more than P20bn ($450m) produced from
brackish water fish ponds alone, along with a significant and rapidly growing contribution from marine and
brackish water cages, at P9.7bn ($218.3m), and smaller contributions from freshwater cages and fish pens
and marine and brackish water fish pens. In 2013 fish
farmers yielded more than 400,000 tonnes of milkfish,
which is widely consumed domestically. Other significant contributors include tiger prawns raised in brackish water fish ponds, at P19.72bn ($443.7m) in 2013,
tilapia from freshwater ponds and cages (P10.38bn,
$233.6m) and seaweed (P9.9bn, $222.8m).
COMMERCIAL: Commercial fisheries, which mostly
focus on large pelagic species like tuna, billfish, marlin
and sailfish, were the largest contributor to the sector
in the 1970s, but have since declined in relative value,
with the industry producing P69.92bn ($1.6bn) worth
of fish in 2013, ranking it third behind the municipal
and aquaculture segments. Tuna was the largest and
most profitable segment in the 1980s as the country
became the leading producer of the fish in South-east
Asia, due in large part to the introduction of fish aggregating devices. However, the effectiveness and efficiency of the devices eventually led to declining domestic
tuna schools, prompting local vessels to expand their
operations into international waters. In spite of the
changes in species of tuna targeted, overall catches continue to climb mainly due to increased production of
skipjack tuna, which rose from 83,385 tonnes in 2002
to a peak of 201,262 in 2009 before tailing off to
171,261in 2013. Local production continues to fall,
with frigate tuna and eastern little tuna tailing off from
100,958 and 26,811 tonnes in 2002 to 73,647 and
22,179 tonnes by 2013. Other, less plentiful species,
such as bigeye and yellowfin, have also declined of late.
MUNICIPAL: Municipal fisheries in which the fishing
is carried out in inland and coastal areas with or without the use of a fishing boat totalled 1.26m tonnes
in 2013 and were worth a total of P80.9bn ($1.8bn).
THE REPORT The Philippines 2015
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AGRICULTURE ANALYSIS
Most fruit and vegetable exports go to China and the Middle East
Fruitful business
Production volumes and exports of fruit and vegetables continue to rise
219
Health
The universal health care system continues to expand
Registering patients more efficiently is a key priority
Price caps on pharmaceuticals raise uptake of generics
Public spending on health boosts private providers
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HEALTH OVERVIEW
With the government committing unprecedented levels of funding to increasing the coverage of its national public health insurance programme, positive effects
are being felt throughout the domestic health sector. The Philippine experiment of combining public
health care spending with private sector delivery continues to evolve. As health care remains central to the
public interest, there is a heavy onus on improving
access and efficiency in accordance with the goal of
providing universal health care coverage for all Filipinos
by 2016. In addition to the realisation of hard infrastructure projects under public-private partnerships
(PPPs), options for the provision of health services and
business process outsourcing (BPO) more generally
under such a model are gradually coming to the fore.
MULTI-LEVEL: While the progression of the domestic health care sector has failed to reach its potential
in recent years due to poor infrastructure, insufficient human resources and under-investment, the
current government is prioritising the fulfilment of its
public health care promises.
Universal health care coverage now extends to
about 82% of the population, and the governments
aim to ensure universal health care to the entire population is taking shape. Though currently in a period
of adjustment as the private sector digests and adapts
to the demands of its increasingly redefined role, the
positives for the overall sector appear to far outweigh
the negatives. However, with this evolution comes an
increased responsibility of the government to regulate and maintain standards. This extends not just to
quality of care and service delivery but also to the ongoing development of the PPP model, which remains
prone to the inefficient bureaucracy and tardy implementation that can dampen investor appetite.
CURRENT CHALLENGES: In light of steps to increase
universal health care coverage, more is now required
from the state in terms of effective management of
health care distribution. However, this is an area where
the country has been liable to face difficulty, due to
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HEALTH OVERVIEW
96
72
infrastructure, which would allow for better management. Hospitals are often forced to rely on an offline
system whereby data from their respective practice
is transferred to a central database via memory stick.
HEALTH INDICATORS: The recently increased spending and the extension of the universal health care
scheme will take time to have effect, so health care
indicators in the Philippines still show a deficit in the
quality and distribution of care across the board.
According to the latest World Bank data from 2012,
life expectancy at birth is 69 years old, compared to
75 in Malaysia and 71 in Indonesia. Infant mortality
at birth is 25 per 1000 live births as of 2012, with 72%
of births being attended by skilled medical staff. Health
care spending per capita was $119 in 2012 compared
to $215 in Thailand and $108 in Indonesia, however
this has undoubtedly gone up since then.
PROGRESS: After a decade-long debate between
government and the Catholic Church, the Reproductive Health Bill was passed in December 2012, gaining Supreme Court approval in 2014. While those in
urban areas have access to contraception and health
care services, those in rural areas do not. The UN Population Fund estimated of the 3.4m pregnancies annually in the Philippines, more than half are unintended and one-third are aborted. To counter this, the
new law requires government health centres to hand
out free condoms and birth control pills, as well as
mandating that sex education be taught in schools.
It also requires that public health workers receive
family planning training and post-abortion medical
care has been also legalised. It is believed that the law
will greatly reduce the levels of child mortality, some
of the highest in the region, while also reducing the
strain on the universal health care system.
As for improving primary care, the Health Facility
Enhancement Programme has continued to make
gains. The Philippines has over 3000 rural health care
units, servicing between two and four barangays (villages) each. Each unit has a doctor, a nurse, a midwife and potentially other additional health care staff.
These units represent the backbone of primary health
care in the Philippines, managed by LGUs and put
under considerable strain by the large populations
located in rural areas. The installation of birthing facilities at these clinics is now being prioritised in accordance with aforementioned MDGs. Though 57.79% had
such facilities in 2010, it is estimated that this level
has now reached over 70%.
The reallocation and boosting of the government
health care budget has been key to the constantly
developing coverage of Philippine Health Insurance
Corporation (PhilHealth). The implementation of initiatives such as the 2012 Sin Tax Law has been a success, helping to increase the Department of Health
budget by 57.9%, from P50bn ($1.1bn) in 2013 to
P83.7bn ($1.9bn) in 2014 under the 2014 General
Appropriations Act. From January to November 2013,
the Bureau of Internal Revenue collected P91.6bn
($2.1bn) from excise taxes on tobacco and alcohol
products, resulting in P41.1bn ($924.8m) worth of
221
48
24
2010
2011
2012
222
HEALTH OVERVIEW
HEALTH OVERVIEW
Under the order, funeral benefits for private and public sector employees were doubled from P10,000
($225) to P20,000 ($450) in addition to a 10% increase
for Employees Compensation (EC) covering those
with permanent partial, permanent total disability
and/or survivorship pension.
PRIVATE HEALTH CARE: During the years of lacklustre investment under previous administrations, private
health care provision in the Philippines grew in order
to supply the demands of a growing population.
According to the latest WHO data from 2012, the
country has approximately 1800 hospitals, of which
60% are private, and which cover a range of services
in the areas of medicine, paediatrics, primary and tertiary clinical laboratory, and radiology. The number of
primary health care centres around the country is
2252 and there are 721 public hospitals under the
management of LGUs. There are 70 DoH hospitals,
which treat patients suffering specific illnesses requiring a range of services. As for actual hospital usage,
in 2013 the percentage of persons treated in a public hospital or clinic was 55%, compared with 44%
handled in a private facility, according to the National Demographic and Health Survey. About 2% of Filipinos are covered by private insurance or membership in health maintenance organisations (HMOs).
The effect of the increased coverage under PhilHealth and consequent demands for increased private sector health care delivery is forecast to have a
positive effect on the sector. The government paid out
P47.2bn ($1.1bn) for claims in 2012 and over P62bn
($1.4bn) in 2013. The primary revenue sources for private hospitals are user fees and health-cost reimbursement from PhilHealth, and the scales are expected to tip in favour of the latter as the country
approaches universal coverage.
Private hospitals in the Philippines are generally
smaller than public hospitals and have sought to invest
in specialist treatment segments such as eye care,
cosmetic surgery, orthopaedics and cancer treatment
to ensure profit making. However, the increased
coverage of PhilHealth will likely result in the construction of larger private hospitals that provide general
and primary care. As for the pharma industry, following the imposition of the Maximum Drug Retail Price
6.3
6.9
94
90
88
0.4
120
24
30
3000
70,987
98.39
223
Some 55% of patients were treated in public hospitals in 2013, while 44% visited private facilities
224
HEALTH OVERVIEW
The Philippines has suffered a brain drain in the medical sector and is incentivising residencies at home
In anticipation of higher
usage of medical services
and facilities resulting from
full implementation of
universal health care
coverage, private firms are
adding to their total bed
capacity.
226
HEALTH ANALYSIS
Per capita health care spend was $119 in 2013, up from $30 in 2003
Cutting spending
Pharmaceuticals comprise a significant portion of per capita health
expenses, but the government is working to reduce costs
The nations
pharmaceuticals industry
was valued at $4.3bn in
2013, but could reach
approximately $8bn by
2020.
HEALTH ANALYSIS
227
228
HEALTH INTERVIEW
On the mend
OBG talks to Alexander A Padilla, President and CEO, Philippine Health
Insurance Corporation (PhilHealth)
How can PhilHealth boost utilisation of the universal coverage programme among the unserved and
underserved segments of the population?
PADILLA: In 2014 alone, the national government allotted P35.3bn ($794.3m) in premium contributions for
14.7m families, or roughly 46m individuals. Allocation
will increase to P37.2bn ($837m) in 2015, as coverage
is expanded to Barangay officials and as part of the
peace initiative to the Moro Islamic Liberation Front
and other qualifying political groups. To put utilisation
in context, for every 100 members, around eight normally get sick, and covering their needs requires the
resources of all contributors. As such, we do not aspire
for 50% utilisation, as it would mean an epidemic.
For the poor, utilisation has increased from 7% to
roughly 12%, accelerated by an information campaign.
Traditionally, many of the poor have not known they
are members of PhilHealth, though this trend is being
reversed by efforts to coordinate with other government agencies to increase awareness. The goal is to
help members learn about PhilHealth and demand their
rights. Aside from the no balance policy, which helps
the poor avoid out-of-pocket expenses after entering
a hospital, we have point-of-care enrolment, whereby
anyone who is not part of the listed poor under the
Department of Social Welfare and Development or listed as formal sector can enter a hospital and enrol
immediately with PhilHealth.
We have also come up with a new case rate system.
Currently, we have a fixed amount for each treated
medical case, ranging from P10,000 ($225) for dengue,
to P8000 ($180) for normal childbirth and P19,000
($427.5) for caesareans. In the past, we did not know
the cost of public versus private hospitals or secondary versus tertiary ones. The new system now allows
hospitals that are efficient and able to discharge patients
in a timely manner to benefit from our case rate. The
case rate not only protects members and increases
hospital accountability, but also promotes a change in
behaviour. For example, hospitals often complain that
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HEALTH ANALYSIS
229
Maximising potential
The health care sector is set to grow through a number of public-private
partnerships
Though health care sector spending is on the rise in
the Philippines, years of underinvestment have resulted in a deficit in both available facilities and services. Although improvements are being made in 2014
the Philippine government spending on health care
reached the 5% of GDP recommended by the WHO
to reach the levels of care planned for the universal
health care system by 2016, integrating of the private
sector is necessary. Health care provision is an important issue in the Philippines, but there has traditionally been trepidation about involving the private sector in what is viewed as a state responsibility. Such
caution, which was often due to a lack of understanding regarding the distinction between public-private
partnerships (PPPs) and privatisation, is one reason
for the lack of investment in the sector. However, attitudes have begun to change as PPPs materialised in
areas like transport infrastructure.
PPP BUILDUP: This momentum is now being built
upon by the International Specialist Centre of Excellence on PPPs, which is focused on PPP implementation in several sectors. The centre was established by
the Ministry of Health in Manila in 2012, under the
auspices of the UN Economic Commission for Europes
International PPP Centre of Excellence, which is also
assisting with the drafting process. Several PPPs have
been proposed for the health sector that satisfy the
demands of the universal health care system, and the
centre is also in the process of completing a guide on
best practices for PPPs in health.
The administration of the President Benigno Aquino
III and the Department of Health (DoH) have designated a particular focus on the modernisation and
upgrading of hospitals, cancer centres, orthopaedics,
dialysis as well as primary health care clinics. Providing an adequate number of hospital beds has been
an enduring challenge in the Philippines, currently at
1.15 per 1000 people, according to World Bank data,
while its lowest value reached 0.5 in 2002. However,
as the role of the private sector continues to expand
alongside the evolution of Philippine Health Insurance Corporation (PhilHealth) and accommodating
government legislation, initiatives to incorporate soft
infrastructure projects in addition to the hard
infrastructure projects under way are also being
considered. A combination of both under a well implemented and monitored PPP mechanism would allow
the Philippines to keep pace with its neighbours.
CURRENT PROJECTS: The headline PPP within the
health care sector thus far has been the P5.7bn
($128.3m) modernisation project for the Philippine
Orthopaedic Centre, which began in mid-2013. The
Megaworld-World Citi consortium, a joint venture
between Megawide Construction and World Citi, was
the sole bidder of the project that involves the construction of a 700-bed-capacity, super-specialty, tertiary orthopaedic hospital that will be located within
the National Kidney and Transplant Institute Compound in Quezon City. It will replace the 68-year-old
Philippine Orthopaedic Hospital that is currently located in Quezon City. Only 300 out of the 700 beds of
the hospital are usable because of its current poor
condition. Megawides partner, World Citi, operates
the 276-bed World Citi Medical Centre.
In terms of financing, Megawide Construction
entered into a P2.9bn ($65.3m) omnibus loan and
security agreement with Land Bank of the Philippines,
Land Bank of the Philippines-Trust Banking Group
and Development Bank of the Philippines in October
2014. The consortium can finance up to 70% of the
project cost through borrowings and the remaining
30% through equity. Under the build-operate-transfer arrangement with the DoH, the consortium will
design, build, finance, operate and maintain the facility for 25 years. At the end of the 25-year concession
period, the hospital will be returned to the DoH. During the 25-year programme, there will still be free
services for the poor even as the modernised hospital makes its money from other patients to achieve a
return on their investment. So far, Megawide has won
THE REPORT The Philippines 2015
230
HEALTH ANALYSIS
Modernisation efforts have resulted in improvements at 20 Philippine hospitals at a cost of about $20bn
In order to provide a
greater range of services
and increase reliability for
rural residents,
telemedicine is being used
to extend treatment to
previously under-served
populations.
231
Education
The sector begins to transition to a K-12 system
Reforms increase the availability of educational services
ASEAN integration attracts international students
Expanding rural access remains a key priority
232
EDUCATION OVERVIEW
The academic year lasts for 200 days between June and March
Having been the only country in South-east Asia providing just 10 years of basic education to its population, the Philippines is working to join its neighbours
and implement a K-12 system in 2016. Though the
administration of President Benigno Aquino III is providing the Department of Education (DepEd) with
more funding to aid the realisation of this task, the
challenge of doing so over in a short transition period is unquestionable. The growing role of the private
sector in providing educational services is crucial,
with greater opportunities on the horizon and the
government taking slow but steady steps to define
them. Continuing reform is set to further integrate
and incentivise private sector participation, as is happening in sectors like infrastructure and health care.
Elsewhere, the challenges of access and quality
remain, which the government continues to address
through a host of pragmatic initiatives. However, the
implementation of such programmes across the
Philippines challenging archipelagic landscape, populated by over 100m people, is no small feat. The
development of human capital and production of
job-ready graduates is crucial to the growth of the
Philippines, which had one of the highest unemployment rates of all ASEAN nations in 2013, at 7.3%.
The rate steadily decreased to 6.7% by the end of
2014, due in part to the workforces fundamentals,
such as fluency in English and the evolving number
of vocational degrees offered to graduates. Since
coming to power in 2010, the current administration
has laid down a concrete education agenda via the
Philippine Development Plan (PDP) 2011-16. This
plan was updated for 2014-16 with DepEd prioritising access to basic complete quality basic education,
engagement with the private sector in broadening
opportunities for basic education and preparing graduates for further education and employment.
LEGAL BASIS: The former education system, which
has been in place since 1945, is also enforced by
stipulations in the Philippines Constitution of 1987
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that all children attend basic public education, divided into six years of elementary school and four years
of secondary education. However, the country has
since fallen behind many of its regional competitors,
largely due to the scale of the implementation effort.
At the beginning of the millennium, the original constitution was updated via the Governance of Basic
Education Act of 2001, which reinforced the constitutional right to free basic education for the schoolage population and young adults. Under the Aquino
administration, this was bolstered through the Kindergarten Act in 2012 and the Enhanced Basic Education Act of 2013, which demonstrated political will
to reform the education sector and propel the country towards achieving its high growth potential.
In the Philippines, the academic year begins in June
and lasts approximately 200 days. Holidays are taken for the summer between March and May, while
students are also granted two weeks at Christmas
among other public holidays. While there has been
talk of harmonising the national calendar at both
the high school and college levels to one that is more
in sync with other ASEAN nations, the majority of
Philippine education institutions are waiting for clearer definition from the ASEAN secretariat.
SECTOR OVERSIGHT: DepEd is responsible for ensuring the provision of basic education to primary and
secondary school students while also managing the
Alternative Learning System for out-of-school youths
and adults. DepEd oversees kindergarten care and
education alongside the Department of Social Welfare and Development (DSWD).
Tertiary degree programmes conducted by state and
private institutions are supervised by the Commission
on Higher Education (CHED), while the Technical Education and Skills Development Authority (TESDA) is
responsible for the formulation and supervision of
manpower and skilled workers. TESDA sets appropriate skills benchmarks and aptitude tests alongside
various government policies and programmes. It also
EDUCATION OVERVIEW
2.0
SOURCE: Department of Education
oversees policy and resource guidelines for Technicalvocational and education and training institutions in both the private and public sectors.
BUDGETING: With provision of good basic education
the central priority of the incumbent government, the
DepEd accordingly received a P321.05bn ($7.22bn)
budget for 2015, making it the largest recipient of
all ministries. However, despite substantial allocations of P293.4bn ($6.6bn) in 2013 and P336.9bn
($7.6bn) in 2014, its funding remains behind the UN
Educational, Scientific and Cultural Organisations
(UNESCO) recommended spending rate of 4-6% of
GDP, advised by the Education for All (EFA) movement.
Some P42.27bn ($951.1m) of the total was allotted for state universities and colleges (SUCs) in 2015,
a roughly 11% increase over 2014, to provide for faculty upgrading, operating funds and capital outlays.
This budget includes an estimated P3.5bn ($78.8m)
for SUC scholarships and P2.2bn ($49.5m) for scholarships administered by the CHED. Some P316m
($7.1m) was set aside as a research fund to improve
the quality of higher education.
In addition to its EFA commitments, the Philippines
is also pursuing eight time-specific targets under the
Millennium Declaration, which it signed on September 2000. The declaration aims to cut poverty in half
by 2015, to 22.65% of the population living below
poverty incidence and 12.15% below subsistence
incidence. With the adoption of the declaration, the
Philippines also affirmed its commitment to the Millennium Development Goals (MDGs) aimed at reducing poverty, hunger, disease, illiteracy, discrimination
against women and environmental degradation.
BASIC EDUCATION: Even without the under-investment in education that occurred under previous
administrations, the challenge of providing basic education to the over 21m children enrolled in the Philippine public school system is considerable. With a
population of 98.39m and a growth rate of 1.7%,
according to 2013 World Bank data, the weight placed
on education is increasing and enrolment rates have
risen, in part thanks to the Basic Education Reform
Agenda 2006-12. Enrolment numbers of elementary
education for students aged between six and 11
increased from 13m in 2005 to 14.4m in 2013.
Similarly, secondary school enrolment of students
aged 12 to 15 also increased from 6.3m in 2005 to
7.1m in 2013. Kindergarten enrolment was at 2.2m
in 2013, up from 1.1m in 2008. However, with 20.7%
of the population living in poverty, according to the
latest data from the National Statistical Coordination
Board, the government estimates that approximately 5.59m children between the ages of five and 17
years old were working and therefore not in full-time
education. The government has been countering this
through programmes such as the Conditional Cash
Transfer (CCT) programme, locally known as Pantawid Pamilyang Pilipino Programme (4Ps) to provide the
poorest households a P500 ($11.25) subsidy per
month for health care and nutrition expenses and a
P300 ($6.75) education subsidy per month per child
233
1.5
1.0
0.5
0.0
2008/09
2009/10
2010/11
2011/12
2012/13
234
EDUCATION OVERVIEW
The K-12 system began enrolling students in the 2012/13 school year
EDUCATION OVERVIEW
Private
8000
6400
SOURCE: Department of Education
235
4800
3200
1600
0
2008/09
2009/10
2010/11
2011/12
2012/13
236
EDUCATION OVERVIEW
It is expected that the number of students pursuing a university education will grow by 700,000 by 2020
accessing a university education are also being continually lowered with the growth in popularity of
online open courses, which are significantly less costprohibitive for Filipino students than even the bestvalue public universities.
As a result, those PHEIs at the very top and other
aspiring HEIs have begun to increasingly focus on
fulfilling international accreditation standards such
as ABET to set themselves apart. While an ASEAN University Network, an association for accrediting regional schools, is on the horizon, at present it appears that
inclusion in the group will be restricted to the best
institutions in Asia, making it likely that only three
Philippine HEIs are eligible at the moment.
Despite students previously entering HEIs at the
age of 16, typically being able to graduate with bachelors degree at 20 and a further masters degree at
22, the K-12 system means that students entering HEIs
will be 18 years old starting from 2018/19. While for
SUCs the acclimatisation period and the loss of a
whole cohort of students between 2016 and 2018
is likely to be less of a problem as their budgets are
assured by the state, for PHEIs the period will be significantly more difficult and uncertain.
The president of the Technological Institute of the
Philippines, Elizabeth Lahoz, told OBG, Private higher learning institutions are completely reliant on revenue from tuition fees and hardly get any government
support. In order to remain competitive, schools must
invest resources to accommodate demand for popular programmes such as nursing. However, these
schools may also become victims as demand for such
programmes inevitably rises and falls and so they
have to be very strategic in order to survive.
PRIVATE CHALLENGES: The primary challenge facing all HEIs, whether in the private or public sector,
is providing space for the growing number of students.
The Philippines is forecast to have one of the worlds
highest growth rates in university and higher education participation. The British Council estimated that
700,000 additional Filipino students will pursue tertiary education by 2020, a 26% increase over the
2010 benchmark of 2.77m. According to the CHED,
the most popular HEI bachelors programmes for
2014 include agriculture, engineering, science and
maths, information technology (IT), teacher education and health sciences. Demand for courses for
tourism-related studies and business have also been
on the rise in recent years. With the rise in popularity of outcome-based education encouraged by the
government and required by ABET accredited programmes, colleges are increasingly following the German model which mixes work experience integration
into bachelors courses. One example is the Marine
Engineering Course offered at the Technical Institute of the Philippines, which includes three years of
class time and one year at sea before a final year back
in class to consolidate learning before graduation.
The government has also rolled out its own Government Internship programme under the DSWD as
part of the Kabataan 2000 programme, which provides opportunity for youths to get hands-on experience working in various government agencies.
FUNDING: With the majority of HEIs being for-profit institutions, with little or no support provided by
the government, many have turned to income generating projects (IGPs) to boost funding. In 2011, the
government made a push for both SUCs and PHEIs
to start aiming for financial independence through
IGPs, as part of the Aquino administrations larger
Roadmap to Higher Education Reform (RPHER). The
end goal of having the top-22 SUCs source 50% of
their budgetary requirements from internal income
seems uncertain, with relatively little funding coming from IGPs to date. For example, in 2013 the University of the Philippines (UP) accrued just P115m
($2.59m), and the Philippine Normal University garnered P54m ($1.22m). While it seems increasingly likely that the government will work to extend more
equitable funding through a voucher scheme, seeking to mitigate a dearth of students resulting from
EDUCATION OVERVIEW
237
238
EDUCATION INTERVIEW
Core skills
OBG talks to Armin Luistro, Secretary, Department of Education (DepEd)
How can the education system nurture English proficiency while embracing cultural sensitivities and
promoting learning in the mother tongue?
LUISTRO: The DepEd is currently implementing mother-tongue based multilingual education (MTB-MLE) as
part of our K-12 reform. This is not a purely pedagogical strategy for language but a learner-centred
approach. By using the language students are comfortable with, the MTB-MLE in the enhanced curriculum helps them develop the language skills they need
to learn the fundamentals of various subjects from
kindergarten to third grade, and to move seamlessly from
home to school. Children clearly learn best when we
use the language they understand, especially in elementary education. Additionally, prior to the launch of MTBMLE, studies had shown that language skills mastered
with the mother tongue can enable students to learn
a second and subsequent languages faster.
What can be done to address the backlog of infrastructure, basic materials and financing that are
needed for the K-12 programme?
LUISTRO: Over the last three and a half years the DepEd
has been addressing gaps in basic inputs namely,
classrooms, teachers, textbooks, seats, and water and
sanitation facilities. We have fully accounted for backlogs of these in all 47,000 schools from 2010, and will
continue to build more infrastructure, hire more teachers and buy more learning materials and tools for the
K-12 programme. Senior high school (SHS) will be introduced nationwide starting with grade 11 in 2016 followed by grade 12 in 2017. We expect 1.4m students
per cohort to enter grade 11, more than 1m of them
from public junior high schools. The department will
fulfil these requirements both by building capacity at
public high schools and by tapping available capacities
at private schools and other state-funded institutions.
Starting in 2016, an SHS voucher programme will provide financial subsidies to public junior high graduates
wishing to attend private SHS or schools managed by
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How can ICT adoption complement learning-teaching capabilities and enhance access to education?
LUISTRO: Providing ICT tools to public schools nationwide has been one of the departments priorities, to
complement the new curriculum and revolutionise education using the limitless possibilities of technology. We
have incorporated interactive learning tools to build fundamental ICT skills, and tried to democratise information by posting the entire curriculum and other learning materials online for use by teachers, students and
other interested stakeholders. ICT is also used as a tool
to broaden access to basic education, especially for nonmainstream learners who find it hard to attend school
on the traditional calendar or schedule. Programmes
like the Open High School and Alternative Learning
System employ suitable on- and off-line technologies
to reach marginalised learners and develop their skills.
EDUCATION ANALYSIS
239
Helping hand
The private sector plays an important role in education provision
The role of the private sector in education has always
been apparent in the Philippines, particularly due to
the dominance of private tertiary institutions that
were established before state institutions arrived to
provide more affordable options. As a result of this
history, past and present governments have been able
to consistently work together with private sector entities, both domestic and foreign, to the benefit of the
sector. It is important to note that this extends far
beyond educational institutions, but as a more general participation of a variety of players from different industries. Such participation has been aided by
encouraging and enabling legislation set out by the
Department of Education (DepEd), such as the Adopta-School Act and the Republic Act 8525 of 1988,
which provided a way for the private sector to participate in nation-building via the education of Filipinos.
EDUCATIONAL ADOPTION: For 2014, the DepEd
recently confirmed that it has received more than
P5.5bn ($124m) in donations from the private sector
towards the Adopt-a-School programme. The programme links the DepEd with players and organisations that are able to assist in the provision of basic
education resources, such as classrooms, teaching
materials and equipment. Currently, more than 130
private companies are participating by supporting
specific DepEd initiatives and programmes such as
nationwide feeding programmes, teacher training and
integration of integration technology.
Aside from the existing Adopt-a-School programme,
the DepEd has also been championing and inviting private sector support of the Abot Alam programme.
This programme focuses specifically on location-outof-school youth (OSY) between the ages of 15 and
30, with the aim of successfully finding them educational, entrepreneurship and employment opportunities. Since the beginning of the programme, the
DepEd has mapped over 1.2m OSY. Of this number,
76,000 have been enrolled in the Alternative Learning System programme, Alternative Delivery Mode,
EDUCATION ANALYSIS
241
Aiming high
The government is implementing widespread reforms to turn out
better students
Aimed at modernising an outdated system and providing students with an education that better equips
them to participate in an increasingly competitive
world, the K-12 programme is receiving full support
from the government. Part of President Benigno
Aquino IIIs 10 Point Education Agenda, the K-12 programme turns the existing 10-year system into a 13year one, including mandatory kindergarten and two
years of senior high school education.
One of the main areas of change and improvement,
therefore, is the curriculum. At senior high school
(SHS), students are expected to take two years of
specialised courses bases upon aptitude, interest and
the capacity of their school, allowing them to follow
a certain vocational direction if desired. SHS offers
subjects included within the core curriculum, often
referred to as general studies programmes, and more
specialised, tracked curriculum options.
The core curriculum includes languages, literature,
communication, mathematics, philosophy, natural sciences and social sciences. However, students may
also select from three tracks, academic, technicalvocational-livelihood and sport-art combined. The
academic track is broken into three different paths,
namely, business, accountancy and management;
humanities, education and social sciences; and science, technology, engineering and mathematics.
K-12 TRAINING: In addition to new curricula, which
allows students to hone in on their area of expertise
or interest, the K-12 system also allows for students
to begin to gain practical and technical competencies
after year 10, or their final year of junior high school.
Following this, students are allowed to study for Certificates of Competency, National Certificate (NC) Level I in year 11 and NC Level II if completing a technical-vocational-livelihood track in 2012. All certificates
improve the employability of students in sectors like
agriculture, electronics and trade, also demonstrating the willingness of students to apply themselves.
It is envisaged the complementary qualifications will
242
EDUCATION ANALYSIS
Some universities are changing their calendars to start classes in July or August, like others in the region
243
Mining
New revenue-sharing proposal before Congress
Moratorium on exploration permits lifted in 2013
Tax burden could increase for mining companies
Investment lagging due to lack of regulatory clarity
Transparency initiative gaining traction in the sector
244
MINING OVERVIEW
Waiting game
Murky regulatory environment continues to impede expansion
The Philippines boasts some
of the largest precious
metals reserves in the
world, valued at around
$840bn at 2010 prices
equivalent to 14 times the
countrys external debt as
of January 2014.
Progress on commoditising the Philippines vast mineral potential is proceeding at a painstaking pace, with
a few successful mine openings in 2014 driving modest growth in the sector. Although overall output and
revenue are being sustained by existing operations,
new investment continues to lag, as mining companies
wait out the finalisation of new mining regulations,
which have dragged on since 2011. In 2014 the mining sector contributed just 0.9% to national GDP in real
terms, with the contribution of mining and quarrying
increasing only marginally in recent years, from P72.05bn
($1.62bn) in 2012 (equivalent to 1% of GDP) to P72.9bn
($1.64bn) in 2013 and P75.48bn ($1.7bn) in 2014,
according to the Philippine Statistics Authority National Statistical Coordination Board (PSA-NSCB).
HOLDING STEADY: The dearth of new mining projects
coming on-line in the Philippines in recent years has
resulted in inelastic production since 2010, with any
minor variations in the nominal value of output in the
mining sector primarily due to fluctuations in global commodity prices rather than substantial changes in production levels. According to the Mines & Geoscience
Bureau (MGB), the gross production value of mining in
the country amounted to P157.1bn ($3.53bn) in 2013,
compared to P144.6bn ($3.25bn) in 2012, P163.2bn
($3.67bn) in 2011 when commodity prices briefly
rebounded and P145.3bn ($3.27bn) in 2010.
Virtually all metallic mining has been accounted for
by large-scale mines since 2011, due to a change in
tax collection practices that essentially eliminated smallscale gold mining operations from the formal sector
(see analysis). According to the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, the gross production value from such operations came to just P1.2bn
($27m) in 2012 and P300m ($6.75m) in 2013 a significant decline from the P42.9bn ($965.25m) and
P34.1bn ($767.25m) in 2010 and 2011, respectively.
By contrast, data from the MGB saw large-scale
metallic mining steadily increase its gross production
value over the period, from P69.1bn ($1.55bn) in 2010
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MINING OVERVIEW
production fell by more than half over the same period, from 8629 kg to around 4226 kg.
The bulk of increasing gold production is due to two
new operations the high-grade gold-copper Didipio
Mine and copper-gold Padcal mine which ramped up
operations at the end of 2013. Operated by Australias
OceanaGold, the Didipio mine located about 270 km
north of Manila on the island of Luzon commenced
commercial operations in April 2013 and increased
annual output to 106,256 oz of gold and 25,010 tonnes
of copper by end-2014, according to statements by the
company. In the first four years of the 16-year project
open-pit mining will be taking place, with underground
operations scheduled to ramp up starting in years 5-7.
Nominal annual production is slated to reach 100,000
oz of gold and 14,000 tonnes copper from total reserves
of 1.59m oz of gold and 210,000 tonnes of copper.
The closure of the Padcal mine by its owner, Philex
Mining, from April 2012 to March 2013 limited production at the site in Benguet to 99,802 oz of gold in 2013,
up from 71,297 oz in 2012, but 29% less than the
140,113 oz recorded in 2011. Increased throughput of
higher-ore grades boosted copper output by 46% from
10.14m kg in 2012 to 14.77m kg in 2013, but was down
14% from the 17.25m kg seen in 2011. According to
data from the MGB, the mine produced 28,995 oz of
gold in the first quarter 2014, a 247% rise over the 8360
oz mined the previous year. Copper production likewise
improved, increasing by more than three-fold from
4393 tonnes to 18,052 tonnes of concentrate.
The 2012 closure came as a result of heavy rains
brought on by two typhoons that caused one of the
tailing storage pits to overflow, discharging some 20m
tonnes of silt into the Balog Creek and Agno River and
resulting in fines of P188.6m ($4.24m). According to
company estimates, the total reserves of the Padcal mine
covered by mineral agreements are spread out over an
area of 13,492 ha and amount to around 65.8m tonnes
of copper and gold grades of 0.20% and 0.40 grams
per tonnes, resulting in recoverable resources of 108.7m
kg of copper and 627,000 oz of gold.
ESTABLISHED PRODUCERS: Strong production from
the well-established Toledo copper mine in Cebu also
helped to bolster output, with the facility turning out
41.6m kg of copper concentrate in 2013, a 2% y-o-y
increase from the 40.9m kg produced in 2012, according to company reports. As a subsidiary of the Australian
Atlas Mining through its domestic operator Carmen
Copper Corporation, Toledo is one of the countrys
largest copper mines, with estimated mineral resources
of 1.43m tonnes at 0.29% copper grade and 4.1m
tonnes of copper metal at 0.15% cut-off grade.
A handful of other operations also posted positive
y-o-y gains in the first quarter of 2014, including the
Co-O Gold Project, operated by Mindanao Mineral Processing and Refining, which increased production 19%
from 494 kg to 588 kg. The output from the Benguet
Corporations Acupan Contract Mining Project also
more than doubled y-o-y, from 92 kg to 188 kg. These
rises combined to more than offset declines in other
areas, such as from the shuttering of Greenstone
245
2011
2012
2013
2014*
69.1
88
97.8
99
21.94
42.9
34.1
1.2
0.3
0.04
Non-metallic mining
33.3
41.1
45.6
57.8
SOURCE: MGB
246
MINING OVERVIEW
2011
2012
2013
2014*
Nickel
15
18
21
24
27
Iron
SOURCE: MGB
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MINING OVERVIEW
249
Three new mining projects with combined investments of $32.85m are expected to begin operating in 2015
962.3m tonnes at 0.25% total copper, 0.06% soluble copper and 0.33 grams per tonne of gold, resulting in
2.45bn kg of contained copper and 10.3m oz of contained gold, according to data from St Augustine.
Other significant projects in varying stages of development include the Far Southeast copper-gold project from Lepanto Consolidated Mining Company and
Gold Fields, which is expecting approval for its Financial or Technical Assistance Agreement in 2015, and
Philexs Silangan gold and copper project, forecast to
begin production in 2018.
EXPLORATION: Despite the challenges of obtaining
exploration permits (EPs), mining firms continue to
show considerable interest in the sector. After the
moratorium on EPs was lifted in 2013, the MGB had
received some 130 applications for exploration as of
October 2014, sought after as a placeholder to secure
land in the hopes that the legislative morass will be
resolved prior to the permits expiration. Depending on
how accommodating the government is in approving
EP applications, exploration activity could begin to pick
up again after the number of active EPs fell from 53 in
early 2013 to 36 by July 2014, according the MGB.
OUTLOOK: The Philippines vast and largely untapped
mining potential will continue to draw strong interest
from both foreign and domestic actors despite decreasing investment in the short term. Although a few projects are moving forward, the vast majority of large-scale
developments will remain on hold until the government issues the relevant sector regulations, which
could feasibly drag on through the 2016 elections.
Once these issues are resolved, there are many large,
high-grade reserves in the country," Artemio Disini,
chairman of the Chamber of Mines of the Philippines,
told OBG. "There are large deposits of gold, copper and
nickel in Eastern Mindanao. If internationals decide the
risk is too great in the Philippines, large local conglomerates are already showing interest in filling the void.
The question is when the regulatory framework will
catch up with demand. Timing, as they say, is everything.
THE REPORT The Philippines 2015
The moratorium on
exploration permits was
lifted in 2013, leading to a
flurry of applications. As of
October 2014, the Mines
and Geoscience Bureau had
received more than 130
applications for exploration
activity.
250
MINING ANALYSIS
When making investment decisions, mining companies take a wide array of variables into account, including everything from regulatory policies and political
stability, to resource size and accessibility. As geologic factors such as the grade or depth of resources are
relatively constant, governments have a more limited toolbox when it comes to attracting mining operations to their territory. One of the most influential
of these policy tools is a countrys taxation structure,
which is often the deciding factor for whether a mining company chooses to move forward with a given
project or pursue other prospects in countries with
a more profitable tax structure.
In the case of the Philippines, this crucial policy
direction remains in flux along with many of the other regulatory issues related to the sector (see
overview). Mining taxation has become something of
a hot-button issue in recent years, with politicians,
agencies, companies and industry bodies weighing in
publicly with their opinions on the industrys future.
PLANNED REFORM: The federal government has
announced plans to collect up to $1bn per year from
the sector by imposing a new revenue-sharing system that would take in a 55% of the adjusted net mining revenues or 10% of gross revenue whichever is
higher. Approved by the Mining Industry Coordinating Council (MICC) in June 2014 but not formally
approved by Congress as of February 2015, the new
scheme would replace all existing national and local
taxes, with the exception of the real property, valueadded, capital gains, stock transaction, documentary
stamp, and donors tax, as well as the Securities and
Exchange Commission, environmental, administrative
and judicial fees. It would also entitle the government
to collect a supplementary tax on windfall profits.
TWO SIDES OF THE COIN: The government has justified the tax boost, contending that the mining sector has not been pulling its weight in terms of tax collection, citing the current gross tax rate of 2%, levied
as a resource rent for companies extracting minerals
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MINING ANALYSIS
P42.9bn ($965.3m) in revenues, while paying virtually no taxes. This yielded an overall tax rate on gross
production of 9.2%. However, after removing SSM
output from the total, revenues came to P95.9bn
($2.2bn), with a tax rate of 13.4%, according to a study
by the Chamber of Mines of the Philippines (COMP).
This anomaly was largely alleviated after 2011, with
reported SSM revenue plummeting from P34.1bn
($767.3m) in 2011 equivalent to nearly one-fifth of
total mineral revenue to P1.2bn ($27m) in 2012
and P33m ($742,500) in 2013. The dramatic downturn in SSM output was the result of a previous unrelated tax reform initiative implemented in 2012 in
which the BIR tasked the Philippine central bank,
Bangko Sentral ng Pilipinas (BSP), with enforcing a 2%
excise tax on its gold purchases. The change in regulations saw the vast majority of SSM operators, which
had previously sold their gold to the BSP under taxfree, no-name transactions, shift to the informal economy overnight, with roughly one-third of annual
domestic gold production vanishing from the books.
AETR ARGUMENT: Another commonly used method
of comparing extractive resource tax regimes is the
average effective tax rate (AETR), which has also been
used by the MGB and others, projecting prohibitively high tax rates under the current form of the MICC
proposal. For example, when the AETR model was
applied to a mining operation with a theoretical 20year life span and commodity prices set at $6.82 per
kg of copper and $1292 per oz of gold, the state
would yield an AETR of 79.3% for an internal rate of
return (IRR) of 13.2%, according to the COMP study.
This AETR would compare unfavourably to those in other mining intensive countries, such as Australia (58.8%),
Canada (58.3%), Peru (54.7%), South Africa (52.6%),
Chile (40.8%) and Papua New Guinea (34.5%).
WEIGHING IN: As stakeholders debate the sectors
real tax burden and how it should be most fairly distributed going forward, third-party research is also
being conducted on the possible effects of the MICC
proposal, accompanied by recommendations for an
equitable solution for all parties.
A study published by the Asian Institute of Management in January 2013 concluded that under the existing regulations, mining companies operating in the
Philippines have a negligible difference in average tax
payments, expressed as a share of total company revenue, compared with mining firms operating in other countries. The report also noted that average tax
payments in the Philippines were significantly higher than the industry-wide average cited by the government in the MICC proposal.
According to the study, the two Philippines-based
mining outfits sampled paid taxes at an average of
rate of 19.4% of revenue, compared to a 15.7% taxation rate for their counterparts operating in other
countries. The foreign companies sampled in the survey included established industry players like Barrick
Gold, ENRC, Rio Tinto, Vale Indonesia and Norilsk Nickel, in addition to two domestic operators, Philex Mining and Nickel Asia. The average level of taxation in
251
The average level of taxation in the sector is higher than in Latin America, Africa and the OECD
252
MINING INTERVIEW
Voluntary action
OBG talks to Gerard H Brimo, President and CEO, Nickel Asia Corporation
How can mining officials ensure the development
of the communities surrounding mining sites?
BRIMO: Mining firms are already mandated to spend
1.5% of their annual operating costs for the development of their immediate local communities. Moreover,
excise taxes and royalties on mining operations are
shared with local government units, providing more
funds that can fuel development if spent wisely. Generally, host communities are supportive of the industry in properly organised mining areas, as they benefit
from the development that the sector generates.
That said, the country can do a lot more in the sphere
of social development in remote, mountainous areas,
which is exactly where the mining industry tends to be
based. The Philippines is rich in natural minerals and
yet mining accounts for only 1% of GDP. The country
could use its mineral resources to decrease poverty, but
this would necessitate greater government support. The
case of Palawan, which has been declared a no-go mining zone, illustrates this. There are few tourist areas in
southern Palawan, nor is there much in the way of agriculture, in areas where the soil is lateritic, meaning it
is full of iron, reducing the availability of nutrients and
impeding agricultural development. As a result, lateritic areas call for different forms of development. Prior
to the beginning of operations at our Rio Tuba mine,
the area was not developed. Infrastructure did not exist
and people had limited means to earn a livelihood.
However, looking at it now, mining has generated significant opportunities in that part of Palawan.
basis. As a result, the Philippines hopes to reach country accreditation within a year.
The EITI holds great potential to improve transparency in both the extractive sector and the government.
Extractive companies publish details about their tax payments, and any discrepancies with government receipts
undergo a reconciliation process. Companies also publish details of their social expenditures and royalties to
indigenous peoples, while there is a write-up on applicable laws and regulations regarding extractives. In
addition to the EITI, there have also been other significant initiatives to strengthen environmental protection. The monitoring by the Mines and Geosciences
Bureau has involved multipartite teams overseeing the
performance of each mining company on a quarterly
basis. However, such efforts need to be followed in
small-scale mining. Unfortunately, the negative image
of small-scale mining, which for the most part involves
illegal, unsupervised operations, has affected the image
of large-scale mining, as both are lumped together.
What kind of opportunities exist for the development of downstream and value-added industries?
BRIMO: Opportunities remain limited because the mining industry is currently small, while the countrys power supply is among the most expensive in our region.
There are only a handful of copper and gold mines in
operation today, and they are not large by international standards. There are more nickel mines producing
nickel ore for exports, which Indonesia last year banned
to encourage processing. If the Philippines did the
same, it would be difficult to compete with Indonesia,
which has higher-grade nickel mines in contrast to our
mostly low- and medium-grade operations, and has
abundant coal with higher calorific content than ours
to power their plants. If there are opportunities for significant value-added activities, the private sector would
naturally gravitate towards those. We have also proven
that through our participation in two nickel processing plants in the country, even without a ban in place.
253
Legal Framework
New legislation allows full entry of foreign banks
Domestic banks able to open Islamic windows
Legal procedures for mergers and acquisitions
Rules on data privacy and anti-money laundering
254
LEGAL FRAMEWORK
New legislation allows for the full entry of qualified foreign banks
By the law
Important legal and regulatory developments
As ASEAN starts its economic integration in 2015, there
have been certain important developments in the legal
and regulatory framework of the Philippines. As elucidated below, the changes of recent years have significant implications in the area of banking and finance,
mergers and acquisitions, and data privacy.
LIBERALISED ENTRY OF FOREIGN BANKS: Perhaps
the most significant legal development in the banking
sector is the passage of Republic Act No. 10641, which
allows full entry of qualified foreign banks into the
Philippines. Prior to this law, a foreign bank could enter
the Philippine banking system by (1) acquiring up to
60% of the voting stock of an existing domestic bank,
(2) forming a new banking subsidiary whose voting
stock was to be owned up to 60% by the foreign bank,
or (3) establishing a Philippine branch with full banking authority. Eventually, these last two modes of entry
were closed. Under the new statute, all three modes
have been made available anew, with modifications.
Presently, a foreign bank can be authorised by the central bank, Bangko Sentral ng Pilipinas (BSP), to (i) acquire
up to 100% of the voting stock of an existing bank, (ii)
form a 100%-owned banking subsidiary, or (iii) establish a Philippine branch with full banking authority.
Before, to be considered by the BSP, a foreign bank had
to be among the top 150 foreign banks in the world or
among the top five banks in its country of origin. Now,
it is sufficient that the foreign bank be widely owned
or publicly listed, if not owned or controlled by the government of its country of origin.
Prior to the passage of the new law, a domestic bank
whose capital stock was owned more than 40% by a
foreign bank, as well as a local branch of a foreign bank,
could not bid at the foreclosure sale of land mortgaged
to it, and was merely entitled to receive the net proceeds from such sale. This was in view of the provision
in the constitution of the Philippines restricting the
ownership of land to Philippine nationals, such as
through a company at least 60% owned by Philippine
citizens. At present, a foreign bank, acting through its
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LEGAL FRAMEWORK
255
Laws are in place to control acquisitions that might substantially lessen competition or form a monopoly
least 40% of a local insurers voting stock. In the banking sector, the BSPs approval is required for acquisition of more than 20% of a local banks voting stock.
With the initial implementation in 2015 of ASEAN economic integration and the eventual launching of qualified ASEAN banks, the BSP will continue to encourage
mergers and consolidations between and among local
banks to make them more competitive with their much
bigger counterparts in the region.
DATA PRIVACY: The Data Privacy Act was passed to
protect the fundamental human right of privacy of
communication while ensuring free flow of information to promote innovation and growth. Protected
here is personal information, defined as any information recorded in material form or not, from which
the identity of an individual is apparent or can be reasonably and directly ascertained by the entity holding
the information, or when put together with other information would directly and certainly identify an individual. However, this act does not interdict the reporting
of information by local banks and other financial institutions to the BSP under the Credit Information System Act and the Anti-Money Laundering Act of 2001.
The Data Privacy Act does not amend the various bank
secrecy laws. However, the Anti-Money Laundering Act
of 2001 empowers the Anti-Money Laundering Council to examine deposits or investments with banks and
other financial institutions, when there is a probable
cause that these deposits or investments are involved
in money laundering. Here, the said council is generally required to obtain a court order for that purpose. In
contrast, under the Terrorism Financing Prevention Act
of 2012, the said council, either upon its own initiative
or at the request of the Anti-Terrorism Council, can
inquire into or examine deposits or investments with
banks and financial institutions, without a court order.
OBG would like to thank SyCip Salazar Hernandez &
Gatmaitan for its contribution to
THE REPORT The Philippines 2015
256
Legal protections
OBG talks to Rafael A Morales, Managing Partner, SyCip Salazar
Hernandez & Gatmaitan
How can the authorities help level the playing field?
MORALES: The Philippines legislature has yet to pass
a competition or anti-trust law, despite the fact that
the 1987 Constitution mandates the regulation or prohibition of monopolies and combinations in restraint
of trade. In the meantime, the Department of Justice
(DoJ) has been designated as the ad hoc competition
authority. The DoJ recently made an agreement with
the Securities and Exchange Commission (SEC), whereby the SEC will notify the DoJ of applications for mergers or consolidations of companies. This will allow the
DoJs Office of Competition to assess their impact on
competition, as well as help to level the playing field.
How can the public-private partnership (PPP) framework help accelerate infrastructure development?
MORALES: The problem is the slow implementation
of the PPP programme. So far only a few projects have
been awarded to successful bidders of these, only
five are expected to be completed before the end of
the presidency of Benigno Aquino III.
If the World Banks advice were to be followed, the
Philippines should be spending around 5% of its GDP
on infrastructure development to catch up with its
regional counterparts; however, it would appear that
only about 2.2% of GDP has been devoted to this purpose since 2009. Clearly, the government needs to
redouble its efforts to solicit private-sector assistance to address the Philippines infrastructure backlog.
257
Tax
Financial reporting aligned with international standards
Separate tax regimes offered in special economic zones
Regulations governing transfer pricing issued in 2013
Bookkeeping requirements laid out in detail
TAX OVERVIEW
259
In detail
A look at the key elements of the tax regime
Taxes in the Philippines are imposed at both the national and local levels. At the national level, taxes are
imposed and collected pursuant to the National Internal Revenue Code, the Tariff and Customs Code, and
several special laws. There are four main types of national internal revenue taxes: income, indirect (value-added
and percentage taxes), excise and documentary stamp
taxes, all of which are administered by the Bureau of
Internal Revenue. At the local level, governments also
have some autonomy to impose taxes on business and
ownership of real property.
There is a territorial system of taxation for foreign
corporations and individuals, as well as non-resident
citizens. Only Philippine-sourced income is subject to
Philippine taxes for the latter group. Corporations incorporated under Philippine laws and resident citizens are
subject to income tax on their worldwide income.
CORPORATE INCOME TAX: The general rate is 30% on
net taxable income. There is a minimum corporate
income tax (MCIT) equivalent to 2% of gross income,
which applies beginning on the fourth year of commercial operation.
Allowable expenses in computing the gross income
subject to MCIT for certain business activities have
been enumerated. The excess MCIT paid over the regular income tax is allowed as a tax credit against the
regular corporate income tax payable in the succeeding three years. The 30% rate applies to non-resident
foreign corporations. The tax is, however, calculated on
gross income instead of net income. Exemptions apply
pursuant to tax treaty provisions.
Certain types of income and corporations are subject to special tax rates and are as follows:
International carriers doing business in the Philippines
are required to pay 2.5% of gross billings from carriage originating from the Philippines. Lower rates
are available under tax treaties. Exemption applies
on condition of reciprocity;
Expanded foreign currency deposit units of banks are
required to pay 10% on onshore interest income;
260
TAX OVERVIEW
TAX OVERVIEW
261
Taxes in the Philippines are imposed at the national and local levels
for corporations. The 40% OSD for individuals is, however, based on gross revenues.
Non-resident foreign nationals not doing business
in the Philippines are taxed at a rate of 25% on their
Philippine-sourced income, including wages, rents,
gains, interest, dividends and royalties.
Foreign nationals employed by offshore banking
units, regional or area headquarters and operating
headquarters of multinational companies, and petroleum service contractors and subcontractors enjoy a
preferential rate of 15%.
INDIVIDUAL TAX RETURNS & PAYMENT: For individuals, the tax year is the calendar year and the income
tax is due on or before April 15 of the following year.
The tax liabilities of spouses are calculated separately,
although spouses are required to file their tax returns
jointly.
Individuals filing income tax returns are required to
disclose in their annual income tax returns the amounts
and sources of other income that is exempt from tax
or already subject to final taxes.
For employees receiving only compensation, employers are relied upon to ensure that the correct tax for
the year is fully withheld. Employees qualifying under
the substituted filing scheme are exempt from filing
annual income tax returns.
Employees receiving only the statutory minimum
wage are exempt from the payment of income tax if
they do not earn other taxable income, whether from
the conduct of business or from other employment.
Employers are not required to withhold tax from them.
Non-resident aliens not engaged in business are not
required to file an annual income tax return.
WITHHOLDING TAXES: Most income is subject to
withholding of taxes.
If classified as a top-20,000 corporation or a top-5000
individual engaged in business, the payor is required
to withhold on all payments for the purchase of goods
(1%) and services (2%). Withholding taxes on income
subject to the regular corporate rate are creditable
THE REPORT The Philippines 2015
262
TAX OVERVIEW
A corporation may choose either a calendar or fiscal year for its taxable year
Life insurance companies and agents of foreign insurance firms 5% of the premiums; and
Sale of shares through initial public offerings onehalf of 1% of the selling price.
EXCISE TAXES: In addition to VAT, excise taxes are also
imposed on the following: alcohol, tobacco, petroleum
products, automobiles, mineral products, and nonessential goods such as jewellery and precious stones,
perfumes, yachts and other sport vessels.
DOCUMENTARY STAMP TAX: A documentary stamp
tax (DST) is required for certain documents, transactions or instruments specified in the tax code when the
obligation or right arises from Philippine sources or when
the property is situated in the Philippines. These include:
Bills of exchange 0.15%;
Bills of lading 1%;
Sale of real property 1.5% of the fair market value;
Original issuance of shares 0.5% of par value;
Sale of shares (except those listed and traded in the
local stock exchange) 0.38% of par value;
Debt instruments 0.5%; and
Lease agreements 0.1% of the total lease over the
lease period.
TAX AUDIT: The period allowed for tax authorities to
audit companies and assess deficiency taxes is three
years from the date of filing of the final return. If fraud
is alleged, this period may extend to 10 years from the
date of discovery of the possible fraud.
The deficiency tax may be collected within five years
from the date when the assessment becomes final.
Assessments may be contested in courts.
RECOVERY OF TAXES: In the case of taxes that have
been excessively or erroneously paid, a taxpayer may
apply for refund or the issuance of TCCs within two years
from the date of payment. For purposes of the creditable taxes withheld, the option to carry forward the
excess credits generated shall be irrevocable once chosen. A VAT-registered taxpayer may apply for refund of
any excess VAT when the taxpayer shifts to a non-VAT
activity or ceases to be in business or when such input
taxes arise from zero-rated sales.
BOOKKEEPING REQUIREMENTS: All business entities
subject to internal revenue taxes are required to maintain books of account. These consist of a journal, a
ledger and subsidiary records required for the business.
Entities subject to VAT are also required to keep subsidiary sales and purchase journals.
Books of accounts and other accounting records
may be kept in either English or Spanish. The books and
records must be preserved for a period of at least 10
years. Companies with gross quarterly sales or receipts
exceeding P150,000 ($3375) shall have their books
audited and examined yearly by independent certified
public accountants who should be accredited as tax
agents by the tax bureau.
For public companies, as well as banks and insurance companies, the independent certified public
accountants should further be accredited by regulatory agencies, such as the Securities and Exchange
Commission (SEC), the Bangko Sentral ng Pilipinas
(the central bank), or the Insurance Commission.
TAX OVERVIEW
Financial statements are required to be filed together with annual income tax returns. In addition to maintaining books of accounts, the Corporation Code requires
businesses to keep the following items: records of all
the business transactions, minutes of meetings of shareholders and directors, and a stock and transfer book.
Sales should be evidenced by official receipts and
invoices based on the prescribed format.
The books may be in manual or digital form. These
are required to be registered with the tax authorities
prior to their use. Large taxpayers, however, are mandated to adopt a digitised accounting system.
FINANCIAL REPORTING FRAMEWORK: The amended Securities Regulation Code (SRC) Rule 68 (the Rule)
issued by the Philippine SEC prescribed a financial
reporting framework or set of accounting principles,
standards, interpretations and pronouncements that
must be adopted in the preparation and submission of
the annual financial statements of a particular group
of entities. The following paragraphs outline the financial reporting framework prescribed by SRC Rule 68 for
each group of entities covered by the Rule:
Large and/or publicly accountable entities are those
with assets exceeding P350m ($7.9m) or liabilities of
more than P250m ($5.6m). Other entities covered by
the Rule include those required to file financial statements under Part II of SRC Rule 68 (for example, an
issuer that has sold a class of securities pursuant to
registration under Section 12 of the SRC, an issuer
with a class of securities listed for trading on an
exchange, and an issuer with assets of at least P50m
[$1.1m] and 200 or more shareholders each holding
at least 100 shares of a class of equity securities); entities in the process of issuing securities to the public
market; or entities that are holders of secondary licences
issued by regulatory agencies. Entities qualifying for any
of the criteria provided above shall use Philippine Financial Reporting Standards (PFRS) as their reporting
framework. However, another set of reporting rules
may be permitted by the SEC for certain regulated entities such as banks and insurance companies. The PFRS
are adopted by the Financial Reporting Standard Council (FRSC) from the International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB).
Small and medium-sized entities (SMEs) are defined
as entities with total assets between P3m ($67,500) and
P350m ($7.9m), or total liabilities between P3m
($67,500) and P250m ($5.6m). If the entity is a parent
company, such amounts will be based on consolidated figures. Other entities classed as SMEs are those not
required to file financial statements under Part II of SRC
Rule 68; entities not in the process of issuing securities to the public market; and entities that are not holders of secondary licences. Entities that qualify based
on all above criteria shall use the PFRS for SMEs as their
financial reporting framework.
PFRS for SMEs are adopted by the FRSC from the IFRS
for SMEs issued by the IASB. Except for those allowed
under the Rule, the SEC requires mandatory adoption
of PFRS for SMEs for entities that qualify as SMEs.
263
264
TAX INTERVIEW
How can the Philippine tax regime stimulate sunrise industries and economic diversification?
ESPAO: The success of the Philippine Economic Zone
Authority in encouraging investments in export-oriented activities is a concrete example of how desired
businesses can be promoted and protected. Sunrise
industries and other desired activities should be identified and incentives tax and non-tax should be provided. It is important to maintain focused and sustained
effort on ensuring that industry is receiving support
and incentives that drive desired activities.
In the implementation of incentives, compliance
requirements could be streamlined to ensure revenue
generation and encourage business. Transparency and
consistency should also be maintained during implementation. Research and development (R&D) is crucial to innovation and growth; its taxation, therefore,
should be structured so as to encourage risk-taking.
Without an incentive to take risk, R&D will be limited
to activities with guaranteed commercial gains.
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The Guide
Development as an ecotourism destination is ongoing
Listings for a range of local hotels and resorts
Important telephone numbers to keep on hand
Useful information for business and leisure travellers
266
An enchanted land
Theres something to suit all tastes in this Asian archipelago
As the Philippines attracts tourists in ever greater numbers, the focus of the sector has shifted away from the
mass market to promoting the country as an ecotourism
destination. Crucial to this strategy has been an focus
on sustainable development, emphasising projects with
a minimal impact on the environment, as well as efforts
to avoid the displacement of indigenous people.
This strategy has centred on the MIMAROPA region,
the acronym encompassing its members Mindoro,
Marinduque, Romblon and Palawan, and home to some
of the countrys most renowned natural wonders. Most
notably, Busuanga and Puerto Galera have been consolidating their reputations as the archipelagos premier ecotourism destinations. They are located in the
neighbouring island provinces of Palawan and Oriental Mindoro, respectively, in the MIMAROPA region.
WILDLIFE SANCTUARY: Situated in the western third
of Busuanga Island, which is the largest island in the
Calamian Islands and hosts the Philippines other leading diving destination, Coron, Busuanga lies around
halfway between the islands of Mindoro and Palawan,
and is bordered by the South China Sea (known locally as the West Philippine Sea) to the west and the Sulu
Sea to its south-east. The combination of impressive
natural landscapes and underwater shipwrecks has
made Busuanga into a popular destination. The recent
renovation of its local airport, which receives direct
daily flights from Manila, has allowed the municipality
to handle increasing numbers of tourists who are keen
to take advantage of the islands diving opportunities.
Busuanga Island is home to the Tagbanwa people,
one of the countrys oldest ethnic groups. In 1998, the
Tagbanwa were awarded a certificate of ancestral
domain title, including more than 22,000 ha of land and
sea in Coron. This award gave them the right to manage the areas marine and land resources. Furthermore,
a presidential decree in 1967 declared Palawan a marine
and wildlife sanctuary, establishing the Palawan Council for Sustainable Development. There has been a concerted effort by authorities to avoid the growth of
www.oxfordbusinessgroup.com/country/philippines-2015
The waters surrounding Puerto Galera house a variety of wrecks that have sunk over the years
INCLUSIVE APPROACH: The area has become increasingly engaged in bringing public and private sector
players to join forces as they undertake environmentally friendly projects, including luxury developments.
An example of these initiatives is Huma Island Resort
and Spa, a Maldives-inspired luxury destination located in a remote area renowned for its wildlife and biodiversity, including mangroves and tropical gardens.
According to Jurgen Geier, Humas assistant vice-president for hospitality, We are endorsing and following
responsible tourism as a pathway towards sustainable
tourism by taking responsibility for the local communities and culture as well as wildlife conservation and
the environment. The resorts name derives from the
Great Galleon Huma and the legend of Captain Ibrahim,
and it is located one hour away by plane from Manila,
or a 30-minute speedboat ride away from Busuanga.
As they initiate new projects, developers must also
ensure direct support to local communities of indigeneous people. As Geiger stresses, Local communities
benefit from sustainable tourism through economic
development, job creation and infrastructure development, which can raise the standard of living in destination communities. Equally important is developing
tourism infrastructure without disturbing ecology and
with a positive impact on the environment.
The potential of Puerto Galera has also attracted
interest from investors interested in luxury developments. For instance, Infinity Resorts & Spa, which opened
in 2013, sits on a 2-ha property three hours away by
car from Metro Manila. It is surrounded by the mountains of Malasimbo, Talipanan and Alunbayan of Oriental Mindoro on one side and the waters of the Verde
Passage. Guests can access luxury amenities as well as
enjoy opportunities for outdoor activities.
THE LONG TERM: Alongside the development of
tourism infrastructure, wildlife preservation and the
inclusion of local indigeneous communities are therefore urgent priorities as the region seeks to ensure its
long-term sustainability as an ecotourism destination.
THE REPORT The Philippines 2015
267
268
Sleep tight
HUMA ISLAND RESORT & SPA
Huma Island
Busuanga
Palawan
T: 63 (2) 553 0119
F: 63 (2) 553 0121
www.humaisland.com
reservation@humaisland.com
Rooms: 64 water villas, 15 beach villas, 1 family suite,
2 presidential suites.
Business & Conference Facilities: Meeting room with
audio-visual equipment.
Health & Leisure Facilities: Fitness centre, kids club,
library, dive centre, infinity pool, kids pool, Kapuruan
Spa featuring 7 treatment rooms and an authentic Arabic hammam, archery, volleyball. A Jacuzzi and bath tub
are provided in each villa.
Guest Services: 24-hour villa host service, laundry and
dry cleaning, babysitting, airport transfer, 24-hour room
service, Wi-Fi in villas and public areas.
Wining & Dining: 7 dining outlets, including 4 specialty restaurants.
Makati Shangri-La
Health & Leisure Facilities: Fitness centre, sauna, outdoor swimming pool, clinic, beauty salon.
Guest Services: Concierge, room service, laundry service, safety deposit, basement parking.
Wining & Dining: Eastwood Caf (all-day dining restaurant), the Gallery (bar), the Lounge (lobby lounge).
MAKATI SHANGRI-LA
Ayala Avenue, at the corner of Makati Avenue
Makati City, Metro Manila
T: 63 (2) 813 8888
F: 63 (2) 813 5065
slm@shangri-la.com
www.shangri-la.com
Rooms: 696 rooms and suites.
Business & Conference Facilities: Four levels of function space, including Rizal Ballroom (with capacity of
2100) and the Isabela Ballroom (with capacity of 540).
Health & Leisure Facilities: 24-hour health club, exercise room with fitness classes, outdoor swimming pool,
steam room, massage service, sauna, spa, tennis courts.
Wining & Dining: Shang Palace (Cantonese), Inagiku
(Japanese), Circles Event Caf (all day international dining), Lobby Lounge, Pool Bar (snacks), Sinfully Circles
and Sinfully by Makati Shangri-La (pastries).
Health & Leisure Facilities: 25-metre indoor competition swimming pool, gym, sauna.
Guest Services: 24-hour reception, concierge and security, apartment cleaning service.
Wining & Dining: Hanaichi (Japanese restaurant) and
Riozen (Japanese restaurant).
BERJAYA HOTEL
7835 Makati Avenue
Corner of Eduque Street
Makati City 1209
T: 63 (2) 750 7500
F: 63 (2) 890 3878
www.berjayahotel.com
manila.inquiry@berjayahotel.com
Rooms: 117 deluxe units, 38 premier units, 12 grand
deluxe units, 4 studio units, 3 junior suite units, 5 twobedroom deluxe units, 36 executive deluxe units, 4
executive studio units and 4 executive suite units.
Business & Conference Facilities: Business centre, 6
meeting rooms with audio-visual equipment.
Health & Leisure Facilities: 1 indoor pool, Jacuzzi, gym.
Guest Services: 24-hour reception and room service,
concierge, laundry and dry cleaning, airport transfer.
Wining & Dining: El Prado Restaurant, El Paseo Bar, Las
Ramblas and Veranda.
MANILA HOTEL
1 Rizal Park 0913
Manila 1099
T: 63 (2) 527 0011
F: 63 (2) 527 0722
www.manila-hotel.com.ph
resvn@manila-hotel.com.ph
Rooms: 500 guest rooms.
Business & Conference Facilities: Conference rooms and
ballrooms catering to a range of needs, business centre with a wide range of administrative services.
Health & Leisure Facilities: Fully equipped health centre, newly renovated pool and garden area with a pool
bar and a recently opened spa.
Guest Services: 24-hour reception, concierge and security, laundry and dry cleaning, airport transfers.
Wining & Dining: Cafe Ilang Ilang (casual international dining), Champagne Room (French and Italian),
Mabuhay Palace (Chinese cuisine), Cowrie Grill (steak
and seafood), Ginza (Japanese cuisine), Lobby Lounge
(bar and cocktails), Tap Room (bar snacks and drinks).
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Berjaya Hotel
Manila Hotel
270
GOVERNMENT
OFFICES
Department of Agrarian
Reform
63 (2) 928 7031
63 (2) 928 7039
Department of Agriculture
63 (2) 928 8762/65
Department of Budget and
Management
63 (2) 490 1000
Department of Education
63 (2) 632 1361/71
Department of Energy
63 (2) 479 2900
Department of
Environment and Natural
Resources
63 (2) 929 6626/29
Department of Finance
63 (2) 523 9911/14
Department of
Foreign Affairs
63 (2) 834 4000
Department of Health
63 (2) 651 7800
Department of Interior and
Local Government
63 (2) 925 0330
Department of Justice
63 (2) 523 8481/98
Department of Labour and
Employment
63 (2) 527 3000
Department of National
Defense
63 (2) 982 5600
Department of Public
Works and Highways
63 (2) 304 3000
BUSINESS
ORGANISATIONS
Bangko Sentral ng Pilipinas
Investor Relations Office
63 (2) 708 7487
Makati Business Club
63 (2) 751 1137/38
Philippine Chamber of
Commerce & Industry
63 (2) 846 8196
Management Association
of the Philippines
63 (2) 751 1149
Financial Executives of the
Philippines (FINEX)
63 (2) 811 4052
CHAMBERS OF
COMMERCE
British Chamber of
Commerce
63 (2) 858 2255
European Chamber of
Commerce
63 (2) 845 1324
Korean Chamber of
Commerce
63 (2) 885 7342
American Chamber of
Commerce
63 (2) 818 7911
63 (2) 818 7913
Canadian Chamber of
Commerce
63 (2) 843 6457
Spanish Chamber of
Commerce
63 (2) 886 7643
Australia-New Zealand
Chamber of Commerce &
Industry
63 (2) 755 8840/41
French Chamber of
Commerce
63 (2) 813 9005
Japanese Chamber of
Commerce
63 (2) 892 3233
Board of Investments
63 (2) 897 6682
www.oxfordbusinessgroup.com/country/philippines-2015
Manila is notorious for endless traffic jams, and during peak hours travel around the city can be extremely difficult. If anything, the situation has worsened in
recent years as large-scale infrastructure projects have
begun construction in the middle of the metropolis.
Cebu Chamber of
Commerce & Industry
63 (32) 232 1421/24
Federation of FilipinoChinese Chambers of
Commerce & Industry
63 (2) 241 9201/05
Mindanao Business Council
63 (82) 224 2581
Philippine Economic Zone
Authority
63 (2) 551 3436
FOREIGN
MISSIONS
Australia
63 (2) 757 8100
Canada
63 (2) 857 9000
China
63 (2) 844 3148
France
63 (2) 857 6900
Germany
63 (2) 702 3000
India
63 (2) 843 0101
63 (2) 843 0102
Italy
63 (2) 892 4531
Japan
63 (2) 551 5710
Malaysia
63 (2) 864 0761/68
New Zealand
63 (2) 891 5358
Singapore
63 (2) 856 9922
South Korea
63 (2) 856 9210
Taiwan
63 (2) 887 6688
United Kingdom
63 (2) 858 2200
United States
63 (2) 301 2000
BANKING
Banco de Oro
63 (2) 840 7000
Land Bank of the
Philippines
63 (2) 633 7585
Bank of the Philippine
Islands
63 (2) 891 0000
Asian Development Bank
63 (2) 632 4444
Metro Bank
63 (2) 870 0700
Philippine National Bank
63 (2) 891 6040
LEGAL &
ACCOUNTANCY
Punongbayan & Araullo
63 (2) 886 5511
SyCip Salazar Hernandez &
Gatmaitan
63 (2) 982 3500
CAR HIRE
Avis
63 (2) 462 2881
Autohub
63 (2) 860-8844
Europcar
63 (2) 664 0782
Filcar
63 (2) 817 8346
THE GUIDE
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