Monthly Archives: May 2014

PH power users to continue to bear high costs

Despite the high cost of power, the government chooses not to provide a subsidy to benefit everybody and instead chooses to do it indirectly for the poor through the CCT program.  What do you think?

Palace rejects calls for power subsidy

MANILA, Philippines – The Aquino administration has thumbed down calls to subsidize the high cost of power in the country even with the prevailing power crunch in three existing grids.

“It’s not an option of the government,” Budget Secretary Florencio Abad told The STAR in an interview during the World Economic Forum on East Asia last week, when asked if the administration would consider subsidizing power.

In one of the sessions during the forum, businessman Manuel V. Pangilinan said the cost of power in the Philippines is high because there is no government subsidy unlike in other countries.

In the same session, Marife Zamora, chairman of Convergys Philippines said businesses would do better if power is subsidized.

“If there is some assistance in that area, that would be good. If the government can do it, why not?” Zamora pointed out.

However, Abad said subsidizing power would put a huge dent on state coffers.


“It’s a lot of drain on the fiscal position. Subsidizing power also leads to subsidizing even the wealthy, which is not a good idea,” Abad said.

Furthermore, he said that if the Aquino administration starts subsidizing the high cost of power, it would be difficult for succeeding administrations to remove such subsidy once it is in place.

“It’s going to be political. It’s going to be very difficult for any government to remove that subsidy,” Abad said.

Instead of directly subsidizing power, he said the administration has been implementing the conditional cash transfer (CCT) program, which is a general subsidy for indigents.

“It’s better to have subsidies directly to the poor such as the conditional cash transfer. You provide health services. That’s the better way of managing subsidies,” he said.

The government’s CCT program provides modest cash grants so that poor households could invest in the education and health of their children from infancy to 18 years.

As of April, the program has covered close to four million poor household beneficiaries or about 20 million people nationwide.

The National Statistical Coordination Board (NSCB) said in a report last year that electricity rates in the Philippines are among the highest in the region.

“Data from the Asean (Association of Southeast Asian Nations) Center for Energy show that among the 10 countries in Southeast Asia in 2007, the country ranks as having the third highest residential electricity tariffs, fifth highest for commercial, and fourth highest in terms of industrial electricity tariffs,” NSCB said.

NSCB said that a study conducted by the Perth-based consultancy firm International Energy Consultants (IEC) placed the rates in Luzon as having the ninth highest electricity tariffs of the 44 countries surveyed.

One of the main reasons for this is the absence of government subsidies for electricity unlike in Indonesia, Thailand, and Malaysia where the government subsidizes electricity costs.

“These subsidies eat up a large chunk of public budget. In Indonesia, for example energy subsidies account for 24 percent of the 2013 public expenditure plan,” the NSCB paper said.

It also said that generation costs make up the biggest component of the electricity cost accounting for 65 percent of what customers pay for.

The World Economic Forum is coming to Manila

The World Economic Forum is coming to Manila this week and will give the big international business players the opportunity of a look see on the country. Let’s hope they will be encouraged with what they see and bring out the big money to make the much needed foriegn investments by the country. Let’s see.

From the Philippine Daily Inquirer

  • 20 & 21 May 2014
  • By Doris C. Dumlao


PH to share turnaround story as host of the WEF

THE EAST Asia summit of the World Economic Forum (WEF) usually takes place in a country that’s shaping the story of the region for that particular year.

Last year’s host Burma (Myanmar), for instance, had just come out of decades of economic and political isolation and being Southeast Asia’s last frontier, business groups—including outbound-looking Philippine conglomerates—are scrambling to gain a foothold.

When Indonesia hosted the summit in 2011, it was the hottest emerging market as the commodity boom benefited the world’s largest coal exporter. At the time Thailand hosted the same summit in 2012, it was grappling with slowing exports, but intensified public spending allowed it to defy the global slowdown.

The program is built on three pillars: achieving equitable progress, advancing models for sustainable growth, and realizing regional connectivity.

“We are especially pleased to be holding the meeting in the Philippines for the first time. This is the right moment to shine the spotlight on a country which has turned itself around remarkably after years of unfulfilled promise,” WEF’s Rao said.

“All indications suggest the Philippines will be the second-fastest growing Asian economy in 2014, second only to China, and on target to be the world’s 14th largest economy by 2050. The resilience of the people and economy in the face of the devastating impact of Supertyphoon “Yolanda” (international name: Haiyan) has been truly impressive,” he said.

While the East Asia summit will formally open tomorrow, most of the public events will take place on Thursday and Friday.

From the local perspective, one keenly awaited session will be Thursday’s “Philippines: The Next Asian Miracle,” which will have as part of its panel Manuel V. Pangilinan, one of the most influential business leaders in the country and Karim Raslan, a Malaysian business consultant, a writer and group chief executive of the KRA Group. He was also the founding chair of WEF’s global advisory council (GAC) in Southeast Asia.

I’ve known Raslan for many years, having been enlisted by him to be part of the same GAC in Southeast Asia and I distinctly remember him telling me—long before it happened—that he could feel a turnaround happening for the Philippines. This session, to be moderated by Young Global Leader (YGL) Karen Davila, will also have as panelists Cherrie Atilano, cofounder and president of Gawad Kalinga Enchanted Farm Agricool, YGL Kevin Lu of international business school Insead and Marife Zamora, chair of Convergys Philippines Services Corp.

Over the years, the Philippines has been uplifted by overseas remittances and business process outsourcing and I’m hoping to see a vibrant discussion on other growth sectors that the country can tap.

Sessions on education, entrepreneurship and employment as well as equitable employment are likewise keenly awaited, given the region’s demographic profile which is heavily skewed toward the young.

Tessie Sy-Coson, vice chair of leading conglomerate SM Investments Corp., will be part of the panel on the education-enterprise employment nexus on Thursday, which will discuss strategies on generating employment and driving economic growth in the region. Likewise a panelist in this session is one of the country’s most prominent social entrepreneurs, Mark Ruiz, president and cofounder of Hapinoy/Microventures.

The forum is all about tackling global, regional and industry agendas that will change the game and as Rao often says, also about creating trusts, collaborations and partnerships via multistakeholder platforms. A lot of the interesting conversations will take place outside of the sessions, during coffee breaks, side events, networking lunches and evening receptions.

It will be three hottest days this summer.

Having personally participated in all these past three summits, I’m glad to see our country hosting this year’s East Asia summit in the next three days especially at the crucial juncture that the unification of Southeast Asian markets is almost upon us. It also comes at a time that the Philippines, a laggard for a long time, has become the region’s outperformer.

Now, it’s the Philippines’ turn to share with the world its turnaround story as the country rolls out the red carpet for over 600 corporate and civic leaders, policy-makers, social entrepreneurs who will tackle the opportunities and challenges faced by the region with the creation of Asean Economic Community by 2015.

It’s the same story that President Aquino and his economic team had pitched to investors many times before—in Davos, Switzerland, last year during the President’s WEF debut at the annual meetings, in Naypyitaw, Burma, during the last East Asia summit or in sovereign roadshows. It’s about this “sick man of Asia” making progress in curbing corruption as a means to drastically reduce poverty, thereby opening opportunities for consumers and businesses and promoting inclusive growth.

In the words of Tourism Secretary Ramon Jimenez, it’s an opportunity to look more closely at what some deem as the next “Asian miracle” which is but a logical approach to cleaning up a very dirty kitchen inherited from the previous regime, and operating better because it now has a relatively cleaner kitchen.

Ahead of the WEF East Asia summit, the Philippine sovereign—which already enjoys an investment grade from all three major credit rating agencies—got a further upgrade from Standard & Poor’s, which now rates the government at one notch above the minimum investment grade. And with a growth rate of 7.2 percent in 2013, the Philippines was the fastest-growing economy in Southeast Asia, and the second fastest in the whole of Asia, next only to China.

But it’s one thing for foreigners to hear about a good story and another thing to hit the ground to see for yourself. Some corporate leaders visiting the country for the first time, apart from picking the brains of fellow delegates, can better feel the pulse of the local Main Street: by talking to the taxi driver, the cashier at a local mall or the waitress. Some of them will probably stay for a few days after the summit for rest and recreation. When they see the countryside and talk to rural folks, they can be the better judge of whether the Philippines’ changing fortunes are gaining traction and more importantly, being shared by more people.

Who’s coming

The theme of the 23rd World Economic Forum on East Asia, which opens tomorrow and runs until Friday, is “Leveraging Growth for Equitable Progress,” reflecting the challenges faced by a fast-growing region, which is simultaneously grappling with persistent disparities in competitiveness and development.

Delegates will come from 30 countries, including leaders from 25 industry sectors—such as financial services, healthcare, agriculture, connectivity, social “intrapreneurship” and civic engagement. There will be at least two other heads of state or government joining Mr. Aquino: President Susilo Bambang Yudhoyono of Indonesia and Prime Minister Nguyen Tan Dung of Vietnam. Together, these three represent leadership in the three most populous and fastest-growing nations in the region, said Sushant Palakurthi Rao, WEF senior director and head of Southeast Asia.

World Economic Forum on inclusive growth opens

ALL eyes are on Manila as about 600 delegates from 30 countries converge here today for the 23rd World Economic Forum (WEF) to discuss how the rapid East Asian economic growth could distribute its benefits more equitably among its 600 million people.

The three-day meeting of representatives of business, government, civil society and academia convenes against a backdrop of not only impressive growth rates in the economic bloc, but also persistent disparities in competitiveness and development.

Aquino sent invitations to Chinese President Xi Jinping and Prime Minister Li Keqiang, but both did not even bother to reply.

The closest to a state official that China will have in Manila is an executive dean of Peking University.

Vietnam and China are also locked in a tense stand-off over a giant oil rig the Chinese towed into waters claimed by both countries.

Despite the growing tension, delegates expect the over-arching message from the forum to be one of pragmatism.

“My belief is that pragmatism rules, and a pragmatic view of the situation would suggest that peaceful resolutions of these issues would be made,” said the EU-Asean Business Council’s Donald Kanak.

PH back from the brink

Guillermo Luz, private sector cochairman of the National Competitiveness Council (NCC) and former executive director of the Makati Business Club ( MBC), said the forum could showcase the Philippines as a viable economic, financial, and investment hub for foreign visitors.

Chief market strategist Jonathan Ravelas of BDO Unibank, Inc. said the Philippines, being the host country, has reached an important milestone.

“Our economic ‘back-from-the-brink’ story is one of the best, if not the best, in recent years, being an economy with the youngest population in Asia, and with sustainable growth ranging from 6 to 7 percent,” Ravelas told The Manila Times.

However, aware that the country’s growth rates are high, what the WEF is likely to want to check out during the forum is the sustainability of that growth, said Alvin Ang, economist at the University of Santo Tomas.

“The forum will be an opportunity for the Philippines to say ‘yes, growth will be sustainable,’” Ang said.

The private sector plays a big part in that growth, particularly in job generation.

“We should raise the point that WEF member countries can help the Philippine economy grow by investing in it, in the productive sectors that could create jobs to sustain the current growth path,” Ang said.

Manufacturing offers many possibilities, he said. The sector needs more foreign direct investment so it can be more integrated into the Asean market.

Presenting what the Philippines has to offer to the global investment community with a stronger, broader, deeper participation from the both the private and public sectors will help Filipinos better understand the concerns of the investing community and be able to act on these concerns as soon as possible, said Jun Neri, Bank of the Philippine Islands chief economist.

The country has a big chance of success in vying for a share of the global market in services, but will have a more difficult time competing in agriculture and manufacturing if the current productivity does not improve, Neri said.

Luz underscores the country’s advantage in terms of manpower. “In the area of people, we have an advantage—but only if we educate and train our people,” he said.

“We will also have the largest working-age population [ages 18 to 64] over the next 30 to 40 years. If we educate and train our people for high- value jobs here or across Asean, that places the country in a strong position,” Luz said.

Local private industries and corporations that have been preparing and will continue to prepare for the 2015 target date for AEC will be able to compete better in areas that have not yet been liberalized.

“Those who do not prepare will suffer,” Neri added.

President Benigno Aquino 3rd and his team will be joined at the meeting by Nguyen Tan Dung, Prime Minister of Vietnam, Susilo Bambang Yudhoyono, President of Indonesia, and U Nyan Tun, Vice-President of Myanmar. Under the meeting’s theme, Leveraging

Growth for Equitable Progress, participants will discuss the opportunities to promote greater inclusion across East Asia, with a three- point agenda: achieving equitable progress, advancing models for sustainable growth and realizing regional connectivity. Big buzz phrases like “Asia’s next economic miracle” and “a dream of 600 million fulfilled” will not be in short supply when the 600 thinkers discuss the Asean Economic Community (AEC) during the event.

The AEC, a long cherished dream among 10 Asean countries that is expected to launch next year will be a common market with a combined gross domestic product of about US$2 trillion, according to a report by McClatchy Tribune Information Services (MCT).

By January 1 next year, tariff and non-tariff barriers across South-east Asia will be removed, and restrictions on services, investments and labor mobility eased.

“This brings unprecedented opportunities for partnership, trade and foreign direct investment,” said WEF managing director Philipp Rosler.

On the ground, however, economists and bureaucrats are carefully managing expectations, saying this “dream” is likely to arrive as a “series of little bangs” rather than a seismic shift.

Neither would the AEC upend the way business is conducted.

Gradual integration

“Integration is a process. It is not going to be a big bang,” said Philippine Finance Secretary Cesar Purisima. Europe, he pointed out, is still integrating more than three decades since the European Union was formed.

For Philippine Trade Secretary Gregory Domingo, the “big bang”

already happened four years ago, when nearly all tariff lines in South-east Asia were rolled back to zero or near-zero.

The big shift will be in non-tariff barriers that could see countries such as the Philippines easing limits on ownership of key industries and opening up more sectors to foreign competition, he said.

Already, big lenders from abroad, including Singapore-based Bridge Financial Services, are anticipating a law that will allow them to own 100 percent of Philippine banks, Edward Garcia, former president of the Rural Bankers Association of the Philippines, told

The Straits Times.

While this week’s WEF meeting will focus on the economic promises of Asean 2015, rising geopolitical tension in the region will not be far from the minds of the delegates.

China, which has seen its territorial dispute with the Philippines worsen in recent months, is apparently snubbing the host by sending just a token delegation to the forum this year.

Power, power, power. How much and who owns it in the Philippines

Promoting cross border investments to the Philippines over the years continue to be challenge and an opportunity. On one hand, the opportunity of abundant talent and natural resources are sufficient to attract investors. On the other hand, you have structural and systemic challenges like poor governance, insufficient infrastructure, harsh weather (typhoons, earthquakes, volcanic eruptions) and even legal barriers (foreign ownership restrictions) to discourage and most cases offset whatever attraction present. High power rates is one challenge which continue to exist despite of the best efforts of the government to deregulate and privatise it.

From Flat Planet

High Power Rates, Power Supply Problems Affect Investments in the Philippines

ElectricityThe Philippines’ high electricity rates have not only hurt ordinary consumers, but have also served as among the biggest barriers against investments in the country. Analysts say that what the Philippines needs the most is not more privatization and economic liberalization which have actually exacerbated rather than ameliorated the country’s structural economic weaknesses since the 1990s. What the country needs is a stronger state that (a) can bust oligarchic collusion, and (b) protect the interest of the consumers and productive sectors of the economy. 

Analysis by various research institutions show that the high costs and unreliability of electricity supplies in the Philippines are main deterrents to investing in the country.

According to Enerdata, foreign business leaders see the problem as a persuasive reason to invest elsewhere. Enerdata is an independent information and consulting firm that specializes in the global energy industry and carbon market. Apparently, foreign businesses are not blind to the fact that the power grid network should be upgraded to avoid regular rolling blackouts. The Aquino government also has to add more capacity and by some 1,000 MW every year between now and 2030 if the country is to win against the energy crisis. Foreign investors, it has been pointed out, are deterred by problems concerning power plant capacities as investors are unable to find reliable electricity cooperatives for distribution of their electricity output. This leads to delays in commitments and the risk of energy deficiencies during peak periods.

According to Enerdata, the Philippines is the only country in South-East Asia that does not subsidize electricity companies. Its generating capacity per capita is also relatively low – roughly five times lower than Malaysia and Thailand. Electricity prices at the cost of 18.2 US cents/kWh for industrial supply in 2012 are some of the highest in Asia. When considered that the GDP per capita is US$2,600, electricity rates prices are clearly prohibitive.

“When benchmarking Philippines against similar emerging countries such as Thailand, Indonesia and Malaysia then we can see that Philippines is badly suffering from a dip in foreign direct investment (FDI) into the country with electricity prices playing the part of bad actor. In the 1990s, the Philippines’ FDI were at the same level of the other benchmarked countries and 25 years later, it stayed at a level of US$1.5billion per year with the other three benchmarked countries FDI going up to values between US$7 billion per year to US$18 billion per year,” the report further explained. “Now, the Philippines has committed to install 1,000 MW per year, each year for the next 15 years. Assuming a split 25/75 between new renewable power plants and new thermal power plants, then we are talking about US$2.25 billion per year, that is equivalent to 150% of today FDI values.”

Impact on Businesses

The research institution stated that the Philippine government has some work to do to ensure there is the right balance between energy policies and electricity price to attract more foreign investment coming into the country to support the power generation growth in Philippines. For instance, the Philippines is a preferred BPO destination because of low labor costs, highly skilled and educated work force and high proficiency in spoken English. The growth of the BPO industry fuels demand for office space rentals which also cover electricity costs. The BPO sector is expected to grow and employ 120,000 jobs annually in the next three years.

In April 2013, the Contact Center of the Philippines (CCAP) said that the government, both local and national, should support energy savings and efficiency initiatives for commercial buildings and infrastructure to promote energy savings in the country’s businesses. The CCAP said that there should be four-way cooperation including the government and energy services companies (ESCO) to easily fund energy savings and efficiency initiatives and to give knowledge to small-scale commercial companies, particularly the BPO sector.

In a report in the Manila Times, the CCAP stated that because of building requirements that they be energy efficient, big companies and buildings were going to the point of financing their own energy efficiency and savings initiatives without any help coming from ESCOs or government.

In a related statement, the Filipino Franchisors Inc (AFFI) in April 2014 called on the government to provide power cost relief discounts while long-term plans to put in place low cost sources of energy are underway.” The very high cost of power remains a common complaint of businesses in the Philippines and a very important negative factor for national competitiveness,” the group said.

AFFI also pointed out that the Philippines has eased out Japan as having Asia’s most expensive electricity. The group cited an October 2010 study by the International Energy Consultants showing the average retail rate of electricity at $0.181 per kilowatt-hour (kWh) in the Philippines, as against $0.179 per kWh in Japan.

“Thus, in 2010 a factory in the Philippines likely paid more than twice as much for power than a factory in Indonesia and Vietnam and almost twice as much as a factory in Malaysia and Thailand. This scenario will be even more aggravated by power rate increases,” AFFI said. The group said bringing down overhead costs improves investment returns, allowing companies to employ more people, to re-invest in training, marketing, technology, product development and market expansion.

Exorbitant Electricity Rates

In the meantime, the Manila Electric Co.’s (Meralco) generation charge alone is already higher than the average electricity rates – which include generation and other charges as well as taxes – that American households pay on the average. Based on data released by the IBON research group, the average residential rates in the United States S in 2012 were pegged at 11.88 cents per kilowatt-hour (kWh) or around Php5.03 using that year’s average exchange rate of Php42.37 per US dollar. Meanwhile, IBON said that the average generation charge of Meralco in 2012 was Php5.61 per kWh, or 58 centavos higher than the average US residential rates.

The research group also noted that Meralco’s generation charge was higher than the residential rates paid by American households in 38 of the 51 US states. Meralco’s reported average residential rate for all its customer classes of Php9.64 per kWh in 2012 was almost double the US average during the same period.

Data on US electricity rates were culled by the Energy Information Administration (EIA) of the US, the world’s largest and most industrialized economy. According to IBON, the comparison underscores the extremely high cost of power in the Philippines and the onerous burden that Filipino electricity consumers – and by extension businesses — bear. It blamed the huge generation cost of Meralco to privatization, deregulation and full cost recovery under the Electric Power Industry Reform Act (Epira) of 2001. Meralco’s planned staggered rate hike of Php4.15 per kWh stemmed from its automatic generation rates adjustment (AGRA) which Epira allows.

Privatization and Corruption

Privatization also appears to be a causing problems in the power industry. According to Richard Hadrian foreign affairs and economic analyst in an article in Huffington Post (December 23, 2013), regulatory capture in the electricity industry of the Philippines undermines emerging markets.

Based on reports Heydarian cited, the Philippines’ high electricity rates have not only hurt ordinary consumers, but have also served as among the strongest disincentives against investments in the country, He stated that what the Philippines needs the most is not more privatization and economic liberalization which have actually exacerbated rather than ameliorated the country’s structural economic weaknesses since the 1990s. What the country needs, Heydarian argued, is a stronger state that (a) can bust oligarchic collusion, and (b) protect the interest of the consumers and productive sectors of the economy.

Protests against Relentless Electricity Rates

Various grassroots organizations and consumers groups have launched continuous protests in recent months to denounce corruption in government. When it was announced that the Meralco aims to implement an unprecedented electricity rate hike in three trenches in 2014, there was a massive outcry and the Aquino administration was forced to conduct investigation’s on the issue.

In December 2013, Energy Regulatory Commission (ERC) chief Zenaida Cruz-Ducut came under fire for overseeing the approval of Meralco’s request for rate increases. Ducat was also is implicated in corruption scam involving the Priority Development Assistance Fund (PDAF). She was a former member of the House of Representatives as then appointed to the ERC by the previous Macapagal-Arroyo administration. Ex-president Arroyo remains under hospital arrest and facing charges of corruption and betrayal of public trust.

Heydrian is also critical against privatization in the Philippine power industry. He explained that the power crisis derails the country’s programs for economic development.

“It is not a product of excessive state intervention and public mismanagement. Instead, it is a classic example of how economic liberalization — under the auspices of a corrupt political system and in the absence of a competitive private sector — has handed the key sectors of the economy to a handful of oligarchs, which have prioritized profits over capacity-building and accessibility.”

The AEC is upon us (5 of 5)

The ASEAN Economic Community (AEC), a common market among the member countries of ASEAN will be in force by 2015. It gives the Philippines the opportunity to cater to a much bigger market for its products and services. Likewise, it will also offer the same for other ASEAN member countries to enter the country to market in the country their products and services on the same basis. The following is last of 5 parts explaining the challenges and opportunities as a result of the AEC. My many thanks to SGV & Co for presenting this information.

From BusinessWorld Philippines

The challenge and opportunity of labor in the Philippines

In addition to high unemployment and underemployment, the country also suffers from low labor productivity. Part of the solution is increased investment in infrastructure and human capital. Let’s all try to find a way to help increase investment in the Philippines

From BusinessWorld Philippines

May 08, 2014

Country lags in labor productivity: World Bank

CREATING adequate and quality employment continues to be a challenge for Philippines, making it one of the worst-performing countries in the region in terms of labor productivity and inclusiveness despite the economy’s rapid expansion, according to the World Bank.

In “East Asia Pacific at Work: Employment, Enterprise and Well-Being,” a report released yesterday, the multilateral lender noted that while labor has helped the region develop, over the years, conditions in the labor market have stagnated due to the lack of appropriate policies, resulting in worsening inequality.

“As the region’s economic growth is moderating and labor costs are rising, constraints of the region’s current labor market and social protection policies are becoming a more pressing issue,” the bank said.

“Though relatively strong on paper, those policies are often poorly enforced, driving more people — especially women, young people and those with fewer skills, such as janitors and caterers — into unprotected, unregulated and untaxed jobs, or even unemployment,” the report noted.

The World Bank said that specific problems it found common among countries in the region are widespread economic informality, high youth inactivity and unemployment, rising inequality, and skills shortage.

“For example, in the past decade, the Philippines experienced much slower poverty reduction than its neighbors, despite respectable economic growth,” it said.

“This stagnation in living standards is linked to the low productivity of most forms of employment created by the economy,” it added.

According to the report, labor productivity in the Philippines has been “stagnant,” increasing the least among East Asian economies over the past 20 years.

“In terms of youth inactivity, measured by the number of people aged 15-24 years old not in employment, education or formal training, the Philippines has the highest rate in the region in that statistic,” Axel van Trotsenburg, World Bank East Asia and Pacific regional vice-president, also pointed out in a briefing yesterday.

“This shows that the country has difficulty absorbing young people, young graduates into the labor market… Even as the Philippines has a young population, there’s that difficulty,” Mr. van Trotsenburg said.

Karl Kendrick T. Chua, World Bank senior country economist for the Philippines, said that the country’s labor market woes stem from “a long history of underinvestment”.

“When Filipinos are given the opportunity, as evidenced by the millions of overseas Filipino workers, they can unleash productivity and income-earning activities that can benefit their lives,” Mr. Chua said.

“Majority of Filipinos are not given that opportunity because of underinvestment in human capital and also infrastructure, which hinders businesses from coming in and creating employment here,” he noted.

Mr. Chua said that while skills mismatches are also a problem, the bigger issue is really the lack of jobs and the opportunity for people to create their own jobs.

“We estimate that there are almost 1.2 million entrants to the work force every year… but only 250,000 will find jobs in formal sector, while maybe 200,000 will find jobs abroad, and the rest will be either unemployed or underemployed. ” he said.

Productivity is also hindered by the widely informal labor market, with 75% of employment in the country created in the informal sector, said Rogier van den Brink, World Bank lead economist for the Philippines.

“Nothing is inherently wrong with Filipino labor. They have proven that they are a competitive labor force,” said Mr. van den Brink.

“Creating opportunities for the workforce to prosper is really the challenge… How do you get more capital to go into the Philippine labor force? There is a whole range of issues that need to be addressed… and while it is very challenging, at the moment, things look good,” he noted.

Mr. Chua said that to create more and better jobs to support the government’s “inclusive growth agenda,” among the things that should be ensured are sustained investments in infrastructure, health, and education, the creation of a better business environment, and also complementary reforms in property rights.

For the region as a whole, the report also noted, policies should encourage mobility of labor and human capital and not favor some forms of employment over others.

“Countries should look beyond the labor market and focus on fundamentals, such as policies that ensure price stability, encourage investment and innovation, and support a regulatory framework that enables small- and medium-size enterprises, which employ most people in the region,” it said.

“Top-down industrial policies are less viable in today’s increasingly integrated and rules-based global economy,” said Truman Packard, World Bank lead economist.

“The region’s diverse economies, of course, call for different policy priorities. For the many countries that are still mainly agrarian, the report recommends that policy makers focus on boosting agricultural productivity and encouraging non-farm enterprises. For urbanizing economies, such as China, Indonesia, the Philippines and Vietnam, the report suggests that governments focus on making cities work better by boosting infrastructure and improving services,” Mr. Packard said.

Article location : lags in labor productivity: World Bank&id=87167

PH Banking apps demand is growing

Attention Aussie app developers. The Philippine banking industry is in need of apps to serve its customers.  Maybe even local app developers may like to join in as well.


From BusinessWorld Philippines

May 05, 2014

Local banks looking more at online, apps

LOCAL BANKS are increasingly looking to online and mobile banking for fresh revenue streams amid thinning trading gains and stiff competition in core businesses.

Bank of the Philippine Islands (BPI) boasts of having about half a million of its seven million customers using its mobile app and another two million signed up for online banking, according to Executive Vice-President Natividad N. Alejo.

Last week, the bank tied up with sister firm Globe Telecom, Inc. to boost that base, offering free internet access to the BPI app until August 31.

“We feel that expanding the usage of apps is the next step,” BPI Vice-President Armando T. Navarrete, Jr. said during last week’s announcement of the deal with Globe.

“We think the potential’s even much greater. The penetration of smartphones has been more than outstanding,” he added.

The bank’s competitors are playing catch-up. Metropolitan Bank & Trust Co.’s (Metrobank), whose mobile banking app has seen “significantly less” downloads according to an executive, said it was seeing less and less customers going to bank branches.

“Last February, we posted two new apps for Metrobank – a mobile app for iPhone and a mobile app for Android,” Metrobank First Vice-Presiden Mark Anthony B. Perez said.

According to Google’s app retail site, BPI’s app has had 100,000-500,000 downloads while Metrobank’s has only had 5,000-10,000 so far. BDO Unibank, Inc. (BDO)’s own app, meanwhile, has also been downloaded 100,000-500,000 times.

In Apple’s Philippine App Store, only two banking apps have made it to the top 200 free apps: BPI’s in 52nd and the BDO app in 124th.

BPI has had a considerable head start. The Ayala-led bank first offered its mobile banking app on September 1, 2011, much earlier than the debut of BDO’s app on July 31, 2013 and Metrobank’s February entry.

Whichever way the race is going, though, there is no denying online and mobile banking are gaining popularity, and fast.

“In terms of growth, [Metrobank’s online banking platform] is getting more than five times what I was getting in enrollment last year … I think I’m now hitting eight times, nine times bigger in terms of enrollment,” Mr. Perez said.

BPI also said that face-to-face branch-based transactions are on a general decline.

“The [majority] of transactions have actually gone to our alternative channels … When we say alternative channels, that’s everything that’s not the branch,” Mr. Navarrete said.

Monetizing these services, however, appears to be the tricky part.

“We actually don’t make money off the channel,” Mr. Navarrete said. “The way we help is by making the services available in alternative channels. We have not really fixed a figure to that.”

Asked whether BPI would open up its mobile platform to advertising, Mr. Navarrete said this was a possibility.

“Not at this time … Eventually we’ll look at it — I promise we’ll look at it.”

Metrobank First Vice-President Jette C. Gamboa framed Metrobank’s efforts in the context of decreasing margins in traditional businesses.

“There’s so much competition on the lending side of the business. I think in the Philippines, in total, the net interest income is more than half of any bank’s revenue base,” Ms. Gamboa explained.

“If that is now subject to a lot of competition, then naturally, you have to look at other revenue streams, which is your fee-based income.”

“The idea,” Mr. Perez said, “is that customers would be willing to pay if there is value to your offer.”

“That’s why, for retail, we’re also talking about customer experience. You cannot go in and start moving towards these particular products and services, and not pay attention to the fact that fees come from customers.” — R. L. B. Aquino

Article location : banks looking more at online, apps&id=87001

The AEC is upon us (4 of 5)

The ASEAN Economic Community (AEC), a common market among the member countries of ASEAN will be in force by 2015. It gives the Philippines the opportunity to cater to a much bigger market for its products and services. Likewise, it will also offer the same for other ASEAN member countries to enter the country to market in the country their products and services on the same basis. The following is 3 of 5 parts explaining the challenges and opportunities as a result of the AEC.

From BusinessWorld Philippines

May 04, 2014

AEC 2015 Prospects: Services sectors abroad

(Fourth in a five-part series)
IN LAST week’s column, we discussed the Philippines’ commitments to liberalize its services sector. We will continue to look into services, but this time from the perspective of our ASEAN neighbors — what are they offering in return?

The Philippine services sector has long made forays into international markets even beyond Southeast Asia. We have seen, for instance, a Filipino mall chain setting up a megastore in China, a local port operator buying into Latin American ventures, several banks setting up remittance centers in the Middle East, and the continued expansion of the business process outsourcing (BPO) industry’s client base in Europe and the United States.

Some firms seeking to operate closer to home, however, have complained about regional barriers. According to a 2013 study by the government think tank Philippine Institute for Development Studies (PIDS), companies here have commonly cited the following deterrents to selling their services to the ASEAN market: restrictions on legal entities, discriminatory taxes, and a lack of information on opportunities. Furthermore, businesses seeking to set up local operations in ASEAN countries said minimum capital requirements, restrictive labor regulations, legal rules for partnerships, and licensing requirements for professionals were significant stumbling blocks.

These are the observations about the countries in the region — the Philippines included — that have been generally conservative in their pledges to liberalize their services sector. Nevertheless, opportunities can be spotted if one takes the time to comb through the members’ packages of commitments.

Our research shows that across three types of indicators — labor productivity, growth rates, and contribution to the service sector’s total output — five service areas consistently come out as the Philippines’ niches: (1) wholesale and retail trade, (2) transport and communications, (3) financial intermediation, (4) real estate, and (5) business services.

As Department of Trade and Industry Secretary Gregory L. Domingo said in an April 10 forum organized by the DTI and USAID, the Philippine services sector is poised to come out on top in the region due to its educated and capable workforce.

What opportunities, then, lie in store for Philippine firms in these five areas, particularly in the key ASEAN markets of Singapore, Malaysia, Indonesia, Thailand, and Vietnam?

The annexes of the 8th ASEAN Framework on Services (AFAS) suggest that wholesale and retail trade distribution is among the more liberalized service industries among the members. Singapore, for instance, has declared that there are to be no market access limits involving the commercial presence of ASEAN firms engaged in commission agent services and the wholesale trade of products except for pharmaceutical and medical goods and cosmetics.

Both Singapore and Vietnam have also stated that there are to be no market access and national treatment limits on the commercial presences of franchising services in their countries, except that the chief of branch in Vietnam has to be a resident there. Malaysia and Indonesia, for their part, have declared that they allow up to 51% foreign equity in several trade distribution services.

The liberalization of the transport sector is more of a mixed bag. For air transport, the ASEAN Secretariat and the World Bank jointly said in their integration monitoring report last year that there has been “very good progress and good growth” in this priority sector, as indicated by the bilateral air agreements for increased flight seats and frequencies. However, they noted that more work needs to be done in granting the Fifth Freedom in the region — that is, the right to ferry passengers and cargo between foreign countries and not just the home country of an airline. The report notes that Cambodia, Indonesia, Laos, and the Philippines have not yet ratified key agreements relating to the Fifth Freedom.

For the maritime sector, there are less liberalization commitments tabled. Many countries in the region impose limits on foreign equity in maritime and auxiliary services. Some bright spots, however, include towage and shipping brokerage in Singapore where there are no declared market access limits on commercial presence in its AFAS annex. Unfortunately, limits do abound around the region in terms of road and rail transport industries.

In telecommunications, some countries permit foreign entities to hold a majority stake. Singapore’s AFAS annex states that it allows a cumulative total of 73.99% foreign equity in several telecom services, based on 49% direct investment and 24.99% indirect investment. Vietnam, for its part, declared that “foreign capital contribution shall not exceed 51% of the legal capital of the joint ventures” for various telecom services, while Malaysia has pegged theirs at a higher 70% foreign shareholding in service providers. Thailand, in contrast, stated that foreign equity participation must not exceed 49% of the registered capital.

Judging from the ASEAN members’ package of commitments, the financial intermediation industry is perhaps the most closely guarded. Several members impose a limit on the number of foreign bank branches, their lending volumes, and the number of foreign executives.

Malaysia, for instance, confines the entry of offshore banks and insurance firms to the federal territory of Labuan. It further mentions that only 13 wholly foreign-owned commercial banks are permitted to remain wholly-owned by their existing shareholders and has reserved the right to keep its policy for new licenses “unbound.” Singapore has similarly stated that new foreign banks may only be established as offshore bank branches or representative offices. Indonesia has stated that there are to be only two sub-branches and two auxiliary offices for a foreign bank’s branch office or for a joint venture bank. Vietnam has a condition whereby it “may limit equity participation by foreign credit institutions in equitized Vietnamese state-owned banks” to equal that of Vietnamese banks. In Thailand, a foreign firm’s market access to locally incorporated banks is limited to the acquisition of shares in existing banks, with the caveat that foreign equity participation is restricted to a maximum 25% of paid-up registered capital.

Many other restrictions are detailed in each country’s fifth package of commitments for financial services; these are worth a careful read for financial institutions keen to expand in the region.

Meanwhile, firms engaged in property management, rentals, urban planning, and even landscaping would do well to look into our neighbors’ liberalization commitments. Singapore has declared that there will be no limits on ASEAN countries’ market access and treatment in terms of commercial presence in the areas of residential and non-residential property management, except for the resort island of Sentosa and the Southern Islands of Singapore, which only the Sentosa Development Corp. is allowed to develop and manage. In Indonesia, ASEAN firms are allowed to hold not more than 51% of the share capital of a joint venture company with a local partner for services like urban planning and landscaping. Thailand has declared that it allows up to 70% foreign equity participation in joint venture firms with a Thai national providing urban planning services limited to land use, site selection, road systems and servicing of land. It further stated that it allows up to 49% foreign equity participation in the registered capital of firms involved in residential property leasing and management, and up to 70% for residential condominium management.

In comparison, the business services sector is fraught with more restrictions, particularly with regard to the licensing of foreign professionals. Firms in the areas of architecture, law, engineering, accountancy, advertising, computer services, and management consultancy — among others — would do well to look into the AFAS annexes of Singapore and Vietnam, which offer opportunities for foreign entry. Malaysia, Indonesia, and Thailand, meanwhile, allow majority foreign equity in some of these services.

As with anything in business, information is the key to a winning strategy. As wealth in this emerging part of the world continues to grow and trickle down, the demand for services will increase rapidly to support the smooth running and expansion of ASEAN economies. Many opportunities in the region lie in store for Philippine service firms as long as they come prepared.

J. Carlitos G. Cruz is the Vice-Chairman and Deputy Managing Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Article location : 2015 Prospects: Services sectors abroad&id=86915


The AEC is upon us (3 of 5)

The ASEAN Economic Community (AEC), a common market among the member countries of ASEAN will be in force by 2015. It gives the Philippines the opportunity to cater to a much bigger market for its products and services. Likewise, it will also offer the same for other ASEAN member countries to enter the country to market in the country their products and services on the same basis. The following is 3 of 5 parts explaining the challenges and opportunities as a result of the AEC.

From BusinessWorld Philippines

April 27, 2014

AEC 2015 Prospects:
Services Integration

(Third in a five-part series)
THE PHILIPPINE economy is driven by the services sector. The country’s banks, telcos, malls, and call centers all hum with a level of frenzied activity, unmatched by farms and factories. Just last year, the sector accounted for roughly 60% of Gross Domestic Product (GDP).

It is therefore understandable that the planned integration of services into the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) has caused firms and professionals to worry about foreign competition, falling market share, and a race for jobs.

This anxiety is largely unfounded or misplaced at best. The Philippines has in fact not made substantial commitments to open up its services market, a development which some have tagged as the true cause for concern.

Under the AEC Blueprint, members of the regional bloc are meant to “remove substantially” all restrictions on priority sectors — air transport, e-ASEAN (information communication technology), health care, tourism, and logistics — by 2013, and by 2015 for all the other sectors. Members are also supposed to allow ASEAN equity participation of 70% for all service sectors by 2015. This ambitious goal, however, is tempered by the provision that “pre-agreed flexibility shall be accorded to all ASEAN member countries.”

The Philippines has made use of this leeway. As such, it ranks second only to Brunei in promising the least services liberalization among the 10 member countries, according to a study published in 2012 by the Economic Research Institute for ASEAN and East Asia. Furthermore, what few commitments the Philippines signed are not substantially different from what it already offered under the 1995 General Agreement on Trade in Services (GATS).

A closer look at the country’s package of commitments under the ASEAN Framework Agreement on Services (AFAS) confirms this. From the get-go, the Philippines has stated in its horizontal commitments that market access is to be limited “in all activities expressly reserved by law to citizens of the Philippines (i.e. foreign equity is limited to a minority or zero share.)”

Furthermore, it has also limited the entry and temporary stay of natural persons supplying services by stating: “Non-resident aliens may be admitted to the Philippines for the supply of a service after a determination of the non-availability of a person in the Philippines who is competent, able, and willing, at the time of application, to perform the services for which the alien is desired.”

These blanket conditions effectively narrow the liberalization expected from the Philippines in terms of the so-called Modes 3 and 4 deliveries of services. The two modes refer to provision of services either through the physical presence of a foreign company (by way of equity in a local firm) or an alien worker on Philippine soil — areas where liberalization makes a greater impact. Modes 1 and 2 — the consumption of services abroad or cross-border transactions, say, through online transactions — are generally liberalized already but are useful only for those services which by nature do not require physical presence.

The restrictive conditions thus maintain the status quo for service subsectors. For instance, the transport, construction, energy distribution, and telecommunications sectors — among the more vibrant sectors perceived critical to economic growth — remain restricted with foreign equity permitted up to 40%.

Some subsectors are granted a higher foreign equity ceiling but actually entail steep requirements for the practice of the very professionals these businesses rely on. The Philippines’ AFAS annex states that wholesale and retail trade, publishing, management consultancy, property management, and research and development are among those where up to 51% foreign equity participation is allowed. However, foreigners who want to work in the companies they establish must secure government determination of non-availability of local labor.

ASEAN professionals, meanwhile, are allowed to set up firms or partnerships in the Philippines for the practice of architecture, civil engineering, and auditing, among others. However, the AFAS annex further states that they must not only acquire Philippine licenses and public practice experience, their own country must also admit Filipinos to “practice the same profession without restriction or allow Filipinos to practice it after passing the exam on equal terms with foreign citizens, including unconditional recognition of degrees/diplomas.” These sub-sectors are also covered by the blanket condition of local labor non-availability.

It is important to note, however, that temporary permits are nonetheless granted to foreign workers if they are business visitors, intra-corporate transferees, or investors.

That is not to say that there are absolutely no opportunities for foreign investors (or local firms seeking foreign infusion). Perusing the AFAS annexes reveals three bright spots.

First, there are those subsectors for which the Philippines declared that 100% foreign equity participation is allowed: computer services, foreign-funded, internationally-bid construction projects, hospital services, international freight forwarding by sea, oil and gas exploration (subject to the President’s approval) and construction of power plants under the build-operate-transfer scheme.

A second opportunity to access the local market is through the delivery of certain services without the presence of the commercial entity or alien worker in the Philippines. Most of the service subsectors have been liberalized in this respect. Although this is not a new development with online transactions now commonplace, it is nevertheless an opportunity that can be explored. These specific services are detailed in the Philippines vertical commitments as part of the 8th AFAS package, which can be found on the Invest ASEAN Web site.

The third, albeit harder won, opportunity for market access is through reciprocity. As mentioned, ASEAN professionals may be allowed to practice locally if their country extends the same courtesy to Filipino counterparts. The Philippines is signatory to eight mutual recognition arrangements (MRAs), which pave the way for ASEAN members to accept accreditations and allow the practice of professionals in the following services: engineering, nursing, architecture, surveying, medicine, dentistry, accountancy, and tourism.

However, more work is needed to transform these frameworks into implementable procedures. According to a report from the Philippine Institute for Development Studies (PIDS), the government think tank, progress varies for each profession. For architecture and engineering, a registration mechanism is in place to qualify as an ASEAN architect or engineer, with a few more assessment policies left to be ironed out. For accounting, surveying, medical, dental, and nursing services, the MRA implementation mechanisms are reportedly still in the works. On top of these, PIDS has noted that “domestic laws and regulations need to be changed in order to align with and support the specific MRAs.”

As such, drastic policy changes for the service sector are not expected in the near term, even as the AEC is meant to be officially established next year. This at least provides the Philippines more time to assess its services strategy and also to take advantage of the existing offers from its neighbors, which will be detailed in the next installment of this series.

Indeed, competitive pressures may be felt if the services sector is opened up to our ASEAN neighbors but, at the same time, a well-planned liberalization effort that is coordinated with the rest of the region could also mean increased opportunities for Philippine firms and the world-class Filipino worker.

J. Carlitos G. Cruz is the vice-chairman and deputy managing partner of SGV & CO.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Article location : 2015 Prospects:
Services Integration&id=86614


The AEC is upon us (part 2 of 5)

The ASEAN Economic Community (AEC), a common market among the member countries of ASEAN will be in force by 2015. It gives the Philippines the opportunity to cater to a much bigger market for its products and services. Likewise, it will also offer the same for other ASEAN member countries to enter the country to market in the country their products and services on the same basis. The following is 2 of 5 parts explaining the challenges and opportunities as a result of the AEC.

From BusinessWorld Philippines

April 20, 2014

AEC 2015 Prospects:
Qualifying for FTA Tariffs

(Second in a five-part series)
ANY SAVVY executive knows that a deal isn’t done until the money is in the bank. The same may be said for the Association of Southeast Asian Nations (ASEAN) Trade in Goods Agreement (ATIGA), where negotiated tariff cuts are only meaningful when traders are able to use them.

Many more tariff cuts await enterprising companies in 2015 for goods including rice, sugar, and automotives, as discussed in the pilot of this five-part series on the ASEAN Economic Community (AEC). The next question, however, is how can traders qualify for such preferential tariffs?

So far, there has been mixed feedback on whether companies really take advantage of free trade agreements (FTAs) in the region. According to a 2009 study by Masahiro Kawai and Ganeshan Wignaraja of the Asian Development Bank, only 20% of companies surveyed in the Philippines said they were using FTAs, a rate bested by the 25% utilization in Thailand. Meanwhile, a figure from the ASEAN Secretariat quoted by the Department of Trade and Industry places the Philippines’ utilization at a less dire 41.15% in 2010.

One of the reasons firms reportedly hesitate to use FTAs is the cost associated with obtaining a Certificate of Origin, which proves that a certain good is made up of inputs from participating FTA members. Only then can it qualify for zero or lower tariffs. It is the exporter’s responsibility to secure this certificate so that the importer at the good’s destination can enjoy the preferential tariffs.

Obtaining the Certificate of Origin can be condensed into three steps. First, a trader must determine which FTA to use and what tariff rate is assigned to the product in question. For goods traded among Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, traders should apply the provisions of the ATIGA. Firms would also do well to take a look at ASEAN FTAs with Australia, China, India, Japan, Korea, and New Zealand if their business involves these countries. The right tariff code and tariff rate are stated on the importing country’s Schedule of Tariff Commitments, which is usually posted as an annex to the agreements on the ASEAN Web site.

The second step is to prove that the product to be exported is produced mainly in the ASEAN. Two criteria are used to indicate this: either (1) the item derives not less than 40% of its inputs from the region — a figure called the Regional Value Content (RVC), or (2) the non-ASEAN imported input was substantially transformed such that the tariff classification changes at the four-digit level.

If the exporter wants to qualify for preferential tariffs by demonstrating an RCV of not less than 40%, this can be computed directly by dividing the sum of the ASEAN material cost, direct labor, direct overhead, other costs, and profit over the good’s Freight on Board (FOB) price. Exporters are also allowed to meet the RVC rule through an indirect method of calculation wherein the value of non-originating materials is subtracted from the FOB price and the difference is divided by the FOB price. Supporting documents on these are needed for the application for and release of a Certificate of Origin.

Alternatively, an exporter may qualify for preferential tariffs by demonstrating a change in the tariff heading of the finished good. For instance, leather lining imported from Spain falls under Harmonized System Code (HSC) 6406.10.100. Assume that the leather lining is manufactured in the Philippines into shoes for export to the ASEAN. Since leather shoes are classified under HSC 6403.20.000, the first four numbers are different from that of the leather lining, and thus represent a substantial transformation. Because of this, the product is now eligible for preferential tariffs under ATIGA.

Once the Certificate of Origin is obtained, the third step is to send it to the importer who will then present the document to his or her country’s customs authority. Only then can the good enter its destination at the lower or zero tariffs provided by ATIGA or the other ASEAN FTAs.

Understandably, traders may find the process cumbersome, especially if they deal with fast-moving or perishable goods that cannot afford to be delayed by paperwork. Traders may also run into difficulties if they work with fledgling suppliers who may not be familiar with the systems needed to track the origin of inputs. This can be the case especially when a company applies for a certificate for the very first time for a certain product as there may be verification processes and ocular inspections to hurdle. While it can be faster to obtain a certificate for recurring shipments, it is important to note that Customs reserves the right of inspection whenever it deems it necessary. Recognizing this, some ASEAN members are trying out a self-certification program to make it even easier to avail of the preferential tariffs.

The Philippines, in particular, is part of the second pilot project on self-certification which aims to altogether do away with the process and instead allow qualified exporters to merely declare that their goods indeed comply with the rules of origin. Under Bureau of Customs (BoC) Administrative Order 06-2013 dated Dec. 12, 2013, exporters who wish to be certified must, among others, have been exporting to any ASEAN member state for at least a year, have officers who have sufficient knowledge and competence in the application of rules of origin and have undergone training on this pilot project conducted by BoC, and is a legitimate manufacturer or producer.

It should be emphasized, however, that the second pilot project counts Indonesia and Laos as the other participants, and in the meantime, self-certifications in the Philippines will only be honored in these participating countries. A separate pilot project implemented among Brunei, Malaysia, Thailand, and Singapore will end on Dec. 31, 2015. Hopefully, this will be replaced by a region-wide self-certification process.

This innovation — along with many others in the pipeline, such as the ASEAN Single Window for faster Customs clearance, harmonization of members’ product standards, and engagement with the private sector on non-tariff barriers — should further improve the ease and transparency of FTA usage in the region. A business-friendly regime for trade in goods, after all, is an essential complement to a thriving trade in services — which will be the topic for next week’s installment of this AEC series. Businesses have much to look forward to on the road ahead.

Emmanuel C. Alcantara is the head of the tax division of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Article location : 2015 Prospects:
Qualifying for FTA Tariffs&id=86269


AEC is upon us (part 1 of 5)

The ASEAN Economic Community (AEC), a common market among the member countries of ASEAN will be in force by 2015. It gives the Philippines the opportunity to cater to a much bigger market for its products and services. Likewise, it will also offer the same for other ASEAN member countries to enter the country to market in the country their products and services on the same basis. The following is 1 of 5 parts explaining the challenges and opportunities as a result of the AEC.

From BusinessWorld Philippines

April 13, 2014

AEC 2015 Prospects
Part one: Overview and trade in goods

AS THE day of reckoning for the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) draws closer, our clients have been asking how further integration will impact doing business and operating in a regional environment given the diversity of culture, political platform, scale of market and geography.

Though many companies have long engaged in cross-border operations in the region, the larger market access envisioned under the AEC raises questions about what to expect and how to adjust. To answer these, we are rolling out a five-part series in this column to not only condense explanations on the ASEAN’s various agreements but also to pinpoint opportunities and challenges in 2015 and beyond.

This first installment will provide an overview of the opportunities, challenges and the overall big picture scenario in the AEC before delving into the nitty-gritty of trade in goods — particularly what to expect in terms of tariff cuts as we move toward a single regional market and production base. Next week, Part Two will explain how to qualify for lower or zero tariffs by making sense of tariff codes and rules of origin. Parts Three and Four will go on to discuss services liberalization, starting with the Philippines’ commitments and then those of other key ASEAN members. Part Five will conclude with a look at envisioned enhancements to the flow of investment within the region.

The AEC is due to be officially realized by Dec. 31, 2015, five years ahead of the original deadline, following an acceleration agreement signed by ASEAN leaders in Cebu. However, in that same city just last February, Department of Trade and Industry Assistant Secretary Ceferino S. Rodolfo emphasized that the AEC is actually virtually upon us already.

Speaking to participants at the ASEAN Economic Forum organized by SGV & Co. and the Sun.Star media group, Mr. Rodolfo pointed out that more than 90% of tariffs among the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) have already been at zero since 2010. The other members — Cambodia, Myanmar, Laos, and Vietnam (CMLV) — are likewise undertaking tariff cuts albeit at a slower pace.

After all, the idea underpinning the blueprint is to phase in the initiatives depending on the development of each member. This is in keeping with AEC’s goal to achieve not just a single competitive production base integrated with the rest of the world, but also one that engenders equitable economic development. By tailoring the initiatives to each member’s capabilities, the integration project does not pit ASEAN members only as competitors but also as complements.

Taking on this mindset of complementarity will help companies unlock the ability to imagine the full potential of the AEC. The question is no longer solely about what business will be lost to competitors but, instead, what gains can be reaped from new alliances.

Some firms have long recognized this. They import inputs such as intermediate goods and services from neighboring suppliers, allocate operations across their ASEAN subsidiaries, and leverage the region’s combined consumer bases as a larger selling platform. This has been the case in the electronics, automotive, and consumer products industries even back in the 1990s.

Moving forward, the AEC can be expected to enhance the use of such linked supply chains and cooperative strategies with the freer flow of capital, investments, services, and — not least of all — goods. Capital flow and demographic shift could also be enhanced with a single market and production base.

For 2015 specifically, opportunities relating to the single market and production base can be gleaned from combing through the countries’ tariff commitments in the annexes of the ASEAN Trade in Goods Agreement (ATIGA).

Our research shows that the bright spots for 2015 are two-fold: first, increased market access to the lesser developed but fast-growing CMLV, which are beginning to ease more into the AEC; and second, a lowering of tariffs on sensitive agricultural products like rice and sugar among the more affluent ASEAN-6. In short, firms’ regional strategies will be enhanced with the inclusion of more members and more sectors into the integration project next year.

The CMLV market is particularly promising because it is a valuable addition to the market of the ASEAN-6, which had pursued integration more aggressively. The International Monetary Fund expects Vietnam’s Gross Domestic Product to grow by 5.4% in 2014 and 2015, while Cambodia’s economy is forecast to expand by a swifter 7.2%-7.3%.

A key change anticipated in 2015 is Vietnam’s commitment to cut even further tariffs on imported automotives and motorcycles, thus creating an opportunity, say, for car companies to export units from the Philippines instead of putting up a factory in Vietnam. Vietnam’s tariffs on imported vehicles are slated to fall to 35% in 2015 as part of a yearly cut in the tariff, which is meant to drop to 0% by 2018 according to news reports. Already, Vietnam’s 2012-2014 tariff schedule shows that import duties which stood at 70% in 2012 have been cut by 10 percentage points each year ending at 40% for 2014.

Furthermore, according to the Philippines’ Tariff Commission, Vietnam has committed to eliminate its existing tariff rate quotas (TRQs) in three tranches leading to 2015 with flexibility up to 2018. Vietnam imposes TRQs on eggs, cane sugar, tobacco, and salt.

Cambodia’s tariff schedule, on the other hand, shows that various goods imported with 5% tariffs will enjoy a 0% to 5% rate come 2015, signaling possible elimination of, or at least cuts in, duties. These goods include Philippine key exports such as wiring harnesses, chemicals, bananas, mangoes, seaweed, and many others.

Laos, for its part, had committed to implement tariff cuts on sensitive agricultural produce back in 2013, but it is slated to slash tariffs even further in 2015 for a host of vegetables and fruits such as onions, cucumber, sweet corn, cassava, and papaya. Myanmar, meanwhile, has pegged the tariff for certain rice varieties at 5% for the next year.

Similarly, the Philippines and other ASEAN members have committed to slash tariffs on rice and sugar. In the Philippines, rice tariffs will fall to 35% from 40% in 2015 under Executive Order (EO) 894, making it cheaper to import rice from ASEAN members like Thailand and Vietnam that are large rice producers. For sugar, the tariff imposed by the Philippines on ASEAN imports will fall to 5% from 10% in 2015 under EO 892.

Companies that work with these commodities would also do well to check tariff cuts in other ASEAN countries scheduled for 2015, as this could translate into opportunities to either export such goods or set up processing factories that rely on them as input.

Indonesia, for instance, has committed to slash rice tariffs to 25% in 2015 from 30% in 2014. It has also committed to cut tariffs on cane sugar to 5% from 10%, while for refined sugar, Indonesia’s commitment is to bring tariffs down to 10% from 20%

Besides tariff cuts among the 10 ASEAN members, there may be other opportunities in store in the six markets with which ASEAN has free trade agreements, namely: Australia, New Zealand, India, China, Korea, and Japan, which together account for a hefty portion of world trade.

Businesses equipping themselves with information may have already won half the battle as preparation can spell the difference between gains and losses. The next concern moving forward will be the execution steps across the region. A case in point is how to avail of such preferential tariffs amid the various rules on origin imposed by Customs authorities, a topic which will be tackled in the next part of this series.

Cirilo P. Noel is the Chairman and Managing Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

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