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 21^st 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 “1^st 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 1^st 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.