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Monday, October 30, 2017

Boracay: Nurturing the goose that lays the Golden Eggs

(Published in the ECCP Business Review, Feb. 2012)

Ah, Boracay, the world’s fourth best island destination in 2011, said readers of Travel + Leisure Magazine, a leading international travel magazine.

Ah, Boracay, whose White Beach was voted Asia’s best beach and the world’s second best by travelers who took part in a survey by TripAdvisor.com, a leading online travel site, also in 2011.

European backpackers re-discovered Boracay for the world in the 1980s. Their word-of-mouth advertising of this then unknown, exotic Philippine Paradise with its pristine talcum-powdery white sand beaches unlike any other set in train a series of events leading directly to the praises—and the unbelievable economic bounty—Boracay enjoys today.

An ever rising flood of Filipino and foreign tourists has made Boracay the richest local government unit (LGU) in the Philippines. Only 7.5 kilometers long and a scant kilometer wide at its narrowest, this fortunate slice of real estate accounted for record-setting revenues of P16.7 billion in 2011, up a sizeable 17% over the P14.3 billion it earned in 2010.

It easily beat Quezon City, the Philippines’ richest city and arguably its most business friendly, which registered record revenues of P12.9 billion last year, a 13% improvement over P11.4 billion in 2010.

Boracay’s revenues, however, were close to 30% higher than Quezon City’s, an LGU 1,560 times larger in land area and 22,000 times greater in population.

Makati City, by the way, ended 2011 with revenues of P11 billion, a tenth higher than in 2010.

Recall that Boracay is only a “barangay” (or village) and one is left all the more astounded by how this “flyspeck-of-an-island” can consistently generate more income than any Philippine city, town or barangay. It is one of more than 370 barangays in the province of Aklan to which it belongs.

Not by Mother Nature alone
Boracay didn’t become this Golden Island by leaving Mother Nature to nurture its world famous White Beach all by herself. Mother Nature’s only good at growing wild grasses and causing wildlife population explosions in areas where she’s left unchecked.   

Boracay became Boracay because the local community and its LGU, the town of Malay, early on rightly decided that one of the paths to prosperity was to welcome investors without overburdening them with petty taxes imposed to generate “quickie revenues.”

Apart from local and national taxes mandatory to any business anywhere in the Philippines, Malay has not levied frivolous taxes on tourism enterprises and tourists, 909,000 of whom visited Boracay last year. About 360,000 of these tourists were foreigners.

Rey de la Rosa, Consultant for Boracay Government Affairs, said the LGU’s responsibility and that of the national agencies on Boracay is to ensure the security and safety of investors and the entire community on the island, which bills itself as a “Premier Tourist Community Destination.”

“Our community's commitment to the ‘One Island. One Goal’ concept means our goal is to complement each other and not compete against each other. Anything negative or good happening in Boracay is felt by all and we all know and realize this,” he told the Business Review.

More perks are in store for investors, de la Rosa said. The Tourism Infrastructure and Enterprise Zone Authority (TIEZA), an agency of the Department of Tourism, is now making plans to include Boracay in its plans for a type of Tourist PEZA (Philippine Export Zone Authority) zone for investors.

Investors in the new tourism zones are expected to receive the same tax incentives and other privileges now enjoyed by investors in PEZA zones around the country such as Subic and Clark.

“For investors here, the advantage is that Boracay, being an island, is easier regulated than land-based PEZA zones.”

Supportive LGU
The Malay municipal government under Mayor John Yap has consistently sided with the private sector against ordinances and projects emanating from the Aklan provincial government it considers detrimental to Boracay and its multi-billion peso tourism industry.

Only last September, the partnership between Malay and Boracay’s business sector successfully forced Aklan to abandon a controversial P1 billion reclamation project at the main jetty port on Aklan used by tourists to cross into Boracay.

The provincial government had wanted to expand the jetty port at Caticlan but without going through the necessary paperwork and consultations with the local community mandated by law. It had also apparently circumvented government laws in doing so.

Resistance to the project at the community level was so fierce the Sangguiang Bayan (municipal council) of Malay issued three successive resolutions against it. The private sector quickly obtained a Temporary Environmental Protection Order (TEPO) from the Supreme Court that stalled the project.

The TEPO said the reclamation project would damage the ecology that contributes directly to the creation of the powdery white sand that is the economic lifeblood of Boracay.

At the first hearing on the TEPO in September, the Supreme Court was informed that Aklan Governor Carlito Marquez had written a letter officially abandoning the project. There was widespread elation on Boracay following the provincial government’s retreat.

Malay and the private sector are again today united in opposing parts of a new revenue code being pushed by the Aklan provincial government. Controversial revenue raising measures seek to levy a “pass-through tax” on goods and merchandise transiting Aklan’s territory, and double the terminal fees (to P100 from P50) tourists have to pay at the jetty ports to enter and leave Boracay.

Section 133 of the Local Government Code, however, explicitly forbids this pass through tax that has long been a source of discord between the business community and local governments.

It says the taxing powers of provinces does not extend to imposing taxes, fees and charges and other impositions upon goods carried into and out of, or passing through, the territorial jurisdictions of local government units “. . . in the guise of wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or services.”

“Pass-through taxes” are illegal
Jesse Robredo, Secretary of the Department of Interior and Local Government again reminded all LGU to stop imposing and collecting fees and taxes on goods passing through their localities.

Robredo last October again urged local chief executives to refrain from enforcing any existing ordinance authorizing the levy of fees and taxes on inter-province transport of goods, regulatory fees from passengers in local ports and other additional taxes, fees or charges in any form upon transporting goods and passengers.

DILG memorandum circular No. 2015-151 re-emphasizes the prohibition on pass-through taxes and fees levied on inter-provincial transport of goods and services that can raise the prices of goods sold locally. The memorandum seeks to ban this sort of double taxation.

The secretary’s continuous appeals to LGUs to desist from imposing illegal and controversial revenue raising measures illustrates the effectiveness of “devolution” or the decentralization of political power from the national government downwards to the barangay.

LGUs became autonomous in 1991 and since then have legislated and collected taxes as mandated by the Local Government Code. Their power to tax rests on the Constitution.

Although one aim of devolution was to wean LGUs from their overreliance on “Imperial Manila” for funding, an unexpected result has been to leave some LGUs with the impression that the need for tax revenues trumps national laws and development priorities such as redirecting investments to the countryside.

And there’s a practical reason for LGUs targeting business firms: business taxes are the main source of tax revenues for cities. Towns, on the other hand, tend to derive most of their income from real property taxes with business taxes an important secondary source.

The IRA
A study made in 2008 showed that the combined incomes of all cities (numbering some 120) reached P116 billion. The total income of all provinces (80) hit P65 billion while municipalities (1,500) generated P94 billion.

A simple mathematical calculation will confirm that funds generated by these LGUs from tax and non-tax sources were far short of their needs.

In the case of the average town, that calculation shows a town receiving about P5 million a month for its expenses. This might be good for a sixth class town (defined as one with a yearly income of P10 million) but will be inadequate for a first class town (P50 million).

Hence, the massive importance of the Internal Revenue Allotment (IRA) doled out every month by the national government to every province, city, town and barangay.

The IRA is an LGU’s share of revenues from the national government.  It is based largely on land area and population, meaning the more land or population in an LGU, the larger its IRA.

Municipalities, however, are totally dependent on their IRAs: the funds can account for as much as 90% of a town’s total revenues. Cities are typically less dependent than towns but IRAs still provide up to 70% of their revenues.

Some experts trace the penchant of towns for legislating “creative taxes” such as the pass-through tax to the delayed disbursement of IRAs by the national government.

Batangas Congressman Hermilando Mandanas last year railed loudly against the continuing delays in what should be the automatic monthly release of IRAs, saying the Constitution provides for this mandatory and automatic release of IRAs.

Mandanas noted that because of these unending delays, the national government owes LGUs a cumulative P500 billion in unpaid IRAs from 1992 to 2012. He estimates that P68 billion in IRAs were not released in 2011.

Mandanas this January filed before the Supreme Court a petition seeking to stop the release of capital outlays amounting to P60.75 billion in the 2012 national budget to compel payment of this massive debt.

Mandanas asked the SC to issue a writ of preliminary injunction or a temporary restraining order on the release of this amount, which is equivalent to the IRA for LGUs that he alleges has been misappropriated by the national government in the budget for 2012.

DBM Secretary Florencio Abad, however, told the Business Review this allegation has no concrete basis.

“The Department of Budget and Management has been faithful to the Local Government Code, especially the provisions on internal revenue allotment of local government units,” he said

Abad noted that Local Government Code specifically states that the IRA share of LGUs should be computed as 40 percent of all internal tax revenues collected three fiscal years prior to the current fiscal year.

The National Internal Revenue Code provides the sources of internal revenue collections include revenues from income tax, estate and donors' tax, value-added tax, excise tax, documentary stamp tax, other percentage taxes and other such taxes imposed and collected by the Bureau of Internal Revenue (BIR).

“Operationally, it is the BIR which provides our department with the aggregate computation of IRA for all LGUs, which we then distribute to all LGUs according to the formula provided in the Local Government Code,” he pointed out.

Abad assailed Mandanas’ assertion that the national government has not paid some P500 billion in IRA since 1992.

Abad said this comes from Mandanas’ own arbitrary computation that includes external revenue collected by the Bureau of Customs in the computation of IRA. Meanwhile, it is clear that the Local Government Code and the National Internal Revenue Code that internal revenue taxes do not include the collections of the BoC, said Abad.

“If Rep. Mandanas wishes to change the computation of the IRA, the formula for which is based in law, then the proper way is through the legislative route. Unless amended by Congress, we are bound to stick with what is mandated by law.”

Lower revenues=lower IRAs
This thorny issue of delayed IRAs is bound to get worse this year.

Abad has announced substantial cuts in the IRA for 2012. He said IRA funding for 2012 will drop to P273 billion from P287 billion in 2011, a fall of 5%.

Abad blamed the lower LGU IRA share to a sharp drop in revenues in 2009 due to a series of factors that included revenue-eroding measures enforced by the previous administration. Other politicians said the creation of 16 new cities was another major factor in slashing IRAs.

“Unfortunately, the IRA for 2012 has decreased, precisely due to lower revenue collections in 2009 as an effect of the global economic slump as well as revenue-eroding measures passed at that time. The Supreme Court ruling allowing the creation of 16 new cities has also affected the distribution of IRA,” he said.

The cuts are forcing LGUs to find ways to make up for their lower funding.

Tacloban City in Leyte said it would intensify tax collection. It also expects to earn P600 million from the sale of 40 government lots.

South Cotabato, site of the controversial Tampakan gold mine, will slash its maintenance and other operating expenses after receiving word its IRA will fall by P36 million to P2.1 billion. Its planned operating budget for 2012 was lowered to P440 million from P525 million as a result.

Davao City relies on the IRA for half its revenues. It is considering tax increases and improving the income of revenue-generating economic enterprises to offset part of the P300 million in lost IRA. Zamboanga City, which will lose P135 million in IRAs, is re-tooling its budget to cope with the lower funding.

Some LGUs, however, might be tempted to legislate “creative” fiscal solutions such as pass-through taxes to make-up for the lower funding. Abad feels that measures put in place by the government will serve to curb these excesses, however.

“We have nonetheless responded to the needs of LGUs who have been affected the most by these circumstances,” Abad said.

“In our Disbursement Acceleration Program crafted last year to accelerate public spending, we have allocated P6.5 billion as Local Government Support Fund for IRA-dependent LGUs. At the same time, in order to maximize the impact of local government resources, we have encouraged the local government units to align their programs, activities and projects with the national government’s priorities under the Aquino Social Contract.

“This way, national government can co-finance LGU’s critical development projects, such as school buildings, rural health centers, infrastructure that supports agriculture and tourism, and other endeavors.

Abad emphasizes the government is encouraging LGUs to become more financially sustainable, specifically by ensuring alignment of their activities with the priorities of the national government and by introducing more efficiency in revenue collection and overall operations.

“In fact, the Department of Budget and Management and the Department of Interior and Local Government are jointly implementing an LGU Public Financial Management reform program that will improve LGUs’ fiscal management.

“DILG is also closely monitoring the performance of LGUs and rewarding those which attain a ‘Seal of Good Housekeeping’ with Performance Challenge grants.

“The national government is also serious in streamlining business processes down to the LGU level. DILG and the Department of Trade and Industry are implementing a program that streamlines the business registration and permits system of LGUs.”

Abad noted that all of these, and other initiatives, seek to improve the competitiveness of LGUs.

“After all, LGUs are our critical partners in inducing sustainable development and inclusive economic growth. The national government is proactively working with LGUs, supporting them in their resource needs as much as we can while ensuring that they implement governance reform and competitiveness programs.” 

LGUs can also could consider Robredo’s long-term solution that LGUs formulate their own Local Investment and Incentives Code (LIIC) to attract investors—but subject to guidelines. Robredo said that under the Local Government Code, Local Development Councils at the provincial, city and municipal levels have to develop their own LIICs.

“The LIIC is a come-on for potential investors because it should not only spell out the local government’s investment policies and programs, but the local fiscal and non-fiscal incentives available to them, and the procedures for availing them as well,” he said.

Robredo, however, acknowledges that some LGUs might use their corporate powers as an opportunity for corruption.

“Even as we want to draw both local and foreign investors especially in priority areas and industries, we hope to eradicate leakages which can be used to circumvent the provisions of the law. It is for this reason that we deem it necessary to come up with a standard or guide for LGUs in formulating their LIIC,” Robredo said.

Investments at the LGU level
LGU overreliance on the IRA could be mitigated with more countryside investments and with the intense level of cooperation that has allowed Boracay to flourish as this country’s richest tourist destination for years.

The selflessness on Boracay recognizes that the island’s unique white sand is gold in another form. Both the LGU and the business community on Boracay (dominated by its over 350 tourist resorts) have realized that their divergent aims can be attained by together protecting the finite resource on which their wealth depends.

Because of this outlook, Malay is not as reliant on the IRA as it would be if it considered the sand as only a quickie revenue source and imposed frivolous taxes accordingly. Who knows, but there might now be a tax for diving at White Beach if Malay’s current leadership weren’t as enlightened.

Don’t laugh but just such a tax was levied late last year by the coastal municipality of Buruanga in Aklan. Buruanga is visible across the Tablas Strait from White Beach and is the site of Ariel’s Point where Boracay’s tourists travel to cliff dive.

Since late October, Buruanga has demanded that visitors who anchor within its municipal waters pay a mooring fee of P300 per boat; a diving fee of P100 per diver and an environmental fee of P50 per person. The new fees are authorized by an ordinance passed by the town’s Sangguniang Bayan but are probably in conflict with Section 133.

A Boracay resort owner said that while Buruanga has a legal right to charge tourists whatever fees it wants, these new fees will have a negative effect on the coastal tourism the town is trying to develop.

The sudden imposition of these fees, apparently without any prior public announcement, has triggered mounting complaints against the levies.

Now, for the real world
Boracay probably represents the ideal as far as a successful long-term partnership between an LGU and its business community goes. Outside Boracay, however, the partnership picture in some places tends to become blurred and in others downright adversarial.

The main culprit: a dearth of revenues that will bite deeper this year and in the coming years because of lower IRAs.

The enlightened self-interest at the core of Boracay’s “One Island. One Goal” concept can probably be used as a template in other LGUs blessed by an abundant natural resource such as strategic minerals or by exotic tourist locations.

LGUs should remember it isn’t merely “Don’t shoot the Goose that lays the Golden Egg,” but more important, “Let the Goose lay the Golden Egg first.”

In other words, first let the investor invest and do business in accordance with national and local laws and then let the LGU take its lawful share of the proceeds, also in accordance with national and local laws.

Recent episodes involving multi-billion dollar investments, however, tend to show a penchant for shooting the goose before the goose gets to lay a single egg. The result: no egg at all.

Journalist Amado Macasaet, publisher of the broadsheet newspaper, Malaya, a year ago wrote about a US$1 billion mining project that was thrown into disarray by a barangay chairman and members of his council.

The chairman denied the investor authority to operate a mine located in their barangay allegedly because they hadn’t been given grease money. Macasaet also wrote that other business projects have been set back, delayed or abandoned because of the alleged corruption at the barangay level.

Greed isn’t the only reason for harassing investors; sometimes ignorance of an investor’s business is also a reason. Macasaet said a proposal to set up a nickel operation in a barangay in Agusan took months before it could be given a permit by the barangay captain and his council.

He said the barangay officials would not ask questions about the project but just sat on the application for the permit.

Tampakan and responsible mining
And there’s Tampakan, a fourth class municipality of 33,000 persons in the hinterlands of South Cotabato that stands to turn almost overnight into one of the Philippines’ richest LGUs, perhaps surpassing even Boracay.

Tampakan’s untapped gold and copper reserves are so massive they stand to account for 1% (or P93 billion) of the Philippines’ entire Gross Domestic Product. Tampakan will have a mine life of up to 25 years.

Responsible mining practiced by large miners, however, offers a sustainable solution to the festering revenue problems faced by Tampakan and other LGUs fortunate enough to sit on massive mineral wealth.

For the Tampakan copper-gold project, the Philippines’ single largest mining project and foreign investment today, the problem is getting the project up and running. And that doesn’t appear to happening any time soon thanks to opposition to the project by the provincial and national government and not from the town and townspeople of Tampakan.

The national government has denied the mine operators (an Australian firm with a Philippine subsidiary) an Environmental Compliance Certificate (ECC) despite its compliance with the necessary requirements. The mine would have begun commercial production by 2016 had it received its ECC.

The national government said it returned the ECC application since the issue of South Cotabato’s open pit mining ban has not been resolved by the provincial government. It used a provincial ordinance issued by the former governor as the basis for denying the ECC.

The P254 billion Tampakan project is located in one of the largest undeveloped mine sites in Southeast Asia. Fully developed, the mine will contribute an average of one percent to the Philippines’ annual GDP, which also is equivalent to 10% of Mindanao’s GDP.

The project has the full support of the town of Tampakan and its town council led by Mayor Leonardo Escobillo, who said their way of life has improved with the initial investments made by the mining company.

Opposition to the project does not come from the town and its citizens, however, but from the provincial government and the national government. Escobillo has repeatedly appealed for the project to be given the go ahead.

Every year the project is delayed denies Tampakan huge tax revenues that could substantially reduce its dependence on the IRA, and improve the life of the townsfolk.

It also prevents Tampakan from taking a 40% share mandated by law of the gross collection derived by the national government from the preceding fiscal year from mining taxes.

The national government’s decision to deny Tampakan an ECC could end up discouraging mining investments, said the Australia and New Zealand Chamber of Commerce of the Philippines.

Henry Schumacher, Vice-President for External Affairs of the European Chamber of Commerce of the Philippines, said ECCP was also concerned as the government's move had undermined the mining industry.

"It shakes investor confidence," Schumacher said.

The Joint Foreign Chambers also support the project and want to see the Philippine Mining Act of 1995, which does not prohibit open pit mining, take precedence. The ban on open pit mining in South Cotabato was imposed by the province’s former governor.

Schumacher called for the government to detail a clear direction for mining investments.

"(We) need long term national strategy that is not undermined by local governments.  We are talking about responsible mining," he said.

Complicating the picture are recent national government moves to raise the excise tax to 7% from 2%; the imposition of more taxes and the removal of investment incentives for large-scale mining operations.

Too much money
The conflict between Tampakan on one hand and the provincial and national government on the other muddies the issue of devolution by turning this into a struggle for the ultimate control of immense wealth.

Now what to do with all that money.

The Norwegian Sovereign Wealth Fund is a good example of how to protect the revenues derived from mineral wealth.

Implemented in 1991, the fund safeguards Norway’s long-term interests through the use of petroleum revenues.

Its income consists of the cash flow from petroleum activities, which is transferred from the central government budget, and the return on the Fund’s capital, and the net results of financial transactions associated with petroleum activities.

The fund’s capital has been invested in the same manner as the central government’s other assets. It may only be used for transfers to the central government budget pursuant to a resolution by the Norwegian parliament.

The fund’s capital may not be used in any other way, nor may it be used to provide credit to the central government or to private sector entities.

Placing revenues from mining at Tampakan into a fund similar to that of the Norwegians will allay fears revenues might be misused, and will ensure the LGU that the money remains intact.

Today, it takes an LGU from two to three years to receive its shares of the excise tax from minerals from the national government. Excise tax payments by mining companies go directly to the national treasury and it takes that long before the LGU can get the money it generated in the first place.

This direct remittance to the national government has long been resented by LGUs. It is also an important reason why local officials are unable to quickly utilize the revenues derived from mining operations in their areas.

Clearly, self-interest seems to predominate all LGU levels. Money is indeed the root of all discord.

Measures being put into place by the national government to wean LGUs from their over reliance on the IRA are laudable but will take time. Perhaps the example of Boracay can guide LGUs, especially those blessed with mineral or tourism wealth, on how they should coexist and cooperate with business and together nurture the goose that lays the golden eggs.

“One Island. One Goal” can easily be translated into “One Town. One Goal” or “One Barangay. One Goal.”


All it needs is a long-term perspective, and a recognition that it takes two to tango. 

Monday, July 3, 2017

Europe matters -- a lot

(Published in the ECCP Business Review, 2011)

SEEING NO FURTHER than the end of their noses can’t be said of Filipino businessmen now pressing the government to expand business relations with Europe, the world’s wealthiest market that has quietly evolved into the Philippines’ most important business partner in the 21st century.

A growing call among Filipino businessmen for trade talks with Europe seems to be driving home the point that Europe matters to the Philippines in a big way. This welcome focus comes five years after the European Union (EU), the 27 nation common market that is essentially today's Europe, became the Philippines’ largest export destination, displacing the USA. 

Europe is unquestionably vital to the Philippines.

It’s this country’s largest export market (over 20 percent of total exports); its largest foreign investor; its third largest trading partner and its fifth largest import source. As world leader in the sustainable or “green” movement, Europe has both the experience and technologies such as “smart grids” that can assist the Philippines do more with what it has while protecting the environment.

The EU is the Philippines’ only major trading partner that has had a consistently negative balance of trade with the Philippines over the past few years, which is both heartening and surprising.

In 2009, Philippine exports to the EU came to $8.4 billion as against imports of $3.7 billion for a positive trade balance of $4.7 billion. Last year, Philippine exports to the EU amounted to $7.9 billion with imports at $5.4 billion.

Largest FDIs source
The EU was the largest source of FDIs into the Philippines from 1990 to 2001. In 2006, the EU became the Philippines’ largest single investor, and accounted for 28 percent of all FDIs compared to 18 percent from the USA and four percent from Japan.

The Philippines, however, retains an unwelcome tag as a not so favorable FDI destination due to perceptions about corruption, bureaucratic red tape, an unpredictable policy and legal climate, deficient physical infrastructure and inadequate human capital.

These drawbacks led to a further loss of FDI in 2010: net FDIs fell to $1.71 billion from $1.96 billion in 2009. Worse, the low FDI helped weaken Philippine competitiveness.

The International Finance Corporation (IFC), private sector arm of the World Bank, believes more infrastructure spending and not redundant tax perks should be prioritized if the Philippines is to secure more FDIs. It said the Philippines should focus on what investors really need: better infrastructure.

In 2008, the European Commission in the Philippines proffered ways by which the Philippines could take fuller advantage of trade and investment opportunities in the EU. This list, which appears appropriate to this day, includes:

  • Strengthen investments, especially domestic investments, in physical infrastructure (transport and energy, among others) and in human infrastructure (education and health).

  • Improve the business climate through actions that uphold the rule of law, are predictable and transparent.

  • Maintain and strengthen fiscal and monetary stability by setting a calm macroeconomic framework, improving government revenues and spending revenues wisely.

  • Address poverty, create jobs and provide for basic human needs such as health and education.

A track record of partnership and cooperation
Europe also matters because of its decades-long track record of providing Official Development Assistance (ODA) that has helped hasten Philippine development in many areas.

EU ODA to developing countries such as the Philippines reached a historical high of $79 billion in 2010, making the EU the largest donor in the world. From 2004 to 2010, the EU provided 57 percent of net ODA to developing countries.

Despite the global financial crisis, 18 EU Member States increased their aid volumes in 2010 while the EU has announced its determination to maintain its collective ODA commitments in the years ahead.

The Philippines has historically benefited from the EU’s largesse. The EU began providing cooperation funding totaling $89.5 million from 2007 to 2010 through the European Commission (EC) to strengthen health services, support the peace process in Mindanao and provide trade-related technical assistance. This brought the EU’s total cooperation funding for the Philippines since these programs began in 1976 to over $1.5 billion.

From 1976, EC cooperation funding has focused on combating poverty and raising standards of living of the poorest groups. Since 2005, this funding has been expanded to include social services and sustainable development.

EU funds coursed through the EC is, however only one part of total EU cooperation with the Philippines. From 1992 to 2004, the EC, the European Investment Bank and EU Member States together lent $1.9 billion in ODA. This made the EU the Philippines’ fourth largest ODA source.

As defined by the government, an ODA is a loan or a grant administered to promote sustainable social and economic development in the Philippines. An ODA must be contracted with a foreign government with whom the Philippines has diplomatic, trade relations or bilateral agreements, or which is a member of the United Nations, their agencies and international or multilateral lending institutions.

Time to Act
The government has recently shown a renewed interest in building increased trade with the EU. It is using a study conducted by the Universal Access to Competitiveness and Trade (U-Act), a think tank affiliated with the Philippine Chamber of Commerce and Industry (PCCI), as a guide during a consultation process that is expected to lead to negotiations for a Free Trade Agreement (FTA) between the Philippines and the EU.

PCCI previously announced its support for talks leading to an FTA with the EU. PCCI treasurer and U-Act Chairman and CEO Donald Dee said the Philippines can ill afford to lose out to other Asian countries that are trying to cut FTAs with the EU. Dee feels the Philippines must act on an FTA now.

“EU might no longer be interested in engaging the Philippines if one country has already signed with them with the same market as ours,” he pointed out.

PCCI’s U-Act study advised the government to begin negotiations for a bilateral FTA with the EU instead of waiting for ASEAN to decide on whether it wants an FTA with the EU, which has been the Philippines’ position.

ASEAN-EU FTA talks, however, have been in limbo since May 2009. Consequently, some ASEAN countries such as Indonesia, Singapore, Thailand and Vietnam decided to begin bilateral talks with the EU on their own.

The study, entitled “Merits to Philippine Business of Having a Bilateral Philippines-EU Free Trade Agreement (FTA),” noted that pursuing a bilateral track with the EU would be beneficial to Philippine business.

It said the Philippine business “. . . cannot continue losing out on trade and investment opportunities with the EU, especially when projections indicate substantial Philippine gains from an FTA are forthcoming.”

PCCI’s U-Act study identifies the EU is the world’s largest economy responsible for 17 percent of world trade in goods; a fourth of services and half of Foreign Direct Investments (FDIs). EU investments accounted for 22 percent of world investments into Southeast Asia from 2006 to 2008.

More exports to Europe needed
An urgent priority for the Philippines, and one that increased trade can accomplish, is to arrest the disheartening annual drop in its exports to the EU. Philippine EU exports have fallen every year since 2003: from $11.6 billion to $7.9 billion in 2010. And this when exports to the EU by the Philippines’s ASEAN (Association of South East Asian Nations) competitors are growing some five percent annually.

Hubert d’Aboville, President of the European Chamber of Commerce of the Philippines (ECCP), believes a renewed focus on Europe could help reverse the downward trend in Philippine exports.

“This would entail the tough task to expand the product range from the monoculture of electronics and semiconductors to more manufactured products, processed food and services . . . more decisive steps have to be made to increase the visibility of the Philippines in Europe,” d’Aboville noted.

Among the long list of products the government believes have a profitable future in the EU are seafood and marine products (especially Mindanao tuna); agricultural products such as fresh fruits, bananas and muscovado sugar; processed fruits such as mangoes, banana chips and pomelos; coffee products; coconut-based products such as virgin coconut oil; soap and perfume; handmade paper; natural rubber; oleochemicals; biofuels; jewelry and furniture.

Services the Philippines can provide include health and tourism and information and communications technology (ICT). Skilled labor for the services sector is also needed by Europe.

This list jibes with what the EU has said it needs. Among these are furnishings, processed foods, fruits, Business Process Outsourcing (BPO), medical services, tourism, retirement and healthcare.

The EU in 2008 decided to assist Philippine exporters sell more to it by setting aside a $9.5 million fund to help boost Philippine exports to the EU. The fund assistance, which will end in 2012, aims to increase Filipino compliance with the EU Technical Barriers to Trade and Sanitary and Phytosanitary control requirements.

Europe matters in BPO
Europe matters for many other reasons that are in the Philippines’ national interest. Europe is not only a market that absorbs over a fifth of Philippine export products annually; it’s also a huge but largely untapped market for Philippine service industries such as BPO and information and communication technology (ICT).

A study conducted by the European IT-Service Center Foundation (EITSC) discovered that only 1.2 percent of Europe’s share in the BPO industry went to the Philippines in 2007 and that only 10 percent of local BPO revenue came from European firm. These figures have not changed much over the past three years.

EITSC is an initiative of ECCP, the German Development Cooperation (GTZ) and the Asia-Europe Foundation of the Philippines to bridge the eSourcing needs of Europe with the IT/BPO capabilities in the Philippines.

Team Europe, which consists of various private and governmental organizations in the Philippines that promote the Philippines as the offshoring destination of choice in Europe, believes the country has a potential to secure a share of the $40 billion European outsourcing market.

To do this, however, means the Philippines must diversify its clientele, which are mostly U.S. firms. Over 65 percent of local BPOs service U.S.-based companies.

Team Europe says Europe recognizes the benefits of offshoring to the Philippines. It’s eying the United Kingdom, the Netherlands, Scandinavia and German-speaking countries as potential markets for Philippine BPO firms.

These countries have a range of outsourcing needs that can be met by Philippine offshoring companies, while several European companies are looking to expand their offshore business here. Among the better known European multinationals that now outsource their operations to the Philippines are Siemens, Ericsson, Deutsche Bank, HSBC, Henkel, Shell and Nestlé.

The UK is expected to outsource $160 billion this year; Germany, $125 billion; France, $92 billion; Italy, $50 billion and the Nordic countries; $63 billion.

Team Europe informs European prospects about the Philippines' capabilities and how they benefit from offshoring to the Philippines. It leads an industry-wide effort to promote the Philippine outsourcing industry to Europe.

Focusing more on Europe could further strengthen the Philippines new-found position as the world’s call center capital. The Philippines reached this rank in 2010 by dislodging India in number of jobs and total revenues generated.

There were some 350,000 Filipino call center jobs in 2010 versus 330,000 in India. Philippines call center revenues came to $6.3 billion as against India’s $5.9 billion in this year.

India, however, still reigns as top honcho in BPO by a huge margin over the Philippines: $70 billion against $9 billion. This is partly due to India’s significant presence in the UK, its former colonial master, and the Philippines’ absence in this huge market.

In order to gain ground in call centers and BPO, Philippine companies will have to promote themselves as an outsourcing destination since European companies don’t know much about the Philippines’ BPO potential.

Henry Schumacher, ECCP Vice President for External Affairs, said Philippine BPOs should aim to penetrate Europe’s markets to gain a truly global reach.

“The Philippines has successfully invaded the U.S. but Europe is a huge market. India is everywhere; the Philippines isn’t. We have to go out and sell the Philippines as a good offshoring and outsourcing destination,” he noted.

Learning from a Green Europe
A new and green technology is now well on its way to making Europe almost totally independent of fossil fuels by 2050. “Smart grid technologies” will see dramatic reductions in Europe’s greenhouse gas (GhG) emissions and the almost complete elimination of fossil fuels from its energy portfolio.

This will be brought about by reducing losses in electricity distribution networks through automation, and by encouraging consumers to cut energy use by using “smart meters” that give more accurate and timely information about power use.

Technologies that will require smart grids include wind and solar power generation, electric vehicles and heat pumps. Smart grids will also require the upgrading of transmission systems, distribution automation and substation automation.

Smart metering systems are to be installed in 80 percent of EU homes by 2020. Smart metering will make possible time-based tariffs and give consumers information about their electricity use in real time so they can promptly save energy.

Over the next 40 years, smart grids will transform European energy networks, industry and society. In all, smart grids could save the EU $76 billion every year.

While the Philippines does not have anything similar on its drawing boards, smart grids are another example of European leadership in the “green movement” still sweeping the globe.

Among today’s buzzwords that have crept into our consciousness are sustainable development, sustainable energy, combating climate change, carbon abatement and green buildings and in these, the EU is the acknowledged world leader.

“Green” has found fertile ground in the EU and from here is propagating worldwide. The Philippines can learn from the experience of the EU in turning itself green.

Energy efficiency and the EU
Among the plethora of green solutions, the EU sees energy efficiency as the quickest, cheapest and most direct way to turn threats to the security of its energy supply into real opportunities. With existing technologies, the EU believes energy savings of up to 30 percent are now feasible. The improved application of energy efficiency could also cut some 20 percent of GhG emissions in the EU.

For Europe, this process began in 2006 when it launched its Energy Efficiency Watch Initiative. This calls for the promotion of energy efficiency and knowledge sharing of good policies within the EU. The overall objective is to promote energy efficiency across the EU by analyzing Member States’ national energy efficiency strategies, and highlighting good practice energy efficiency policies, instruments and activities.

Member States are to achieve a nine percent reduction target in end-use energy consumption by 2016. Their green targets: 20 percent energy saved; 20 percent energy from renewable energy and 20 percent greenhouse gas reduction by 2020.

ECCP is taking the lead in assisting the Philippines in this green transformation. ECCP organized two major and well received “1st Philippine Energy Efficiency Forum” in July and “The New Energy forum: A Stakeholders’ Forum” in October.

It will hold another energy efficiency conference this year. ECCP also launched the nationwide Energy Smart Program during the energy efficiency forum.

The EU is also paying particular attention to the development of wind energy in the Philippines, which has the potential to become the leading wind energy producer in Asia. A Danish company built the Philippines’ first wind farm at Bangui, Ilocos Norte in 2005. The EU, by the way, is the world’s top producer of wind energy.

Wind energy is expected to contribute some 400MW to the country’s electricity grid within the next three years compared to 33MW today. This marked growth in wind energy use is being driven by Renewable Energy Law passed in 2007.

The law is drawing investments into the wind energy sector and is telling investors there is a good return on investment to be made in harnessing the wind to produce clean and renewable electricity.

The Renewable Energy Law promotes the development, utilization and commercialization of renewable sources of energy such as wind, solar and biomass. It establishes a framework for the grant of fiscal and non-fiscal incentives to all renewable energy activities and created the National Renewable Energy Board (NREB).

The law also establishes a Renewable Energy Trust Fund to finance research, development, demonstration and promotion of various renewable energy systems. It seeks to increase the Philippines' energy security and is a tool in reducing the dangerous impact of climate change.

The Renewable Energy Law is the product of 12 years of studies and research by Philippine, European and other foreign experts in renewable energy sources.

Helping the Philippines fight climate change
The climate conference at Copenhagen, Denmark in December 2009, while not too successful, did open the world’s eyes wider to the accelerated pace of climate change and its dangers.

Of particular importance to the Philippines was a report that the faster pace of global warming has caused the world’s oceans to rise about 1-1/2 inches in the past 12 years because 2.5 trillion tons of ice in Antarctica and Greenland had melted far quicker than expected.

Accelerated sea level rise is one of the most dangerous outcomes of global warming. With growing portions of flood-prone Manila’s 39 square kilometer area already below sea level, any sea level rise presents a clear threat to the city and its 1.7 million inhabitants. The extreme peril Manila faces from floods was painfully driven home in September 2009 when tropical storm “Ondoy” flooded 80 percent of the city in just a few hours.

Last year, the World Bank issued a study identifying Manila as one of a number of Asian cities in grave danger from natural calamities, including flooding, triggered by climate change. The environmental group Greenpeace, on the other hand, said a one meter rise in sea level resulting from melting polar ice caps could put 64 of the Philippines’ 81 provinces at risk of being submerged.

The EU continues to support the Philippines’ fight against climate change. In late 2010, the EU provided €69 million in development assistance over the next three years to help the country meet its Millennium Development Goals.
About $17.6 million will go to climate change projects and the Mindanao peace process. This grant brought to $1.5 billion total EU development aid to the Philippines during the past 30 years.
“Silver aristocrats” and “Best agers”
The Retirement and Healthcare Coalition, Inc. (RHC), an organization consisting of ECCP; the American Chamber of Commerce of the Philippines; the Korean Chamber of Commerce Philippines and the Japanese Chamber of Commerce and Industry of the Philippines this April organized the 1st Philippine Retirement and Healthcare Summit.

The summit sought to promote the Philippines as the preferred international retirement destination by undertaking a combination of measures among its stakeholders in government and the private sector.

Europe and its rapidly graying population have been identified as one of the key markets for the Philippines’ retirement and healthcare industry. RHC aims to promote and win recognition of the Philippines’ value as a retirement haven, and as a center of excellence for medical and managed care services for retirees worldwide.

RHC is promoting the “Long Stay Visitor Program” as a market entry strategy to gain credibility and trust in the Philippines. The program offers services along the line of community development, lifestyle and healthcare.

Caring for retirees, most of whom are seniors in their 60s, no longer consists of consigning retirees to the tender mercies of uncaring (and probably abusive) staffs at “nursing homes.” What the RHC wants are fully integrated retirement villages responsive to the unique needs and wants of retirees and staffed by carefully trained, English-speaking Filipinos.

There is as yet no existing fully integrated retirement village in the Philippines as envisioned by the RHC, whose long-term commitment is to take care of foreign seniors.

RHC has begun the process of creating consortia to build its fully integrated retirement village and has begun investment promotion for this groundbreaking project.

RHC is looking at five promising sites for its retirement village: Dumaguete; Clark/Subic; Cebu; Tagaytay/Nasugbu and Metro Manila. RHC said it carefully selected these locations with respect to proximity to medical care, wellness, sports and leisure facilities.

RHC is busily promoting the Philippines as a “long-stay destination” to Europeans, especially those it describes as “Old Kids” and “Best agers” (persons 50 years old and up).

Crowning RHC efforts will be establishing true retirement villages in partnership with private companies. These villages will reflect RHC’s unique view that retirement is a lifestyle and not real estate. The first of these European lifestyle retirement villages is expected to be completed in the next few years.

The Philippines has many of the key ingredients to successfully attract local and international retirees, which are taken to mean the “baby boomers” born from 1946 to 1964. Among these pluses are quality healthcare, good infrastructure, service culture and a low cost of living.

Crucial for the Philippines’ success as an international retirement destination, however, is developing a retirement and aged care model appropriate to its values and culture, while providing lifestyle attractions.

RHC believes that community, lifestyle and healthcare are the three crucial pull factors that, if addressed correctly, should succeed in drawing tourists, long stay visitors, second homeowners and retirees to the Philippines.

Growing agribusinesses with the EU
Nestlé, Inc., a leader in agribusiness and one of Europe’s leading local corporations, has an agronomy program that teaches Nestlé’s sustainable farming system to Mindanao coffee farmers. Most of the country’s coffee farms are located in Mindanao.

For the past 17 years, Nestlé’s Experimental & Demonstration Farm (NEDF) in Tagum, Davao del Sur provides technologically-advanced farming tools and methods to coffee farmers to ensure the quality of coffee beans goes into its coffee brand, Nescafe. Some 10,000 coffee farmers, technicians and agricultural students have undergone training at NEDF since it opened in 1994.

NEDF is the core of Nestlé’s agronomy program. Its goal is to reduce the gap between the supply and demand for coffee beans by spearheading research and training in coffee production.

By equipping coffee farmers with the proper knowledge, these farmers stand a better chance of being more self-sufficient and competitive. NEDF has distributed hundreds of thousands or coffee seeds and seedlings, which have, in turn, generated thousands of jobs across the country.

NEDF's close coordination with the Nestlé R&D Center in Tours, France ensures that Filipino farmers trained at NEDF have access to the latest farming technologies, from coffee harvesting to processing methods.

At NEDF, farmers are trained in the proper way of growing coffee, reinforcing the importance of good crop management, and are provided with quality and high-yielding Robusta coffee planting materials.

NEDF also demonstrates how to go about the post-harvest treatment of the beans and suggests what equipment to use. NEDF provides 80 percent of all Robusta cuttings in the Philippines.

In 2003, Nestlé initiated another program that continues to help farmers further increase their income by encouraging the planting of other crops alongside coffee.  Called the Coffee-Based Sustainable Farming System, this program encourages farmers to plant crops alongside coffee to gain additional income. 

Nestlé is also establishing satellite buying stations in areas with large concentrations of coffee farmers. The satellite buying stations give farmers the option to sell directly to Nestlé without going through a trader, ensuring farmers a fair market price for their produce.

ECCP and the FTA
Until the signing of the Partnership and Cooperation Agreement (PCA) last year, bilateral relations between the Philippines and the EU were guided by the 30-year old ASEAN-European Community Cooperation Agreement. The age of this vital document, created when Ferdinand Marcos was still President, was impetus enough for a new trade agreement.

Present developments, however, also make necessary an enhanced framework of relations between both sides. This new framework is the PCA, which provides the legal basis for enhancing bilateral cooperation with the EU in areas such as trade and investment and development cooperation.

The PCA will benefit the Philippines with the liberalization of trade in goods and a significant liberalization of services. The Filipino consumer benefits by having more product choices and can, therefore, derive more value from his peso.

The Philippines thus became the second ASEAN country after Indonesia to complete negotiations for a PCA, which lasted from February 2009 to June 2010.

The Philippines' interest in an FTA and its signing of the PCA are its clearest signals yet that Europe matters to it, not only in trade and business, but also in a range of other national concerns including improving the environment, renewable energy, healthcare and human rights

An FTA is a legally binding agreement between two or more countries that seeks to cut or remove obstacles to trade, and permit cross border movement of goods and services between signatory countries.

A PCA is a pre-requisite deal for the Philippines to qualify for the FTA. It is expected to enhance trade and investments cooperation, economic and development cooperation and political cooperation through policy dialogue and technical assistance. It also illustrates a shared commitment to democracy and human rights.

ECCP will have a role to play in the negotiations leading to the FTA.

During the business summit in Indonesia last May, ECCP and five other European chambers of Commerce in ASEAN jointly organized the “EU-ASEAN Business Council.”

The organization of the council is historic because it is the first regional platform among European chambers of commerce in South East Asia. More important, however, is that the council will also play a role in the establishment of EU FTAs with ASEAN countries including the Philippines.

D’Aboville said the EU believes an FTA represents a huge opportunity for every ASEAN member state and is engaging in a sustained effort to broker FTAs between the EU and ASEAN.

“The council is, therefore, a vital conduit for expanding trade between ASEAN and the EU,” he noted.


The council has been identified as one of the seven key results of the business summit, along with the proposed creation of an ASEAN Economic Community by 2015 that will be patterned after the EU.