Braving It and Making It - · PDF fileBRAVING IT and MAKING IT ... Case Study of Agumil Philippines Inc. Investments in ARMM, ... and Chiquita Brands International through Unifrutti

Braving It and Making ItInsights from Successful Investors in Muslim Mindanaoby Cielito F. Habito

BRAVING IT AND MAKING IT

Insights From Successful Investors in Muslim Mindanao

By Cielito F. Habito

Copyright 2012 by Cielito F. Habito. All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information and retrieval system, without permission from the publishers. Inquiries should be addressed to the author, c/o Department of Economics, 4F Leong Hall, Ateneo de Manila University, Loyola Heights, Quezon City, 1108 .

This publication was made possible through the support of AusAID. The opinions expressed herein are those of the author and do not necessarily reflect the views of AusAID.

BRAVING IT and MAKING ITInsights from Successful Investors in Muslim Mindanao

byCielito F. Habito

A joint publication of:

ARMM Regional Board of InvestmentsARMM Business Council

Management Association of the Philippines

Through the support of the Australian Agency for International Development

Edited by Ma. Salve I. Duplito

iv

Table Of Contents

La Frutera: Reaping The Fruit Case Study of La Frutera Inc., Datu Paglas, Maguindanao Background 3 The Company 5 Peculiar Challenges and “Success Secrets” 6 Synthesis 10 References 12Agumil: The Promise of Palm Oil Case Study of Agumil Philippines Inc. Investments in ARMM, Maguindanao Background 13 The Maguindanao Investment 14 Peculiar Challenges and “Success Secrets” 18 Conclusion 21 References 21BJ Coconut Mill: Catalyst for the Sulu Economy Case Study of BJ Coconut Oil Mill, Indanan, Sulu Background 22 Company Operations 23 Other Business Challenges 24 Pointers for Prospective Sulu Investors 25 References 27Matling Industrial & Commercial Corp.: Resilience Amidst Challenges Malabang, Lanao del Sur Background 28 Company Operations 29 Challenges 30 Survival Forumula: Good Community Relations 31 References 32EA Trilink Corporation: Bringing ARMM Into the Future Case Study of EA Trilink Corp.’s ARMM Investment Background 33 Business Strategy and Operations 5 Hurdles and Enablers 38 Next Steps 39 References 39Air 21 - Marawi City: Treading Tricky Terrain Case Study of Logistics Firm Air2100/Fedex-Marawi City Background 40 Business Operations and Challenges 41 “Secrets” of Doing Business in ARMM 43 References 43Investing Successfully in ARMM: A Synthesis General Strategies/Principles 46 Good Practices 51 Policy Implications 54 Conclusions 55

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

1

Introduction

For many years, Muslim Mindanao has remained an undiscovered gem.

It is endowed with key ingredients for a prime investment area within the Philippines. It possesses superior agro-climatic conditions, with certain crops such as cassava, white corn and coffee attaining better yields than elsewhere. It is blessed with an abundance of primary resources including minerals. It still has large tracts of idle lands. And wage rates, both official and de facto, are lower compared to most of the rest of the country.

It also possesses vast scope for economic growth and diversification owing to Mindanao’s BIMP-EAGA1 connection – a linkage that is of even greater significance and potential for Muslim Mindanao relative to the rest of the country. This is because Muslims comprise the majority of the population in Southeast Asia, giving Muslim Mindanao the potential edge in meeting their particular demands for goods and services.

Notwithstanding all these, the Autonomous Region in Muslim Mindanao (ARMM) is where the highest incidence of poverty in the country is found, and where average incomes are among the lowest. Poverty rate in the region has risen faster than the rest of the country in the past decade.

The reasons for this contradiction are well known. Foremost perhaps is persistent conflict and violence that have impeded economic activity and deterred investment, whether from within or from outside the region. Infrastructure facilities are poor and inadequate. Land access and tenure security can be problematic in the face of uncertain instruments of land ownership. The labour force is largely unskilled and unstable. Weak governance and institutions, fraught with weak capacities and a checkered history of graft and corruption, further undermine the business environment. All these have perpetuated a vicious cycle of low investment and persistent poverty that the region simply must find a way to break out of.

The imperative challenge for ARMM, then, is to raise the level of investments in the region. In the past, even wealthy individuals from within the region itself – those who would be the most logical first investors – tended to bring their own wealth outside: to Davao, Cagayan de Oro, Metro Manila or overseas. This reverse demonstration effect makes it even

1 Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area

2

more difficult to convince outsiders to overcome their reluctance to put their stakes there. But attracting greater investment in Muslim Mindanao by both locals and outsiders is the only way out of its poverty trap.

Contrary to common perception, investing in the region need not be a bad business proposition, based on the actual experience of a good number of firms, both large and small. This handbook examines the experience of six private companies that had chosen to locate in the region, and had demonstrably benefited from it. The six case studies deliberately sought to identify the enabling factors, useful insights and “secrets” that made it possible for the firms to thrive under the otherwise peculiar and often challenging circumstances within the ARMM.

It is hoped that the insights and lessons shared by these companies could help guide other potential investors navigate the otherwise challenging investment territory that ARMM may initially appear to be. The rewards to be reaped, both for the investors and for the people of Muslim Mindanao, promise to be well worth the seeming additional risks to be taken on by prospective investors. And the rewards to early movers are likely to be even greater, matching those already reaped by first movers like the firms featured in this handbook.

Beyond these potential private gains, early movers stand to make a profound public contribution to invigorating the economy in a long-neglected and long-depressed region of the Philippines. As such, they would be instrumental to uplifting the lives of the poorest individuals and families in the land. The multiplier effects and the momentum that such “missionary” investments would impel are bound to impact in turn on the wider Philippine economy and help “raise the tide” for all boats.

It is hoped, then, that this handbook can be instrumental in bringing about this outcome long desired by many, not only for the accelerated development of Mindanao, but for the consolidation of peace and security in this long-troubled land.

CHAPTER 1 La Frutera: Reaping the Fruit 3

La Frutera: Reaping The Fruit*Case Study1 of La Frutera Inc.,

Datu Paglas, Maguindanao

Background

Unifrutti Philippines Inc. (UPI) is one of the country’s biggest banana exporters, shipping an estimated 44 million boxes of bananas a year to Japan, Korea, China, Iran and other countries in the Middle East. In 1997, it made the bold decision to invest in a banana plantation and packing house in the municipality of Datu Paglas, province of Maguindanao. At the time, the town was considered a hot spot for kidnappings, ambushes, and other forms of violence associated with the political conflict between the Moro Islamic Liberation Front (MILF) and the government.

The story of how John Perrine (Chief Executive of UPI) and Senen Bacani (head of Ultrex Management and Investments Corp.) formed a partnership with Datu Ibrahim “Toto” Paglas, to start what Perrine describes as Unifrutti’s most successful investment in Mindanao, is well documented and widely told, even appearing in Wall Street Journal.

The investment came out of a partnership among the Saudi trading company Abdullah Abbar & Ahmed Zainy Co., Israeli farming experts, the Italian De Nadai Family, and Chiquita Brands International through Unifrutti Philippines (the Oribanex Group), together with

• This case study is based on interviews with John Perrine, Edgar Bullecer and Senen Bacani, apart from various write-ups and case studies previously written about La Frutera and the Datu Paglas experience (see Reference List).

CHAPTER 1

Investing in trust and confidence building with local partners and the local community is an im-perative that cannot be short-circuited or rushed.

4 CHAPTER 1 La Frutera: Reaping the Fruit

Bacani’s Ultrex group. On the other side was Datu Ibrahim “Toto” Paglas III, then Mayor of the town, who, together with neighbouring leaders formed a consortium known as the Paglas Corp. (PagCorp), making available some 1,300 hectares from his substantial landholdings.

Paglas obtained the assent of then MILF Chairman Hashim Salamat and some other elders to enter into the partnership, along with his friends in the military including General Joselin Nazareno, who was later to become Armed Forces Chief of Staff under President Joseph Estrada. He also obtained the support and endorsement of then President Fidel V. Ramos. The Oribanex group through Unifrutti made an investment of $27 million, making it the largest foreign direct investment in Muslim Mindanao.

Thus was born La Frutera Inc. (LFI), which was managed by the Ultrex group for the foreign investors. The charismatic Datu Toto convinced Moro Islamic Liberation Front (MILF) soldiers and sympathisers to work for the plantation, thereby providing its labour force. Pagcorp handled labour relations (i.e., as a labour contracting company) and support services in terms of trucking and security. It also controlled the gas stations that supplied petroleum for the company’s transport needs. Perrine’s decision to invest in war-torn Maguindanao took a deliberate process of confidence building between him and Toto. In a publication entitled “The Paglas Experience: Extraordinary Leadership in a Zone of Conflict,” Astrid Tuminez writes that Perrine later recounted how in a crucial conversation,

It helped that Perrine was born and raised in Mindanao. His father had been the longest-staying president of Del Monte’s plantation in Bukidnon and held executive positions in Asian operations until his retirement in the mid-1980s. Except for a few years spent in the United States for higher studies, Perrine spent his entire life in Mindanao, and developed friendships over the years with people who later became key personalities in the region.

An important impetus for looking to Maguindanao, part of the Autonomous Region in Muslim Mindanao (ARMM), for Unifrutti’s expansion was a government cap on banana hectarage prevailing at the time. The cap had been imposed earlier at the insistence of the industry in fear of a market glut. Unifrutti had forged a partnership with the De Nadai family and Abdullah Abbar & Ahmed Zainy Co., owner of a chain of cold stores in Saudi Arabia and other countries in the Middle East, and among the largest importers of fruit, frozen meats, and dairy products in the region. The Abbar-Zainy-De Nadai group had been

“Toto just looked me in the eyes and he said, ‘From my heart, I commit to you that we will never ask anything from

you, and that with my blood, I will protect you and your employees and your investors—if you come and invest in

this place.” Tuminez 2009


buying bananas from other plantations in Mindanao for years, and had been looking to invest directly in banana growing. As an autonomous region, ARMM invoked exemption from the banana hectarage limits, clearing the way for Unifrutti’s expansion.

The Company

LFI was also established to provide for Chiquita’s return to the Japanese market. Unifrutti leased 1,251 hectares from Pagcorp at $70 per hectare per year, much lower than $160 per hectare per year (see Box 1) paid elsewhere. Toto Paglas didn’t question the price, as not a single investor had ever invested in Muslim lands.

“His task was to prove first that the money could be put to work profitably, and he understood that other investments would follow. Government leaders in the ARMM supported Toto Paglas’ venture. For example, they expedited necessary paperwork and exempted La Frutera from a mandated minimum wage raise, agreeing instead to the plantation’s request to pay the old minimum wage while granting incentive pay to many workers, based on performance,” Tuminez wrote.

Tuminez further wrote: “La Frutera became a successful enterprise. Capital was used to build new roads, offices, irrigation systems, and other infrastructure in Paglas municipality. The original project expanded from 1,000 to 1,600 hectares, with close to 3,000 people employed. As of 2005, the plantation infused approximately $400,000 a month in the form of salaries to residents in the area. A local economy evolved, including a mini mall and a local development bank.”

Nearby Tacurong, which became a city in early 2000, credited Datu Paglas for its dramatic economic boom. A great bulk of the $400,000 monthly salaries and its multiplier effects went to establishments in Tacurong. Its Chamber of Commerce awarded a commendation

Box 1

Effective Benefits Per Hectare

How Datu Toto Paglas, by his own declaration not a finance man nor economist, proved that

the “cheap” rentals paid massive returns compared to the P30,000 rentals fetched by corn, or

less for sugar:

Rentals of $70 (P3,500)

per hectare per year

$400,000 wage payments

x P45/$1 x 13 months or

P187,050/hectare


to Datu Toto for the economic benefit and peace LFI had brought to the benefit of Tacurong.

Enrollment in elementary and high schools rose to 70% and crime fell to nearly zero, in a town where buses used to be routinely ambushed and no vehicle would ply the highway after 3pm. During the early part of LFI’s first year, employees would leave by 3:00 pm due to the town’s notorious record of ambuscades, hold-ups, and other lawlessness.

Key to the success of LFI was the partnership with PagCorp, which took care of providing for the workforce through a labor-contracting arrangement. The workers in the plantation and the packing house were technically employees of Pagcorp. although under the supervision of LFI. Hence, Pagcorp dealt with labour conflict, often with direct intervention from Datu Toto. The 2,000 farm workers were almost entirely Muslim and mostly former MILF combatants, while at least 85% of the work force in the packing houses were women.

PagCorp likewise set up ancillary businesses to support LFI, including trucking, security, and gas stations. The security services were handled by erstwhile MILF combatants and even former kidnappers and bandits. They were registered together with their loose firearms with the security agency, thanks to the excellent military and government connections of Datu Toto. He saw an opportunity to account for loose firearms while giving a chance for a new normal life to those who represented security problems to the government.

Peculiar Challenges and “Success Secrets”

Trust and Confidence Building

Building trust and confidence was a critical prerequisite to making the investment decisions on both sides. The challenge of trust and confidence-building continued well beyond that initial decision, and into the early years of the company as both sides adjusted to each other and “felt each other out.”

Within LFI’s first year in 1997, Edgar Bullecer, who had been originally recruited to Unifrutti by Perrine in 1990-91 to help with the project feasibility preparation and project start-up financial management, was sent to Datu Paglas, to help address early difficulties. With concurrence from both sides, he was appointed Chief Operating Officer of Pagcorp.

Bullecer would jokingly describe how he felt like a “cannonball” thrown into the center of action. He saw his role as helping build up the company amidst all the challenges, including building trust and confidence with local partners. He cited the importance of

Building trust and confidence was a criticalprerequisite to making the investment decisions on

both sides.


having such an “ambassador of goodwill” on the part of a foreign investor.

To be effective, Bullecer asserts, such an “ambassador” should adapt to the new cultural environment to the point of considering it as his other home. “He must be able to accept the people in his new surroundings as members of his own family, and must constantly build bridges of understanding so that those from different cultures who may feel isolated eventually find a direct connection,” Bullecer reflects. Bullecer recounts: “I was initially puzzled when Datu Toto and other Muslims in the plantation expressed surprise when I asked if there was a place in Datu Paglas I could rent to stay in.” His work demanded interacting at the workplace during the day, hence could only do the focused paper or computer work beyond office hours, which could last until very late in the evening or beyond. Practically all other non-Muslim employees and officers would leave early to make sure that they would be out of town well before nightfall. He surprised them even more when he insisted in residing within the vicinity of the company, rather than live in nearby Tacurong City some 30-45 minutes away.

His gesture was much appreciated by the locals, who felt honored that a company executive would decide to live in their midst. He unintentionally and quickly earned the respect and trust of the Muslim community, particularly the leaders, his colleagues and subordinates. His quick integration into the community was further reinforced with small gestures, such dining and spending casual times with ordinary employees and the community. With his management position, everyone had expected him to be segregated and given special treatment. He did not put up barriers and removed those naturally occurring in a corporate setting, thereby helping reinforce confidence in him.

Like Perrine, Bullecer took an interest in learning about Islam by studying the Qur’an and worshipping with the Muslims. He shunned pork when with them, and faithfully observed every year’s Ramadan fasting. Still, he admits that there were two or three instances when both the Unifrutti and Paglas sides contemplated backing out of the partnership during the early years. But perseverance and a strong desire on both sides to make the partnership work led LFI to what it is today--the most widely cited “success story” of a large scale foreign investment that thrived within conflict-ridden Muslim Mindanao.

Worker Discipline Through A Unifying Leader

Among the early challenges of running LFI was instilling discipline among employees. The local workers had no previous experience with reporting for work daily at regular hours. They had to learn the discipline of coming to work on time, punching in time cards, and working productively. Furthermore. the male workers insisted on bringing their weapons to work as if it was part of their regular attire.

The men felt incomplete, even “naked” without them. When asked not to do so, the workers initially resorted to having their young sons carry the weapons for them instead.


In an interview with the Wall Street Journal in 2002, Datu Toto had said: “I tell people that if they have guns near my plantation, I’ll kill them.” Datu Toto Paglas’s strong leadership and influence on the local workforce and community clearly spelled the success in overcoming such basic challenges facing La Frutera in this different environment.

Tuminez further wrote: “According to Toto, it took one year to end finally the habit of carrying weapons to work. Toto led by example when it came to ending the habit of carrying weapons to feel like you were somebody. He said, ‘I was brought up in a culture where guns and goons define a man’s status in society. I challenged that convention. At first, I was not comfortable because it was ‘not the normal thing’ to go around town without my bodyguards. But I decided to put an end to that fashion because the old ways were not working . . .’ Thus, as a leader, clad in his usual “uniform” of blue jeans and a white t-shirt, Toto dispensed of his bodyguards and went everywhere without guns.”

As mayor, Toto practiced open governance in his municipality of Datu Paglas. Non-government organizations and academics were engaged to undertake training, skills building, values formation and education. He listened to the concerns of different groups, giving new voice to those who were previously excluded from decision-making. Recognizing Muslim culture to be very exclusive, he challenged this by bringing everyone’s concerns to the table—the government, the military, the religious leaders, the workers, the rebels and even the lawless elements, on the belief that “what each of these groups says is of great value.” In short, by giving previously marginalized individuals a stake in economic development and infusing the community with the values of hard work, merit, and reward, Toto managed to change the “rules of the game.” (Tuminez 2009)

Deliberate Values Formation and Cross-Cultural Understanding

The management instilled a new work ethic in the workforce through a Core Values Training Program, based on the Holy Qur’an and the Holy Bible, taught by Muslim and Christian religious leaders/scholars. All employees were required to undergo this once-a-week program. Muslims were asked to attend lessons on the Bible while Christians attended lectures on the Qur’an. Christian employees avoided eating pork in the presence of their Muslim workmates. Perrine himself, along with Christian Unifrutti colleagues like Ed Bullecer, began to join the Muslim employees in regular worship in the mosque.

Datu Toto saw the challenge of bridging the “gulf of understanding” between Muslims and Christians as requiring a “leap of faith.” Aside from the Christians and Muslims on the plantation, there was also a small group of Jewish agricultural specialists helping on farm production technologies, who managed to fit into the company with no problems. The key was sincere efforts on all sides to transcend cultural and religious differences.

As a deliberate policy, LFI also adjusted work schedules and certain other practices during the Muslim Holy Month of Ramadan. For example, field workers had to be home well before the “Iftar” or breaking of the fast, usually shortly before sunset.


Sensitivity to Workers’ Cultural Norms and Values

Senen Bacani, Chairman of LFI., asserts that a key element in managing the company given the local culture was the slogan “walang maiiwanan” (no one will be left behind).

Workers needed to be treated fairly and equally. Avoiding situations where workers would suffer embarrassment and humiliation was also an important management concern when managing Muslim workers, according to Perrine. Given the strong sense of personal honor and aversion to embarrassment and humiliation among the Muslim workers, dismissed employees were termed to be on “stay-at-home” status rather than outright terminated, as a face-saving device. Disciplinary action on errant workers was a function that the company preferred not to exercise directly, but dispensed by their recognized and respected leader, the Datu, who was technically their employer through Pagcorp.

Bacani recounts a case wherein a trusted worker was found to have illicitly received a P25,000 payoff from a supplier, but managed to get to the Datu (incumbent Mayor Mohamad Paglas, brother of the late Toto) and win his support before the company management could get to him on the case. The company found retaining the employee untenable and dismissed him anyway, leading to initial friction. Fortunately the conflict was eventually smoothened out.

Management also found that their Muslim workers had the habit of having a brother or other family member occasionally report for work in their place, effectively “sharing the job” within the family (a practice known as sumpat). The company found this practice to be common and difficult to stop. Perrine explains that they agreed to institutionalise the practice by giving the alternate family member an official appointment as well, effectively dividing one full-time job into two part-time ones. However, this may fall within a legal gray area, as the National Labour Code permits part-time employment only up to six months. Perrine thus suggests that explicitly legalizing regular (i.e., indefinite, rather than time-bound to six months) part-time employment is one meaningful provision of investment incentives that the ARMM may invoke its autonomy on to provide through legislation.

Another important consideration in organising the workforce is the need to respect the traditional social hierarchy within the Muslim community, borne out of kinship with royalty or the Datu. Management realised that it was untenable to have a Muslim worker of higher social status work as a subordinate to one of lower status, no matter how superior in technical or supervisory qualifications; the former would take no orders from the latter. At the same time, common workers tend to respect and defer to those among them with such higher social status. Hence, the LFI management found it useful to appoint individuals of higher status to supervisory roles, regardless of technical qualifications. When lacking in this, a qualified assistant is assigned to the supervisor. What is more important is that the supervisor’s status of influence helps ensure that workers will follow his instructions, promoting order and discipline within the ranks, and ultimately, work efficiency in the company. Bullecer asserts that the Datus and their women counterparts (the ‘Bai’s) also


respond positively to this system by trying to meet the expectations of the company. This was made easier because Toto had set the example of respecting corporate structures.

Productivity-Based Compensation and Incentive Systems

LFI boasts of significantly higher productivity on both a per-hectare and per-worker basis compared to similarly placed banana plantations. A major reason for this, apart from the practices described above, is the way plantation and packinghouse workers are compensated.

Bacani explains that most workers were paid on piece rates (per banana stems harvested or per box packed), i.e., based on output rather than time. For those whose attendance record exceeds 80%, a P20 per day bonus is added to the daily pay. A 30% add-on premium is likewise added for plantation workers who exceed the norm of 60 stems per man-day. As such, most workers manage to earn wages well beyond the government-mandated minimum wage. These built-in productivity incentives directly translate to higher productivity; indeed, Perrine often describes La Frutera as Unifrutti’s most productive investment in Mindanao.

Perrine argues that for foreign investors to be attracted into ARMM, government wage policy must be flexible and realistic, especially given the reality that “community wages” (de facto market wages) can be far below the government-mandated minimum wage. For example, when the minimum wage was set at P190 per day, most local farm workers were reportedly willing to work for less than half (P90). As an incentive for landowner partners who leased their lands for the use of LFI, the company also raffled travel grants to the annual Haj to Mecca. 2

Synthesis

From the experience of Unifrutti in its LFI investment in Datu Paglas, the following observations might be of use to prospective investors in ARMM:

• On Achieving Local Acceptance: Key to achieving a strong partnership with Datu Toto Paglas and Paglas Corp. was agreeing to a symbiotic business relationship where the latter captured ancillary businesses such as trucking, security services and gasoline stations. Toto, after all, was also a businessman, and his motivation for attracting Unifrutti into his municipality was not entirely out of benevolence for the plight of his constituents. An external investor coming into ARMM, whether foreign or Filipino, enters a new area with a very different social, political and business environment from other investment destinations in the country. Receptiveness of the local community to an outsider would not be guaranteed on the basis of bringing in new business opportunities or new jobs alone. An initial barrier of trust on both sides must be bridged at the outset. LFI’s experience shows that partnering with a local leader can be crucial in winning this trust. Investing in trust and confidence building with local partners and the local

2 Bacani recounts how this initially led some landowners to split up their landholdings on the misplaced belief that this would increase their chances of winning the Haj grant, i.e. by increasing their entries in the raffle.


community is an imperative that cannot be short-circuited or rushed. The process can take years of patient and sincere efforts, and the greater onus of this falls on the entering investor. Having a “goodwill ambassador” to facilitate the process, as was the professed role of Bullecer in Unifrutti and La Frutera, can be an effective approach.

• On Access to Land: For agri-based and agribusiness enterprises, land is the single most important element in the investment. Possibly the most critical hurdle to overcome is gaining access to adequate land and having reasonable security of tenure over the land for the life of the investment. While ARMM continues to have vast tracts of available land that are undeveloped or idle, land ownership is often open to question, and legal instruments of ownership tend to be inadequate, spurious or non-existent. LFI gained access to 1,500 hectares of land by entering into a partnership with an influential local leader (Datu Toto), who not only controlled a large area directly, but also exercised great influence on smaller landowners around to convince them to make their lands available to LFI as well. It is critical at the outset to identify an appropriate local partner, ideally an influential local leader, who is in a position to guarantee access to the required land for an incoming investment.

• On Effective Enterprise Management Within an Alien Culture: Managing the enterprise in an environment with a different local culture requires adaptability on the part of the enterprise. To expect the local community and local workers to adapt to the external investor’s enterprise culture is to court instability and failure. One of the first gestures to demonstrate this on the part of the investor was to agree for security services to be outsourced to Pagcorp, entrusting it to individuals (MILF combatants) that would normally be seen as the very elements that comprise a threat. LFI’s deliberate moves to adapt to local norms and practices, such as institutionalized “sharing of jobs,” putting social hierarchies to good use in the management of workers, and respecting and even adopting Islamic practices (including worshiping with the workers/ locals) paid off well in terms of worker productivity and enterprise stability.

• On Incentive Systems: LFI saw it fit to employ a compensation system that provided incentives for higher productivity. By compensating its workforce on a piece rate basis, they not only encouraged higher productivity, but also managed to exceed minimum wage requirements. On top of this, the company provided productivity bonuses for exceeding defined productivity standards. It also kept lessor landowners happy by annually awarding Haj travel grants by raffle. It thus used appropriate incentives that promoted industrial peace and higher productivity.

• On Promoting Workforce Motivation and Harmony: The Core Values Training Program, along with other motivational initiatives such as a sports program, helped the company maintain a cohesive and well-motivated workforce. The company also amply provided opportunities for growth and professional advancement for its employees. The company has been cited for the way its Muslim workers have increasingly found their way into management positions, through its deliberate efforts for human


resource development and training. As to maintaining worker discipline, Unifrutti/La Frutera found it advantageous to rely on their local partner PagCorp and its principal Datu Toto to take charge of disciplining errant workers. Thus, discipline among the ranks was maintained in a way that respected the local culture while avoiding adverse repercussions from workers or the local community. The labour contracting arrangement with PagCorp proved to be a convenient way for the outside investor to avoid the common challenges attendant to worker-management relations.

• On Overall Cohesion: Also contributing to the effective relationship between the outside investor and the local partner is the realization, seen through the passage of time, that Unifrutti/LFI and PagCorp are not mere supplier-customer parties to a financial transaction. Rather, they are partners to a joint project, bound together as one family that is “on board a common ship which could bring all to their respective aspirations if they succeed, or sink to the bottom to die if the project fails,” as the late Datu Toto would strive to explain to everyone on both sides. Bullecer observed that through time, members of LFI/Unifrutti/ Pagcorp had achieved the sense of belonging to one family. Thus, the core value of working within the culture that John Perrine had challenged Unifrutti and LFI to adopt, had also been internalized by the local partners starting with the members of the Paglas family. Hence, they too had strived hard to adapt in turn to the corporate culture, and in Bullecer’s view, did a very good job in doing so.

References:

Bacani, Senen C. 2007. ”The Case of La Frutera,” speech delivered at “Covering CSR: A Two-Way Street”. Forum held at Marco Polo, Davao, August 27, 2007.

Jampac, Jasper. Undated. “Paglas Corp/La Frutera, Inc.: Business As An Instrument Of Peace.” Unpublished Case Study for Classroom Use.

Nuguid-Anden, Charmaine. 2003. “Enhancing Business-Community Relations: La Frutera and Paglas Case Study.” Joint publication of UN Volunteers, New Academy of Business (UK) and Philippine Business for Social Progress. September.

Solomon, Jay. 2002. “In This Philippine Town, Muslims, Jews, Rebels Set Aside Differences for Bananas,” Wall Street Journal. March 21.

Tuminez, Astrid S. 2009. The “Paglas Experience”: Extraordinary Leadership In a Zone of Conflict. Lee Kuan Yew School of Public Policy and CARC Institute.

Wallace, Peter. 2003. Assessment of the Business and Investment Climate in the ARMM and Strategies to Address the Problems”. Growth with Equity in Mindanao (GEM-2) Project.

Williams, Mark S. 2010. Business and Peace: The Case of La Frutera Plantation in Datu Paglas. Universal-Publishers.

Personal Interviews with John Perrine (August 20 and November 10, 2011 in Manolo Fortich, Bukidnon), Edgar Bullecer (August 20 and November 10, 2011 in Manolo Fortich, Bukidnon), Senen Bacani (October 11, 2011 in Pasig City, Metro Manila), and La Frutera officials (Datu Paglas, Maguindanao) in 2010.

http://www.lafrutera.com.ph

CHAPTER 2 Agumil: The Promise of Palm Oil 13

Agumil: The Promise of Palm OilCase Study of Agumil Philippines Inc. Investments in ARMM

Buluan, Maguindanao

Background

Oil palm was introduced in Mindanao in the 1950s on Basilan Island, where Menzi Agricultural Corp. established a 200-hectare plantation. More than 15 years later, another company, Kenram Phils. Inc., turned to oil palm as demand for kenaf and ramie fibers declined. In 1967, it initially set up a 167-hectare plantation in Sultan Kudarat in mainland Mindanao and then expanded to 1,600 hectares by 1972. The company established a crude oil processing mill in Tacurong in 1978, sparking interest among other landowners in the prospects of the crop, leading to the development of around 3,000 hectares of outgrower farms.

In the 1980s, a joint venture between government-owned National Development Corp. and Malaysian-based Guthrie Corp. also developed 8,000 hectares of oil palm in San Francisco and Rosario of Agusan del Sur, which subsequently became Pilipinas Palm Oil Plantation, Inc. The company set up an oil mill with a capacity of 36 tons of fresh fruit bunches (FFB) per hour. Businessmen witnessed the increasing success of Kenram and NDC-Guthrie and began desiring to be part of the action. Some decided to put up Agusan Plantation Inc. (API) in 1993, through a joint venture among Singaporean, Filipino, and Malaysian investors. They started with a 1,815-hectare oil-pam plantation in Trento, Agusan de l Sur. They also set up a 20-ton per hour crude palm oil milling plant in 1998.

Chee Kong (C.K.) Chang, a Malaysian national who came to Mindanao in 1984 with Guthrie,

CHAPTER 2

“I see a progressive and dynamic ARMM built around oil palm and palm oil un-der a total development approach, including construction of hospitals, mosques

and other public amenities in previously war-torn areas.”– CK Chang, Agumil

14 CHAPTER 2 Agumil: The Promise of Palm Oil

led API (subsequently Agumil) through its expansion beyond Agusan del Sur. Chang began beefing up Agumil’s out-grower program in 1998 by persuading independent landowners, especially agrarian reform beneficiaries, to plant oil palm. The company also expanded into the provinces of Sultan Kudarat and Maguindanao to feed its oil mill, because these areas already had independent oil palm growers selling their produce to Kenram and Pilipinas Palm Oil. Chang established an oil palm nursery in Tacurong in 1999, and then in neighboring Buluan, Maguindanao. He also urged the growers to form the Mindanao Palm Oil Development Council to take the lead in the advocacy for the industry.

Agumil had by then also expanded operations into Bohol, where it established a 30-ton- per-hour capacity oil mill in 2005, prompting a change in the council’s name to Philippine Palm Oil Development Council. In 2006, Agumil registered its investment in a palm oil mill in Buluan, Maguindanao with the Board of Investments of the Autonomous Region in Muslim Mindanao (ARMM). The Buluan mill wanted to reduce transport costs for oil palm fruit produced by Agumil’s out-grower farms. The fruit had to be transported from Davao region to the mill in Agusan del Sur, with a total travel time of up to 11 hours. Agumil now has a grower base of 26,000 hectares in four locations, namely Agusan del Sur, Central Mindanao (Sultan Kudarat and Maguindanao), Bohol, and most recently, Palawan.

The Maguindanao Investment

Tripartite Agreement

Agumil’s operations in ARMM began in 2000. While it sought to expand oil palm hectarage, the company could not own and operate its own plantation due to the Comprehensive Agrarian Reform Program. It pursued the expansion of its out-grower program into Central Mindanao, particularly Tacurong and Buluan. The company traced the owners of the land holdings in the area by checking through the Register of Deeds and other relevant entities and began the painstaking process of negotiating for lands parcel by parcel. According to plant manager Phil Roy Malana, problems arose when agreements with a Datu were not honored by his successor upon his death.

Chang noted at the outset that the Land Bank of the Philippines and the Development Bank of the Philippines (DBP) were the most likely sources of financing for farmer growers. However, Landbank would only finance cooperatives. DBP, on the other hand, was willing to finance individual borrowers, but did so under strict requirements including land titles as collateral. Since hardly any lands in the area were titled, DBP was out.

The core of the out-grower program was a tripartite Production, Technical and Marketing Agreement among Agumil, the landowners, and Landbank. The landowners needed the bank to provide financing for planting oil palm, but apart from restricting financing to coops, Landbank would not extend financing without assurance of a market for the oil palm fruit. Agumil filled this gap, while it also needed the growers to provide raw materials for its mills. Thus, the arrangement was mutually beneficial.


As part of the arrangement, Agumil agreed to advance the 20% equity required by Landbank to extend the loans needed to buy inputs including planting materials and fertilizers and to undertake land preparation and crop protection and maintenance. Agumil and Landbank tailor-fitted the loan package for the situation, accounting for the gestation period of the seedlings and other peculiar features of the oil palm enterprise. Either Chang himself or someone in the company’s management team routinely co-signed Landbank loans given to grower coops. Chang believed that his credit-worthiness and the bank’s familiarity with his work helped secure the banks’ confidence in the loans. Under the loan, Landbank provided up to P144,000 per hectare over four years, for which the growers’ cooperatives paid an annual interest of 14% under the bank’s Innovative Financing Scheme (IFS). For individual growers not affiliated with a cooperative, Agumil lent to them directly through an on-lending scheme with Landbank where the bank lent funds to Agumil at 12% interest, and passed on to the growers at 14%. The company covered up to 600 hectares in its early years through the scheme. However, Landbank and Agumil agreed to stop the program as loan defaults mounted. The company then focused on clustering individual growers into cooperatives, deploying field staff to assist in organising initially nine cooperatives out of 664 growers all over Central Mindanao covering Cotabato, North Cotabato, South Cotabato, Maguindanao, Sultan Kudarat, and part of Davao del Sur. The company now deals with more than 30 coops in all its sites.

In Buluan, bulk of their sources were still individual growers, with farm sizes ranging from 0.75 hectare to around 100 hectares. The coops organized by the company in Buluan were relatively young. While the oil palm grower coops were working well, Chang believed there was need to guide them on the use and disposition of their collective earnings. As the bank financed the development phase of an out-grower farm, Agumil administered work on the farm. Agumil released money only upon seeing progress and completion of specific tasks (e.g., land preparation, planting). Upon certification of work done, Agumil released money directly to the coop. Growers started repaying Landbank only after the fifth year, under a predefined amortization plan where the first payments were for the cost of seedlings, then development costs. Interest was also the first to be paid.

Part of the system is a marketing agreement with the growers’ cooperatives, committing the latter to sell their entire output to Agumil. Still, up to 30% of the total production of their out-growers became subject to pole-vaulting (selling the output to outside buyers), as estimated by Malana. Since gestation only takes three years (trees bear fruit by then), growers kept the entire farm earnings between the third and fifth year, thereby getting a two-year grace period before having to repay their loan. Through the entire period, technical supervisors visited the farms, provided advice on crop care and maintenance, and even financial management. The company monitored the coops closely, with each coop assigned a dedicated officer. The coops managed the farms as a collective unit to achieve economies of scale, and took care of apportioning farm proceeds to members.

Seedling Nursery


As the company encouraged more Mindanao landowners to plant oil palm, demand grew for planting materials for the thousands of hectares of oil palm envisaged. Agumil set up its initial nursery in the University of Southern Mindanao compound in Kabacan, Cotabato. Seedling nurseries were set up in Tacurong and Buluan as well. For a seed nursery enterprise to be economically viable, it must also be assured of continuous demand for its seedlings. Thus, it was in the company’s interest to sustain its efforts to encourage further increased plantings of oil palm in Mindanao. “Wherever there is land, we will plant” became an informal company motto, according to Malana.

Chang asserts that Agumil keeps strict quality control over its oil palm seedlings. The company does not undertake any research and development work on breeding and varietal improvement; its nurseries simply nurture seedlings from seeds procured from various sources overseas (Box 1). Seedlings were initially nursed for eight months, later 10-12 months, at which time the seedlings are ready for replanting. A drip irrigation system was later installed in the nurseries, which made it possible to have even 6 month-old seedlings strong enough for transplanting. He further asserts that Agumil’s seedlings can flower by 18 months, instead of the usual 24. A good-quality seedling would sell at P220, but this would require strict quality control. Seedlings of inferior quality sell at P165. Chang believes that many of the other seedling producers in Mindanao lack experience and proper knowhow, and that Agumil’s seedlings, while more expensive, are ultimately

more cost effective due to their superior quality.

Box 1

R&D on Oil Palm

The Philippine Coconut Authority is the government body tasked to administer oil

palm in country, including research and development and breeding. C.K. Chang

spoke of how they attempted to convince PCA scientists to undertake more research

on oil palm, including breeding for improved varieties and tissue culture (clon-

ing). However, they found little support from the past PCA leadership, who saw oil

palm as competitor, rather than as a key complement to coconut. Chang argues that

increased oil palm production and productivity would allow the country to save on

both coconut oil and imported palm oil that currently provide for substantial domes-

tic requirements for cooking oil. Thus, with increased domestic production of palm

oil, the country would be able to export more coconuts at a premium price, especially

with the emerging high demands for new coconut products such as coco-sugar and

coconut water.According to Chang, Agumil is the largest oil palm seedling producer;

accounting for about 35% of the seedling market. He takes pride in Agumil’s quality

control. The company is particularly strict in culling inferior quality seedlings, elimi-

nating a minimum of 25% from the original seeds planted.


A local politician complained that Agumil effectively stifled his intention to make a sizable investment in oil palm production by refusing to sell enough seedlings to him even if he was prepared to pay cash. Chang clarifies that seedlings produced by Agumil are for their out-growers (via the financing scheme described above) on a first come-first served basis. Thus, even large-volume buyers who are willing to pay cash cannot get ahead of the queue, to be fair to Agumil’s out-growers.

Oil Mill Operations

Prior to setting up the Buluan mill, oil palm growers in the area delivered their produce either to Kenram (Tacurong) or Pilipinas Palm Oil (Agusan). Chang believes that the prices paid by the two farmers were too low, or what he describes as “price dumping.” He gathered growers in Tacurong and informed them of his plan to open a mill, and offered a pricing formula based on a fair computation of costs.

Agumil started palm oil milling operations in Buluan, Maguindanao in 2007. The Buluan oil mill originally had a capacity of 30 tons of FFB per hour, which could service up to 5,000 hectares of fully mature oil palm. The mill has recently been expanded to accommodate 45 tons to cope with increased oil palm plantings in recent years. The plant capacity can potentially be expanded up to 90 tons per hour. The plant operates with 30-35 workers in one shift, with overtime during peak production season from October to January. The company had registered the investment with the Board of Investments of the Autonomous Region in Muslim Mindanao (ARMM) with an investment cost of P360 million on 20 hectares of land. It availed itself of investment incentives offered under the BOI’s Investment Priorities Plan for ARMM, including a five-year income tax holiday extendable by another three years. But the incentive required that a certain percentage of output be exported and a minimum number of employees be employed, with preferential absorption of local workers in the enterprise.

Chang takes issue with the export requirement, which dates back to the 1970s when government trade policy was highly protective and encouraged import-substitution rather than exports. In 2009, Agumil’s oil mills exported less than 3,000 tons in total, and only because BOI required it as a prerequisite to qualify for incentives. He reports that starting 2012, Agumil’s Palawan plant will need to export 70% of its output, just to comply with the export requirement for fiscal incentives. He argues that in the case of the palm oil industry, a policy that forces firms to export when the country imports large quantities of palm oil at the same time is misplaced. Thus, in the case of palm oil, foreign exchange savings through reduced imports are equivalent and just as deserving of incentives as foreign exchange earnings. While he had brought up this sentiment with a BOI governor, no action has been taken on the matter since.

Chang recalls that Agumil offered P2,500 per ton of FFB at its Agusan mill, whereas the highest price he recalls ever paid by Kenram was P1,700. Agumil’s purchase price had started with P4,500, and had peaked at P8,400 per ton (i.e., when world prices rose to record levels in 2008-2009). Chang claims that growers had never received prices that high


even when world prices reached similar levels. Agumil’s Buluan mill had even processed fruit delivered from Agusan in the past, apparently attracted by their higher purchase price.

Agumil paid growers on a 15-day cycle, i.e., payments were released to growers only on the 15th and 30th of the month. But this leads many farmers to time their deliveries at or close to these dates, leading to congestion at the mill gate. Delivery trucks had to queue for more than 24 hours while waiting to be accepted. This led to deterioration in the quality of the fruit, as free fatty acid (FFA) content rises 1% for each day of delay. For this reason, Agumil was interested in dealing more with cooperatives, as they are easier to manage particularly in the schedule of deliveries. Meanwhile, enterprising landowners adjacent to the mill have begun to charge the queued trucks a P10 “parking charge.”

Recently, the company invested P40 million to install a biogas power plant in Buluan, which could generate one megawatt of power for its own use out of crushed fruit bunches. Chang estimates that the Buluan mill can generate up to 5MW of power. However, the investment decision to expand the plan’s capacity would be influenced by the policy and institutional environment governing electric power in Mindanao, including the need for a mechanism for selling excess individual power production to the grid. In the meantime, the excess biomass waste is being used as organic fertilizer, with technical assistance being provided by an agricultural scientist from the Central Luzon State University.

Peculiar Circumstances and “Success Secrets”

The Human Factor: C.K. Chang and Phil Roy Malana

For C.K. Chang, developing the palm oil industry in the Philippines has been a personal vision and mission. He first came to Mindanao from his native Malaysia in 1984 at the age of 29 years, and has lived in the country for 28 years now. He married a Filipino Christian and remains a Malaysian citizen, although he has no remaining business interests in Malaysia. The son of rubber tappers in Malaysia, he grew up beside a plantation. He started his career as an ordinary plantation staff at 19 right after graduation and got involved in oil palm, rubber and cacao. He subsequently went into commodity trading, but found the job too stressful. He tried his fortune in Sabah where he spent three years in cacao production, but after careful study on crop options, he eventually decided to focus on oil palm. At this juncture, his Malaysian employer invited him to work in the company’s oil palm business in Agusan, at a time when the province was still a hotbed of communist rebellion. After the 1986 People Power Revolution and the assumption into office of President Corazon Aquino, Chang became concerned about the plight of thousands of agrarian reform beneficiaries in the wake of CARP. He saw oil palm to be the best crop option for these farmers, and resolved to convince Mindanao’s new landowner beneficiaries to plant the crop. Knowing that a minimum of 6,000 hectares of oil palm is needed to support a mill, he talked with as many farmers as he could in Central Mindanao, both Muslims and Christians. He even talked to leaders of the Moro International Liberation Front (MILF).


Working in Central Mindanao after Agumil had set up its oil palm seedling nurseries in Tacurong and Buluan was not without its trials for Chang. At one point, he received threats from the notorious Alonto kidnap gang. But he pressed on and worked, ate and slept together with the workers in the nursery, winning their confidence and trust. Through hands-on work and such trust-building gestures, he demonstrated his sincerity to his partners and associates. Muslim leaders were later to describe him to their constituents as someone “sent by God” to help improve their lives, hence was not to be harassed or harmed. Chang asserts that the company received more harassment from the New People’s Army operatives than from Muslim rebels.

Engineer Phil Roy Malana is the son of a former manager in Kenram and was born in the area, hence is very much at home in Buluan where he manages the Agumil palm oil mill. He was tasked with setting up the oil mill from scratch since the early 2000s. He recruited workers directly from the community when the preparatory work towards building the factory began, starting from land clearing, to construction, and on to actual plant operation. MILF fighters would pass through the area without touching them, as they were known to help the locals. He asserts that rebels would only touch a person who has done them wrong (such as making false promises). He feels confident about how Agumil has won the goodwill of the populace, so he sees no need for security when he moves around.

Trust and Altruism

Malana asserts that the company always had the vision of helping depressed communities in Mindanao, that is why they moved to conflict areas. Believing that “a hungry man is an angry man,” they felt that helping provide livelihood and gainful employment to the local communities would be the best way to diminish violent conflict. Chang finds himself frequently telling others: “You can never be happy if your neighbors are poor.” They felt confident that if seen by all to be helping the community, they “will not be touched” by rebels, and the communities will be the first to defend them against any aggression.

Chang declares that he felt completely comfortable talking to and dealing with Muslim partners and workers, even if he was not a Muslim. He understood the Muslim temperament having grown up in Malaysia, and knew they were “not too difficult to deal with.” “If you deal with them with sincerity, they will accept you,” he asserts. Chang underscores the importance of equality among his workers, especially as the Buluan mill has a mix of

He pressed on and worked, ate and slept together with the workers in the nursery, winning their confidence and trust.

Through hands-on work and such trust-building gestures, he demonstrated his sincerity to his partners and associates.


Ilongos and Muslims in its work force. He asserts that he gets the same productivity from them regardless of ethnic origin. In cases of labour conflicts, Agumil requests the town Mayor to act as mediator.

Pricing Transparency

Many believe that palm oil mills have been paying monopsony prices that are lower than they should be. Growers also complained that they could not confirm true oil content and even the weight of the fresh fruit bunches sold to the mill, especially when actual measurement is done far away in Agusan (i.e. in the case of Pilipinas Palm Oil). These complaints have prompted the Department of Trade and Industry to look into the possibility of analysing and intervening in the pricing of oil palm fruit by the oil mills, according to SK DTI Provincial Director Nelly Dillera.

Chang explains that the traders’ price for palm oil is set monthly based on prevailing international prices. The price paid to growers is computed from the prevailing price of locally traded palm oil, less sales commissions and processing charges, leaving all of the remainder for the farmer. Chang declares that he is always prepared to show to his growers how the prices are arrived at. In one instance when the mill equipment had to close down for repairs, the company trucked all the fruit bought from growers all the way to its Agusan mill, without passing on the costs to growers, he said. Because Agumil pays better prices than its competitors, growers from as far as Agusan deliver fruit to their Buluan mill, he claims. He has never rejected any delivery, but laments that farmers occasionally take advantage of this.

Inherent Attractiveness of Oil Palm

A key factor in the success of Agumil in bringing investments into ARMM is the relative ease of attracting farmers into growing oil palm, compared to other crops. Chang tells of a conversation he had with an MILF commander who once told him,: “Sir, I wish we also had oil palm, so there will be no more war.” Chang later relayed this sentiment to Hashim Salamat, and suggested planting all MILF camps with oil palm and equipping them with basic amenities. However, the MILF leadership were apparently not keen on the idea at the time.

Malana asserts that when the rebel leaders realized how oil palm growers’ lives were improving, they even encouraged their people to plant the crop. Chang tells of an elderly woman in Bohol who owns the smallest farm (0.75 ha.) who used to live in a house made of amakan (woven bamboo strips). She now lives in a more durable house made of GI sheets.Agricultural economist Rolando Dy says that apart from being relatively easy to plant and maintain, oil palm can provide farmers a steady cash flow every two weeks, unlike coconut wherein the harvesting cycle takes up to 90 days. Malaysian Pilipinas Palm Oil partner Tai Han Phoa, in an interview in Kuala Lumpur, indicated no intention nor desire to expand their oil palm operations into ARMM, asserting: “We don’t need to go into troubled areas;


it’s so easy to ‘sell’ oil palm growing to farmers elsewhere anyway.”

Conclusion

C.K. Chang observes that there is “plenty of land” in Mindanao, especially in ARMM. He believes that government should take over lands that remain uncultivated for extended periods. He envisages a progressive and dynamic ARMM built around oil palm and palm oil under a development approach, including construction of hospitals, mosques and other public amenities in previously war-torn areas. He continues to see an “MILF oil palm complex” as the answer to addressing the socio-economic issues that had brought MILF into confrontation with the Philippine government. The challenge is to attract far more investments into ARMM, and the oil palm/palm oil industry appears to be a “low hanging fruit” that may be pursued.

References:

Dy, Rolando T. 2011. “Priming the ARMM Economy with Agribusiness.” Working paper submitted to AusAID.

“Oil palm producers eyeing 100,000 hectares in 5 years in Caraga region,” http://www.pinoylife.jp/news/detail.php?news_seq=4776

“Oil Palm Spreads in Region 12,” http://sme12.ph/sme12/southbound/pip1.swfVillanueva, Jo. 2011. “Oil palm expansion in the Philippines: Analysis of land rights, environment

and food security issues,” Chapter 4 in Marcus Colchester & Sophie Chao (Eds) with Jonas Dallinger, H.E.P Sokhannaro, Vo Thai Dan and Jo Villaneuva (2011), Oil Palm Expansion in South East Asia: Trends and Implications for Local Communities and Indigenous Peoples, Forest Peoples Programme and SawitWatch.

Personal Interviews:• Engr. Phil Roy Malana (Plant Manager, Agumil Oil Mill) and Mr. Tong Fale – August 21, 2011;

Buluan, Maguindanao• Ms. Nelly Dillera (DTI Provincial Director, Sultan Kudarat) – August 22, 2011; Tacurong City• Dr. Wong Chee Yoong (Malaysian Ministry of Agriculture) – October 31, 2011; Kuala Lumpur,

Malaysia• Dr. Christopher Shun (Menang Corporation Berhad) – October 31, 2011; Kuala Lumpur,

Malaysia• Dr. Chew Poh Soon (Agrinos Malaysia) – November 1, 2011; Kuala Lumpur, Malaysia• Mr. Tai Han Phoa (Asagro Sdn Berhad) – November 1, 2011; Kuala Lumpur, Malaysia• Mr. Chang Chee Kong (C.K. Chang) – December 10, 2011; Davao City

22 CHAPTER 3 BJ Coconut Oil Mill: Catalyst for the Sulu Economy

BJ Coconut Mill: Catalyst for the Sulu Economy

Case Study of BJ Coconut Oil Mill, Indanan, Sulu

Background

BJ Coconut Oil Mill is the only large industrial enterprise in the island province of Sulu. It is also the only coconut oil mill in all of the Autonomous Region in Muslim Mindanao (ARMM). Prior to its operation, all of the copra produced in Sulu (and in the nearby island province of Basilan) had to be shipped to Zamboanga City to be milled.

Some 40,000 hectares are planted with coconuts in Sulu, more than adequate to support the operations of the plant. Replanting of aging trees has recently been underway. Sulu Congressman Tupay Loong has reportedly distributed some 50,000 coconut seedlings, and has ordered another 100,000 using his Priority Development Assistance Fund. The seedlings are distributed through municipal mayors, or directly to farmers.

Benjamin Loong (brother of the Congressman and Governor of Sulu in 2004-2007) established the company back in 1995, and started commercial operation in 1997. That was a time, Ben Loong recalls, when then President Fidel V. Ramos had issued a policy directive to the government banks to “go down to the ground, and help small businesses.” Emboldened by this, Loong approached the provincial commanders of the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP) with the question: would they guarantee the security of investments in the then conflict-ridden province? The military and the police said yes, and told him that it was in fact their duty.

He then approached the Land Bank of the Philippines and asked: If he obtains certification

CHAPTER 3

“We succeeded in enterprises which demand the positive qualities we posses, but we excel in those that can also make use of our defects.”

– Alexis de Tocqueville

CHAPTER 3 BJ Coconut Oil Mill: Catalyst for the Sulu Economy 23

from the military and police that his investment would be secure, would the bank agree to provide financing? Having again obtained a positive answer, the persistent Loong sought and obtained handwritten guarantees from the military and PNP commanders. (A military detachment was subsequently assigned to protect his factory.) Against the advice of his brother Tupay, he proceeded with the investment, availing of ARMM Board of Investments incentives including income tax holiday and duty exemption on imported capital equipment.

Thus was born BJ Coconut Oil Mill, a mechanical, full-press coconut oil milling plant with a rated capacity of 210 metric tons per day, and actual capacity of 175-200 MT. As indicated above, there was more than adequate raw material available within Sulu to support the operations of the plant, which had processed an estimated 60% of total coconut production in the province. The company also bought some of its copra from Basilan. Copra coming from the smaller islands was usually brought all the way to Zamboanga. Producers found it more practical since the copra had to be loaded onto boats anyway.

Unfortunately, the plant had to be closed in 2009 after about 12 years in operation, due to difficulties arising from the global economic downturn. Escalating costs especially of fuel, and unfavorable price movements in coconut oil led to losses that forced the closure. Ben Loong still hopes to reopen the plant, and has been discussing with prospective business partners to infuse new capital. Meanwhile, the plant has been mothballed and maintained in operable condition, waiting to resume operations.

Company Operations BJ Coco Oil purchased copra directly from farmers and traders. The buying price benchmark was set in Zamboanga City, where several coconut oil mills are located. The Zamboanga price was in turn the basis for pricing by the Sulu copra traders mostly located at the “Kilometer 3” stretch in Jolo, where buying prices would usually be P1.00 per kilo less than the Zamboanga buying price, to account for transport costs.

According to Hadji Alonto Loong, Zamboanga mills enjoyed a cost advantage as they could avail of cheaper electric power at industrial rates. To be competitive, BJ Coco Oil thus had to account for this in its own copra pricing strategy. Forward sales also influenced pricing of the copra. In general, the company managed to pay farmers and traders 50 centavos higher than “Kilometer 3” prices. This made itattractive for both local copra producers and traders to sell to the company instead of shipping to Zamboanga, especially since it was not uncommon to losecopra cargo to accidents, as vessels plying the route were very old. According to Hj. Alonto Loong, BJ Coco Oil would operate at least 25 days per month during peak periods, and at least 15 days during lean periods, operating for 24 hours with three worker shifts. As it is a highly mechanized operation, only around seven workers were required to run the plant at each shift. Wage rates were set at the ARMM mandated minimum daily wage, which was P240 at the time of the plant’s closure in 2009, with a 20% wage premium for the graveyard and Sunday shifts.


Electric power proved to be a major cost and constraint for the firm’s operations. Sulu Electric Cooperative (SULECO) provided power at P6 per kilowatt-hour, but supply was erratic. BJ Coco Oil paid from P900,000 up to P1.6 million per month to SULECO for electric power. After relying on SULECO power for more than two years, and as the power utility’s service increasingly became unreliable, the company decided to invest in its own diesel-fired power generating unit, thereby gaining direct control over its power needs. This direct control ensured that the company’s forward sales could be properly serviced. Running the diesel power genset cost the company about P200,000 per 24 hours. To save on energy costs, only five or six out of the plant’s seven expellers would be run at a given time. The company also managed to economize further on diesel costs. It purchased fuel at depot price directly from the Petron depot, and used the company’s two ships to transport the fuel to the plant, by using the diesel as ballast instead of seawater. The company managed to save P2 for every liter of diesel, which contributed to its ability to buy copra at a higher price relative to competitor buyers. The company also relied on cheaper bunker oil – P1 cheaper per liter than diesel fuel – for its boilers.

In its earlier years, BJ Coconut Oil Mill had a guaranteed buyer in San Miguel Corp., which had allotted the company a dedicated reservoir in its Iligan facilities because its product was considered superior. This was during the time San Miguel controlled an estimated 60%-80% of Philippine coconut oil production. San Miguel’s decision to discontinue its coconut oil operations in 2006 forced the company to look for buyers from as far as Manila.

BJ Coco Oil had also engaged in buying cassava at one point, particularly during the governorship of Benjamin Loong, under the provincial government’s “Arms for Farms” program. The company thus provided a ready outlet to farmers for their excess production over their own household consumption needs. The company had also gone into limited production of coconut shell charcoal.

Another allied business was a shipping company that operated two ships, with one dedicated to the oil mill’s transport requirements. Prior to establishment of the oil mill, the ships had been engaged in “barter trade” with nearby Malaysian ports. Access to its own shipping services gave the company control over the timing of shipping, which was valuable in fulfilling forward sales. It also helped the company save on the costs of diesel fuel, helping to provide the company a competitive edge.

Other Business Challenges

Being the first and only major factory in Sulu, BJ Coco Oil faced the challenge of enforcing discipline among its workers. Locally hired Muslim workers had no tradition of full time and longterm employment commitment. The discipline of reporting at regular hours was alien to local workers. In light of this, critical technical level positions had to be filled with non-locals. Only 10 locally hired workers from Sulu eventually became permanent employees in the company.


Given the nature of its work force, the company found it necessary to have a supervisor for every 11 workers. These supervisors must command the respect of workers via blood heritage with royalty or a family of high social stature in the traditional hierarchy. There was a relatively fast worker turnover. It was common for locally hired workers to leave on short notice, or no prior warning.

Hadji Alonto Loong recalls that their company faced greater hurdles under the Estrada and Arroyo administrations. He felt that disincentives on ARMM investments, both implicit and explicit, existed under the Estrada and Arroyo administrations, and is hopeful that the investment climate has turned positive under the Aquino administration. He believed that Pres. Estrada had issued a silent (verbal) order for banks not to grant loans for ARMM investments during the all-out war against the MILF. Even if investors may be willing to set up within ARMM, banks may not be willing to finance their investment, especially because there was no insurance available for ARMM investments. Financing working capital requirements became more difficult for BJ Coco Oil, and it turned for the worse with the 2008-09 global financial crisis, when world market prices for coconut oil also fell. Alonto Loong laments, “when business got tough, bank financing got even tighter, which is the exact reverse of what businesses need under those circumstances.”

In the midst of the global financial crisis (in 2009), BJ Coco Oil found itself with a coconut oil inventory of 2,000 metric tons (in copra terms) of oil with no ready buyers. The oil had been produced at a cost of P64,000/MT (in oil terms); in the end, the company was forced to sell it for just over P40,000/MT, taking a substantial loss on the transaction. With no financing to tide it over, the company had no choice but to halt operations.

Nonetheless, Ben Loong and his colleagues are hopeful that BJ Coco Oil will get back into operation in the near future. Loong cites the need to find a partner who, apart from providing the needed financial infusion, would also link the company to large players in the industry, and provide greater access to the market. The company has debts to settle with its creditor banks, and a fairly large amount of capital infusion would be needed. The market has become difficult, especially with palm oil steadily crowding coconut oil-based cooking oil out of the market. Furthermore, much cheaper palm oil can easily come from Malaysia. Still, coconut oil prices have been favorable, as is the case with palm oil.

Pointers for Prospective Sulu Investors

BJ Coco Oil’s experience brings forth a number of lessons and pointers useful for

Given the binding constraint of electric power supply reliability, a new industrial investor would best consider bringing its own power.


prospective investors into Sulu and ARMM:

• Given the binding constraint of electric power supply reliability, a new industrial investor would best consider bringing its own power, just as BJ Coco Oil eventually had to do – at least until a long term solution to Sulu’s energy deficiency is in place. While biomass-fueled power generation could be an option, Hadji Alonto Loong had not considered it an economically viable option for BJ Coco Oil. This is because biomass would still have to be collected from individual farms and assembled in large quantities, apart from biomass-based power generation being more complicated. Still, given the huge amount of biomass waste generated in Sulu farms from growing various crops, biomass-based power may yet prove to be a worthwhile investment, provided an efficient biomass waste collection system can be put in place.

• Potential industrial investors would have to bring in technical personnel along with their investments. It would also be a challenge to keep them as they are likely to get bored and impatient on the island. Investors must thus find a way to deal with or compensate for this challenge.

• Ben Loong believes, as others do, that it is important for a prospective investor to partner with an influential leader in the community who can assure access to and ensure security of tenure on land; and help maintain discipline in the work force, particularly those that are locally hired. In the case of BJ Coco Oil, it was Ben himself who fulfilled this role, being an insider and prominent local businessman who was later elected provincial governor and subsequently vice-governor. He thus commanded the respect, hence cooperation and obedience, of his work force.

• It is important to respect specific cultural norms and traditions of the local work force where there is lack of a tradition for formal and regular employment. Those in supervisory positions must inherently command the respect of their subordinates by virtue of social status vested by historical/cultural tradition or royalty. It is untenable to put a worker of higher social stature (e.g., one with royal lineage) under the supervision of one who is of lower social stature.

• Government support is important, via assistance in gaining access to land and provision of attractive investment incentives. Given the prevailing conflict situation, assured protection by government security forces was a crucial element. Bank financing would not be forthcoming without such assurance of security.

• In any business situation, but more especially in Sulu and ARMM, resource fulness and creativity are vital for an enterprise to survive. BJ Coco Oil found ways to reduce energy and transport costs through its complementary business in shipping. Coconut shell charcoal and abaca processing also helped optimize equipment and facilities.

BJ Coco Oil had been an important catalytic investment in Sulu, and reopening it would


provide a major boost to the Sulu local economy and the ARMM regional economy. Ben Loong has been actively engaged in discussions with a Mindanao-based foreign prospective partner for a joint venture arrangement to bring the company into operation once again. If plans work out favorably, BJ Coconut Oil may yet be back in business within the near future.

References:

Adriano, Fermin. 2011. “Promoting Sustainable Economic Opportunities in Conflict Areas: Experiences of Selected Private Sector Enterprises (Annex 6i on BJ Coconut Oil Mill).” Unpublished paper for the World Bank, Manila.

BJ Coconut Oil Mill: Company Profile (3-page Handout).

Personal Interviews:

• Vice-Governor Benjamin Loong (Owner, BJ Coconut Oil Mill) – December 14, 2011; Makati City• Abdelnaser Kadil (Plant caretaker) - February 17, 2012; Jolo, Sulu • Hadji Alonto Loong (Vice-President for Operations, BJ Coconut Oil Mill) – March 14,

2012; Zamboanga City

28 CHAPTER 4 Matling Indstrial & Commercial Corp: Resilience Amidst Challenges

Matling Industrial & Commercial Corp.:Resilience Amidst

ChallengesMalabang, Lanao del Sur

“Effort only releases its reward after a person refuses to quit.”– Napoleon Hill

Background

Matling Industrial and Commercial Corp. (MICC) started out in 1928 as a coconut plantation founded by an American woman who was among the “Thomasites” – schoolteachers shipped to the Philippines by the US government to establish a public school system in the country they had won from Spain. Her husband, an American soldier, returned to the US after his tour of duty, leaving behind Mrs. Spencer and their son Richard. Mrs. Spencer, a dedicated educator who chose to stay behind with her schoolchildren, invested her salary in local property. She and her son eventually settled in Lanao, and established a coconut plantation in Malabang that was later expanded by Richard Spencer into one of the largest coconut plantations in the Philippines, spanning some 3,000 hectares.

While copra production was originally the company’s main business, it had also gone into cassava and cacao production as intercrops through the years. Richard Spencer first established cassava production and processing at a small scale in the early 1950s. It was in the 1960s when a full-scale cassava flour factory was built, at which time cassava processing had become the company’s main business.

CHAPTER 4

CHAPTER 4 Matling Indstrial & Commercial Corp: Resilience Amidst Challenges 29

With the institution of the Comprehensive Agrarian Reform Program (CARP) in 1988, about 1,760 hectares of the plantation were transferred to farm tenants and workers. Some 1,000 hectares remained under the direct control of the company, with some 600 hectares preserved as natural forest. The CARP beneficiaries were organized into a cooperative that holds a collective Certificate of Land Ownership Award (CLOA) for its 910 members. Members sell their produce to MICC through the cooperative, in a symbiotic business relationship that has sustained the enterprise through various challenges over the years.

Company Operations

MICC is the largest cassava starch producer in Mindanao and one of the oldest corporations in the island region. The company produces food-grade starch, which is acknowledged in the market to be of superior quality. It has established marketing outlets mainly in Manila, where its products are bought primarily by Manila-based (mostly Filipino-Chinese) traders. As indicated above, the company had evolved over the decades from being primarily a coconut plantation to a cassava production and processing enterprise.

MICC sources its raw materials from both its own farm operations and from the cooperative of its agrarian reform beneficiaries. Initially, the company had engaged in a contract-growing type of arrangement whereby it extended loans directly to farmers. However, it decided to discontinue this arrangement after numerous loans were not paid. At that time, it was common for Matling to discover that certain farms already had a different owner or tiller by the time the loans were due for payment, thus making it impossible to collect on the loan. The company has since adopted an arrangement where it has simply become a buyer of the production of the farmer growers. The company takes care of land preparation and planting, including the lands of coop members and farmers who are not coop members.

For members of the cooperative, land preparation services are provided at a subsidized charge of P7,000 per hectare (vs. the normal cost of around P20,000). Some coop members are known to further lease land from Matling’s retained holdings to further increase their hectarage planted with cassava. Matling hires out land preparation services at cost to farmers that are not members of the cooperative, particularly tractors and harrows. The cooperative supplies the fertilizer requirements of its grower members, and deducts the corresponding costs from the member’s share of revenues from sale of raw cassava to Matling. While the price paid by Matling to its growers is lower than that paid by processors in Bukidnon and General Santos, subsidized land preparation costs enjoyed by the growers make up for the difference.

According to Martin Lagura, Matling’s Controller, the company sees no problem with pole-vaulting (the practice of selling the harvest to a third party other than Matling after having enjoyed subsidized land preparation costs) as there are no attractive alternative outlets for farmers’ cassava yields. The nearest alternative cassava processor is in Lanao del Norte, too far to be an economic alternative. Besides, Lagura asserts, cassava growers like selling to


Matling as it pays promptly, unlike other buyers where payments are deferred.

To power its processing facilities and other requirements within the company premises, Matling had relied for 30 years on its own 1-megawatt diesel powerplant, composed of four 250-kilowatt generating units. A waterfall is located within the company property, making hydroelectric power generation feasible. Construction of such mini-hydro facility had been planned since the 1980s, but the financial crisis got in the way of securing financing. In 1995, the company finally put up a P70 million 1.5 megawatt mini-hydroelectric power plant, even as scope for up to 10 MW hydro power capacity reportedly exists within Matling’s premises. More recently, the company invested P24 million in 2011 on a biomass power facility that uses dried cassava and rhizome chips to power a steam turbine generator. This augments the company’s power generation for its starch manufacturing operations.

Challenges

Matling has thrived through many years of trials and challenges, marked by economic crises (especially in the 1980s and late 1990s), violent political conflict and fragile law and order, the Comprehensive Agrarian Reform Program, and internal management challenges.

While the hectarage devoted to cassava had grown through the years, the supply of planting materials has been a constraint, and the need persists for more cassava stalks for planting. Matling must also contend with insufficient cassava tubers as raw material for its starch processing operation during lean production months from January to May. During these periods, cassava tubers are obtained from more distant sources such as the Surallah Valley and Bukidnon, where peak harvests occur during Malabang’s lean months.

When violent conflict erupted in Mindanao in the 1970s, some company workers were members of Muslim rebel groups. The company continued to provide jobs to the surrounding population. Lagura recounts that some of their workers were occasionally ambushed, particularly when a worker would get into trouble with rebels. At times this led to other Matling workers being ambushed in rido-like reprisals. Around 1980, the ambush of one of the company’s security guards prompted Mr. Spencer to organize a security force (Special Civilian Armed Auxuliary or SCAA composed of around 100 mostly Christian members. The company had managed to resist threats and prevent actual attack through the years of violence in Central Mindanao.

When President Estrada declared all-out war on the MILF in 2000, the company again found itself under threat of attack from the rebels. However, it proved to the company’s advantage that some MILF commanders were actually among its workers. At that time, there was already a military battalion located adjacent to the Matling premises, which further helped deter threats of attack and maintain the peace in the Matling premises.

For a company as large as Matling, challenges in managing workers were an inevitable

CHAPTER 4 Matling Indstrial & Commercial Corp: Resilience Amidst Challenges 31

part of operating the enterprise. Some workers refused to work in the fields, and would go home after reporting to their supervisors. In such cases, the workers were shifted to other jobs that do not entail working in the fields, such as land guards. Supervisors occasionally received threats from disgruntled workers, prompting the company to provide them a security escort, usually a respected member of the community who becomes a guarantor on the life of the supervisor he is tasked to protect. The responsibility of being entrusted with the life of a company supervisor becomes a matter of maratabat (honor) for the hired escort. While the employment of such escorts has raised overhead costs for the company, it is a necessary cost that helps maintain peace and stability within the company workplace.

There is also a practice among local workers to have a brother or relative substitute for them at work (a practice known as sumpat). Unlike in La Frutera where the practice was institutionalised, the Spencers prohibited the practice to strictly adhere to labor laws.

Survival Formula: Good Community Relations

Key to MICC’s resilience through wars and violent conflicts spanning the many decades of its successful existence is maintenance of good relations with its workers and the local communities, in various ways. As a dedicated educator, the elder Mrs. Spencer demonstrated a genuine desire to uplift the local community with basic services, particularly education and health. Her son Richard and his mestiza wife Sarah Miller had the same values; Richard was widely known to be a kind and honest man, according to Lagura.

The family built a school and a hospital to serve the local community, and according to Lagura, Richard Spencer had always considered these facilities vital to the operation of the company. Matling also provides a feeding center to serve the poor from surrounding barangays, employing staff dedicated to preparation and feeding. The plantation itself has provided gainful employment and livelihood for the local population since the start of its operations in 1928. Workers from neighboring provinces especially Maguindanao are known to migrate to Malabang to seek employment opportunities in Matling’s farms and factory. MICC directly employs its workers, unlike in La Frutera in Maguindanao, for example, where the company entered a labor contracting arrangement with a local partner firm.

Good relations with the farmers and their cooperative are also crucial to the company’s survival and success. Among other things, Matling deliberately provided additional income earning opportunities for its farmer-growers. An example is the way the company gave

Key to MICC’s resilience through wars and violent conflicts spanning the many decades of its successful existence is maintenance of good relations with its workers and the local communities.


an additional earning opportunity to the farmers from trucking services. Matling used to operate its own trucks, which had occasionally been under threat of ambush from violent elements. The company deliberately ceased its own trucking operations, and instead gave the farmers the opportunity to provide the trucking services. Farmers were encouraged and assisted to acquire their own trucks, which could then be hired out to Matling.

The farmers’ cooperative has done well through the years. It has started to go into rubber, particularly for the areas not suitable to cassava, and has also begun to plant abaca as an intercrop to coconuts. Landbank granted collateral-free loans to the coop in 2006 for acquiring 14 tractors, and the loans have since been fully paid.

Landbank-Parang has reportedly cited the Matling Cooperative as the only coop that has managed to pay back its loans. The coop had in fact earned enough income in 2011 to award bonuses to its members. Because it has managed to thrive as a cooperative, Lagura asserts that there is resistance to breaking up the coop’s collective CLOA into individual CLOAs as provided eventually in the agrarian reform law.

While the company employs many Muslims, Christians are still the majority in the Matling community. The Spencers have been faithful Christians themselves. Lagura quotes Richard Spencer as having constantly asserted that Matling as a company exists and survives “because of God’s grace.”

They ran the company on the basis of strong principles founded on service to the community, honesty and integrity, and adherence to the law. Indeed, MICC has been awarded by the Bureau of Internal Revenue as a faithful taxpayer in the region. The Spencers have been strong and consistent supporters of Christian churches and organizations, including the Assembly of God, ICI Ministries Philippines, and the Philippine General Council of Assemblies of God.

To these organizations, the company devotes regular “tithes” (donations amounting to 10 percent of net earnings), consistent with Scriptural teachings. Both Lagura and Ali Tuba (Matling’s Personnel Officer) hold the conviction that faithful payment of these tithes has been key to the company’s success and resilience in the face of various trials over the decades.

References

Personal interview with Mr. Martin Lagura (Controller) and Mr. Ali Tuba (Personnel Officer), Matling Industrial and Commercial Corporation, in Cotabato City, March 26, 2011 Sarmiento, Bong S. 2011. “Mindanao firm puts up own biomass power plant,” Sun-Star Davao, October 18.Society for the Advancement of Technology Management in the Philippines. (no date). “Harnessing Hydro Energy for Off-Grid Rural Electrification.” Technology Brief prepared with the support of the Department of Energy and U.S. Agency for International Development as part of the Technical Assistance to the DOE for Enhancing Private Sector Participation in Renewable Energy.

CHAPTER 5 EA Trilink Corp.: Bringing ARMM Into the Future 33

CHAPTER 5

“Success is often achieved by those who don’t know that failure is inevitable.”

– Coco Chanel

Background

In February 1996, the Regional Legislative Assembly (RLA) of the Autonomous Region in Muslim Mindanao (ARMM) enacted ARMM Act No. 47, granting a franchise to Trilink Corp. to establish telecommunication facilities in the ARMM. Datu Hadji Nasser D. Sampaco, Regional Secretary of Environment and Natural Resources under Regional Governor Nur Misuari, was the original founder and investor in the company, in a joint venture with Malaysian partners.

In March 1998, the ARMM National Telecommunications Commission granted the company provisional authority and a Certificate of Public Convenience and Necessity (CPCN), which was subsequently made permanent in September 1999. The company was granted “the authority to establish, operate and maintain the Intra-regional BIMP-EAGA1 Gateway and International Gateway facility/ties and to levy fees, charges, tolls, or rates therefor.”

The breakout of hostilities in the region upon President Estrada’s declaration of all-out war on Muslim rebels led by the Moro Islamic Liberation Front forced the project to be put on indefinite hold. Its revival came in July 2009, when the Securities and Exchange Commission issued a confirmation re-listing Trilink’s license to operate. A year later, the company obtained the endorsement of the ARMM Regional Government to construct

1 Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area.

EA Trilink Corporation:Bringing ARMM Into

the FutureCase Study of EA Trilink Corp.’s

ARMM Investment

34 CHAPTER 5 EA Trilink Corp.: Bringing ARMM Into the Future

a pilot project for installing rural ICT facilities in the region. It subsequently became the Philippine signatory to BIMP-EAGA subregional cooperation agreements to promote connectivity and develop ICT facilities in the subregion. In July 2010, the company signed a Memorandum of Understanding with Infocom Federation of Brunei (IFB) to pursue a Rural ICT Pilot Project for BIMP-EAGA, with the expansion covering the whole of Mindanao and Palawan provinces. In the same month, it also became an initial party member to the BIMP-EAGA Submarine (BES) Cable consortium.

Before then, a Manila-based Filipino group led by Dr. Alfredo C. Panizales, formerly with Domestic Satellite Philippines Inc. (DOMSAT), had bought out the Malaysian shares in the company, thereby gaining 80% ownership. East Asia Global Alliance, through its Chairman Douglas E. Railton, subsequently bought 40% of the shares, making the company 60% Filipino-owned and 40% foreign-owned. Its company prospectus now describes EA Trilink Corpo. as “an Asian regional telecommunications company based in the Philippines, engaged in termination services through its International Gateway Facility (IGF), in the process of two ICT rollouts and development of a wireless landline operation in the ARMM.”

The company holds a number of telecommunication licenses including for broadband services, IGF, ICT, mobile and data services, landline and broadcast services. It also operates the only IGF located outside of Luzon (and one of four in the country), and holds the only telecommunication franchise in the ARMM.

Business Strategy and Operations

At present, EA Trilink Corp. remains at the preparatory stages of its intended business operations in the ARMM, having spent the last two years awaiting enabling decisions and agreements at the BIMP-EAGA intergovernmental level. Since its services to be provided to the ARMM are part of the sub-regional initiative, it has been unable to move forward without the requisite official agreements signed among BIMP-EAGA officials.

One of the final impediments to project commencement was cleared at the last ASEAN Summit meeting held in April 2012 at Phnom Penh, Cambodia. The gathering of ASEAN leaders provided the opportunity for a side meeting on the BIMP-EAGA initiatives to approve the subregional telecom and ICT agreement. This paves the way for Trilink to proceed with its ARMM projects.

At full operation, Trilink will provide its services under four components: (1) International Gateway Facility (IGF), (2) Information and Communications Technology (ICT), (3) Broadband, and (4) Wireless Landline.

For its International Gateway Facility, Trilink will locate switches in Makati City, Cotabato City and Zamboanga City. The company currently operates a 66-seat call center at its office in Makati City, site of its existing IGF switch in Luzon. The BIMP-EAGA Submarine (BES) Cable connecting to Southeast Asia and the rest of the world will terminate in Trilink’s IGF


Switch located in Zamboanga City. By establishing the IGF in Mindanao and in the vicinity of ARMM, Trilink provides ARMM residents and businesses with voice, data and broadband services as mandated in its license. Revenue will be generated through interconnection agreements with international and national carriers and aggregators, and by charging toll fees for international transmission. The IGF will also directly meet the requirements of the other three service offerings of Trilink for Broadband, ICT and Wireless Landline.

Trilink intends to roll out its Information and Communication Technology (ICT) program in two separate packages. One, in cooperation with Infocom Federation of Brunei (IFB), it will introduce a pilot rural ICT program under the umbrella of the BIMP-EAGA organization using existing satellite coverage to offer rural communities connectivity throughout the Trilink ICT technology program. Two, Trilink will establish a satellite-based hub in Cebu supporting the ICT services network. The company has opted to employ a satellite system to expedite the deployment of the ICT network throughout the archipelago in a way that reduces construction costs while maximizing market coverage. Trilink’s Broadband Services will reach out to the wider market through e-Kiosks franchised to local entrepreneurs, at P300,000 to P1 million per franchise, with a target of 2,400 e-Kiosks to be established in all barangays all over ARMM. The e-Kiosks will offer value-added services such as Internet access, Internet-based voice calls, wireless broadband, IP camera, and electronic financial services such as point-of-sale (POS), money remittance and debit cards.

Finally, Trilink will market Wireless Landline Services to subscribers throughout the ARMM region for homes, offices, and other establishments with the need for mobile connectivity. This will fill in the telecommunication services gap in ARMM, where most areas are generally either unserved or underserved, with several sizable cities still having no landline capabilities at present. The company will earn revenue from monthly and usage charges.

EA Trilink Project Milestones

6 February 1996 ARMM Act No. 47 establishing the Franchise of Trilink was enacted as law in the autonomous region

25 March 1998 Trilink granted Provisional Authority, a Certificate of Public Con-venience and necessity (CPCN), by the NTC-ARMM

9 September 1998 NTC assigned the International Signaling Point Code “5-033-6” and the National Signaling Point Code “300 and 301”

11 November 1998 DOTC-ARMM extends Trilink’s provisional authority by six months

July 2009 SEC issued confirmation re-listing Trilink license (SEC No. AS95-10787)


21 September 1999 Trilink’s Provisional Authority made permanent and granted a CPCN and among other things, granted “the authority to establish, operate and maintain Intra-regional BIMP-EAGA Gateway and International Gateway facility/ties and to levy fees, charges, tolls, or rates therefor”

11-12 November 2009 The fruitful meeting of the 5th BIMP-EAGA Working Group on ICT held in Cagayan De Oro City provided opportunity for EA Trilink to present to the Working Group the Rural ICT program for ARMM.

15 December 2009 Signed JVA with Planet Online ASEAN for the construction of an ASEAN Wimax network and other telecom services

18 January 2010 Signed wholesale service agreement with Smart Telecom, Co. Ltd

5-6 April 2010 At the BIMP-EAGA CEO Meeting in Brunei the same Rural ICT Program has been endorsed by the CEO Meeting and recommended to conduct a Pilot project for Southern Philippines and Brunei.

23 April 23 2010 EA Trilink obtained the Endorsement from the ARMM Regional Governor Adiong for the Rural ICT Project in ARMM.

2 June 2010 Received endorsement of ARMM Government to construct Pilot pro-ject for Rural ICT. The Philippine (P-EAGA) ICT Working Group endorsed the same Rural ICT program for ARMM in its meeting held last at NTC Main Office in Manila.

16 June 16 2010 The Rural ICT Project for ARMM was formally submitted to MED-CO Chairman Dureza and DTI’s USEC as required by ADB.

6 July 2010 Signed Memorandum of Understanding with Infocom Federation of Brunei (IFB) to construct Rural ICT Pilot Project for BIMP-EAGA with the expansion covering the whole of Mindanao and Palawan provinces

5-8 July 2010 A joint meeting of the BIMP-EAGA ICT Working Group and TIICTD Cluster Meeting were held in Balikpapan, Indonesia and en-dorsed infrastructure projects – two of which are Trilink’s proposed Rural ICT Project for ARMM and the Submarine Cable Rink.

6 July 2010 An MOU was signed between EA Trilink and Infocom Federation of Brunei to implement the Rural ICT Pilot projects.

8 July 2010 The Chairman of the BIMP-EAGA TIICTD cluster fully endorsed the Rural ICT Project of EA Trilink.

29 July 2010 Initial Party member to BIMP-EAGA Submarine (BES) Cable con-sortium; Satellite-based ICT Pilot project implementation in conjunc-tion with NIAT & Telecom Brunei (TelBru)

5 August 2010 Partnership Agreement with Centrex Telecom (HKG/Japan) for International Gateway Operation (Voice termination), prepaid card services


12 August 2010 Signed Service Agreement with Villagenet (Cambodia), the manage-ment company of Cambodia Village Phone with 7,000 kiosks serving Cambodia, for ICT Services, Mobile Banking and Value Added Services

25 August 2010 Joint Venture Agreement with NAISCORP (Vietnam) for distribu-tion of Value Added Services from Vietnam to the Philippines and Rest-of-the-World

31 August 2010 Signed Carrier Service Agreement with One tone (HKG) for A-Z services, POP operation in HKG

28-29 September 2010 The Senior Officials Meeting and Ministerial Meeting held in Kuch-ing, Malaysia approved the endorsement of the TIICTD Cluster for the implementation of the ICT project and BES Cable Rink.

1 October 2010 Adoption for implementation of Trilink s ICT Rural Project for BIMP-EAGA including the Mindanao and Palawan provinces by the Ministerial Meeting held in Kuching, Sarawak

1 October 2010 Adoption for implementation of the BIMP-EAGA Submarine (BES) Cable project by the Ministerial meeting, where Trilink is lead propo-nent for the Philippine Zamboanga landing station and IGF Facilities

4 November 2010 Signed Reciprocal Carrier Service Agreement with LuckyTone Com-munication, Ltd. Of Taiwan to provide international voice services and other associated services

10 December 2010 Signed joint Venture Agreement with Millenium Industrial Com-mercial Corporation (MICC) to construct, operate and provide a satellite-based communication services (Teleport) in Cebu

1 February 2011 Signed IGF-IGF Interconnection Agreements with Eastern Telecom-munications (Phil) Inc. (ETPI) and Telecommunications Technolo-gies (Phil) Inc., for transmission of incoming and outgoing interna-tional voice and data traffic

16 February 2011 Signed Supplier s Agreement with Enhanced Communications for satellite System for Rural ICT Project.

11-12 January 2012 The BIMP-EAGA Strategic Planning Meeting (SPM) held at New World Hotel in Makati City approved the Implementation Blueprint (IB) for the 2-year rolling program that included the Rural ICT Project of EA Trilink.

20 January 2012 At the invitation of the Eisenhower Fellows Association of the Phil., Trilink presented an update on the ICT Project at the Forum on Investment in Mindanao Conflict Areas.

5 April 5 2012 Philippine President Benigno Aquino Jr. presented at the ASEAN Leaders Meeting in Phnom Penh, Cambodia highlights of the BIMP-EAGA Implementation Blueprint including the Rural ICT Project.


Hurdles and Enablers

Since its establishment in 1996, Trilink had to contend with changes in the overall political environment surrounding the ARMM, including changes in the national and regional political leadership, and developments in the political conflict in Muslim Mindanao. The unsettled situation in the region brought about by the escalation of military hostilities under President Estrada led to the temporary shelving of the company’s proposed telecommunication projects in ARMM. This led to a long hiatus in the project’s implementation.

At one point, a former Regional Governor facilitated the entry of another competing investor, threatening the viability of the Trilink investment, which was premised on having an exclusive franchise in the ARMM. Fortunately for Trilink, the other group did not pursue their investment. The NTC-ARMM has since provided five years exclusivity for Trilink’s telecommunications project.

The BIMP-EAGA connection (i.e., pursuing its projects in ARMM as part of the subregional collaborative ICT initiatives) proved to be both an advantage and disadvantage for Trilink. The advantage lay in the strengthened government commitment to the project, being governed by a multilateral agreement among four countries. The disadvantage lay in the slow pace of progress in obtaining approvals and clearance to proceed, which had to wait until concerned ASEAN and BIMP-EAGA officials had met and reached agreement.

Trilink obtained certification for its project from the ARMM Regional Board of Investments, securing fiscal incentives for 11 years from approval. The company was given two years to roll out its project. However, as indicated above, various delays in obtaining the requisite approvals and clearances from the BIMP-EAGA have pushed the schedule back. Dr. Panizales thus argues that the reckoning of the period for which the BOI incentives may be enjoyed should be counted from the actual start of the project.

The company as currently constituted is a partnership between Panizales’s group composed of Manila-based Christians, ARMM-based Muslim principals (Datu Sampaco), and Vietnam-based East Asia Global Alliance (Douglas Railton). Panizales attests that differences in religious and cultural background has never been an issue in doing business with their ARMM partners. What is important, he asserts, is developing a sound relationship of trust and confidence with the host partners. He sees the critical importance of ensuring local ownership of the investment project; hence, having an influential local partner (Datu Sampaco in Trilink’s case) is vital. Panizales believes that ideally, the investor

What is important, he asserts, is developing a sound relationship of trust and confidence with the host partners.


firm must be seen as a Muslim company, or at least one that the Muslim community can easily identify with. A former MNLF commander has been chosen as the company’s liaison officer, helping facilitate the company’s interaction and dealings with the ARMM Regional Government and local governments and stakeholders.

Next Steps

Trilink is ready to begin its investment project in ARMM after obtaining the needed go signal from the BIMP-EAGA authorities in the April 2012 ASEAN meeting in Phnom Penh. The next step is an investor’s forum to mobilise interest in the franchises for e-Kiosks to be set up all over the ARMM.

Several prominent individuals from ARMM, both in the island provinces and on the mainland, have already expressed interest in the franchises. Already, 20 definite sites for e-Kiosks with interested franchisees have been identified. Meanwhile, clearance is being awaited from the provincial TESDA2 office in Sultan Kudarat for Trilink’s Network Operations Center to be located in its premises. Otherwise, the key requisites for pursuing full business operations are in place. Even financing will not pose any difficulties, according to Panizales, who has been assured by his financiers that duly signed franchise agreements for the e-Kiosks are enough to provide the security required by bank creditors.

Asked what risks the company sees ahead as it prepares to begin rolling out its projects in the region, Panizales can only point to a possible failure of the Peace Process, i.e., the ongoing negotiations between the Philippine Government and the MILF. The company had already been held back before by the breakdown of peace in the region. It can only hope that it will not be interrupted anew by another such breakdown in the pursuit of its self-appointed mission of bringing the people of ARMM into the 21st century through wide access to state of the art information and communication technology.

References

Personal interview with Dr. Alfredo Panizales, May 27, 2012, Los Baños, Laguna.

“EA Trilink Corporation.” Powerpoint presentation.

“ICT Initiative And Services Development Project For The Autonomous Region in Muslim Mindanao (ARMM).” Project Document submitted to BIMP-EAGA.

2 Technical Education and Skills Development Authority

40 CHAPTER 6 Air 21 - Marawi City: Treading Tricky Terrain

Air 21 - Marawi City: Treading Tricky TerrainCase Study of Logistics Firm Air2100/Fedex-Marawi City

Background

Air2100/Fedex is the only logistics and delivery firm currently operating in Marawi City. Abdul Rashid “Elian” Macala decided to get into the business in 2004 despite doubts from friends and associates. Most of the locals looked down on the business, associating it with the lowly function of a messenger, and people around him wondered why he would bother with such a business when he already had a successful farm enterprise.

At the time he decided to invest in an Air2100/Fedex branch, Macala had already made a name for himself in farming and agribusiness. He had previously worked in the unsuccessful electoral bid for Regional Governor of Datu Ibrahim “Toto” Paglas, who later influenced him to go into farming. Paglas introduced him to Agriculture Secretary Luis Lorenzo and convinced him to venture into hybrid rice production on 100 hectares of land owned by his family and relatives. His farm became a showcase of successful hybrid rice farming for the Department of Agriculture, which assisted with postharvest facilities including a rice mill. Former President Gloria Macapagal Arroyo and Secretary Lorenzo even presided over the farm’s launching on December 20, 2002. Macala recounts how he gained prominence with his successful farm operation, which made him the target of political intrigue by those who felt threatened by his rising prominence in Lanao del Sur and in the region.

He found his farm enterprise being undermined and subjected to pressures and difficulties by local political leaders who did not want to see him gain popularity, especially as his name began to be floated as candidate to be the next mayor of the Municipality of Lumba-

CHAPTER 6

“The secret of successfully investing in ARMM is dedication and perseverance in the face of various challenges.”

– Abdul Rashid “Elian” Macala

CHAPTER 6 Air 21 - Marawi City: Treading Tricky Terrain 41

Bayabao. His entry into the logistics business first came about when he was asked to escort and secure Ms. Sabrina Artadi, former Binibining Pilipinas World 1987 and at the time a Federal Express (FedEx) executive, who had come to Marawi City in 2004 to attend to some personal legal matters. Upon discovering that no courier services were available there, Artadi encouraged him to open a local branch for Air2100/FedEx.1 She subsequently introduced Macala to FedEx country president Alberto Lina, who welcomed the idea of opening a Marawi branch of Air2100/FedEx.

His was not the first effort at operating a logistics business in Marawi. LBC had operated a branch there in the past, but decided to close down in the face of peculiar difficulties. For one thing, few people had any form of official identification, which is a problem for a firm that needs to ensure delivery of its cargo to the correct addressees.

Macala said a claimant once brought a known sultan along to certify to his identity when he couldn’t bring an ID. But the LBC employee still would not accommodate the customer in the face of a strict company policy requiring an ID from recipient claimants. This angered the sultan guarantor, who slapped the LBC counter staff and threatened the employee and the company. Incidents of a similar nature led LBC to pull out, making Iligan City the nearest point of delivery for residents of Marawi City and environs. People would thus have to take the extra effort and expense to travel to Iligan City to send out or take delivery of their parcels, letters or remittances.

This was the gap that Macala sought to fill with his investment in an Air21 branch in Marawi City. He lamented how Marawi, in spite of having become a city even earlier than Cotabato and Iligan, still has none of the usual amenities such as fastfood chains or shopping malls, and people cannot feel safe going out at night. He hoped that his small investment in a logistics company could contribute to helping Marawi break out of this backwardness.

Business Operations and Challenges

Elian Macala quickly realized that the absence of a courier delivery service office in Marawi City was not necessarily an undesirable situation for certain customers. Some clients welcomed the excuse to justify a trip to Iligan, charging their offices for gasoline or travel expenses while attending to other personal matters. Thus, when he opened the Air21 office in Marawi, he faced the challenge of uncertain market reception. His offer of free pick up service for outgoing letters and parcels from the sending offices did not turn out to be an attractive come-on for the above types of clients. He also had to struggle with people’s familiarity with rival LBC, whose nearest office was now in Iligan. He is now in discussions with the LBC Company on the possibility of reopening an LBC branch in Marawi even as he continues to operate Air2100/FedEx.

The idea of an American company (FedEx) doing business in Marawi City reportedly faced some resistance, particularly from the MNLF and MILF, especially as the latter had

1 Air 2100 is the domestic courier arm of international air freight courier firm Federal Express (FedEx).

42 CHAPTER 6 Air 21 - Marawi City: Treading Tricky Terrain

been listed by the US government as a terrorist organization at the time. He managed to overcome this resistance by explaining that FedEx was doing active and welcome business in the Islamic countries of the Middle East, notwithstanding the US’ “War on Terror.”

Subsequently, when the FedEx branch in Iligan was closed upon the migration of its manager to Australia, the Iligan business of the company was subsumed under Macala’s Air21 Marawi City branch. The branch became the exclusive handler of all FedEx mail and cargo from and for Muslim Mindanao.

The business operates as a franchise (from FedEx Philippines) and earns revenues from commissions with every shipment (mail or parcel) handled. Macala witnessed first-hand how government shipments of computers, equipment and medicines from the Department of Trade and Industry, Department of Education and Department of Health in Manila had been addressed to non-existent schools and health centers. These were claimed by addressees at their Marawi office, with “principals” and “local health officers” explaining that their school buildings and health centers were “under construction.” Macala confirmed that there were none. He expresses sadness at how this form of corruption had reached such large and widespread incidence in the ARMM particularly under past leadership, which his company had inadvertently become direct witness to while trying very hard to avoid being party to such irregularities.

Attracting workers from among the Muslim community to work as messengers proved to be a challenge, especially as the messenger’s job was seen as a lowly profession. All of his messengers are Christians. There is also a degree of risk involved in the job; one of his messengers has been missing for two years, after disappearing without a trace together with his service motorcycle. He now employs 80 workers, for both Air21 and his associated trucking business. He admits to paying less than the minimum wage, with messengers receiving a fixed salary of P4,500 per month, with no 13th month Christmas bonus as is customary elsewhere. However, he grants a Ramadan bonus to employees and also advances loans to employees for emergencies, payable by salary deduction. Macala argues that greater flexibility is warranted in the application of national labor laws in ARMM due to peculiar labor market conditions and cultural attributes and practices.

Macala’s allied trucking business operates 10 ten-wheeler trucks, two forwarders, two Elf trucks, three vans and seven motorcycles that also handle equipment for the National Grid Corporation of the Philippines, among others. Macala’s Air2100/FedEx franchise has seen business growth through time, as it handles mail and cargo for both private individuals and institutions/offices. Incoming and outgoing mail are more or less equal in volume, with packages outnumbering letters. He expects to see even more growth in the business,

Macala believes it crucial for an outside potential ARMM investor to look for a local partner with a good track record.

CHAPTER 6 Air 21 - Marawi City: Treading Tricky Terrain 43

especially with the ongoing governance reforms in ARMM under the new leadership of OIC Regional Governor Mujiv Hataman and his Cabinet.

“Secrets” of Doing Business in ARMM

Based on his experience and observations through the years, Macala believes it crucial for an outside potential ARMM investor to look for a local partner with a good track record. Local business partners must be well-respected and influential. It is useful for such partners to be Datus or of royal lineage, with Datu Ibrahim “Toto” Paglas being a prime example in the case of La Frutera.

At the same time, the local partner must be business-inclined and possess a long-term business perspective, and interested in maintaining a sustainable business. One needs to research the business background of a prospective local partner. This is not very hard to do. There are professionals from government, academic, business and civil society circles that can provide information. He warns against dealing with local partners who would only use an investor-partner for political reasons.

In Macala’s view, ARMM-DTI would be the logical point of first contact for a new prospective investor. It is the agency that provides assistance to the business chambers. There are two business groups existing in Marawi City: the Marawi Chamber and the Maranao Chamber. But Macala believes that the ARMM Business Council should work to ensure that Chambers are legitimate business groups, composed of members who are actual businessmen (he reveals that even known gun-runners are passing themselves off to be businessmen and have joined such chambers). He mentions one chamber that received generous assistance from USAID, but whose activities were not sustained and whose equipment vanished.

Based on his own direct experience, Macala believes that the secret of successfully investing in ARMM is dedication and perseverance in the face of challenges. In the case of his Air21 franchise, he faced skepticism and even derision from friends and peers for going into what they considered a lowly business. But he pushed on. He believes that an investor need not come in big to succeed, and should be prepared to start small initially, and then growing the business through hard work and perseverance through time. Macala asserts that his Air21 franchise in Marawi City has become a door opener for him. The wider business contacts this enterprise opened up for him paved the way for his entry into several other lines of related business which now, taken all together, bring returns to his original Air21 investment far greater than what one would normally achieve from a single investment. And doing it in the relatively uncharted market of the ARMM has proven to be both a business advantage as well as an opportunity to be of help in uplifting communities that need help the most.

Reference:

Personal interview with Abdul Rashid “Elian” Macala, Owner and Manager, Macala Business Group, March 28, 2012, Al Nor Convention Center, Cotabato City.

44 CHAPTER 7 Investing Successfully in ARMM: A Synthesis

Investing Successfully in ARMM: A Synthesis

What are the “secrets” to investing successfully in Muslim Mindanao?

The experiences detailed in the preceding chapters show that it is possible to build profitable, sustainable businesses in ARMM. However, as in any undertaking, investors may also fail and lose money, and anecdotal evidence suggests that there may be more examples of failed investments than successful ones. In this final chapter, we attempt to distill the factors that contribute to successful investments.

Evidences from the six firms examined in the preceding chapters suggest that there are three key principles that underpin successful investments, namely;

1. Partner with an influential and enlightened local leader.2. Invest time and effort in building trust and confidence with local counterparts,

leaders and people. 3. Respect and work within local cultural norms and practices, and turn them into

a positive factor for the enterprise.

The experiences of the featured investors also point to a number of general recommendations of good practices, including the following:

• Provide appropriate incentive systems to foster higher productivity and loyalty.• Take deliberate measures to promote workforce motivation, discipline and

harmony.• Harness complementary businesses for reducing costs and optimizing

company resources.• Consider providing for own source of power, especially via renewable energy

facilities that tap local resources.

CHAPTER 7

CHAPTER 7 Investing Successfully in ARMM: A Synthesis 45

The six firms examined here had varied experiences conditioned by their particular circumstances, products, and/or management styles and philosophies. But they also faced common challenges, just like other investors in Muslim Mindanao. These include difficulties associated with land access and tenure; poor or inadequate infrastructure; weaknesses in local governance including graft and corruption; and relatively unskilled labour.

There were also difficulties associated with differing attitudes and norms arising from cultural or historical factors. For example, there were challenges, at least initially, associated with employing workers in areas with a weak tradition in regular and formal paid employment, particularly in achieving the discipline to report for work daily at designated hours. Matling, La Frutera and BJ Coconut Oil Mill cited this as one of their early challenges. Air21-Marawi City had to deal with a market where the firm’s proximity and accessibility, rather than being a business advantage, was actually an unwelcome convenience for a significant portion of its potential clientele – in particular, those who preferred having the excuse having to send or take delivery of letters/parcels to justify making a trip to Iligan City and thus attend to other concerns there on official time and expense.

In the face of these potential hurdles, useful lessons may be gleaned from the experience and coping mechanisms employed by the case study firms featured here. In turn, these could provide useful guidance to prospective new investors into the region. These may be summed up in the general strategies/principles and good practices listed below.

La Frutera packing house


General Strategies/Principles

While the following strategies and principles are mostly self-evident at a general level, the individual firms’ respective approaches and methods as detailed in the preceding case studies should be illustrative of how new investors might put them into practice under their own particular circumstances.

For an outside investor, finding a “Toto Paglas” to partner with is key. For the partnership to succeed and endure, it is important that a mutually beneficial business relationship be established with the local leader-partner to ensure a common stake in the success of the investment. Observers have pointed out that it was not entirely out of benevolence that Toto Paglas facilitated the entry and operation of La Frutera in the municipality he led at the time of its establishment. Given exclusive control over the trucking and security requirements of La Frutera through companies controlled by PagCorp, he had a beneficial business interest in the partnership, thus a real stake in its success. Similarly, partnership with Datu Sampaco, who maintains a 20% stake in EA Trilink, is crucial as he provides the

BJ Coco mill.

Partner with an influential and enlightened local leader.


key link to the local authorities and populace to secure their acceptance and support for the company.

Macala describes the desirable attributes of a local leader partner. Such local business partners must be well respected and influential, preferably a Datu or a person of royal lineage. The local partner must be business-inclined and forward-looking, with a long-term business perspective. Prior research on the business background of a prospective local partner is essential, but this need not take undue effort as there are ample sources of relevant information on this in government, academic, business and civil society circles. Macala particularly cautions prospective investors against dealing with local partners who would only use an investment partnership for political ends.

The case of Agumil shows that a formal business partnership with a local leader need not be essential, however. Good relations with local leaders and residents achieved through deliberate and painstaking efforts at trust and confidence building, as further discussed below, may be good enough. Such a partnership was of course not relevant to the cases of BJ Coconut Oil, Matling and Air21 Marawi City, inasmuch as the owner-investors were established locals with a historical, political or cultural foothold in their particular area.

Beyond the benefit of working with someone who “knows the terrain,” such a local partner can be essential in gaining secure access to needed large areas of land (i.e., in the case of an agribusiness enterprise). For such investments, access alone is not sufficient. Ensured stability of that access over a reasonably long period (e.g., 25-50 years) is essential to entice an investor to commit resources to an investment project where land is critical.

This issue of stability of access to a given piece of land is particularly important in the context of Muslim Mindanao, where the unique history of the area gives rise to a perhaps greater-than-usual propensity for conflicting land claims. Thus, holding a government land title, whether genuine or spurious, is often not assurance enough that one can have unhampered use of a given land property. Possessing the legal instrument for ownership or control over land (e.g., land title, tax declaration), or partnership with someone who does, is a necessary condition, but not always a sufficient condition to guarantee security of land access. That guarantee can invariably be provided by an influential local leader, especially if that leader has good rapport with organized political groups such as and especially the MILF and MNLF.

The other important role that a powerful and influential local partner can play – and has played in the case of La Frutera – is that of managing the locally hired work force. This relieves the outside investor of having to contend with worker discipline, a matter that the local leader-partner is immensely better placed to handle. The respect that a Datu or person of royalty commands over local citizens including locally hired workers is the most effective basis for asserting management control and enforcing discipline in the ranks of the workforce. Thus, an arrangement whereby the local leader-partner acts as labour contractor to the external investor works well for the latter as it did for Unifrutti in La Frutera, and may be the preferred option over direct management of the local workforce.


The value of establishing trust, while obvious, cannot be overemphasized. This is true for any external investor coming into new territory, and is of particular importance in Muslim Mindanao where historical divisions put even greater premium on mutual trust and confidence within a business relationship.

La Frutera’s experience is instructive; John Perrine, Senen Bacani and Edgar Bullecer each made sincere and deliberate moves to demonstrate sincerity and earn the trust of their PagCorp counterparts and of their workers. Personal gestures are important, such as joining Muslim workers in their worship, or Bullecer’s practice of working, eating and living among the locals. In Agumil, C.K. Chang similarly worked, ate and slept together with his nursery workers; Phil Roy Malana did the same as he established the beginnings of the Buluan palm oil mill. A key part of such trust building is bridging religious differences. Apart from personal gestures in this regard on the part of its executives, La Frutera deliberately fostered religious understanding in the workplace by requiring Christian and Muslim workers to spend time studying each other’s faiths. The Spencers had earned the trust of the local community in Malabang through their sincere gestures of kindness and charity long before conflict arose in the area. Even a local investor like Elian Macala had to initially overcome the challenge of earning the trust of his prospective local market for a company perceived to be an “enemy” owing to its US links.

Winning the trust of local partners is essential at the outset for the business partnership to even take off. Toto Paglas came to trust John Perrine enough to make a solemn pledge to him, sealed in his own blood, to secure Unifrutti’s La Frutera investment. Trust for C.K. Chang was manifested in the way he came to be described by Muslim leaders in Agumil’s production areas as a man “sent by God” who was not to be harassed or harmed. A relationship of trust clearly marked the business partnership among Datu Sampaco, the group of Fred Panizales and that of Douglas Railton, which permitted them to move forward in their joint venture in EA Trilink.

The trust, hence cooperation, of local workers is just as crucial in ensuring the success of the business investment. Smooth operation of the business enterprise hinges on good relations between owners and managers on one hand and the work force who make the enterprise run, on the other. Bullecer in La Frutera and both Chang and Malana in Agumil established this trust in the early stages of their respective enterprises. For them, this involved bridging the usual gap that exists between management and workers by working, eating and living with ordinary workers. Part of demonstrating this same trust is respecting traditional social hierarchies in defining management and supervisory roles in the company. La Frutera, Matling and BJ Coconut Oil explicitly cited this factor as of particular importance.

Invest time and effort in building trust and confidence with local counterparts, leaders and people.


The trust of the host community – including rebellious elements therein – is likewise essential for the investment to thrive and take root. For Matling, it meant the establishment of beneficial service institutions like a hospital, a school and a feeding center for the poor serving the needs of the local populace. Its decision to yield the trucking business to its farmer-growers to give them added income opportunities, even to the extent of assisting them in the acquisition of trucks, was likewise an important trust-building measure. For La Frutera, it involved entrusting maintenance of security of the enterprise to a local group, composed mostly of known MILF combatants, who elsewhere would have been thought to be the very elements to guard against.1 Agumil, through Malana, earned this trust early on by recruiting workers directly from around the community when the preparatory work

towards building the factory began, starting from land clearing, to construction, and on to actual plant operation. Through time, the company also sought to build trust through a transparent pricing policy for its purchases of oil palm fruit, coupled with a deliberate effort to pay better prices relative to its close competitors.2 Assistance to growers in

1 This approach contrasted with that taken by a similar neighboring enterprise, wherein security was entrusted to “imported” Ilongo guards. Both Matling and BJ Coconut Oil took the traditional approach of seeking and obtaining military protection via establishment of a military detachment within or near the presence of the company.

2 Still, this has not stopped complaints from being raised about the company’s allegedly low prices paid to oil palm growers for their palm fruit. Chang asserts that such claims are misplaced, and professes willingness to personally explain Agumil’s pricing formula to any grower who asks.

Agumil oil mill.


forming cooperatives and close hand-holding in the establishment and operation of growers’ oil palm farms also provided a venue for building trust and goodwill with the host communities. Like Agumil, BJ Coconut Oil also offered better prices for the copra sold to it by the surrounding coconut farmers, even after accounting for the difference of transport costs to Zamboanga mills. It also helped its coconut farmer suppliers get organized to permit them to collectively address common concerns. For Elian Macala’s local Air21 branch, it entailed a painstaking personal communication drive with the local communities to dispel sentiments that his enterprise’s affiliation with an American company compromised his public’s trust.

Investing in trust and confidence building with local partners, workers and the local community is an imperative that cannot be short-circuited or rushed. The process itself could take years of patient and sincere efforts, with the greater onus falling on the incoming investor. As in the case of La Frutera, the process can be a tortuous one that could face serious tests from time to time. In the end, winning trust begets attractive rewards in terms of profitability, stability and sustainability of the enterprise. Investing in building trust is thus a high-return undertaking in itself.

Managing an enterprise within a different local culture from what the investor is accustomed to demands adaptability on the part of the enterprise. To expect the local community and local workers to adjust and adapt to the external investor’s (alien) enterprise culture is to court instability and failure. Matling was keenly sensitive to the sense of maratabat (honor) among the local host populace, and harnessed this in providing effective security for their supervisors under threat. Agumil actively involves local leaders (including Datus and the local mayor) in settling conflicts within the workplace, in respect of the traditional authority vested by cultural and historical tradition.

La Frutera deliberately moved to adapt to local norms and practices, via moves such as institutionalizing sumpat or job-sharing by its workers; respecting and even adopting Islamic practices (including adjusting work hours during the Ramadan fast) in the workplace; and using social hierarchies to advantage in defining the management structures for workers. BJ Coconut Oil similarly ensured that those in supervisory positions inherently command

Respect and work within local cultural norms and practices, and turn them into a positive factor for the enterprise.


the respect of their subordinates by virtue of social status vested by historical/cultural tradition or royalty.

EA Trilink’s experience demonstrates that differences in religious and cultural background need not be an issue, and are even irrelevant, in doing business with ARMM partners. What is important, as asserted by Dr. Panizales, is developing a sound relationship of trust and confidence with the host partners. Of critical importance is ensuring local ownership of the investment project. In Panizales’s view, the investor firm would best be seen publicly as a Muslim company, or at least one that the Muslim community can readily identify with. Efforts to adjust and adapt to local cultural norms, practices and expectations have paid off well in terms of worker productivity and enterprise stability. It thus makes eminent business sense to place due regard for this factor in an ARMM investor’s overall business philosophy and strategy.

Good Practices

In any business situation, but more especially in ARMM, creativity and resourcefulness are vital for an enterprise to survive under circumstances that tend to be more trying than the normal. Certain good practices employed by the case study firms to deal with peculiar challenges that tend to raise the cost of doing business in the region can be instructive to prospective new investors. These good practices include incentive systems that promote productivity and loyalty; measures for workforce motivation, discipline and harmony; cost-reducing complementary business activities; and provision of independent in-house power supply.

By compensating its plantation and packinghouse workforce on a piece rate basis, La Frutera encouraged higher productivity while managing to even well exceed minimum wage requirements. Further reinforcing this was the grant of productivity bonuses for exceeding defined productivity standards. This compensation structure is seen to be instrumental to the significantly higher productivity achieved by La Frutera relative to comparable farms in the area. Lessor landowners were likewise kept motivated through annual awards of Haj travel grants by raffle. The company thus made good use of appropriate incentives that promoted both higher productivity and industrial peace.

Provide appropriate incentive systems to foster higher productivity and loyalty.


Agumil consciously sought to offer better prices to its growers relative to those offered by competitors, at the same time maintaining transparency in its pricing policy. BJ Coconut Oil similarly kept its copra purchase price at a level superior to those offered by local copra traders who ship and sell the product to Zamboanga-based oil mills, even after considering transport costs to Zamboanga. Thus, even the local copra traders found it advantageous to sell their copra to BJ Coconut Oil. Matling’s land preparation subsidy to its cooperative member growers similarly fostered loyalty on the part of the latter, thereby helping secure its continued access to raw material supplies.

Bacani particularly cited the importance of the “walang maiiwanan” (no one will be left behind) principle in maintaining workforce morale in La Frutera. The company’s Core Values Training Program, along with other motivational initiatives including a sports program, has helped the company maintain a cohesive and well-motivated workforce. The company has also amply provided opportunities for growth and professional advancement for employees. Muslim workers have increasingly found their way into management positions with the company’s deliberate efforts for human resource development and training. The company found it advantageous to rely on local partner PagCorp and its principal Datu Toto to manage worker discipline. This way, discipline among the ranks was maintained in a way that respected the local culture while avoiding adverse repercussions for the

Take deliberate measures to promote workforcemotivation, discipline and harmony.


company from workers or the local community. The labour-contracting arrangement with PagCorp. thus allowed the investor to minimize if not avoid the common challenges attendant to worker-management relations particularly in new territory. However, in so doing, the company had to be careful to keep within the limits of national labor laws, even as it argues for greater flexibility in the application of certain regulations in the context of Muslim Mindanao.

In the case of Matling, the firm exercised flexibility in dealing with recalcitrant workers who refused to work in the fields, reassigning them to responsibilities not requiring fieldwork, such as land guards. Chang underscores the importance of not creating disparities among his workers in Agumil, especially as the Buluan mill has a mix of Ilongos and Muslims in its work force. Macala readily extended loans to his 80 workers to cope with emergencies, and paid a Ramadan bonus in lieu of a 13th month Christmas bonus to keep his workers motivated. In BJ Coconut Oil, Ben Loong stressed the importance of observing and respecting specific cultural norms and traditions of the local work force. Supervisors must inherently command the respect of their subordinates by virtue of social status vested by historical/cultural tradition or royalty. It is particularly untenable to put a worker of higher social stature under the supervision of one who is of lower social stature.

BJ Coconut Oil found ways to reduce its fuel and transport costs through its complementary business in shipping. Having its own ships also gave the company direct control over timing of shipments, an important advantage under market conditions that are constantly changing. The company saved around P2 per liter on diesel costs by purchasing the fuel at the depot price directly from the Petron depot, and used the company’s own two ships to transport the fuel to the plant, by using the diesel as ballast instead of seawater. Furthermore, branching into complementary businesses like coconut shell charcoal and abaca processing helped optimize equipment and facilities.

Agumil similarly saved on costs by producing its own oil palm seedlings under rigid quality control. Macala run a distinct trucking operation that also serviced the needs of his Air21 branch office, permitting him to optimize his vehicles. EA Trilink optimized the international gateway it already possessed even before the rollout of its ARMM operations by running a call center in its corporate premises in Makati.

Given the existing binding constraint of electric power supply reliability in ARMM and Mindanao in general, a new industrial investor may find it worthwhile to consider

Harness complementary businesses for reducing costsand optimizing company resources.

Consider providing for own source of power, especially via renewable energy facilities that tap local resources.


providing for at least part of its own power needs. BJ Coconut Oil decided to install its own power facility early in its operation upon experiencing the unreliability of power supplies from SULECO, recognizing that power supply reliability was crucial to the business. The firm installed standard diesel-fired power generating units to power its milling equipment. This provided them direct control, hence greater reliability, in meeting their power requirements, an advantage that outweighed additional costs entailed.

In the face of rising costs of petroleum and environmental concerns associated with hydrocarbon-based energy, renewable energy (particularly hydro and biomass-based power) are viable energy options especially in Mindanao. Matling tapped hydropower resources found within its premises to realize substantial savings in power costs. Both Matling and Agumil generated large volumes of biomass waste within their premises, in the form of cassava and oil palm biomass wastes, as they process their respective raw materials.3 Both firms have recently invested in biomass power plants to provide part of their power requirements. In 2011, Matling invested P24 million on a biomass power facility that uses dried cassava and rhiozome chips to power a steam turbine generator. Well before that, the company had already invested even more in a 1.5MW mini hydropower plant, with scope for up to 10MW of hydropower within its own property. Agumil invested P40 million to install a biogas power plant in Buluan, which could generate 1MW of power for its own use, out of the biomass waste from the crushed fruit bunches. In Chang’s estimate, up to 5MW of power can be generated from the biomass waste generated in their Buluan mill. Meanwhile, Agumil currently uses the excess biomass waste as organic fertilizer.

Policy Implications Many of the insights and lessons from the early movers featured in this volume could help prospective investors improve their chances for success as they decide to place their stakes in Muslim Mindanao. Still, government at the national, regional and local levels must play the key role of ensuring an enabling investment environment that fosters and induces private initiative rather than inhibits it through misplaced rules and restrictions. In the near future, assurance of the security of investors and of their investments and stability of the business environment continues to be the most prior concern the business community would raise with the government. Until the prevailing conflict is definitively addressed and a final peace agreement is achieved and implemented to everyone’s satisfaction, protection from government security forces would need to be convincingly assured. This was a crucial element in the case of BJ Coconut Oil’s investment decision, for example, as bank financing was not to be forthcoming without such assurance of security. Local insecurity and lawlessness can easily undermine all the factors for success identified above.

Also critical is the provision of the requisite public infrastructure for energy, transport, communication, water supply and irrigation. The persistent power shortage in Mindanao is

3 While similarly large volumes of biomass waste are generated in the coconut industry, biomass-fueled power generation had not been an economically viable option for BJ Coconut Oil Mill. This is because in the purchase of copra by the firm for processing into oil, these biomass wastes are left in individual coconut farms. Thus, there would be high costs entailed in the collection and assembly of coconut husks and shells from individual farms


a real impediment that is not limited to Muslim Mindanao. While investment in own power facilities especially renewable power is a recourse recommended above, government policies would also be highly instrumental here. For example, the decision for Agumil and Matling to invest in greater biomass power capacity or for Matling to invest in expanded mini hydropower facilities would depend on the policy and institutional environment governing electric power in Mindanao. A key consideration would be a mechanism that would permit the firms to sell excess individual power production to the grid via the proposed net metering scheme being studied by the government.

Elements in the policy environment that stifle investment and innovation and raise business costs in general also need to be addressed. These include anti-competitive rules such as cabotage and civil aviation restrictions, and rigid labor rules that may not necessarily promote the greatest good for the greatest number under the peculiar circumstances the region.

Given the unique environment in Muslim Mindanao, and in particular the urgent need for economic development to avoid slipping further behind the rest of the country, a strong argument can be made for extraordinary incentives and measures at least in the short to medium term. Apart from focused fiscal incentives, enticements could include an effective investment guarantee and insurance scheme, creative financial mechanisms that could include government equity participation in promising joint business ventures, and other forms of public-private partnerships to attract investment interest in the region. Assistance in gaining access to land, e.g., by the regional Department of Agrarian Reform or by LGUs individually or as allied LGU clusters, is also important. Finally, an effective and well-functioning point of contact for prospective investors – a “one-stop-shop” – is something that the ARMM Board of Investments, Department of Trade and Industry, the ARMM Business Council, and other relevant agencies and institutions are working together to provide. The task ahead is to move beyond investment promotion to investment facilitation, and ensure that investor interest turns into actual entry of investments that will boost jobs and incomes in the region.

Conclusion

Elian Macala asserts that the secret of successfully investing in Muslim Mindanao is dedication and perseverance in the face of various challenges. This could very well be the ultimate “secret” to investing successfully in the region, as exemplified in all of the case study firms featured in this volume. In his view, investors need not come in big to succeed, but can start modestly and then grow the business through time with hard work and perseverance. Large or small, great rewards await those who venture into this relatively uncharted but extremely fertile investment territory, both for themselves and for communities that have waited far too long for a better life.

***

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