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.
TRANSPORT AND COMMUNICATIONS
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.
REAL ESTATE AND BUSINESS SERVICES
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.
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