Mar 19, 2013

Philippines - ‘Realize the potential’

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The Aquino administration continues to inspire business confidence, but impatience is starting to creep in. There is also uncertainty over the sustainability of reforms and the lack of long-term plans in several key sectors.

This can be gleaned from the latest annual assessment of progress in 471 recommendations first presented in 2010 by the Joint Foreign Chambers of the Philippines to improve the business climate and speed up economic growth.

The title of that 470-page document was “Arangkada Philippines” – or acceleration. The 471 recommendations were the product of nine focus group discussions over six months involving about 300 Filipino and foreign investors.

In January last year, the joint chambers released the first anniversary assessment of progress on the 471 recommendations. About 40 senior consultants, academics, business executives and former public officials gave their inputs.

Late last month, the second anniversary assessment came out, with a call to “realize the potential.”

The 214-page assessment acknowledged last year’s economic growth and achievements in promoting investments in several promising areas. It cited gains in the fight against corruption, although in this area, the best rating in a six-tier system that the government received was only four stars, meaning steps to implement the recommendations “started” in 2012. (Five stars mean “substantial progress” and six, “completed.”)

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The report gave two stars (“backward/regression”) to the fight against smuggling. “There is a strong perception that smuggling continues to be rampant and widespread,” the report said.

It added that the seizure of contraband in 2012 tended to reinforce the perception “that smuggling is getting worse instead of improving.”

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While 6.6 percent GDP growth last year made the country the fastest growing economy among the five founding members of the Association of Southeast Asian Nations plus Vietnam (or ASEAN-6), the Philippines is still considered to be growing too slow.

Those behind the Arangkada project believe the country needs an annual growth rate of 9 percent, backed by a clear long-term industry policy. In this area, the assessment report gives five stars for progress in 2012.

Among the founding members of ASEAN, the Philippines is now at the tail-end in terms of per capita income, behind Singapore, Malaysia, Thailand and Indonesia. We’re still ahead of Vietnam.

GDP per capita is not the only area where the Philippines lags behind the ASEAN founding states. In terms of net foreign direct investment, we lag behind ASEAN-6, attracting less than $2 billion in FDI last year. We also have the lowest gross investments as a percentage of GDP.

We’re also losing out in domestic competitiveness, even as our people become highly competitive in the global job market. We have the highest unemployment rate and the lowest labor productivity index within ASEAN-6.

Indonesia overtook us in competitiveness in 2009, making us rank last in ASEAN-5 last year, while within ASEAN-6, we overtook Vietnam in this area only in 2011. The biggest slides in Philippine competitiveness were noted in governance, infrastructure and corruption.

Since 2007, we have ranked lower than Vietnam, making us the lowest within ASEAN-6, in ease of doing business.

From 2003 to 2012, according to the Arangkada assessment report, the top areas of dissatisfaction for investors in the Philippines were corruption, laws and regulations, infrastructure, local protectionism, and ease of moving products.

Corruption is a two-way thing. The Arangkada report did note “little progress in private sector propensity to bribe government officials and follow improper business practices…”

In terms of overall infrastructure, we’re rated ahead of only Vietnam. And one of the recommendations that merited two stars for “backward/regression” was in instituting long-range planning for infrastructure development.

Arangkada recommended that the National Economic and Development Authority “should consider” a 10-year plan. Its latest assessment: “The current development plan is only good for the term of the Aquino Administration. NEDA has not released the Philippine Investment Plan.”

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The report cited the high potential in agribusiness, noting that the country had the lowest agricultural exports within ASEAN-6 from 1990 to 2011. Thailand is No. 1 in this area, followed by Indonesia and Malaysia.

Where the Philippines received a lot of six and five-star ratings was in business process outsourcing, but we already know the good news in BPO. There were also several five stars in the recommendations on developing creative industries.

Certain aspects of investor dissatisfaction are not entirely within P-Noy’s control, such as the judiciary and local governance.

Since 2009, the Philippines has ranked lowest within ASEAN-6 in terms of efficiency of legal framework in settling business disputes.

There are several complaints about intervention by local government units (LGUs), in mining for example, and in Muntinlupa where truckers passing through have been required to register with city hall. Investors want certain economic activities to be considered strategic and kept out of the hands of local governments.

“The issue of LGU exceptionalism and disregard for national policy remains serious,” according to Arangkada, which is proposing the designation of “Domestic Economic Zones” outside LGU jurisdiction.

In infrastructure, the Philippines has the worst airports among ASEAN-6 (yes, we’re rated lower than Vietnam), but progress was noted here in 2012 in several aspects. Our road networks improved last year, putting us ahead of Indonesia and Vietnam within ASEAN-6, but we have the worst seaports.

We have the second highest power costs in East/Southeast Asia after Japan. In telecommunications, we’re ranked below Singapore, Malaysia and Vietnam.

In overall business costs and burden of Customs procedures, we’re ranked lowest in ASEAN-6. The Philippines has the highest minimum wage, the most number of holidays, and highest telecommunication costs among the six countries. Office rentals in Manila, however, are “a relative bargain” and living costs are among the lowest in Asia.

In terms of burden of government regulation, the Philippines ranked 113th among 133 economies in the Global Competitiveness Report prepared by the World Economic Forum ahead of only Vietnam in ASEAN-6.

Overall, the country is seen to be moving forward under P-Noy’s watch, but it can move faster. Investors also want clear signs that new ways of doing business will be sustained beyond 2016. This is as great a challenge to P-Noy as the need for an accelerated pace of reforms.

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