(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.”
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.
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.