-
Economic Modernization through Efficient Reforms and Governance
Enhancement (EMERGE) Unit 2003, 139 Corporate Center, 139 Valero
St., Salcedo Village, Makati City 1227, Philippines
Tel. No. (632) 752 0881 Fax No. (632) 752 2225
First American Chamber of Commerce Abroad
Technical Report
INVESTMENT CLIMATE IMPROVEMENT PROJECT (ICIP) MONITORING REPORT
MARCH 2006 FEBRUARY 2007 by Arlan Z. I. Brucal
Prepared for The American Chamber of Commerce of the Philippines
Submitted for review to USAID/Philippines OEDG
April 2007
-
Preface
This report is the result of technical assistance provided by
the Economic Modernization through Efficient Reforms and Governance
Enhancement (EMERGE) Activity, under contract with the CARANA
Corporation, Nathan Associates Inc. and The Peoples Group (TRG) to
the United States Agency for International Development, Manila,
Philippines (USAID/Philippines) (Contract No. AFP-I-00-00-03-00020
Delivery Order 800). The EMERGE Activity is intended to contribute
towards the Government of the Republic of the Philippines (GRP)
Medium Term Philippine Development Plan (MTPDP) and
USAID/Philippines Strategic Objective 2, Investment Climate Less
Constrained by Corruption and Poor Governance. The purpose of the
activity is to provide technical assistance to support economic
policy reforms that will cause sustainable economic growth and
enhance the competitiveness of the Philippine economy by augmenting
the efforts of Philippine pro-reform partners and stakeholders. The
American Chamber of Commerce in the Philippines (AmCham) submitted
an unsolicited proposal to EMERGE on January 25, 2006, for a grant
to set up a mechanism to identify and communicate to the Philippine
Government activities that will generate additional investments and
jobs in the country. It was called the Investment Climate
Improvement Project (ICIP), and the key actors were Mr. Robert M.
Sears, AmCham Executive Director, Mr. John D. Forbes, AmCham
Legislative Committee Chairman, and Mr. Robert W. Blume, AmCham
Desk Officer at the Philippine Board of Investments (BOI). Mr.
Richard Umali was added to the team as a Project Assistant. EMERGE
subsequently hired Mr. Arlan Z. I. Brucal to help AmCham draft this
and other summary reports. The views expressed and opinions
contained in this publication are those of the author and are not
necessarily those of USAID, the GRP, AmCham, EMERGE or the latters
parent organizations.
-
Table of Contents Executive Summary iii I. Introduction 1 II.
Conceptualizing the Investment Climate 2 III. Analysis of the
Philippine Investment Climate 3 A. Governance 3 B. Infrastructure 5
IV. Recent Developments in Investment Climate Components 6 A.
Governance 6 (i) Reduction in Bureaucracy and Corruption 6 (ii)
Improvements in Judicial, Regulatory and Enforcement 7 B.
Infrastructure 7 (i) Power Sector 7 (ii) Biofuels Sector 8 (iii)
Transportation 8 (iv) Financing 9 V. Investment Situation in the
Philippines 11 A. Approved Investments 11 B. Approved Foreign
Direct Investment 13 C. Domestic Capital Formation 17 VI Investment
Situation and Challenges in Key Sectors 21 A. Health and Retirement
Sector 21 B. Information and Communication Technology 23 C.
Manufacturing 25 D. Mining 27 E. Tourism 31 VII. Achieving Targets
for Local and Foreign Direct Investment 32
ii
-
Executive Summary As part of ICIP, the American Chamber of
Commerce of the Philippines (AmCham) organized and spearheaded an
informal network of private sector business firms or their
associations, with the aim of developing an effective capability in
the private business sector to monitor the business environment
that affects investment decisions. This Investment Climate
Monitoring Report looks at the key developments in the investment
climate in the country during the project period. As conceptualized
by the World Bank and the Asian Development Bank, the investment
climate is composed of three broad sets of factors: (1)
macro-fundamentals, (2) infrastructure, and (3) governance and
institutions.1 Analysis on the Investment Climate of the
Philippines. Reports from internationally recognized surveys and
publications, including, among others, The Global Competitiveness
Report 2006-2007, IMD World Competitiveness Yearbook, WB Doing
Business 2007, and 2006 Index of Economic Freedom, place
macroeconomic instability and inadequate infrastructure among top
concerns of the business sector in the Philippines. Indeed, the
Philippines continues to lag behind on key investment indicators,
such as in government efficiency, corruption, and tax
administration. Meanwhile, the country belongs to the lowest
quartile in terms of access to physical assets and to adequate and
inexpensive financing. Recent Developments in Investment Climate
Components. In the governance component, much of the government
intervention centered on efforts to reduce red tape and corruption.
Presidential Task Forces have been formed, such as the Anti-Red
Tape Task Force and the National Competitiveness Task Force, in
order to promote and develop result-oriented economic reforms and
programs that will help improve the investment climate in the
Philippines. The year 2006 also saw consensus building exercises
among public and private organizations, resulting in numerous
development agenda and, most importantly immediate government
actions such as executive issuances and memorandum orders that
addressed major concerns raised in the events. As regards
infrastructure, mixed progress in the power sector occurred in
2006. These developments centered on lowering power prices through
(a) National Power Corporation (NPC)s time-of-use program, which
allows lower pricing during periods of low demand, (b) lower-price
power for commercial and industrial consumers using 1KW+ monthly,
and (c) start of Wholesale Electricity Spot Market (WESM)
operations. Unprecedented interest in the biofuel investment was
also noted, particularly in biofuel production for domestic use and
for export, in anticipation of the mandatory blending requirements
stipulated in the Biofuels Act. In transportation sectors, major
financed projects have started construction (Subic-Clark-Tarlac
Expressway and Northrail). However, work on many others has barely
started (the South Luzon Expressway (SLEX) rehabilitation). The
expropriated Ninoy Aquino International Airport (NAIA)
International Passenger Terminal 3 remained unopened while the LRT1
extension, MRT3 Phase 2, MRT7 and the C-5 to NLEX connection road
project remain stagnated in their development phase. 1 World
Development Report 2005-A Better Investment Climate for Everyone
(2005). Washington, D.C.: The World
Bank. Improving the Investment Climate in the Philippines
(2005). Manila: Asian Development Bank.
iii
-
In finance, development was focused on two laws implemented in
2006. One was the legislated Expanded Value-Added Tax (EVAT) that
improved public financing in 2006. Also in 2006, President Arroyo
signed Republic Act (RA) 9343 extending the Special Purpose Vehicle
(SPV) Law, which expired in April 2005, to help reduce the bad loan
ratio of banks and free unused capital and assets. Investment
Situation in the Philippines. Investment pledges for the first nine
months in 2006 stood at Php 283 billion, 88 percent more than the
Php 150 billion reported for the equivalent period. An upsurge in
local investments was reportedly boosted by a BOI-approved project
to engage in power generation valued at Php 44 billion,
representing 60 percent of total pledges from Filipino nationals.
Approved FDI for the first nine months of the year posted a 156
percent growth, totaling Php 152 billion compared to the Php 60
billion worth of FDI approvals in the same period of 2005. Such
robust growth rate was driven by the manufacturing sector which
gained cumulative approved FDI of Php 106 billion, an expansion of
163 percent over 2005. The cumulative projected employment for FDI
was estimated at 110,279 jobs, 45 percent higher than 2005.
Meanwhile, domestic capital formation increased to Php 215 from Php
219 billion in 2005, posting a 2 percent rise in real terms,
reflecting strong confidence in future economic conditions. Foreign
capital inflows increased, in line with global trends of increased
capital flows into ASEAN and other emerging markets. FDI as
measured by the BSP for the first nine months of 2006, rose to Php
85 billion, an encouraging increase of 54 percent from the net
inflow of Php 55 billion in 2005. In March 2007, the BSP announced
that total net FDI inflow into the Philippines in 2006 reached
$2.35 billion, up by $491 million from the previous year level of
$1.85 billion. While the recent improvement in investment is
encouraging, there were also investment plans that were cancelled,
if not deferred. A good example would be Tiger Airways decision of
not pursuing the intended setting up of its $300M regional hub and
base at least six new Airbus 320s for Asia-Pacific operations in
Clark as a result of policy reversals in the aviation industry. BOI
also reported a number of failed investment plans in the power
sector due to financial difficulties encountered. Investment
Situation and Challenges in Key Sectors Health and Retirement.
Contrary to the growing retirement, second-home and health tourism
industry in some successful developing countries, the Philippine
retiree program has had limited success, while medical tourism is
just beginning. In 2006, Philippine investment, both domestic and
foreign direct investment, has been modest in this sector while
other important investment in the sector are still in the pipeline
as foreign and local inventors expressed their intention to either
expand existing facilities or put up new ones in the country. The
sector faces serious challenges, including the absence of quality
transportation infrastructure coupled with an apparent lack of
effective strategy to market the country as an alternative
destination in Asia. Restrictive laws
iv
-
prohibiting foreign professionals and foreign ownership of
hospitals and retirement homes are a deterrent to FDI in the
sector. Information and Communication Technology. In ICT,
continuing strong activity in fast-growing IT-enabled services
(ITES) was seen particularly in 2006. Meanwhile, FDI in ICT
industry showed a 96 percent increase in 2006 while Filipino
nationals pledged less investment in ICT with a decline of 41
percent from 2005s commitments. The declining quality of English
language proficiency continuously threatens this promising sector.
Also included among the top concerns is the need to encourage the
growth of a national cyber services corridor that will eventually
yield to job creation and less concentration in Metro Manila.
Finally, it was suggested that the Philippines should also aim to
move up the value chain, following Indias effort to move to
Knowledge Process Outsourcing (KPO). Manufacturing. BOI and PEZA
data show continuing modest expansion of many existing export
manufacturing plants and some new firms locating in the country. A
few export plants have closed to centralize operations elsewhere in
ASEAN after low AFTA tariffs created regional economies of scale.
Manufacturing for the domestic market appears to be in gradual
decline as cheaper goods from China are competing in local markets.
The growth in manufacturing is led by the electronics sector.
Semiconductor and Electronics Industries in the Philippines, Inc.
(SEIPI) reported in the first quarter of 2006 that Philippine
Economic Zone Authority (PEZA)-registered new investment by 20
semiconductor and electronic firms totaled Php 4.4 billion,
compared to Php 663 million during the same period in 2005. For all
of 2006, SEIPI estimated $1 billion new investment. There are
numerous challenges facing the growth of manufacturing, and several
are reflected under most of the main ICIP reform clusters: red
tape, power and transportation infrastructure, and education.
Mining. The future of mining was thrown into question after the
suspension of operations following minor spill at the Australian
Rapu Rapu mine in Albay but rebounded before the second half of
2006. Thereafter, the country experienced an influx of new
investment projects, such as the Berong nickel project of TMM
Management in Palawan; the gold project of Greenstone Resources,
Red V and JCG Resources (Australian) in Surigao del Norte; the
copper-gold project of Colet Mining and Development in Negros
Occidental; the Tampakan copper project of Sagittarius Mines in
South Cotabato; and the copper project of Silangan Mindanao Mining
in Surigao del Norte, among others. Strict implementation of the
Mining Act remains to be the top challenge for the industry to
attract investments in the coming years. Tourism. The potential for
tourism in the Philippines to grow to volumes as high as Malaysia
and Thailand has remained unrealized. The total number of visitor
arrivals in the Philippines reached to a new record high of 2.8
million in 2006, an increase of 8.4 percent from the 2.6 million in
2005 (including balikbayans), still below the Department of Tourism
(DOT)s target of 3 million foreign tourists. With the increased
tourist influx to the Philippines, the number of new accommodation
facilities has increased, while existing hotels are venturing into
expansion and refurbishment. Major challenges to tourism growth
include inadequate infrastructure, internationally substandard
tourist facilities and services, internal security and restrictions
on foreign nationals owning land for resorts and to engage in
retail services (restaurants, rentals, tourist operations, etc) by
the high investment threshold ($2.5 million) of the Retail Trade
Act.
v
-
Achieving Targets for Local and Foreign Direct Investment.
Following the better performance of investment in the country, the
government set its investment target at a modest 12 percent
expansion, which translates to at least Php 306 billion target in
2007 for commitments to establish new or expand existing business
ventures in the country. However, according to a Workshop on FDI
held on October 5, 2006 by the Joint Foreign Chambers of Commerce
of the Philippines, an estimated $9 billion in FDI could possibly
flow into the Philippine economy every year over the next four
years if the countrys investment climate, labor quality and
physical infrastructure continue to improve. These investments, if
realized, would generate over 2.9 million direct and indirect jobs
annually from 2007-2010. ICIP believes that these targets are
attainable if significant economic reforms are sustained and
further developed. Priority and support for the development of
infrastructure, especially in strategic and industrial areas is
essential. The government should also consider looking at the
impediments to entry and restrictions to foreign investors as FDI,
particularly those coming from developed countries, prefer
investing in a country without these restrictions. The political
will to implement economic reforms and pro-business policies is
also necessary to improve the investment climate in the
Philippines. Overall, the ICIP envisions that the country will have
a more encouraging investment climate in the future, driven by
proactive government actions, stronger private sector participation
and better infrastructure and physical and human resources.
vi
-
I. Introduction Overview of ICIP. The American Chamber of
Commerce of the Philippines (AmCham) Investment Climate Improvement
Project (ICIP) is intended to correct factors impeding domestic and
foreign investment in the Philippines. Through ICIP, AmCham
pinpoints problems in the Philippine investment environment,
assesses their importance to the investment climate and works
toward finding and implementing effective solutions. Commencing on
March 1, 2006, after the signing of the grant agreement with the
United States Agency for International Development (USAID) EMERGE
Project on February 28, 2006 (which was followed by the signing of
a ceremonial Memorandum of Agreement between the United States
Ambassador to the Philippines Kristie Kenney and AmCham Vice
President Henry Co on April 19, 2006), this 12-month long project
already identified impediments and disincentives that hindered
domestic and foreign investment inflows to the Philippines. The
ICIP, through its advocacies and network alliances, has been
instrumental in identifying and communicating to the Philippine
Government activities which have high potential of generating
additional investment and jobs as well. Core Components. ICIP has
three core components: (1) networking and investment climate
monitoring, (2) policy research and analysis and (3) investment
climate reform advocacy. These are explained in the ICIP Advocacy
Plan2, which identifies 6 reform clusters (red tape and corruption,
education, power infrastructure, Subic-Batangas transport corridor,
judicial reforms, legislative priorities, and political stability
and security) and 5 reform sectors (healthcare and retirement,
information and communications technology, manufacturing, mining,
and tourism) as ICIP priorities, which closely adhere to the
analysis and recommendations of the Roadmap II More Foreign
Investment3 released in June 2004 (with the exception of population
policy). Methodology. The ICIP implementation methodology employed
several strategies to advance ICIP reform advocacies. Within
AmCham, firm members and committees and the American Desk at the
Board of Investments applied their resources and networks. Outside
AmCham, reform alliance partnerships were joined with other foreign
chambers of commerce, Philippine business associations, academics,
foreign governments and multilateral aid groups and influential
individuals and firms. Voicing reform advocacies in the domestic
and international media was an especially effective method to
influence target opinion and decision makers. Information regarding
ICIP reform advocacies was disseminated in multiple forms and
through multiple channels. Letters to and meetings with senior GRP
officials in the Executive and Congress were used to explain the
importance of reforms to investment. Media releases, comments and
interviews were especially effective in presenting ICIP positions
and often triggered additional comments in editorials and columns.
Four workshops were held, all but one with published
recommendations. All letters, reports and statements were made
publicly available on the AmCham website and through other means of
distribution.
2Investment Climate Improvement Project Advocacy Plan (2006).
Makati City: The American Chamber of
Commerce of the Philippines. 3Roadmap II More Foreign Investment
(2004). Makati City: The American Chamber of Commerce of the
Philippines.
1
-
As part of the ICIP activities, AmCham organized and spearheaded
an informal network of private sector business firms or their
associations, with the aim of developing an effective capability in
the private business sector to monitor the business environment
that affects investment decisions. This Investment Climate
Monitoring Report is the culmination of all the efforts of involved
business organization in the ICIP project, with greater thrust on
key developments in the investment climate in the country during
the project period. In particular, it intends to analyze available
data on new investments, disinvestments, and failed investment
plans, covering both domestic and foreign direct investment while
focusing on the five reform sectors of ICIP. Moreover, it also aims
to analyze emerging problems that prevent new investments or drive
existing businesses out of the country. Finally, this report seeks
to provide recommendations for improving the investment climate in
the Philippines. II. Conceptualizing the Investment Climate
In 2005, the World Bank (WB) and the Asian Development Bank
(ADB) released reports on the investment climate. With the theme A
Better Investment Climate for Everyone, the World Development
Report 2005 described the investment climate as that which reflects
the many location specific factors that shape the opportunities and
incentives for firms to invest productively, create jobs, and
expand.4 More specifically, the ADB identified three broad sets of
factors that make up the investment environment: (i) macro
fundamentals, (ii) infrastructure, and (iii) governance and
institutions. Macro fundamentals include macroeconomic stability
(e.g., reasonable fiscal and external balances, realistic exchange
rate, low inflation and interest rates), competitive markets, and
social and political stability. Infrastructure has to do with
availability and quality of physical infrastructure, such as
transportation (roads and ports), telecommunications, power and
water supply. Governance and institutions refer to transparency and
efficiency in regulation, taxation, and legal system; strong and
well-functioning financial sector; labor market flexibility and
skilled labor force.5
Given the conceptualization above, this report proceeds with the
assessment of the Philippine investment climate during the project
period by focusing on two major components: (a) Governance, which
include macroeconomic and political stability, bureaucratic
regulation, legislation, and the judicial system; and (b)
Infrastructure, which include hard infrastructure particularly
power, airports, seaports, rails, and roads, and soft
infrastructure specifically education and English. The same
components are also considered in assessing the status of the ICIP
reform sectors.
4World Development Report 2005-A Better Investment Climate for
Everyone (2005). Washington, D.C.: The World Bank. 5Improving the
Investment Climate in the Philippines (2005). Manila: Asian
Development Bank.
2
-
III. Analysis of the Philippine Investment Climate The metrics
used in analyzing the investment climate of the Philippines is
based on the results of internationally recognized surveys,
including, among others, the WEFs Global Competitiveness Report,
the IMD World Competitiveness Yearbook, and the WB Doing Business
report. A. Governance The ADBs Asia 2015 conference in 2006 showed
that macroeconomic instability was the top concern of most firms in
the Philippines (see Figure 1).6 Nearly 40 percent of firms
reported that macroeconomic stability in the Philippines is an
impediment to business, third to Indonesia (50%) and Bangladesh
(40%). In contrast, India is reported to have the least concern in
both uncertainties in macroeconomic and regulatory policy.
Source: Asia Conference 2015 (2006).
Figure 1. Percentage of firms reporting political or economic
risk as impediment to business
Institutions are also seen as a major concern in the Philippines
in 2006. The Global Competitiveness Report 2005-2006 indicated that
the country ranked 89th out of the 117 surveyed countries in terms
of competitive institutions. The Philippines also ranked low in
terms of overall government efficiency in the 2006 IMD World
Competitiveness Yearbook, brought about by the very low rankings in
risk of political instability, bribing and corruption, customs
authorities, public service and country credit rating (see Table
1). Other international publications also support the claim that
governance is a major deterrent of investment and business growth
in the Philippines. For example, the report in the Corruption
Perceptions Index 2005 stressed that corruption remains a problem
in the country as it ranked 117th out of the 146 rated nations,
even lower that Vietnam which ranked 107th. At the extreme, the
Global Competitiveness Ranking of the World Economic Forum (WEF)s
2005-2006 Global Competitiveness Ranking rated the Philippines
second to the worst for corruption among 102
6 ASIA 2015 Promoting Growth, Ending Poverty (2006). Asian
Development Bank.
3
-
surveyed countries, and its corruption ranking was the 60th of
the 61 countries in the 2006 World Competitiveness Yearbook.
Source: Forbes (2006). Trends in international rankings of the
Philippines. Presentation during the Workshop on FDI.
Table 1. Survey results on Philippine Government Efficiency,
IMD-WCY, 2006
The Philippines remains inefficient and uncompetitive in terms
of the cost of doing business. The 2005-2006 Global Competitiveness
Ranking of the World Economic Forum (WEF) placed the Philippines
98th among the 102 surveyed countries in red tape, while 2005 Asian
Development Bank poll of 1,000 private sector firms operating in
the Philippines revealed firm managers spent 9% of their time
dealing with bureaucrats. Meanwhile, the ADB reported that tax
rates and tax administration are also major constraints of the
investment climate in the country as tax forms one significant part
of the set of regulations facing businesses. A heavy tax burden
generally increases production costs, while inefficient tax
administration increases compliance costs, discouraging investment.
A weak judicial system is also a major impediment to business in
the country, according to the World Investment Climate Survey
(Phillips, 2006). In particular, the arbitrariness of local systems
of justice and the great variation in the interpretation of laws
have contributed to the low confidence of investors in the judicial
system of the country.
4
-
B. Infrastructure Access to and quality of physical assets
roads, ports, power, water, telecommunications are perceived to be
relatively worse in the Philippines than in more competitive
economies. In the recent Global Competitiveness Report, the
Philippines ranked 90th out of the 117 countries rated. The country
ranked 94th in overall infrastructure quality, 103rd in railroad
infrastructure development and 93rd in terms of telephone lines
(see Table 2). Electricity remains a major concern to business in
the Philippines, followed by transportation, according to 2006
World Bank Investment Climate Survey. This translates to reduction
in global competitiveness, particularly for the electronics and
semiconductor industry which utilizes electricity as a significant
percentage in the cost of production.
5
-
IV. Recent Developments in Investment Climate Components A.
Governance Reduction in Bureaucracy and Corruption Since mid-2006,
the highest levels of the government have begun efforts to reduce
red tape and attendant corruption. Alarmed by the low ranking for
the Philippines (49th of 61 countries) in the 2006 World
Competitiveness Yearbook, President Arroyo in May 2006 asked the
Philippine Chamber of Commerce and Industry (PCCI), Export
Development Council (EDC) and National Economic and Development
Authority (NEDA) to organize public-private sector task forces to
review actions needed to improve Philippine competitiveness
weaknesses. The initiative led to the holding of the first National
Competitiveness Summit in October 2006 in Malacaan Palace. With 300
high-level participants both from the government and private
sector, the Summit tackled competitiveness issues and developed an
action agenda pertaining to better public and private sector
management, and improved transaction flows and costs, among others.
At the Summit, President Gloria Macapagal-Arroyo issued:
Administrative Order No.161, institutionalizing quality-systems
management in government;
Memorandum Order No. 228, directing all departments, bureaus,
commissions, agencies, offices and instrumentalities of the
national government to improve transaction costs and flows in order
to enhance Philippine competitiveness;
A Memorandum directing the department of Transportation and
Communication (DOTC) to provide seamless infrastructure networks to
enhance Philippine competitiveness;
A memorandum directing the Department of Energy (DOE), the
Philippine National Oil Company (PNOC) and the National Power
Corporation (NPC) to lower the cost of and ensure self-sufficiency
in energy to enhance Philippine competitiveness;
A memorandum directing the Department of Education (DepED), the
Commission on Higher Education (CHED) and the Technical Education
and Skills Development Authority (TESDA) to develop programs to
improve the students proficiency in English, Science and Math in
order to enhance Philippine competitiveness; and
EO 571 which creates the public-private sector task force on
Philippine competitiveness attached to the Office of the President
(OP). The task force shall promote and develop national
competitiveness by seeing the implementation of the action agenda
for competitiveness resulting from the National Competitiveness
Summit.
In May 2006, President Arroyo issued EO 428 instructing all
government offices to simplify rules and regulations and reduce
reporting requirements to facilitate business and encourage
investments. The initiative was further strengthened with the
Presidents State of the Nation Address (SONA) in July 2006,
highlighting her agenda of reducing red tape intended to reduce
business costs and increase competitiveness. Following this,
President Arroyo issued EO 557
6
-
which created the Anti-Red Tape Task Force (ARTFF) headed by
Department of Trade and Industry (DTI) Secretary Peter Favila. In
the same month, PCCI and AmCham ICIP organized the Anti-Red Tape
and Corruption Workshop, which generated recommendations for the
passage of the anti-red tape bill and strengthened Ombudsman,
e-governance, e-procurement to reduce agency-level corruption.
Aiming to streamline further business processes in the country,
President Arroyo signed EO 587, ordering DTI to establish and
manage a Philippine Business Registry system to increase commercial
activities by facilitating a seamless transaction environment for
business registration across government agencies such as the DTI,
SEC, BIR and SSS. Workshops and several consensus building
activities are being conducted among concerned government agencies
and the private sector to formulate and develop an action plan
towards establishing and implementing this system. Improvements in
Judicial, Regulatory and Enforcement Few indications of major
improvements have been noted in the areas of judiciary, regulatory
and enforcement in 2006. A glairng failure has been unhindered
smuggling of used vehicles. In 2006, the Supreme Court (SC)
affirmed its decision of upholding right of the Philippine
government to prohibit the importation of used motor vehicles from
freeports into the country customs territory. However, smuggling
continues up to the present as officials at Subic Bay Metropolitan
Authority (SBMA) purportedly have not received instruction from
Manila to enforce the SC decision, according to AmCham. In line
with enforcement, some low and mid-level customs personnel were
suspended or dismissed as the result of life-style checks, although
no cases were brought against the so-called big fish. Several
convictions were also reported in 2006, including, among others,
the conviction of a Union Bank branch manager for violating the
anti-money laundering law. B. Infrastructure Power Sector In 2006,
progress in the sector centered on lowering power prices through
(a) NPCs time-of-use (TOU) program, which allows for lower pricing
during periods of low demand, (b) lower-priced power for commercial
and industrial consumers using more than 1 kilowatt-hour (KW)
monthly, and (c) commencement of Wholesale Electricity Spot Market
(WESM) operations. In addition, the Energy Regulatory Commission
(ERC) continued to strengthen its role as industry regulator, and
the Supreme Court avoided any disruptive interventions. In 2006,
the NPC and the Manila Electric Company (MERALCO) signed a
Memorandum of Agreement (MOA) allowing customers consuming at least
one megawatt-hour (MW) to choose their own power supplier. MERALCO
also introduced its Consumer Choice program, which functions
similarly with NPCs TOU. Moreover, dialogue among MERALCO, NPC and
large power consumers also intensified regarding lower rates during
the period.
7
-
WESM started commercial operations in mid-2006 and by end of
year had sizeable suppliers and customers trading power at reduced
rates. WESM is a centralized venue for buyers and sellers to engage
in the trading of electricity as a commodity. It is, in effect, a
market for electricity. The success of WESM signals the governments
effort to level the playing field for all industry players and is
likely to provide confidence for investors in the power sector to
finance future merchant plants, thus giving opportunity for the
country to provide new power supply to the Luzon grid and avoid
future power shortages.
In sum, the power sector investment climate still needs to
advance faster towards open access and privatization. 2007 will be
a critical year for the Power Sector Assets and Liabilities
management Corporation (PSALM) to demonstrate real progress on
sales of generation and transmission assets. DOE estimates that the
country needs over $4 billion in energy sector investments to meet
estimated needs by 2014. Biofuel Sector Unprecedented interest in
biofuels investment was observed in 2006, particularly in biofuels
production for domestic use and for export, in anticipation of the
mandatory blending requirements stipulated in the Biofuels Act.
Large new investment projects in 2006 include the development of a
$140M cane-based ethanol plant in Pampanga for export through Subic
to Japan by the US-based Far East Biofuels; the opening of the
P1-billion Filipino-owned Chemrez coco-biodiesel plant in Quezon
City; and the committed P2-billion bio-ethanol project of San
Carlos Bio-Energy, a joint venture between National Development
Corporation (NDC) and Bronze Oak Philippines, in Negros Occidental.
International donor agencies including the WB/IFC also expressed
interest in funding and financing biofuels development projects and
renewable energy opportunities in the country. The government,
through the Land Bank, also supported the initiative as it
allocated $350M of funds for loans to proponents of biofuel and
renewable energy projects. Transportation More high-level attention
was given to major infrastructure modernization, especially in
transportation, in 2006 than at any other time since the 1997 Asian
financial crisis. Indeed, President Arroyo, in her 2006 SONA,
committed to prioritize a large array of transportation and other
projects spread throughout five super-regions7, which would cost
nearly P2 trillion over the next four years, of which 65 percent
will be funded by the government and the remaining 35 percent by
the private sector. The goal is raise future total infrastructure
spending to a respectable 5 percent of GDP, while creating a
conducive environment for Public-Private Partnership (PPP).
7 The creation of super regions in the Philippines was made by
President Gloria Macapagal-Arroyo in her July 2006 State of the
Nation Address. These regions are the (1) North Luzon Agribusiness
Quadrangle, (2) Metro Luzon Urban Beltway, (3) Central Philippines,
(4) Mindanao Super Region, and (5) Cyber Corridor.
8
-
Government initiatives in increasing infrastructure projects
strengthened when the Infrastructure Monitoring Task Force was
established as a result of the issuance of Executive Order No. 553.
The Task Force, headed by Presidential Management Staff (PMS) chief
Arthur Yap, shall take steps to speed up the implementation of
projects by regularly monitoring and resolving problems of major
infrastructure projects, especially in the transport sector.
Starting from the expropriated Ninoy Aquino International Airport
(NAIA) International Passenger Terminal (IPT) 3, the Philippine
government paid Philippine International Airport Terminal
Corporation (PIATCO) P3 billion initial payment for the GRP to
operate it. NAIA IPT-3 opening was postponed to March 2007 to allow
for repairs. While some financed projects had started construction
such as the Subic-Clark-Tarlac Expressway and Northrail, work on
others barely started including the South Luzon Expressway (SLEX)
rehabilitation. Another group (LRT-1 south extension which will
connect Manila to Cavite, MRT-3 Phase 2 Edsa North Transit, MRT-7
in Manila and the C-5 to NLEX road connector) remained short of
financial closure and start of construction. While it is laudable
that the government has targeted hard infrastructure modernization
programs and plans, the government has failed to improve the policy
framework to increase competition and a regulatory environment to
promote productivity and competitive costs to spur investments. At
the top of these concerns was the sudden policy reversal that
occurred in the air transport sector in the latter part of the
2006. The protectionist EO 500-A signed by President Arroyo in
mid-2006 reversed EO 500, which allowed pocket open skies for
foreign airlines at Clark and Subic airports, under which Clark has
rapidly developed as low-cost airline hub. The measure impedes
permanent access to Clark for carriers not covered by GRP bilateral
air agreements, including Tiger Airways which was given a 5-year
permit by the Civil Aeronautics Board. The incidence also made the
company defer its intention to set up its $300M regional hub for
Asia-Pacific operations in Clark. Financing Significant reforms in
public sector financing were observed in 2006, which resulted in
generally better credit standing for the Philippines as a whole.
For instance, reports from AmCham stated that increased revenues
from the legislated Expanded Value-Added Tax (EVAT) allowed the
Philippine government to budget counterpart funding, to resume
availment of Japan Bank for International Corporations (JBIC)
project loans as well as to fund more projects internally. Also
related to financing was the proposed Corporate Recovery Act, which
was strongly pushed for enactment by the Bangko Sentral ng
Pilipinas (BSP) in 2006. The bill seeks to improve the process of
corporate restructuring and bankruptcy by increasing legal options
for distressed indebted enterprises. The proposed Corporate
Recovery Act offers different means of relief namely Court
Rehabilitation, Pre-negotiated Rehabilitation, Fast-Track
Rehabilitation, and Dissolution and Liquidation. Another proposal
pending in committee in both chambers was the Personal Equity
Retirement Account (PERA) bill which seeks to create a tax-free
individual retirement program similar to
9
-
the US IRA. PERA accounts can be managed by BSP-accredited banks
or trust companies, investment companies, investment houses
accredited by the Securities and Exchange Commission, and life
insurance and pre-need companies accredited by the Insurance
Commission. PERA would strengthen the capital market and provide an
investment for remittances of overseas Filipinos. Finally,
President Arroyo signed in 2006 Republic Act 9343 extending the
Special Purpose Vehicle (SPV) Law, which expired in April 2005, to
help reduce bank bad loan ratio. SPVs acquire non-performing assets
at substantial discounts and seek to sell them later for a profit.
Based on BSP estimates, the extension will enable the banking
industry to dispose of P100 billion more of non-performing assets
by granting tax exemptions and reduced registration and transfer
fees.
10
-
V. Investment Situation in the Philippines Approved Investment
Reports from the National Statistical Coordination Board (NSCB)
reveal that investment pledges for the first nine months in 2006
grew to Php 283 billion, 88 percent more than the Php 150 billion
reported for the equivalent period (see Table 3). The Board of
Investments (BOI) was the top source of project approvals for the
combined investment of Filipino and foreign nationals, with total
value of Php 142 billion in the first nine months of the year. This
was 26 percent higher than Php 113 billon for the same period in
2005. Other investment promotion agencies (PEZA, SBMA and CDC)
likewise recorded significant improvements in cumulative values of
their investment approvals with a combined worth of Php 140
billion.
Table 3. Total Approved Investments by Nationality (Filipno and
Foreign) and by Promotion AgencyJanuary to September 2005 and
2006(in million Pesos)
Total Filipino* Foreign Total Filipino* Foreign Total Filipino
ForeignBOI 113,239.3 82,266.7 30,972.6 142,341.4 105,584.6 36,756.9
25.7 28.3 18.7 PEZA 35,640.2 8,074.1 27,566.1 58,102.5 19,035.1
39,067.4 63.0 135.8 41.7 SBMA 1,032.1 297.1 735.0 69,943.0 1,526.9
68,416.1 6,676.7 413.9 9,208.7 CDC 434.6 252.8 181.8 12,316.8
4,512.2 7,804.6 2,734.0 1,684.9 4,192.8 Total 150,346.2 90,890.7
59,455.5 282,703.7 130,658.7 152,044.9 88.0 43.8 155.7 % Share to
Total 100.0 60.5 39.5 100.0 46.2 53.8
Source: National Statistiscal Coordination Board* includes al
committed investments of Filipnos in wholly or partially owned
companiesNote: details may not add up to totals due to
rounding.
Growth rateJan-Sept. 2005 - Jan.-Sept. 2006Agency
Approved Investments2005 2006
The total cumulative projected employment from investment
commitments from January to September 2006 reached 125,665, a 39
percent increase from last years 90,487 jobs. The Philippine Export
Zone Authority (PEZA) topped in the generation of potential jobs
with a total of 62,215 employment opportunities. PEZAs employment
potential represents 50 percent of the total projected employment
for the period. Meanwhile, FDI comprised 54 percent of the total
investment pledged in the first nine months of 2006, with 45
percent or Php 68 billion of the Php 152 billion approved through
SBMA. Pledges from Filipino nationals stood at Php 131 billion, 81
percent or Php106 billion of which were approved by BOI. Notably,
approved investments by Filipino nationals in the third quarter of
2006 surged to Php 72 billion, more than 9 times its year-ago level
of Php 8 billion. This upsurge in local investments was reportedly
boosted by a BOI-approved project, which engages Filipino investors
in power generation valued at Php 44 billion, representing 60
percent of total pledges from Filipino nationals in the
quarter.
11
-
Table 4. Total Approved Investments (Filipino and Foreign) by
IndustryJanuary to September 2005 and 2006(in million Pesos)
2005 2006
Agriculture 93.9 4,660.5 1.6 4,863.8 Mining 602.3 3,671.4 1.3
509.6 Manufacturing 111,809.6 118,424.2 41.9 5.9 Electricity
17,473.5 45,352.6 16.0 159.6 Gas 90.2 - - - Water - - - -
Construction 83.3 180.0 0.1 115.9 Trade 303.9 26,151.7 9.3 8,506.2
Transportation 941.5 1,677.9 0.6 78.2 Storage 25.2 25.7 - 2.0
Communication 2,019.5 38,982.1 13.8 1,830.3 Finance and Real Estate
5,523.6 19,529.1 6.9 253.6 Services 11,379.6 24,048.6 8.5 111.3
Total 150,346.2 282,703.7 100.0 88.0
Source: National Statistiscal Coordination BoardNotes: Details
may not add up to totals due to rounding.The services industry
includes hotels/restaurant businesses, computer software
development, health care program services, renting and leasing of
water sport equpment, training services,protection/security
training course, college education and other services.
Industry
Approved InvestmentsPercent to total Jan-Sept. 2006
Growth Rate Jan-Sept. 2005 - Jan. Sept. 2006
January - September
Of the sectors, manufacturing, the largest proportion of
approved investment, rose by 6 percent in the first three quarters
of 2006, reaching Php 118 billion from Php 112 billion in 2005 (see
Table 4). Pledges to the electricity and communication sectors were
also substantial at Php 45 billion and Php 39 billion,
respectively, comprising almost 30 percent of total investment
pledged during the period. Approved investment plans in services
reached Php 24 billion, more than doubling the Php 11 billion in
the equivalent period in 2005. Strong growth was observed in
agriculture, trade (wholesale and retail), and communication.
Improvement in trade could be attributed to the booming franchising
industry. In 2006, franchising outlets reached 100,000 in the
country while franchising concepts reached 850. In particular,
several retailers such as HBC (personal care), Bayo (womens
ready-to-wear), 7-eleven (convenience store), and PR Gaz Haus
Holdings, Inc. (liquefied petroleum gas company) expanded their
market through franchising during the period. Improved investment
in communication is driven mainly by the surge in FDI in the
information and communication technology (ICT) sector from Php 12
billion in 2005 to Php 24 billion this year, a 96 percent growth
rate. The introduction of the third-generation (3G) mobile
technology partly helped to boost the sector. In 2006, more than
nine companies signified interest in becoming 3G operators.
12
-
Approved Foreign Direct Investment Approved FDI for the first
nine months of the year posted a 156 percent growth, totaling 152
billion compared to the Php 60 billion approved FDI approvals in
the same period in 2005 (see Figure 2).
F i g u r e 2 . A p p r o v e d f o r e i g n d i r e c t i n v
e s t m e n t s : J a n u a r y - S e p t e m b e r 2 0 0 5 a n d 2
0 0 6
5 9 . 5
1 5 2 . 0
-
5 0 . 0
1 0 0 . 0
1 5 0 . 0
2 0 0 . 0
J a n - S e p t . 2 0 0 5 J a n - S e p t . 2 0 0 6
S o u r c e : N a t io n a l S t a t is t ic a l C o o r d in a
t io n B o a r d
i n b i l l i o n P h P
The cumulative approved FDI from January to September 2006 for
the manufacturing sector reached Php 106 billion, an expansion of
163 percent over Php 40 billion in 2005 (see Table 5). FDI pledges
to the sector comprised 7o percent of the total investment
commitments for the period. Meanwhile, the trade sector was the
second top recipient of investment commitments in the first nine
months of 2006, growing to Php 20 billion from Php 84 million in
2005. The services sector likewise improved to Php 16 billion, more
than doubling its level of Php 7 billion last year.
13
Table 5. Total Approved Foreign Direct Investments by
IndustryJanuary to September 2005 and 2006(in million Pesos)
2005 2006
Agriculture 330.2 2,355.8 1.5 6,986.5 Mining 225.3 724.1 0.5
221.4 Manufacturing 40,243.9 105,902.7 69.7 163.2 Electricity
10,863.5 439.0 0.3 (96.0) Gas 90.2 - - - Water - - - - Construction
33.9 80.5 0.1 137.4 Trade 84.0 19,542.5 12.9 23,170.9
Transportation 339.6 887.3 0.6 161.3 Storage 0.1 8.9 - 7,237.3
Communication - 2,669.7 1.8 - Finance and Real Estate* 128.0
3,516.1 2.3 2,646.3 Services 7,413.8 15,918.1 10.5 114.7 Total
59,455.5 152,044.9 100.0 155.7 * Includes Economic Zone Development
and Industrial ParkSource: National Statistiscal Coordination
BoardNotes: Details may not add up to totals due to rounding.The
services industry includes hotels/restaurant businesses, computer
software development, health care program services, renting and
leasing of water sport equpment, training
services,protection/security training course, college education and
other services.
Industry
Approved InvestmentsPercent to total Jan-Sept. 2006
Growth Rate Jan-Sept. 2005 - Jan. Sept. 2006
January - September
-
Among the investment promotion agencies, SBMA approved the most
FDI, with 45 percent or Php 68 billion of total FDI approved in the
first nine months of 2006 (see Table 6). The positive growths in
FDI pledges approved by BOI and PEZA and the significant
improvement in approvals by CDC further boosted the collective
January-September results. Table 6. Total Approved Foreign Direct
Investments by Promotion Agency
January to September 2005 and 2006(in million Pesos)
2005 2006BOI 30,972.6 36,756.9 24.2 18.7 PEZA 27,566.1 39,067.4
25.7 41.7 SBMA 735.0 68,416.1 45.0 9,208.7 CDC 181.8 7,804.6 5.1
4,192.8 Total 59,455.5 152,044.9 100.0 155.7
Source: National Statistiscal Coordination BoardNotes: Details
may not add up to totals due to rounding.
Growth Rate Jan-Sept. 2005 - Jan. Sept. 2006
AgencyApproved FDI
January - SeptemberPercent to total Jan-Sept. 2006
In terms of country-specific investors, Koreans were the top
source of FDI commitments in the first three quarters of 2006 with
Php 53 billion, constituting 35 percent of the FDI for the period
(see Table 7). The USA and China with Php 35 billion and Php 18
billion worth of commitments, respectively, followed in second and
third places. Japan, in the fourth place, closely followed China
with Php 17 billion. Together, the top four contributed 81 percent
of potential FDI for the period. China, the UK, and Malaysia also
posted high growth rates in 2006. China pledged to inject Php 18
billion, all of which is committed to the manufacturing sector,
according to the NSCB (see Table 8). Moreover, significant
investment commitments from China were also reported in the latter
part of 2006 in the infrastructure, mining, and energy sectors.
Britains major investments in the Philippines concentrated in
financial and other services. Table 8 shows that British investors
were the largest in finance and real estate, with investments
reaching to Php 3 billion, during the first three quarters. In
addition, British firms are also interested in entering into joint
ventures with call center and business process outsourcing
companies, and in pharmaceutical ventures in the Philippines. .
14
-
15
T a b le 7 . T o t a l A p p r o v e d F o r e ig n D ir e c t
In v e s t m e n t s b y C o u n t r y o f In v e s t o rJ a n u a
r y t o S e p t e m b e r 2 0 0 5 a n d 2 0 0 6( in m i l l io n P
e s o s )
2 0 0 5 2 0 0 6
A u s t r a l ia 5 5 8 .9 5 7 7 .7 0 .4 3 .4 B r . V i r g in I
s . 4 0 9 .0 6 2 8 .4 0 .4 5 3 .6 F r a n c e 2 2 .5 4 2 .5 - 8 8
.7 G e r m a n y 3 9 8 .4 9 3 .5 0 .1 ( 7 6 .5 ) H o n g K o n g 1
4 .0 4 5 6 .7 0 .3 3 ,1 6 7 .4 I n d o n e s ia - 1 1 .0 - - I t a
ly 7 .7 1 8 .4 - 1 4 0 .1 J a p a n 2 3 ,5 0 3 .6 1 7 ,4 8 1 .4 1 1
.5 2 5 .6 K o r e a 1 0 ,5 1 6 .2 5 2 ,7 1 5 .3 3 4 .7 4 0 1 .3 M a
la y s ia 1 9 .5 8 3 3 .3 0 .5 4 ,1 7 8 .1 N e t h e r la n d s 7
,5 9 0 .7 7 ,0 3 9 .0 4 .6 ( 7 .3 ) P R O C 8 2 .3 1 7 ,7 9 3 .6 1
1 .7 2 1 ,5 1 4 .1 S in g a p o r e 2 6 6 .6 6 ,1 2 4 .5 4 .0 2 ,1
9 7 .6 S w e d e n - - - - S w it z e r la n d 8 1 7 .2 5 3 1 .4 0
.3 ( 3 5 .0 ) T a iw a n 1 ,1 5 2 .0 1 ,0 6 6 .6 0 .7 ( 7 .4 ) T h
a i la n d 1 ,5 3 3 .5 2 2 .2 - ( 9 8 .6 ) U K 1 0 2 .2 9 ,0 1 4 .9
5 .9 8 ,7 1 7 .5 U S A 1 0 ,2 3 7 .2 3 4 ,7 1 1 .8 2 2 .8 2 3 9 .1
M a n x - - - - N a u r u - 4 3 9 .0 0 .3 - C a y m a n I s la n d
s - 3 8 4 .0 0 .3 - O t h e r s 2 2 3 .9 2 ,0 5 9 .4 1 .4 ( 7 .4 )
T o t a l 5 9 ,4 5 5 .5 1 5 2 ,0 4 4 .9 1 0 0 .0 1 5 5 .7
S o u r c e : N a t io n a l S ta t is t is c a l C o o rd in a
t io n B o a r dN o te : D e ta i ls m a y n o t a d d u p t o to
ta ls d u e t o ro u n d in g .
C o u n t r y
A p p r o v e d In v e s t m e n t sP e r c e n t t o t o t a l
J a n - S e p t . 2 0 0 6
G r o w t h R a t e J a n - S e p t . 2 0 0 5 - J a n . S e p t
. 2 0 0 6
J a n u a r y - S e p t e m b e r
-
16
Table 8. Approved Foreign Direct Investments, by Nationality and
by SectorJanuary - September 2006
Nationality Manufacturing Mining Commu-nicationFinance &
Real Estate ServicesCons-
tructionTrans-
portation TradeAgri-
culture Storage Electricity
Australia 53.2 413.4 - - 109.8 1.2 - - - - - 577.7
Br in Is 33.2 - - - 595.2 - - - - - - 628.4
Cayman Islands 150.6 - - 156.6 76.9 - - - - - - 384.0
France 16.8 - - - 12.7 - - 13.0 - - - 42.5
- - - - 85.8 - - 7.7 - - - 93.5
Hong Kong 29.2 - - - 160.6 - - 266.9 - - - 456.7
Indonesia 2.7 - - - 8.4 - - - - - - 11.0
Italy 2.7 - - - - 15.7 - - - - - 18.4
Japan 16,991.8 - - 159.8 319.9 - 9.9 - - - - 17,481.4
Korea 52,444.8 - - 156.6 113.9 - - - - - - 52,715.3
Malaysia 90.9 - - 1.2 741.2 - - - - - - 833.3
Nauru - - - - - - - - - - 439.0 439.0
Netherlands 434.9 - - - 469.2 - - 6,135.0 - - - 7,039.0
PROC 16,629.6 - - 8.1 277.8 14.4 854.4 9.3 - - - 17,793.6
Singapore 495.5 - 1,920.0 1.2 1,352.1 - - - 2,355.8 - -
6,124.5
Sweden - - - - 0.0 - - - - - - 0.0
Switzerland 4.7 - - - 526.7 - - - - - - 531.4
Taiwan 1,017.2 - - - 5.2 - 0.5 34.7 - 8.9 - 1,066.6
Thailand 22.2 - - - - - - - - - - 22.2
UK 65.6 - - 2,631.4 2,800.5 - 21.3 - - - - 5,518.9
USA 17,209.1 - - 335.5 4,092.6 - 1.0 13,073.6 - - - 34,711.8
Others 208.0 310.7 749.7 65.7 673.6 49.2 - 2.5 - - - 2,059.4
Grand Total 105,902.7 724.1 2,669.7 3,516.1 12,422.1 80.5 887.3
19,542.5 2,355.8 8.9 439.0 148,548.9
SectorsTOTAL
Germany
Virg
-
Domestic Capital Formation In 2006, domestic capital formation
increased to P224 from P220 billion in 2005, posting a sluggish but
positive 2.1 percent growth in real terms (see Table 9). Fixed
capital grew by 0.6 percent, recovering from a negative growth rate
of 3.9 percent in 2005, but still the lowest since 2002. Public
construction spending grew by 13 percent, although private
construction remained sluggish and further slipped by 3 percent.
Durable equipment spending continues to remain low.
Table 9. Domestic Capital Formation, 2002-2006.
(Levels in Million Pesos)AT CONSTANT 1985 PRICES 2002 2003 2004
2005 2006
Capital Formation 212,081 218,412 234,065 219,926 224,583 A.
Fixed Capital 213,270 221,286 224,176 215,399 216,593 1.
Construction 96,337 95,154 94,402 93,550 96,196 2. Durable
Equipment 100,593 109,869 113,359 105,298 103,849 3. Breeding Stock
& Orchard Dev't 16,340 16,263 16,415 16,551 16,547 B. Changes
in Stocks -1,189 -2,874 9,889 4,527 7,991GROSS DOMESTIC PRODUCT
1,034,094 1,085,072 1,152,174 1,209,473 1,274,415Net factor income
from abroad 71,601 86,359 98,014 111,208 128,312GROSS NATIONAL
PRODUCT 1,105,695 1,171,431 1,250,188 1,320,681 1,402,727
(Growth Rates)AT CONSTANT 1985 PRICES 2002 2003 2004 2005
2006
Capital Formation (4.3) 3.0 7.2 (6.0) 2.1 A. Fixed Capital 2.1
3.8 1.3 (3.9) 0.6 1. Construction (0.7) (1.2) (0.8) (0.9) 2.8 2.
Durable Equipment 4.8 9.2 3.2 (7.1) (1.4) 3. Breeding Stock &
Orchard Dev't 3.3 (0.5) 0.9 0.8 (0.0) B. Changes in Stocks (109.3)
141.7 (444.2) (54.2) 76.5 GROSS DOMESTIC PRODUCT 4.4 4.9 6.2 5.0
5.4 Net factor income from abroad 0.5 20.6 13.5 13.5 15.4 GROSS
NATIONAL PRODUCT 4.2 5.9 6.7 5.6 6.2
(GDP-based Percent Distribution)AT CONSTANT 1985 PRICES 2002
2003 2004 2005 2006
Capital Formation 20.5 20.1 20.3 18.2 17.6 A. Fixed Capital 20.6
20.4 19.5 17.8 17.0 1. Construction 9.3 8.8 8.2 7.7 7.5 2. Durable
Equipment 9.7 10.1 9.8 8.7 8.1 3. Breeding Stock & Orchard
Dev't 1.6 1.5 1.4 1.4 1.3 B. Changes in Stocks (0.1) (0.3) 0.9 0.4
0.6 GROSS DOMESTIC PRODUCT 100.0 100.0 100.0 100.0 100.0
Source: National Accounts of the PhilippinesNational Statistical
Coordination Board
Actual foreign capital inflows increased, in line with global
trends of increased capital flows into ASEAN and other emerging
markets. FDI, as measured by the BSP for 2006, rose to Php 85
billion, an encouraging increase of 54 percent from last years net
inflow of Php 55 billion, and even higher than the global FDI
inflow growth rate of 34 percent (see Table 10). Contributing
significantly to the rise in FDI inflow was the reversal of the
other capital account to a net inflow of Php 37 billion from last
years net inflow of Php 10 billion.
17
-
18
able 10. Balance of Payments Foreign Direct Investments*nuary to
September 2005 and 2006
in million Pesos)
2005 2006
n-residents' investments in the Phils. 55,140.6 85,006.1 100.0
54.2 uity Capital (net) 56,817.7 48,863.0 57.5 (14.0)
einvested Earnings** 7,877.9 (588.8) (0.7) (107.5) ther Capital
9,555.0 36,731.9 43.2 484.4
ource: Bangko Sentral ng Pilipinas Date last updated: 11
December 2006* data includes reinvested earnings from banks
only
January to September Percent to total Jan-Sept. 2006
Growth Rate Jan-Sept. 2005 - Jan. Sept. 2006
T Ja ( No Eq R O S * *
Failed investment plans Probably the biggest failed investment
plan in the country in 2006 occurred during the latter half of the
year, when President Arroyo amended EO 500 - a law which
liberalizes air access of international passengers to the Diosdado
Macapagal International Airport (DMIA) and the Subic Bay
International Airport (SBIA), and gave airlines some assurance of
permanent permits to operate there - by signing EO 500-A, even
before the former was implemented. As discussed previously, EO
500-A essentially reverses EO 500 as it specifies that only
designated airlines from 60 countries with existing Air Service
Agreements with the Philippines can operate at DMIA and SBIA, but
limited to only third and fourth freedoms. EO 500-A restricted the
expansion plans of Tiger Airways, a Singaporean company, because it
is not a designated carrier like other foreign airlines currently
operating at DMIA. In 2006, Tiger Airways deferred setting up its
$300M regional hub and base at least six new Airbus 320s for
Asia-Pacific operations at Clark. Tiger Airways was estimated to
generate some 10 million passengers over a five-year period and
expand its network to cover routes between Clark and Thailand,
Macau, China, Taiwan, Korea, Malaysia and Indonesia and, possibly,
Vietnam and Australia. Data on cancelled registered investment at
BOI is not well-maintained. What is available for 2006 is presented
in Table 10. Most of these consist of capital-intensive geothermal
power activities which indicated financial difficulty as main
reason for their failure to start operations. Other problems
include conflict between the investor and the local community and
unfavorable economic development.
-
Firm Ownership CR No./ Date Activity/ Capacity Plant
Location
Target Operation Date
Project Cost (P000)
Reason(s) for Non-Implementation
1. Natural Resources Mining Devt. Corp.
Filipino 100% 2005-162/ 28-Oct-05
Exploration Project Sitio Depot, Monkayo, Compostela Valley,
Davao
June 2005 204,300
Temporarily stopped operations since last quarter 2006 due to
financial problems
2. Goldsun Cement Corp. Taiwanese-50% Res. Chinese50% 98-027/
28-Jul-98
Cement / 1,600,000 MTPY
Sitio Abagatanen, Brgy. Macaboboni, Agno, Pangasinan
January 2004 12,766,231
Problems with local residents regarding environmental
concerns
3. LMI Holdings Corp. Filipino 100% 98-075/ 21-Aug-98 Cement /
1,500,000 MTPY Cebu Province February 2000 6,565,000
Due to unfavorable economic development for the industry
4. TVI Resource Devt. Phils., Inc.
Canadian 40% Filipino 60%
95-192/ 13-Oct-95
Mining Exploration/ 5,000 HAS. Rapu-Rapu, Albay July 1995
44,364
Peace and order problem in firms exploration sites
5. Ilocos Norte Power Corp. Filipino 100% 97-092/ 14-May-97
Bunker-C fired power plant/ 60MW
Brgy. Of Alejo - Malasig, Municipality of Vintar, Province of
Ilocos Norte
December 2001 2,123,460 Financial Difficulty
6. PNOC Energy Devt. Corp. Filipino 100%
2001-138/ 07-Sep-01
New operator of geothermal power plant/ 40MW
Bo. Saoit & Pagali Pagudpud, Ilocos Norte October 2004
2,171,400 Financial problems
7. PNOC Energy Devt. Corp. Filipino 100%
95-378/ 24-Sep-96
New operator of geothermal power plant/ 120 MW
Labo, Camarines Sur December 1998 6,045,040 Technical
problems
8. PNOC Energy Devt. Corp Filipino 100% 2004-059/ 21-May-04
New operator of geothermal power plant/ 26MW
Palinpinon, Southern Negros March 2006 2,580,000 Financial
problems
9. PNOC Energy Devt. Corp Filipino 100% 2004-056/ 12-May-04
New operator of geothermal power plant/ 54MW
Mailum, Bago City, Negros Occidental July 2006 7,414,000
Financial problems
10. Talisay Bioenergy Inc. Filipino 100% 2004-124/ 28-Oct-04
New operator of cogeneration power plant/ 30 MW
Barangay Dos Hermanas, Talisay City August 2006 3,141,800
Financial problems
11. Agusan Power Corp.
Filipino 95% American 5%
2002-058/ 16-Apr-02
Hydro Power Plant/ 22 MW
Magdagooc, Jabonga, Agusan del Norte July 2004 703,763 Financial
problems
20
Source: Board of Investments
Table 10. BOI-registered mining and infrastructure projects
canceled as of December 2006
-
V. Investment Situation and Challenges in Key Sectors Health and
Retirement Sector The health and medical tourism industry is
growing globally, with growing spillover effects on tourism
spending. In fact, tourism may be combined with wellness and
medical treatment. The report from the October 2006 Workshop on FDI
estimated that the global healthcare tourism industry is estimated
at $40 billion, with close to 50% in wellness and spas. The senior
market (65 years and above) is growing significantly over the last
decade. Henry Schumacher, executive vice president of the European
Chamber of Commerce of the Philippines, estimated that Japan would
have 30 percent of its population belonging to the senior market by
2010 from 21 percent in 1996; Germany would have 25 percent in 2010
from 21 percent in 1996; and Italy would have 26 percent in 2010
from 22 percent n 1996. With demographic aging in developed
countries, the growth potential for retirement and medical tourism
in low-cost tropical countries is considerable. Several tropical
developing countries (e.g. Costa Rica, Malaysia, Mexico and
Thailand) have been successful in attracting considerable numbers
of retired residents from developed countries. India, Singapore and
Thailand are attracting increasing numbers of visitors seeking
inexpensive medical and dental services.
Table 11. Prices of Selected Medical Treatments in Asia,
2003.
21
-
Thailand has taken a leading position in Asias medical and
cosmetic tourism markets. Thailand is stealing a lead on its
competitors as it successfully attracts Western and non-Western
patients for low cost treatments with packages that offer
post-recovery resort stays (see Table 11). The Philippines has yet
to leverage its strengths to carve out a share of this growing
market. The Philippine retiree program has had limited success,
while medical tourism is just beginning. With more than 1,200
hospitals and many medical and nursing schools, the country has a
considerable health infrastructure, including several modern
facilities located in Metro Manila. However, few non-resident
foreigners receive treatment in the country. In 2006, Philippine
investment, both domestic and foreign, has been modest in this
sector. Only a few major investments occurred in 2006,
including:
The Php 3 billion earmarked funds of UST Hospital for upgrading
facilities as a medical tourism destination; and
The Php 350 -billion-worth Benavides Cancer Institute recently
opened by UST, the first of its kind in the country.
Other investment for the sector are reportedly still in the
pipeline as foreign and local inventors expressed their intention
to either expand their existing facilities or put up new ones in
the country. Some of which were:
Cebu Doctors Hospitals plan to put up an integrated retirement
village facility in Naga, utilizing the 250-bed Cebu Doctors' South
General Hospital as medical component;
Investment plan of Asian Hospital to expand its operation under
a partnership with Thailands leading hospital group;
Cardiovascular Hospitals of Americas investment plan to
establish a P1B medical facility in Cebu.
The new Philippine law on dual citizenship may encourage some
Philippines-American doctors to return as health care investors.
Meanwhile, a large number of Filipinos that have worked in health
care services in the US and other countries could be a great
potential to be medical service providers in the Philippines if
they return home. In 2006, the President declared the retirement
industry a flagship program. The new government retirement agency
chief, former Philippine National Police (PNP) head Aglipay, and
new Philippine Retirement Inc. head Ordonez announced an extremely
ambitious target goal of one million foreign retirees by 2015. This
initiative is supported by the JFC. The sector faces numerous
challenges. For example, a study of the University of Asia and the
Pacific (UA&P) in 2006 pointed out problem areas in medical
tourism including the absence of good infrastructure coupled with
an apparent lack of effective strategy to market the country as
alternative destination. The restrictive laws covering practice of
foreign professionals and foreign ownership of hospitals and
retirement homes also deter FDI in the sector. AmCham member
Palafox Associates, for example, told press that the Philippines
could miss out on the $42 billion market for second homes of
foreigners if GRP does not repeal obsolete laws. The same concern
was also raised
22
-
during the Workshop on FDI in October 2006. Concerns over the
deteriorating transportation infrastructure remain, particularly in
Metro Manila and Cebu. Aside from the processing, maintenance and
other fees charged to retirees, there is also a growing concern
over the tedious and costly processing of visas and other required
documents for foreign nationals to enter the country. Information
and Communication Technology After India, the Philippines is viewed
as the best low-cost location although far smaller than India in
terms of the size and skills of its workforce for the growth of
internetenabled services, such as call centers, business
processing, animation, medical transcription, engineering/design
and other services provided remotely over the internet. Several new
locations in low-cost countries are entering the market, adding to
the competition. Nevertheless, the demand for such work to be
performed in the Philippines exceeds the supply and will only be
met by improvements in the skills of the workforce, both near-term
remedial training and longer term through reversing the decline of
education in the country. In March 2006, President Arroyo committed
to prepare one million Philippine workers by 2010 for jobs in the
rapidly-growing call center and business process outsourcing
sector, up from the 200,000 currently working. While such a
five-fold increase is optimistic, the government has made a good
start by establishing a remedial training scholarship fund for
100,000 ICT near-hires who failed to obtain jobs because of
deficient language or IT skills. The DepEd is also working to
improve the poor quality of English, math and science teachers.
PEZA prepared an attractive mix of incentives for new investors in
the sector, while Department of Labor and Employment (DOLE)
consistently grants waivers for female employees to work at night.
PEZA designated as IT Zones 3 buildings in NCR including Market!
Market! shopping mall. Related to this, President Arroyo signed
eight proclamations for new PEZA IT zones in Metro Manila and Cebu.
The first half of 2006 saw continuing strong activity in the
fast-growing IT-enabled services (ITES) sector with many investor
inquiries, firms visiting to evaluate and announcements of start of
operations and expansions. Two of the largest Philippine companies
are buying into established BPO firms. Data from the NSCB showed
that approved FDI in the ICT industry showed a 96 percent increase,
from Php 12 billion in 2005 to Php 24 billion this year. Filipino
nationals pledged less investment in ICT during the period, with
only Php 2 billion, a decline of 41 percent from Php 3 billon in
2005. Of the total FDI investment approvals in ICT as of September
2006, 53 percent of Php 13 billion was intended for manufacturing.
Investments in IT services reached Php 11 billion while the trade
subsector stood at Php 3 million worth of FDI. There were no FDI
investment applications for the telecommunications sector during
the period.
23
-
Table 12. List of reported investments in ICT
Actual Planned $10+ million investment of Bigfoot
Entertainment in digital entertainment production facility in
Cebu.
Dell dedicated new customer care
center located in Mall of Asia, employing 1,400 call center
personnel; Dell later announced 2nd RP call center at Eastwood
SEZ.
GE Indian affiliate GENPACT opened
500-person shared services center.
ICT Group opened 3rd contact center located in a former textile
plant in Marikina. ICT Group announced it will add 800 more seats
at Philippine call centers.
P1B facility of Sutherland Global
Services at Clark SEZ, its 3rd in RP.
Clark Cyberservices and Shogee Studios announced $10M computer
movie studio project at Clark to employ 500.
AmCham member Accenture will
invest $20M over next 18 months, expanding workforce to 12,000
from current 7,500.
People Support to invest $15 M to add
2,000 seats in 2006. Araneta Center plans to invest P4B in a
Cyber Park of 11 low-rise buildings, located near MRT3 and
LRT2.
Ayala Land announced plans to spend
$10M for two BPO campuses.
AmCham member Convergys dedicated a new facility in Makati. It
also announced the opening of its 2nd call center in Cebu and 8th
in RP with 700 employees.
AmCham member TeleTech plans to
open 4 more call center sites and increase its workforce from
8,000 to 15,000.
Ayala Land plans to invest P6B in
science and technology park on 38-ha property of UP Diliman
campus.
Source: American Chamber of Commerce, 2006. Despite these strong
positive developments, there are ICT sector weaknesses restraining
growth. T declining quality of English language proficiency
continuously threatens this promising sector. As such, more private
sector involvement is highly recommended to undertake improvement
in the quality of Filipino English-speakers. The government should
also consider review, assessment and improvement in the College
Curriculum gearing towards enhancing demand-driven education.
24
-
The Philippines should also struggle to move up the value chain,
following Indias efforts to progress from business process
outsourcing to knowledge process outsourcing. This can be done
through continuous improvement in the productivity of workforce
through training, capability building efforts, etc. Specialization
and market-niche targeting (i.e., wireless apps, gaming, medical
transcription, etc.) could also benefit the development of the
Philippine ITES sector. Manufacturing BOI and PEZA data show a
continuing modest expansion of many existing export manufacturing
plants and some new firms locating in the country (see Figure 3). A
few export plants have closed to centralize elsewhere in ASEAN
after low AFTA tariffs created regional economies of scale.
Manufacturing for the domestic market appears to be in gradual
decline as cheaper goods from China are competing in local
markets.
Figure 3. Total Approved FDI in Manufacturing, by Agency,
1996-2006 Although local manufacturing continued to decline,
manufactured exports increased, led by electronics, and foreign
investment in the sector strengthened. Several large foreign
manufacturing investments were announced. The electronics industry
association predicted its members will invest up to $1 billion this
year to meet growing global demand.
SEIPI reported in the first quarter of 2006 that PEZA-registered
new investment by 20 semiconductor and electronic firms totaled
P4.4 billion, compared to Php 663 million in the same period in
2005.
There are numerous challenges facing the growth of
manufacturing, and several of these are reflected under most of the
main ICIP reform groups: red tape, power pricing and availability,
education, security and transportation infrastructure. Wages are
not a major concern for exporters, although there are concerns to
limit minimum wage increases; labor and immigration laws need
modernization. The Philippines retains potential to grow export
manufacturing
25
-
significantly if labor untry a more efficient oper
During the October n the country include:
Modernize th Allow foreig Reduce smug Train more e Develop elec
Hold/Stop i Resolve issue Be and be pe A unified gov
Finally, consensus w eness Summit for the fast NA, both in the
short- and
Recent Major Appr
PEZA-appcomprised
SBMA-apwhich con
New and Planned I
Cold chain Colgate Pa Ford Philip
investmen Hanjin He Hebei Jing Honda ina Hyundai M Temic Au
Tsuneishi Wistron in BOI appro
pioneer sta Ichia Tech
circuit boa Investment Opportu
Componen Higher Va
product de Original E
automotiv Electronic Original D
productivity can be increased and reforms implemented to make
the coating location.
2006 Workshop on FDI, recommendations to improve manufacturing
i
e Labor Code; n ownership of commercial, industrial and
residential land; gling and hijacking;
ngineers and scientists; tronics testing and R & D
subsectors; nvestment-unfriendly legislations; on constitutional
barriers;
rceived as a stable government;
ernment-senate/congress/executive healthy working relationship.
as achieved both in the Workshop on FDI and the National
Competitiv and seamless delivery of infrastructure projects in the
Presidents SO medium-term.
Box 1. Significant Developments in the Manufacturing Sector
oved FDI in Manufacturing roved project to engage in the
fabrication of solar wafers, worth Php14 billion which almost 50%
of FDI pledged in Q4 2005 to the manufacturing sector proved
project involving the manufacture of glass products, worth Php 16
billion stituted 66% of FDI pledged in Q2 2006 to the manufacturing
sector
nvestment Projects facilities being constructed in 3 cities in
Mindanao lmolive Philippines to undertake $40 M expansion pines
launched FFV (Flexible Fuel Vehicle) Technology. Ford plans $40
M
t to manufacture FFV engines in Philippines
avy Industries began work on $1B shipyard at Subic to employ up
to 20,000 niu Group said going ahead with $312M glass project at
Subic ugurated $25 M motorcycle plant otor may assemble vehicles;
Philippine 2005 sales doubled
tomotive plans 4-year, 77M investment program for parts
manufacturing Heavy Industries committed to invest $100M to expand
Cebu shipyard vesting additional P400M to assemble GPS devices at
Subic ved P12B investment of SW Cement in new clinker-based cement
plant in Cebu with tus but granted non-pioneer ITH nologies
expressed interest to build $60M manufacturing facility for keypad
and rds in RP
nities in the Electronics Industry ts/ Parts Manufacturers:
Plastics, metals, cables, PCBs, flex circuits, etc. lue Services
Providers for the Semiconductor Industry: test engineering, design
and velopment services, etc. quipment Manufacturers (OEMs):
Computing, communications, consumer, e, industrial, and medical
electronics s Manufacturing Services (EMS) Providers esign
Manufacturers (ODMs)
26
-
Mining For more than a century, American firms have been
involved in developing Philippine natural resources in mining,
petroleum and natural gas, the later involving the largest
investment project in Philippine history. A 2004 Supreme Court
decision that affirms foreign participation in mining has kindled
considerable international interest in several dozen potential
projects. Mining has the potential to create a considerable number
of jobs and provide the government with large royalty income. While
the government is generally supportive, there is strong distrust of
the mining industry among local communities, including Roman
Catholic bishops in dioceses where the mining projects are located.
Based on widespread abusive environmental practices of extractive
mining and logging activities in the past, the bishops remain to be
convinced that future projects will benefit local communities and
protect the environment. A waste dam overflow at a foreign mining
project in Albay in early 2006 created considerable negative
publicity. Other foreign projects in Nueva Ecija and Zamboanga have
elicited local protest.
Source: Philippine Mineral Exploration Association
Figure 4. Mineral Potential Map of the Philippines
27
-
Box 2. Significant Developments in the Mining Sector Major
Mining Investment/Operations Coral Bay Nickel in Palawan
silver-gold project Rapu-Rapu Polym gold project of Lep copper mine
expan
O going Constructions and
copper-gold projec nickel project of S
In final feasibility and finan
gold project of Fil Carmen copper pro Nonoc nickel proje King
King copper Far Southeast Gold Itogon gold projec cement project
of
New and Planned Investme
GRP l proposal to Lepanto to resume Philex Mining to r TVI
Resources to Filminera Resourc
involving $100 mi MRI Resources AG Rio Tinto Group (
nickel mining in R AngloGold, MRI R Subject of pre-feas
Management in Padel Norte; copper-copper project of Sin Surigao
del Nor
Indophil ResourceXstrata QueenslanCotabato), Columbreached to
$1.4 bil
Berong Nickel - suin Palawan
Philnico agreed toFerrous Metals (PR
of TVI Resource Development in Zamboanga del Norte etallic
project of Lafayette in Albay anto in Benguet sion of Philex Mining
in Benguet
Development: t of Australasian Philippines Mining in Didipio,
Nueva Vizcaya urigao Integrated Resource in Surigao del Norte
cing stage minera Resources in Masbate ject of Atlas in Cebu ct
of Pacific Nickel Philippines in Surigao del Norte project of
Benguet and NDC in Mindanao project of Lepanto in Benguet
t of Itogon Suyoc Mines in Benguet Eagle Cement in Bulacan
nt Projects Jinchuan Non-Ferrous Metals to take over Philnico
for $1 billion investment copper operations in Benguet as global
prices rise evive Bulawan gold mine project in Surigao invest $23
million for Canatuan, Zambales gold mine es said it will start
Aroroy gold mining project in Masbate in first quarter of 2007,
llion in new investment
in talks to provide financing to Atlas Consolidated Mining
Australian) and Chemical Vapour Metal Refining to invest as much as
$3 billion in P esources, Harmony Gold Mining expressed interest in
mining projects
ibility studies and advance exploration are: Berong nickel
project of TMM lawan; gold project of Greenstone Resources, Red V
and JCG Resources in Surigao gold project of Colet Mining and
Development in Negros Occidental; Tampakan agittarius Mines in
South Cotabato; and copper project of Silangan Mindanao Mining te s
completed pre-feasibility study in So