The Report: The Philippines 2015

CONTENTS THE PHILIPPINES 2015
TRADE & INVESTMENT

49 Aiming higher: Gradual market reforms should
56
58
59
60
Catching up
Page 29
The Philippine economy is seeing rapid, broadbased growth as BPO and rising remittances
from overseas workers drive consumer industries and construction. Real growth, despite
slowing in 2014 to 6.1%, still outdid regional
peers and is expected to hold near 6% for the
rest of the decade. Infrastructure bottlenecks
are a key challenge as the government pushes
to aid sectors with potential in outlying regions.
BANKING
67 Positives abound: Sector expansion continues as
deposits and lending increase

72 Interview: Amando M Tetangco Jr, Governor,
74
75
76
SNAPSHOT
The Philippines in figures
COUNTRY PROFILE
79
12 Got to be real: Favourable demographics and
14
16
17
22
26
improving governance make the Philippines a

market for investors to watch closely
Interview: President Benigno Aquino III
Viewpoint: US President Barack Obama
Ready to vote: With elections coming in 2016,
voters are keenly discussing major issues
Taking the lead: Ongoing regional integration has
brought opportunities to a range of industries
Viewpoint: Nicolas Hulot, Special Envoy of
the French President for the Protection of the
Planet
see exports and investment increase

A city will rise: Development of a vast new urban
centre is planned in central Luzon
Bouncing back: The local electronics industry is
benefitting from higher global demand
Interview: Alfred M Yao, President, Philippine
Chamber of Commerce and Industry
Roundtable: Arthur P Tugade, President and CEO,
Clark Development Corporation; Deogracias G P
Custodio, Chairman and Administrator, Freeport
Area of Bataan; Lilia B de Lima, Director-General,
Philippine Economic Zone Authority; and Roberto
Garcia, Chairman and Administrator, Subic Bay
Metropolitan Authority
Bangko Sentral ng Pilipinas

Interview: Hikmet Ersek, President and CEO,
Western Union
Size matters: With rising competition and tighter
requirements, rural banks decline in number
Roundtable: Batara Sianturi, CEO, Citibank
Philippines; Wick Veloso, CEO, HSBC Philippines;
Herminio Famatigan Jr, President & CEO, Maybank
Philippines; and Mahendra Gursahani, former
CEO, Standard Chartered Bank Philippines
Changes ahead: Foreign investment rules loosen
CAPITAL MARKETS
82 Climbing higher: The market shows a strong
performance, with new trading options to come

86 Growth factors: The year 2014 sees a surge in
corporate bond issuance

87 Interview: Jose Pardo, Chairman, Philippines Stock
Exchange
88 Interview: Eduardo V Francisco, President, BDO
Capital & Investment Corporation, and Co-chair,

Capital Market Development Council
Stocks & bonds: Share analysis & data provided
by BDO Capital & Investment Corporation
ECONOMY
29 Catching up: There are signs that the recent high
growth rates may be sustainable

35 Interview: Cesar V Purisima, Secretary,
Department of Finance
36 Viewpoint: Ramon R del Rosario Jr, Chairman,
37
39
42
44
Makati Business Club, and President and CEO,

PHINMA
Eye of the storm: Improved emergency response
Dialogue: Doris Magsaysay Ho, President and
CEO, A Magsaysay, and Jaime Augusto Zobel de
Ayala, Chairman and CEO, Ayala Corporation
All in a days work: The country has long been
known for its large qualified workforce
Closing the gap: Renewed growth could be the
key to addressing inequality
89
90
91
92
92
94
Aboitiz Power: Power generation

DMCI Holdings: Construction & power
First Gen: Power generation
Lafarge Republic: Building materials
Petron Corporation: Oil refining
SM Prime Holdings: Mall operations
INSURANCE
96 Steady through the storm: The industry expands
despite the effects of natural disasters

100 Against the worst: The range of schemes for
natural disaster insurance broadens

102 Interview: Peter G Coyiuto, President & CEO, First
Life Financial Company
ISBN 978-1-910068-26-7
Editor-in-Chief: Andrew Jeffreys
Managing Editor, Asia: Paulius
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Editorial Manager: Rodrigo Diaz
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Senior Sub-Editor: Jennie Patterson
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TOURISM
Chairman: Michael Benson-Colpi
134 More fun under the sun: The government steps
Director of Field Operations: Elizabeth

Boissevain
up its commitment to bring in more visitors

141 Lets meet up: An attractive MICE segment
142 Interview: Ramon R Jimenez Jr, Secretary,
Managing Director, Asia: Laura Herrero

Country Directors: Lauren Denny, Rosa
Piro
Department of Tourism
143 Looking up: Increasing connectivity and
Field Operations Executive: Meltem

Okur
Field Operations Assistant: Arda zgen
accommodation will be key to future growth

145 Natural beauty: Responsible development and
Project Coordinator: Diorel Ollodo

Project Assistant: Ma. Ila Jeanne Perez
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protection of natural attractions will be a priority

147 Dialogue: Cristino L Naguiat Jr, Chairman & CEO,
Philippine Amusement & Gaming Corporation,

and Stephen Reilly, COO, Resorts World Manila
Reversing the trend

Page 116
With an impressive 7.2% growth rate, a rise in
business activity and increased consumer
spending power, the Philippines is one of the
regions most promising retail destinations.
The governments emphasis on competitiveness and added value should help firms
integrate into the ASEAN market, presenting
many promising opportunities for new entrants.
ENERGY
104 Watts next?: With oil production set to remain
flat, a shift to new sources is needed to reduce

dependence on foreign imports
108 Stemming the tide: Diplomatic disagreements
have overshadowed the opportunities opened
up by new exploration
109 Interview: Edgar O Chua, Country Chairman, Shell
Companies in the Philippines
110 Interview: Francis Giles B Puno, President & COO,
First Gen Corporation
111 Power outage: Generation capacity has not kept
pace with economic growth, leading to potential
shortfalls
113 Opening up: Renewable energy has enjoyed its
most productive year to date
INDUSTRY & RETAIL

116 Reversing the trend: Industrial policy is reviving
the sector with a special focus on segments with

scope for growth
121 Interview: Hikosaburo Shibata, President and
CEO, Mitsubishi Motors Philippines
122 Interview: Ben Chan, Chairman and CEO, Suyen
Corporation
123 A steady drive: Establishing a stronger base for
vehicle and components manufacturing
125 Changing with the times: New growth segments
are emerging in electronics, with industry efforts
to move up the value chain and boost exports
127 Good prospects: Rising incomes bode well for
the sector, while mall expansion is shifting more
and more outside of the urban centres
www.oxfordbusinessgroup.com/country/philippines-2015
TRANSPORT & INFRASTRUCTURE

150 On the up: Steady progress is under way
160 Island hopping: New port infrastructure and
better domestic connections

162 Interview: Cosette Canilao, Executive Director,
PPP Centre of the Philippines

163 Stop and go: The removal of limitations on truck
traffic eases port congestion

165 Interview: William K Hotchkiss III,
Director-General, Civil Aviation Authority

166 Interview: Ramon S Ang, Vice-Chairman,
President & COO, San Miguel Corporation

167 Seafaring nation: Filipinos in the maritime sector
CONSTRUCTION & REAL ESTATE

170 Thriller in Manila: Projects in the capital are part
of a host of schemes across the country

174 Back to basics: Affordable housing is a priority
176 Green light: The adoption of environmentally
friendly practices is gaining momentum

179 Home comforts: Matching supply with demand
183 Seeking alignment: Lessons from the last surge
185 Interview: Manuel Paolo A Villar, President and
CEO, Vista Land

186 Interview: Jose E B Antonio, Chairman and CEO,
Century Properties Group
BPO
188 The multiplier effect: The sector creates jobs and
is drawing wealth and investment to the country

192 Interview: Maulik Parekh, President and CEO, SPi
Global
193 Going to the countryside: BPO firms are
expanding into secondary and tertiary cities
TELECOMS & IT
196 Keeping up with expansion: Demand and
opportunities grow for local providers

202 Extending connectivity: Building infrastructure
with an eye to future growth

206 Assistance to start-ups: Public and private efforts
to support local technological innovation

207 Interview: Mariels Almeda Winhoffer,
Vice-President for Global Business Partners

Asia-Pacific, IBM
208 Interview: Maria Rosario Santos-Concio,
President and CEO, ABS-CBN Corporation
AGRICULTURE
210 On the right track: Several segments show
production increases despite inclement weather

215 Interview: Francis N Pangilinan, Secretary, Office
of the Presidential Assistant for Food Security

and Agricultural Modernisation
216 Interview: John P Perrine, Chairman, Unifrutti
Group Philippines
217 Seafood scene: Exports of fish products are
expanding as aquaculture increases output
218 Fruitful business: Production volumes and
exports of fruit and vegetables continue to rise
HEALTH
220 Onwards and upwards: The universal health care
On the up
Page 150
Government spending on public infrastructure projects will rise to 4.1% in 2015
and 5% in 2016, with improvements focusing on the road network. With vehicle
ownership increasing by 29% in 2014,
urban congestion remains a priority. Meanwhile, the development of roll-on/roll-off
ferry services will provide an alternative
to long-distance, inter-island shipping.
programme continues to drive sector growth

226 Cutting spending: With drugs a huge chunk of
health expenses, the state works to reduce costs

228 Interview: Alexander A Padilla, President and CEO,
Philippine Health Insurance Corporation

229 Maximising potential: The sector is set to grow
Thriller in Manila
Page 170
Making up around one-fifth of GDP and
7% of employment, the construction and
real estate sector has expanded rapidly,
spurred by growth in remittances, inbound
investments, tourist arrivals and state
infrastructure spending. Big-ticket and
strategic PPP projects are being awarded, while positive economic indicators
have motivated banks to finance them.
through a number of public-private partnerships
EDUCATION
232 Change for good: The government works to
implement its K-12 programme while raising

general standards
238 Interview: Armin Luistro, Secretary, Department
of Education
239 Helping hand: The key role of the private sector
241 Aiming high: The government is implementing
widespread reforms to turn out better students
MINING
244 Waiting game: Murky regulatory environment
continues to impede expansion

250 Dollars and sense: Conflicting opinions on the
sectors tax burden complicate reforms
252 Interview: Gerard H Brimo, President and CEO,
Nickel Asia Corporation
LEGAL FRAMEWORK
SyCip Salazar Hernandez & Gatmaitan
254 By the law: Important legal and regulatory
developments
256 Interview: Rafael A Morales, Managing Partner,
Keeping up with expansion

Page 196
Having largely leapfrogged fixed-line services to a mobile penetration rate of 104.5%,
data usage and mobile services are expected to grow as smartphones catch on and
the two leading operators upgrade to 4G.
A tech-savvy population of nearly 100m,
meanwhile, with its affordable labour and
English-language proficiency, could transform the country into an IT powerhouse.
SyCip Salazar Hernandez & Gatmaitan
TAX
Punongbayan & Araullo
259 In detail: A look at the key elements of the tax
regime
264 Interview: Marivic C Espao, Chairperson and
CEO, Punongbayan & Araullo
THE GUIDE
266 An enchanted land: There is something to suit all
tastes in this Asian archipelago

268 Sleep tight: Hotel accommodations to consider
270 Local listings: Phone numbers for useful services
271 Facts for visitors: Tips for newcomers
On the right track

Page 210
Contributing 10.4% of GDP and growing modestly, the agriculture and fisheries sector is the nations largest
employer even as investment shifts to
industry. With the state pushing for rice
self-sufficiency and ASEAN integration
set to lower barriers to trade, the nation
may well soon become a net exporter.
THE REPORT The Philippines 2015
SNAPSHOT
The Philippines in figures

Agricultural exports, 2000-13 ($ bn)
International trade, 2005-14* ($ bn)
10
80
6
4
2
0
64
48
32
16
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
* Preliminary data for year to November 2014
Exports
SOURCE: Philippines Statistics Authority
SOURCE: Philippine Statistics Authority
Imports
05 06 07 08 09 10 11 12 13 14*
Largest BPO rms by revenues, 2013 (P bn)

Firm
Revenues
1. Accenture
32.43
2. Convergys Philippines Services Corp.
19.83
3. 24/7 Customer Philippines
13.06
4. JPMorgan Chase Global Service Centre
11.79
5. Telephilippines
8.72
6. Sutherland Global Services Philippines
8.08
7. Hewlett-Packard
7.08
SOURCE: House Committee on Higher & Technical Education
Individuals using the internet, 2000-13 (%)
150
40
120
90
60
30
0
12 12 12 12 13 13 13 13 14 14 14 14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
32
24
16
SOURCE: ITU
*At current prices
Transport & storage gross value added (P bn)*
SOURCE: NSCB
8
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
SNAPSHOT
Gov't revenues & expenditures, 2005-13 (P bn)

Expenditures
2000
1600
1200
2014
2015
2016
2017
GDP (current prices, P bn)
12,634.06
14,069.03
15,432.05
16,929.27
GDP per capita (current prices, P)
126,496.31 138,716.69
SOURCE: NSCB
400
21.1
20.0
21.4
21.9
Gross national savings (% of GDP)
22.3
22.6
23.5
23.4
06
07
08
09
10
11
12
13
Life
SOURCE: Philippines Insurance Commission
600
400
200
0
2012
2013
24.2
Japan
22.3
Others
11.8
Singapore
11.4
US
9.1
Netherlands
7.6
Germany
UK
Australia
3.5
7.977
8.107
Vol. of exports of goods/services (% change)
6.427
6.528
6.057
5.974
6.8
6.8
6.7
6.6
2,404.54
2,637.96
2,899.80
3,188.54
Unemployment rate (% of labour force)

General gov't revenue
General gov't revenue
18.865
18.75
18.791
18.834
General gov't total expenditure (P bn)
2,447.92
2,778.28
3,060.49
3,363.08
General gov't total expenditure (% of GDP)
19.205
19.748
19.832
19.865
General gov't net lending/borrowing (P bn)
-43.384
-140.322
-160.697
-174.547
-0.34
-0.997
-1.041
-1.031
4,623.11
4,769.15
4,945.74
5,124.28
General gov't gross debt (% of GDP)
36.271
33.898
32.048
30.269
Current account balance ($ bn)
9.184
8.548
7.636
6.336
Current account balance (% of GDP)
3.17
2.588
2.068
1.535
SOURCE: IMF, PSA
GDP growth rate by expenditure share, 2011-14 (%)

2010-11
2011-12
2014 Q3
Approved FDI by source, 2014 Q1 (%)

China
3.5
8.91
General gov't gross debt (P bn)
Non-life
800
3.9
8.032
General gov't net lending/borrowing (% of GDP)
Total insurance assets, 2012-14 Q3 (P bn)

1000
4.1
Vol. of imports of goods/services (% change)
Q1
9.6
Q2
8.3
2012-13
Q1
9.2
Q2
8.8
Q3
Q4
7.1
Q3
9.4
7.7
Q4
Q1
7.9
9.7
Q1
8.7
Q2
8.1
Q2
9.8
Q3
9.9
Q3
8.9
Q4
9.4
Q4
10
2013-14
SOURCE: NSCB
Banking sector nancial assets, 2013-14 (P trn)*

2.5
2.0
1.5
2.7
SOURCE: NCSB
1.0
SOURCE: BSP
05
149,172.27 160,436.20
Total investment (% of GDP)

Ination, avg. consumer prices (% change)
800
Economic indicators, 2014-17
0.5
Total market cap of the PSE, 2008-14 (P trn)
0.0
15
Mar.
2013
Jun.
2013
Sept.
2013
Dec.
2013
Mar.
2014
Jun.
2014
Sept.
2014
Dec.
2014
12
Forecast new residential supply, 2013-17 (units)

9
Location
Makati CBD
SOURCE: PSE
6
3
0
2008 2009 2010 2011 2012 2013 2014
Rockwell
End-2013
2014F
2015F
2016F
2017F
Total
17,656
454
4608
2017
1485
26,220
3718
441
346
4505
Fort Bonifacio
17,585
2222
5125
4895
2979
32,806
Ortigas
18,188
11,921
1711
2756
1227
573
Eastwood
6830
718
988
8536
Total
57,710
5546
12,489
9127
5383
90,255
SOURCE: Colliers
*excl. equity investments, net of amortisation
Revenues
11
Country Profile
Efforts to stamp out corruption by current government
Presidential elections due to take place in 2016
Around 12m Filipinos presently live and work overseas
Reforms resulted in upgrades to countrys credit rating
12
COUNTRY PROFILE AT A GLANCE
Only one-seventh of the islands in the Philippines are inhabited
Got to be real
With its favourable demographic profile and improving governance,
the Philippines is a market that investors should watch closely
November 2013 saw the

arrival of the deadliest
cyclone recorded in the
countrys modern history,
Typhoon Haiyan, which
traversed the Eastern
Visayas region, killing an
estimated 5268 people and
costing more than $1.36bn
in damages and relief.
Bounded in the west by the South China Sea (known

locally as the West Philippine Sea) and in the south by
the Sulu and Celebes Seas, the Republic of the Philippines borders Taiwan in the north and lies east of Vietnam. Of the 7107 islands making up the archipelago,
only around 1000 are believed to be inhabited. A history marked by successive waves of human migration
has shaped a multicultural present, with the archipelago being home to multiple ethnicities and dialects.
In the period since the Philippines achieved independence in 1946, the countrys politics has been marred
by a considerable degree of political instability, internal conflict and corruption. Tackling these persistent
challenges are important priorities for the current
administration of President Benigno Aquino III, which
aims to leave a legacy of good governance beyond its
last year in 2016. The countrys abundant biodiversity,
natural resources and youthful demographics are all
assets that have garnered recognition from investors
in recent years. Sustained economic growth and the
Philippines newly attained investment grade status
notwithstanding, the maintenance of peace in the Mindanao region and persistent poverty levels remain key
areas to address as the country prepares for its successful integration into the ASEAN Economic Community in 2015 (see analysis).
GEOGRAPHY & CLIMATE: The Philippine archipelago,
which is situated in the Western Pacific Ocean, is divided into three distinct administrative and geographic
regions, represented by the three stars on the countrys flag. The northern region of Luzon, home to the
capital city of Manila and the source of 33% of GDP, is
the economic, financial and administrative hub of the
country as well as its industrial base. Visayas comprises the Philippines central islands, where many of the
countrys abundant biodiversity and tourism assets are
located, whereas Mindanao, the countrys secondlargest island, makes up the southernmost region. Its
economy is largely rural, and vast natural and mineral
resources have remained untapped due to an ongoing
peace process with local rebel groups. In addition, the

country is subdivided into 17 regions, with Metro Manila or the National Capital Region comprising 16 highly urbanised cities and one municipality.
The nations strategic location as a gateway between
the Pacific and the rest of Asia, in particular given its
proximity to the regions two largest economies, China and Japan, provides it with several vital sea routes
for trade and commerce. Most of the archipelagos
mountainous islands are volcanic in origin and covered
by tropical rainforests, with the highest mountain being
Mount Apo in Mindanao at 2954 metres above sea level, whereas the Galathea Depth is the deepest point in
the country and third deepest in the world.
The climate is predominantly hot and humid, and
marked by heavy rainy seasons from the months of
June until November. During that period, the south-west
monsoon brings a considerable amount of rainfall. The
other two seasons are cool and dry from November to
February, and hot and dry weather from March to May.
The Philippines geographical location close to the equator has also made it subject to a total of up to 15
typhoons every year. For example, November 2013 saw
the arrival of the deadliest cyclone recorded in the
Philippines modern history, Typhoon Haiyan, which traversed the Eastern Visayas region, killing an estimated
5268 people and costing more than $1.36bn in damages and relief. The country also experiences an average of 20 earthquakes a day.
POPULATION: At an estimated 101.2m in 2014 a figure expected to jump to 102.9m by 2015 the Philippines is the 12th-most-populous country in the world
and the seventh most populous in Asia. Population
growth stands at 1.89%, and the country is projected
to enter a demographic window in 2015 where 70% of
its population is of working age, namely under the age
of 35 by the end of 2013, with a median age of 22.2.
Moreover, around 12m Filipinos currently live and
work overseas, forming one of the worlds largest diasporas. This has generated a steady flow of remittances
COUNTRY PROFILE AT A GLANCE
into the country, amounting to $26.92bn in cash and

non-cash remittances in 2014.
RECENT HISTORY: In the immediate aftermath of its
independence in 1946 (see overview), the Philippines
experienced a period of economic growth that largely continued under the rule of President Ferdinand
Marcos. However, widespread allegations of corruption,
authoritarianism he declared martial law in 1972
and the 1983 assassination of opposition leader Benigno Aquino led to his ouster through the peaceful People Power revolution of 1986. The movement brought
Corazon Aquino, Benignos widow, to power.
Cycles of economic and political instability characterised much of the following decades, as the Philippines continued to face social unrest. The elections of
May 2010 saw the late opposition leaders son, Benigno Noynoy Aquino III, elected to office. His administrations efforts to stamp out corruption and attract
more foreign investment have been widely praised by
both the local and international business community.
RELIGION & CULTURE: Boasting the fifth-largest
Catholic population in the world, the Philippines is one
of only two Asian countries with a Christian-majority
population (the other being East Timor). Over 90% of
Filipinos identify as Christian: 81% are Roman Catholic,
5% are Protestant, while the remainder belong to other Christian denominations. Muslims comprise 4% of
the population, and are concentrated primarily in the
southern Autonomous Region in Muslim Mindanao.
Although the US occupation of the Philippines lasted for only 48 years, its influence on the archipelagos
culture will seem prominent to visitors, from numerous
fast-food restaurants and shopping malls to Filipinos
affinity for rock music, basketball and boxing. The countrys cuisine and language have also been heavily influenced by nearly four centuries of Spanish colonial rule.
LANGUAGE: Although over 180 native languages and
dialects are spoken throughout the Philippines, only two
languages are official: Filipino, which is largely based
on Tagalog, and English. Tagalog belongs to the MalayoPolynesian group of languages, but Spanish has heavily influenced its modern-day variant. At the same time,
Filipinos strong command of the English language,
combined with their hospitable nature, has been an
appealing asset sought after by multinational companies. A combination of Tagalog and English, aptly named
Taglish, is popular among young Filipinos and can be
heard on radio and television programmes.
EDUCATION: As one of only three countries in the
world, along with Djibouti and Angola, to have a 10year basic school system, the K-12 Programme was
signed into law by President Aquino in May 2013 to put
Philippine education on a par with the rest of the world.
The new 12-year curriculum will see a mandatory kindergarten year and two additional senior high school years
added to the traditional 10-year model, which included six years of primary school followed by four years
of secondary education. By constitutional decree, education receives the largest portion of spending in the
budget. The high priority accorded to education is a
legacy of US rule, which set up a system of universal
13
The Philippines is the worlds 12th-most-populous country with an estimated 101.2m people as of 2014
and free basic education. Tertiary education consists

of a four-year programme, modelled after the US university system. Over 2m Filipinos attend the countrys
2000-plus higher education institutions every year.
NATURAL RESOURCES: Named by the Asian Development Bank as the fifth-most-mineralised country in
the world, 30% of the Philippines total land area of 30m
ha are believed to contain metallic mineral deposits,
including nickel, cobalt, silver, gold, salt and copper.
The rich minerals found in the country are mostly a product of its volcanic history due to the countrys position
along the Pacific Rim of Fire. The volcanoes also contribute significant geothermal resources, making the
Philippines the second-largest global geothermal energy producer behind the US.
Despite abundant resources, mining has remained
underdeveloped, with only 1.5% of the countrys land
area covered with mining permits and mining contributing to just 1% of GDP. Similarly, while many of its
neighbours have seen significant development of oil
and gas deposits, the Philippines has remained largely dependent on energy imports. With an estimated
1.8trn cu feet and 2.7trn cu feet of reserves, the Galoc
oil field and Malampaya gas-to-power project are the
most prolific energy assets developed thus far, although
they are smaller wells by global standards. Numerous
areas in the South China Sea have received attention,
though these areas are contentious due to territorial
disputes between China and its Asian neighbours.
Of the countrys total land mass, only 19% is arable,
of which 16% of is used agriculturally. The islands most
important crops include rice, corn, sugarcane, coconut,
abaca and tobacco, while rice and corn remain the
most important sources of food. Although the country continues to import rice for its buffer stock, total
import volume has decreased significantly, from 2.4m
tonnes in 2010 to an expected 500,000 tonnes in by
2015. This is in accordance with the governments aims
of achieving self-sufficiency in the cultivation of rice,
as well as the goal of food security more generally.
As the fifth-mostmineralised country in the

world, 30% of the
Philippines total land area
of 30m ha is believed to
contain metallic mineral
deposits, including nickel,
cobalt, silver, gold and salt.
As one of only three

countries in the world,
along with Djibouti and
Angola, to have a 10-year
basic school system, the
K-12 Programme was signed
into law by President Aquino
in 2013 to put Philippine
education on a par with
the rest of the world.
14
COUNTRY PROFILE INTERVIEW
President Benigno Aquino III
Avenues of reform
OBG talks to President Benigno Aquino III
How can the Philippines institutionalise ongoing
reforms and good governance efforts beyond 2015?
AQUINO: From the moment we stepped into office, our
goal was to change the face of the Philippine government and show our countrymen what it is like to have
a government that truly works for them. This is, after
all, the key to ensuring the permanence of our efforts,
and is why, from day one, our administration has worked
to enact and accelerate reform. One can already see
the profound effect of our efforts in every sector.
The Department of Public Works and Highways, for
instance, has long been known as a hotbed of corruption and crooked contracts. Today, under the leadership of Secretary Rogelio Singson, it has become one
of the best-performing agencies in government. Secretary Singsons strategy was simple: the five Rs. They
implement the right projects, built by the right people,
for the right quality and the right price, to be finished
right on time, if not earlier. Through this, they have
been successful in rehabilitating and expanding our critical infrastructure in a manner that is both quick and
efficient, all while saving the government P39bn
($877m) as of October 2014.
One can also look at how we undertook large-scale
reform of our Bureau of Customs, another agency that
was reputed to be among the most corrupt. We formed
offices tasked with optimising and modernising Customs policies. We gave the agency a clean start by
appointing a new commissioner, six new deputy commissioners and 40 other individuals to enact our reforms
for the agency. We sent all employees back to where
they were supposed to work, removing inefficient and
suspicious practices, such as security guards and warehousemen acting as cashiers or examiners. Results
were almost instantaneous. From January to November of 2014, collections have increased by 16% compared to the same period in 2013.
We have also taken measures to spend taxpayers
money more wisely. We have implemented a zero-based
budgeting system, which ensures that all state projects
will have a tangible benefit for the Filipino people. For

the 2014 National Budget, we used what we call a performance-informed budget, which presents information on state agencies targets and performance commitments alongside the budget numbers.
The quickest way to ensure the permanence of reform
is to change the peoples mindset and expectations.
These initiatives, among countless other programmes,
are meant to make it impossible for those wishing to
revive the old system to succeed. We have raised the
standard of public service and will continue doing so
to guarantee the continued progress of our country.
What has been the effect of the conditional cash

transfer programme in alleviating poverty, and what
other schemes might best bridge the income gap?
AQUINO: The cash transfer programme addresses
poverty in both the short and long term. It allows us to
give those in the margins additional resources to get
by. More importantly, it is a massive long-term investment in our countrys greatest resource: our people.
Let us recall the primary conditions for receiving
cash grants: to qualify, households have to send their
children to school, have pregnant women get regular
check-ups and have their children vaccinated. In the
long term, this will create a populace that is both healthier and better equipped to take advantage of the increasing number of job opportunities in the Philippines.
In 2014, we expanded the programme to include
households with children up to 18 years of age. Having a high school education has an enormous impact
on the income of our beneficiaries. For instance, the
Philippine Institute for Development Studies, in partnership with international organisations, has conducted studies revealing that high school graduates earn
40% more than elementary undergraduates.
Of course, to truly equip our people with the wherewithal to lift themselves out of poverty, we must make
sure the services they receive are up to par. Focusing
on these sectors is therefore essential to eliminating
COUNTRY PROFILE INTERVIEW
poverty. This is exactly what our administration has

done. These projects are driven by our belief that the
most important investments the Philippine government will ever make are in the Filipino people. Through
our good governance efforts, we have gained the
resources we need to give our countrymen the chance
to hone and practice their innate skills and talents,
which will ultimately allow them to lift themselves out
of poverty and provide better lives for their families.
In the wake of Typhoon Haiyan, what are the main

challenges and opportunities involved in raising
disaster preparedness and restoring normality?
AQUINO: Perhaps the greatest challenge, as well as the
greatest opportunity, in our post-Haiyan rehabilitation
efforts is confronting and adjusting to the new normal. We have noticed, in the past few years, a startling
trend: that these typhoons are becoming more frequent and more powerful. This is a phenomenon
observed not just in our country but all over the world.
This is why we have looked upon rehabilitation as an
opportunity to build back better. Houses, communities and infrastructure in the affected areas are being
built and positioned with the new normal in mind. We
are looking at every possible solution. For instance, we
have found a way of bending galvanised iron sheets over
the eaves to make them more resistant to strong winds.
Japan has also shared how to construct buildings that
can serve as natural water catchments.
On a broader scale, we are mainstreaming disaster
resilience into our countrys regional and national development plans to minimise the damage when disaster
does strike. We have continued our proactive approach
to reducing the risks posed by natural calamities. As
soon as we stepped into office, we began enhancing
our scientific capabilities, allowing for earlier and more
accurate weather forecasting, thus helping both government and the people to prepare for disasters.
Our governments response to Typhoon Hagupit was
proof of our rapidly improving approach to disaster risk
reduction. Before the storm made landfall, those in the

affected areas were made aware of the incoming storm.
More than 146,000 families in those areas underwent
pre-emptive evacuation. More than 318,000 family
food packs were also stockpiled before the storm hit.
Our preparations and our response were recognised
by the UN Development Programme and the UN Humanitarian Country Team. Due to our preparations, and to
the cooperation of our people, we were able to minimise the damage from the typhoon.
Given ASEAN economic integration, how can the

Philippines leverage its position as an investment
destination? What reforms would accelerate this?
AQUINO: We welcome ASEAN integration. It is an economic milestone that will enhance the growth of investments, trade and tourism among member states, and
will be highly beneficial to the peoples of ASEAN. Of
course, its also means heightened competition within
the various industries in the region, and this is a challenge we are poised to meet.
For small and medium-sized enterprises, for instance,
we are implementing various programmes to provide
them with more access to finance e.g., the ASENSO
Programme under the Go Negosyo Act of 2013 which
will improve their productivity and efficiency. We are
helping prepare Philippine businesses for integration
by conducting awareness seminars to help them understand how they can avail themselves of preferential tariffs and relevant market information.
It helps that our administration, over the past four
years, has created a more open and investor-friendly
business environment. We are eagerly looking into possible areas of cooperation with ASEAN, such as the
establishment of a regional credit agency, the harmonisation of rules and standards, the creation of a global tax identification number and the strengthening of
the regions resilience to natural disasters. These
benefits of integration have the potential to reverberate throughout our region and the global community.
15
16
COUNTRY PROFILE VIEWPOINT
President Barack Obama
An alliance to last
US President Barack Obama on the signing of the Enhanced Defence
Cooperation Agreement with the Republic of the Philippines
I would like to reaffirm the enduring alliance between
the Philippines and the US. I thank President Aquino
for his partnership and the deeper ties that we have
forged. I am especially proud to be here as we remember one of the defining moments of our history, the
70th anniversary of the battle of Leyte during the Second World War and the beginning of the liberation of
the Philippines. Together, Filipinos and Americans put
up a heroic defence, at Bataan and Corregidor. Together, they endured the agony of the death marches and
the horror of the prisoner of war camps. Many never
made it out. In those years of occupation, Filipino resistance fighters kept up the struggle and hundreds of thousands of Filipinos fought under the US flag.
I see the spirit of these veterans their strength, their
solidarity in you as well when you train and exercise
together to stay ready for the future, when our special
forces advise and assist our Filipino partners in their
fight against terrorism, and when you respond to crises
together, as you did after Hurricane Haiyan. Along with
your civilian partners, you rushed into the disaster
zone, pulled people from the rubble, and delivered
food and medicine. You showed what friends can do
when we take care of each other. During my visit, President Aquino and I agreed to begin a new chapter in
our alliance. Under our new agreement, US forces can
begin rotating through Philippine airfields and ports.
We will train and exercise together more to bring our
militaries even closer, and to support your efforts to
strengthen your armed forces. We will improve our
ability to respond even faster to disasters like Haiyan.
Deepening our alliance is part of our broader vision
for the Asia Pacific. We believe that nations and peoples have the right to live in security and peace, and to
have their sovereignty and territorial integrity respected. We believe that international law must be upheld,
that freedom of navigation must be preserved and
commerce must not be impeded. We believe that disputes must be resolved peacefully and not by intimidation or force. That is what our nations stand for. That
is the future were working for and thats why your

service is so important. For more than 60 years, the US
and the Philippines have been bound by a mutual
defence treaty. Our commitment to defend the Philippines is ironclad and the US will keep that commitment,
because allies never stand alone.
I want to leave you with an incredible story that captures the strength of our alliance. We all know about
the massive international response after Haiyan. What
few people realise is that it started all with a single aircraft carrying a handful of Filipino and American troops
and civilians. The storm hit land that Friday. The very
next morning, the first aircraft took off a Philippine
C-130 carrying Captain Roy Trinidad, a Philippine Navy
SEAL; Colonel Mike Wylie, US Marines; and Major George
Apalisok, US Air Force. Just hours after the storm passed,
with Tacloban devastated, they landed at the airport.
And the next day, they were joined by others, including Army Major Leo Liebreich. In the days that followed, they worked together Filipinos and Americans
setting up a medical station, clearing debris from the
runway, reopening that airport. Filipino soldiers
unloaded aid from US cargo aircraft. US troops loaded
supplies onto Filipino helicopters. And when all the
cargo was off those aircraft, our troops worked together to help local residents aboard so that they could be
evacuated to safety. And over and over, those grateful
Filipinos responded with a simple word salamat.
Theres a connection between our proud veterans
from the Second World War and our men and women
serving today bound across the generations by the
spirit of our alliance, Filipinos and Americans standing
together, shoulder-to-shoulder, balikatan.
On behalf of the American people, thank you all for
your service. Thank you all for making us so proud. To
the Americans here, I am never prouder than when I
am able to stand before you as your commander-inchief. To our Filipino armed forces thank you for being
such an outstanding ally. Together, you are helping to
secure the prosperity and peace of both of our nations.
COUNTRY PROFILE ANALYSIS
17
The battle against corruption is a major topic of political debate
Ready to vote
As the Philippines gears up for elections in 2016, voters are keenly
discussing the major issues of the day
With presidential, congressional and local elections
all scheduled for next year, 2015 looks set to be a
time of heated political debate in the Philippines.
Issues such as constitutional reform, good governance and the perennial battle against corruption are
likely to dominate discussion, alongside continued disagreements over how best to share the proceeds of
economic growth. Meanwhile, recent advances in
ensuring internal stability, following the signing of a
peace agreement with militant rebels in the southern region of Mindanao, have come against a background of growing international tension with Beijing
over disputed sections of the South China Sea (known
locally as the West Philippine Sea).
2015 is also set to mark the beginning of the ASEAN
Economic Community, with the Philippines playing an
integral role in the foundation of this ambitious
regional venture. Other international trade negotiations, such as the Trans-Pacific Partnership, as well
as a host of other regional agreements, are also likely to occupy minds in Manila. While none of these
issues is without its various controversies and disagreements, on one point there is general agreement: that the Philippines is today a more politically and economically secure country than it has been
for many years, playing an increasingly influential
role in regional and international affairs.
UNITY & DIVERSITY: An archipelago consisting of
some 7107 islands, the Philippines fragmented geography has contributed to a history characterised by
ethnic, religious and cultural diversity. Waves of settlement have been traced back some 67,000 years,
with the country ruled over time by a range of maritime kingdoms, rajahnates, sultanates and empires.
By the time of the arrival of Portuguese explorer Ferdinand Magellans Spanish expedition in 1521, Islam
was, alongside Hinduism and various native religions,
firmly established in the Sultanate of Maguindanao,
which ruled Mindanao, and the Sultanate of Sulu,
which ruled Palawan and much of the north-east
coast of Borneo. Further north, the Kingdom of Tondo was based around Manila, while two other key
states were the Rajahnates of Butuan and Cebu. In
the Visayas, the Confederation of Madja-as was founded by exiles from the Sumatran Srivijaya Empire.
The long period of Spanish colonisation began in
earnest in 1565, with the arrival of Miguel Lopez de
Legazpi from Mexico. In 1571, Manila was occupied
and established as the capital of the Spanish East
Indies. In subsequent years, the remainder of the
archipelago was conquered by the Spanish, with many
of the inhabitants converting to Catholicism. Even so,
right into the late 19th century, Spanish troops continued to fight against the Moros the Muslim inhabitants of Mindanao and the islands of the Sulu Sea
in an effort to fully subjugate those territories.
FROM WAR TO FREEDOM: That conflict was interrupted by the outbreak of the Philippine Revolution
in 1896 and the Spanish-American War of 1898. Joining the side of the revolutionaries, led by Emilio
Aguinaldo and Mariano Alvarez, US troops landed in
the Philippines to help defeat the Spanish. The subsequent Treaty of Paris in 1898 ended centuries of
Spanish rule, yet did not end the conflict, as the US
moved to establish its own control over the country,
sparking the 1899 Philippine-American War.
The first, independent Philippine Republic was thus
defeated and US colonial rule established over the
country. While the Philippines would not attain independence until 1946, the US had promised it eventual independence from 1916 onwards, establishing
the Commonwealth of the Philippines in 1933 as a
transitional stage towards this end. However, the Second World War interrupted this process, and the
islands were occupied by the Japanese following a brutal military campaign. US troops re-occupied the
Philippines in 1945, although much of Manila was
destroyed in the fierce fighting. After the war,
the Philippines won independence in 1946, and
Manuel Roxas became the states first elected president.
2015 is set to mark the

beginning of the ASEAN
Economic Community, with
the Philippines playing an
integral role in the
foundation of this
ambitious regional venture.
The Philippines won

independence in 1946 in
the aftermath of the
Second World War, and
Manuel Roxas became the
first elected president of
the new state.
18
The Philippines history has been characterised by cultural diversity
Elected for a single,

six-year term in a
first-past-the-post national
ballot, the president
appoints the Cabinet,
whose members may not
have seats in the
legislature.
In 1965, Ferdinand Marcos

won the presidential
elections, and was
subsequently re-elected in
1969. In 1972, however, he
declared martial law, citing
the deteriorating security
situation. He would remain
in power until 1986.
TURBULENT BEGINNINGS: The newly independent

republic faced some major challenges, internal security being foremost among them. The Moro National Liberation Front (MNLF) relaunched its campaign
for an independent, Muslim Mindanao, while the
Communist Party of the Philippines and its guerrilla
force, the New Peoples Army (NPA), also began fighting government forces in the north.
Ferdinand Marcos won the presidential elections
of 1965, and was subsequently re-elected in 1969.
In 1972, however, he declared martial law, citing the
deteriorating security situation. This period continued until 1981, when martial law was partially lifted,
with 1983 seeing opposition leader Benigno Aquino
Jr. returning to the Philippines only to be assassinated on arrival at Manila Airport. This sparked a
period of political turbulence that ended in 1986
with the popular overthrow of Marcos by an opposition movement led by Benignos widow, Corazon.
This became known as the People Power or EDSA
Revolution, named thus after the avenue in Manila
where much of the action took place.
RETURN OF DEMOCRACY: Aquino remained in power until 1992, under a constitution inaugurated in
1987, which had established the current, Fifth Republic. The 1992 presidential election was won by Fidel
Ramos, who moved to legalise the Communist Party
and begin talks with the MNLF. A peace deal was
signed in 1996 with the latter, yet a splinter group,
the Moro Islamic Liberation Front (MILF), did not lay
down its arms. In 1998, Joseph Estrada won presidential elections, remaining in office until 2001, when
he resigned following mass protests over corruption
allegations, often referred to as EDSA 2. He was succeeded by his vice-president, Gloria MacapagalArroyo, who then won the subsequent elections
in 2004, remaining in office until 2010. That was
when the current incumbent, Benigno Aquino III,
widely referred to Noynoy Aquino, or PNoy, was
elected, with his term of office set to end in May 2016.
Under Noynoys administration, the Philippines

faced a diplomatic crisis with Malaysia in 2013, when
supporters of the old Sultanate of Sulu occupied
part of Sabah. Another crisis came with China, which
seized the Scarborough Shoal, a rocky reef claimed
by both states. In 2014, the Comprehensive Agreement on the Bangsamoro was signed with the MILF,
while the NPA insurgency also began to fade. An
enhanced defence cooperation agreement strengthening ties with the US was also signed that year.
PRESIDENTIAL ROLE: The president is the head of
state, head of government and commander-in-chief
of the armed forces. Elected for a single, six-year
term in a first-past-the-post national ballot, he or she
appoints the Cabinet, whose members may not have
seats in the legislature. Cabinet members must also
be approved by the Congressional Committee of
Appointment. The president also has the power to
appoint a range of ministry, armed forces and judicial officials. The office of the presidency supervises local government units and directly oversees a
series of agencies, including the Securities and
Exchange Commission and the Metropolitan Manila
Development Authority. Moreover, the president has
the power of pardon, and may contract foreign loans,
with the agreement of the Monetary Board. This gives
the president considerable budgetary powers.
A vice-president is also elected for a single, six-year
term, at the same time as the president, but via a separate vote. The vice-president takes over in the event
of the death, resignation, impeachment or permanent disability of the president. The current vicepresident is Jejomar Jojo Binay, the former mayor
of Makati, who is widely considered a front-runner
for the presidential elections in 2016. The president
also has extensive veto powers over bills passed by
the legislature. In this event, the bill is returned to
the lower house, which may overturn the presidential veto, if the bills supporters can garner a two-thirds
majority. The president may be impeached by the
legislature, a process that can begin if one-third of
the lower house of Congress approves such a motion.
The upper house then acts as an impeachment tribunal, requiring a two-thirds majority to impeach.
CONGRESSIONAL POWERS: As in the US, the legislature, Congress, consists of a lower chamber, the
House of Representatives and an upper chamber,
the Senate. The House consists of 292 members,
elected for three-year terms, with a maximum of
three terms. Of the total, 234 representatives are
elected directly on a first-past-the-post basis from
single-member legislative districts, while 58 are elected via a party list system. There is a 2% electoral
threshold. The balloting system active since 2007
has been controversial, as it uses proportional representation (PR), under which votes are cast for
groups, rather than individuals. The idea behind this
is to allow smaller interest groups, indigenous communities, labour and womens organisations to find
representation, as the PR system tends to favour single-issue or regional organisations. Determining which
groups make the list has often been contentious. In

2013, the Supreme Court (SC) ruled that national and
regional parties could also run in the party lists,
potentially squeezing out those for whom the seats
had been originally intended. Resolving these disputes is the task of the Commission on Elections,
which also tackles other electoral issues.
The Senate is composed of 24 senators, elected in
two batches for single, six-year terms, meaning that
half are elected every three years. The country is
treated as a single constituency, with the 12 candidates receiving the highest number of votes nationwide elected. Both houses have similar powers, and
both their consent is necessary before a bill can be
passed to the president to be signed into law. A series
of congressional committees also scrutinises bills
between the first and second legislative readings.
POLITICAL PARTIES: The last elections to the House,
held in May 2013, saw the Liberal Party (LP) emerge
as the largest grouping, led by Feliciano Belmonte Jr.
The LP won 111 seats from the districts, while second place went to the conservative Nationalist Peoples Coalition (NPC), with 42 seats. In the party list
section, the largest group was the Buhay Hayaan
Yumabong an offshoot of the Catholic charismatic group, El Shaddai. With 147 seats needed for a
majority, the LP had campaigned within a coalition,
known as Team PNoy, capitalising on the popularity of the LP-affiliated President Aquino.
As of late 2014, the LP headed the majority bloc
in the House, which included the NPC and the thirdplaced National Unity Party of Elpidio Barzaga and
most of the fourth-placed Nacionalista Party (NP) of
Manny Villar. Four other national parties and several local ones, along with four independents, were
also in the bloc. Four representatives from the NP sat
in the minority bloc, along with one LP member. This
was widely regarded as demonstrating the weak hold
that party affiliation generally has over Filipino politicians. Indeed, most groupings tend to be the vehicles of particular personalities and their families. The
next elections are scheduled for May 9, 2016.
In the Senate, meanwhile, the NP emerged the
largest grouping after May 2013 balloting, with five
seats. The LP is second, with four, and Lakas the
unusually multi-denominational Christian Muslim
Democrats with two. A total of 12 senators seats
will also be up for election again on May 9, 2016.
JUDICIAL POWERS: The highest court in the country is the SC, which acts as the court of final appeal
and can conduct judicial reviews on laws to determine their constitutionality. In recent times, this has
often become a cause of friction between the justices and Malacanang the presidential palace. Meanwhile, the legal hierarchy under the SC runs through
the Court of Appeals and Court of Tax Appeals and
the Sandiganbayan, a court that investigates governmental irregularities. In addition to this, there are
regional trial courts with branches in each province.
LOCAL AUTHORITIES: There are 81 provinces,
grouped into 17 regions. This latter number includes
21
The next presidential, congressional and local elections are all scheduled to take place in 2016
the Autonomous Region in Muslim Mindanao, which

is the only region to have its own government. The
provinces are also subdivided into cities and municipalities, with those classed as component coming
under the remit of provincial authorities, while those
classified highly urbanised or independent component have their own administration. In 2014, there
were some 38 such entities across the country.
The lowest-level unit is the barangay, or neighbourhood, with 42,028 of these registered in 2012. All
these levels have elected representatives in local
government, with three-year terms. Provinces also
hold elections for the post of governor, and cities and
municipalities for mayor. In 2016, elections all the way
to barangay level are also being held.
OUTLOOK: With Ninoy still enjoying wide popularity as of late 2014, speculation remained rife that he
might seek to pass a constitutional amendment
removing the bar on serving more than one presidential term, as well as to restrict the powers of the
SC. Both moves are likely to be strongly resisted, with
a considerable degree of wariness among many Filipinos of presidents taking on too much executive
power. However, many believe that the six-year term
limit makes for short-term thinking, and there is a
widespread tendency to consider a president a lame
duck in the final portion of their term.
The next year is likely to see other potential candidates stake out their positions in advance of the
2016 elections. Meanwhile, hopes remain high that
the accord with the MILF will hold and that tensions
with China will decrease. In the longer term, the domination of politics by a number of powerful families
may also come under more scrutiny by voters as the
country gradually becomes wealthier, although
greater political pluralism might require a higher
degree of economic devolution as well. For the year
ahead, in any case, the country will be banging the
drums and waving the flags for what promises to
be both a vibrant and extensive election hustings.
The domination of politics

by powerful families may
also come under more
scrutiny by voters as
the country becomes
wealthier. However,
greater political
pluralism might require
a higher degree of
economic devolution.
In 2013, the Supreme

Court ruled that national
and regional parties could
also run in the party lists,
potentially squeezing out
those for whom the seats
had been originally
intended. Resolving these
disputes is the task of the
Commission on Elections.
22
Improving competitiveness has been a focal point of recent reforms
Taking the lead

Ongoing regional integration has brought with it opportunities for a
range of industries but also challenges that must be addressed
The Board of Investments
developmental road maps
are designed to chart the
future strategy of each
sector. So far 24 plans have
been agreed on covering
key sectors such as
electronics and the
automotive industries.
A series of reforms initiated

by President Aquino in the
last few years have pumped
spending into infrastructure
and opened key industries
to outside investors, as the
Philippines prepares for the
inauguration of the ASEAN
Economic Community.
A series of reforms initiated by President Benigno Aquino

III in the last few years have pumped spending into
infrastructure and opened key industries to outside
investors. The reforms prompted a series of upgrades
to the Philippines credit ratings and echo initiatives taken in the region as it prepares for the inauguration of
the ASEAN Economic Community (AEC) in 2015.
PACE OF REFORM: With many tariff barriers already
reduced to zero in 2010 as part of the ASEAN Free
Trade Area, much of the recent reform effort has
focussed on legislative change and improving competitiveness to ensure that Philippine companies are open
to the opportunities provided by regional integration.
As the deadline for the implementation of the AEC
draws closer, campaigning for the Philippines presidential election in 2016 will intensify (see overview). Aquino
is now in the last two years of his term, said Eugenia
Fabon Victorino, an economist at ANZ in Singapore.
Presidents cannot be elected for a second term, so if
you look at history the past few presidents started to
lose their mandate because that is when you see politicians start to shift their loyalties. That could hinder
Aquinos attempts to carry through on his reforms.
The Department of Trade and Industry has dubbed
its plan for the AEC the 4Cs compliance, competitiveness, communication and collaboration. Introducing
439 measures by April 2014, with a compliance level
of 87%, the Philippines is among the ASEAN member
states with the highest rate of compliance. The focus
on competitiveness has included not only the administrative practices of the national government, but also
the regional, district and local levels. The Cities and
Municipalities Competitive Index, first introduced in
2013, assesses the performance of local governments
on three measures: economic dynamism, administrative efficiency and infrastructure. Some 136 cities and
399 municipalities took part in 2014, with Makati City
emerging as the most competitive. It showed regional
governments in IloIlo and Davao performing well
in terms of efficiency and infrastructure, respectively.
ROAD MAPS FOR DEVELOPMENT: For industries, the

Board of Investment has been devising a series of developmental road maps since 2012. The joint chambers
have called on the government to craft similar plans
for the agricultural sector, which employs about a third
of all Filipinos, but lags the wider economy. Drafted in
discussion between government officials, industry
experts and business leaders, the road maps are
designed to chart the future strategy of each sector.
So far 24 plans have been agreed on covering key sectors such as electronics, the countrys leading manufacturing export, and the automotive industries.
The documents are also intended to provide a foundation for the governments annual Investments Priorities Plan, which provides incentives to industries
seen as key to future growth. The expectation is that
the private sector will take the lead, supported by a government prepared to address policy failures and make
any necessary institutional changes.
Communication is also crucial, as some 90% of Philippine businesses and the countrys largest employers
are small and medium-sized enterprises (SMEs). Outreach would explain free trade agreements (FTAs) that
the Philippines has signed, as well as on the potential
benefits from the AEC, amid concerns that regional
integration could crowd out domestic companies. For
example, senior officials have urged clustering for SMEs,
supporting a policy of so-called coopetition rather than
competition among individual companies.
CREDIT RATING: The governments broader reform
efforts have already caught the attention of the credit rating agencies, and the Philippines ratings have
returned to investment level. Standard and Poors,
which upgraded the country to BBB in May 2014, has
put the Philippines above countries like Russia, India
and Brazil. According to the governor of the Central Bank
of the Philippines, Amando Tetangco, the upgrade was
recognition that the structural reforms we have put
in place continue to gain traction, as demonstrated by
the significant improvement in the countrys position
in international governance and competitiveness surveys. Those indices from the World Banks Ease of
Doing Business Survey to the World Economic Forums
(WEF) Global Competitiveness Index tell a story of
steady improvement. Even so, the Philippines continues to lag behind its ASEAN neighbours. In both the
World Bank and WEF surveys, for instance, it ranked
only sixth out of 10 ASEAN states. Indeed, when it came
to indices related to innovation and logistics its overall performance had actually declined.
TACKLING CORRUPTION: Most importantly, corruption remains an urgent obstacle to the governments
agenda. As President Aquino himself put it in his 2013
State of the Nation address, in reference to the notorious Bureau of Customs, instead of collecting the
proper taxes and preventing contraband from entering the country, they are heedlessly permitting the
smuggling of goods and even drugs, arms and items
of a similar nature into our country. The public shaming of the service underlined Aquinos determination
to reform the agency, widely blamed for hampering the
growth of trade and investment in the Philippines.
Demonstrating his resolve, the president replaced
the agencys top leadership, redeployed intelligence staff
and restructured the organisation to limit opportunities for graft. The authorities also initiated investigations into those suspected of illegal dealings.
At the same time, the authorities introduced a series
of efficiency initiatives designed to streamline import
and export procedures and make Customs activities

more transparent. For example, the creation of the
Philippines National Single Window is a key component
of each ASEAN states commitment under the AEC.
The Philippines has begun a phased implementation
involving 40 different government agencies including
the Bureau of Customs and Board of Investment. As
well as a website to track imports, it aims to have a fully electronic processing system by June 2015 as well as
pre-shipment checks for all goods packed by container, as well as a central valuation reference for commodities. The successful implementation of the reforms will
go a long way in addressing the perennial problem of
smuggling, which contributes to revenue losses for the
Philippine government and, more importantly, deters
the proliferation of legitimate businesses, the Joint
Foreign Chambers of the Philippines said in a statement.
As the Philippines moves into the AEC and in the future
expands its trade and investment treaties with the AsiaPacific and European economies with the Trans-Pacific Partnership or an EU-Philippine FTA, a corrupt Bureau
of Customs will not be acceptable to the countrys
regional as well as global trading partners.
LIMITS ON INVESTMENT: The impending inauguration of the AEC has also turned attention to other issues
that have long hampered the Philippines, for instance
its entrenched and dominant business elite. Attempts
to introduce competition in telecommunications and
the local aviation market had some success in the
23
Demonstrating his resolve

to fight corruption, the
president replaced the
Bureau of Customs top
leadership, redeployed
intelligence staff and
restructured the
organisation to limit
opportunities for graft.
24
As the Philippines becomes

more integrated into
regional and global supply
chains, the electronics
sector stands to gain,
although progress will be
hindered by the poor
infrastructure and
regulatory constraints.
The 1987 Constitution sets

out strict limits on foreign
participation in the
economy. The negative list
includes mass media,
engineering and professions
such as medicine with the
cap set at 40% in many
other industries.
1990s, but successive governments have found it difficult to pass a competition law. As a result, the Philippines remains the only founding member of ASEAN
without clear laws to counter unfair trade practices and
monopolistic activities. Given that such a legal framework forms part of the Philippines commitments under
the AEC, President Aquino has championed proposals
for a Fair Competition Law. However, as political allegiances begin to shift in the run-up to the 2016 elections it is by no means certain the bill will become law.
Further to this, the 1987 Constitution sets out strict
limits on foreign participation in the economy the negative list includes mass media, engineering and professions such as medicine with the cap set at 40% in
many other industries. The Philippines attracted just
$3.86bn of foreign direct investment (FDI) in 2013, a
tiny fraction of the $122bn invested in the ASEAN
region as a whole. Despite these challenges, Aquino has
had some success in bringing down barriers, for instance
passing legislation to enable foreign investment in the
domestic banking sector in the middle of 2014. There
has however been little progress in opening other sectors to foreign investors.
ENERGY WOES: Although the countrys electricity
network was privatised after a major crisis in the 1990s,
the law was not fully implemented, Prices remain high
and service is erratic. Power prices are among the most
expensive in Asia at $0.22 per kWh. Under the Philippine Energy Plan 2012-30, capacity is expected to rise
to 25,800 MW by 2030, from 16,250 MW in 2012, but
demand is projected to rise to 29,330 MW over the same
period. The extra capacity will require major improvements in infrastructure for distribution and transmission. At present, power grids across the archipelago are
not connected, according to business advisory firm
KPMG. It estimates the energy sector will require investment amounting to $25bn by 2030. The firm notes that
Philippine power companies which are mostly drawn
from the countrys dominant conglomerates could
learn from the examples of more competitive markets
elsewhere. Manilas dominant power company Meralco, for instance, has a 70% stake in an 800-MW combined cycle gas plant in Singapore in a joint venture with
Hong Kongs First Pacific.
REGIONAL CONNECTIONS: The Brunei-IndonesiaMalaysia-Philippines East ASEAN Growth Area (BIMPEAGA) is designed to deepen cooperation between the
neighbouring regions of the four ASEAN nations and
to share natural resources in addition to infrastructure.
The Malaysian state of Sarawak has invested heavily in
controversial hydropower in the past two decades and
is likely to have far more electricity than it needs.
The BIMP-EAGA has already had some success in
improving connectivity. A more direct shipping route
between the Mindanao cities of Davao and General Santos with Manado in Indonesia began operations on
August 31 2014 a few months later than anticipated reducing costs by more than half and cutting the
journey time by a third. This is expected to be useful
for the Philippines food exporters. Authorities are also
looking at a route connecting Palawan with Sabah and
Brunei, while regional air links and an undersea fibre

optic cable are also on the drawing board.
Across the Philippines, limited liberalisation has helped
in some areas, notably in aviation, where the privatised
national carrier, Philippines Airlines (PAL), has faced competition from low-cost carriers such as Cebu Pacific and
Philippines AirAsia. Malaysia-based AirAsia, which operates in the Philippines as a joint venture, is seeking official approval to secure nearly complete control of the
Philippines AirAsia to expand routes and buy more
planes. However, despite being in private hands, PAL
benefits from the fiscal incentives and guarantees it
had previously enjoyed as a state-run airline. Moreover
long-term underinvestment in infrastructure means
the airport and terminal facilities cannot support this
expansion. Compared to its ASEAN rivals, which are
counted among the worlds best, Manilas Ninoy Aquino
International Airport is a by-word for congestion and
delays. While the ASEAN Single Aviation Market should
help smooth out some of these issues, a recent report
from the CIMB ASEAN Research Institute noted that
Indonesia and the Philippines have yet to accept terms
on third, fourth and fifth freedom flying rights.
FOREVER YOUNG: With a median age of 22.2 years,
the Philippines has one of the youngest demographic
profiles in the region. While limited job opportunities
at home and persistent underemployment have prompted many to head overseas, better jobs are slowly becoming available. The biggest success in this regard has been
the business process outsourcing industry. From humble beginnings at the turn of the century, it is now a
world leader, providing work for more than 900,000 people, revenues of around $15 billion a year and innovations going beyond the traditional call centre, such as
research and financial back-office services. The industry is expected to benefit significantly from the integration of the ASEAN economies.
As the Philippines becomes more integrated over
time into regional and global supply chains, the electronics sector also stands to gain, although progress
will be hindered by the poor infrastructure and regulatory constraints. Fellow ASEAN members Cambodia,
Vietnam and even Myanmar are aggressively marketing their textile and footwear products, while also boasting lower labour costs than the Philippines. Under the
AEC, they will also have longer to open their markets.
FREE MOVEMENT: With the official launch of the AEC
drawing ever closer, some of the Philippines better
known brands have begun to venture overseas, mostly into ASEAN, but also further afield. The fried chicken company Jollibee has outlets in Brunei, Vietnam and
Singapore and is planning to move into Malaysia and
Indonesia as part of a two-year expansion strategy. The
fast good giant, one of the Philippines most recognisable brands, plans to take advantage of the proposed
free movement of labour that will come with the AEC
to deploy Filipino managers to open new stores and train
local staff. The onus will now be on the government to
deliver stronger laws and institutions, thereby putting
the Philippines in a position to benefit from the opportunities of ASEANs single market and production base.
26
COUNTRY PROFILE VIEWPOINT
Nicolas Hulot, Special Envoy of the French President for the

Protection of the Planet
In from the storm

Nicolas Hulot, Special Envoy of the French President for the Protection
of the Planet, on climate change and disaster risk management
In the Philippines as is the case elsewhere around the
world climate change is driving risk and multiplying
the impact of other drivers of risk such as poverty, population growth and poor urban planning.
The Philippines has some of the best legislation and
policy frameworks on climate change and disaster risk
management. It also has strong institutions such as the
National Council for Disaster Risk Reduction and Management and the Philippine Atmospheric, Geophysical
and Astronomical Services Administration.
Unfortunately, that will not be enough in the face of
shifting typhoon seasons which can produce superstorms like Typhoon Haiyan. It was the strongest storm
ever to make landfall, claiming nearly 8000 lives, affecting more than 16m people, and causing irreparable
damage to livelihoods and economic growth.
Haiyan, which resulted in $13bn in damages, was
one of the top two most damaging disasters in 2013,
along with the floods in Germany in May and June that
caused $12.9bn worth of economic damage. Even a lesser event like Tropical Storm Sendong, which arrived in
the middle of the night in December 2011, killed some
1500 people who were vulnerable to floods and landslides on the southern island of Mindanao.
A decade ago, the Philippines adopted the Hyogo
Framework for Action, the first comprehensive agreement on disaster risk reduction. Since then, it has been
hit by 181 major reported disasters, including typhoons,
earthquakes and volcanic eruptions. Only the US and
China have suffered more hazard events. Economic
losses in the US are in the region of $443bn compared
to $16bn in the Philippines for that decade. While
absolute losses are many times greater in economic
superpowers, so is their economic resilience.
As a result, the impact of an event like Typhoon
Haiyan on the GDP of the Philippines was far more significant than the impact of Superstorm Sandy or the
recent winter storms on the US economy. Developing
countries tend to experience higher risks than developed countries in terms of their impact on human life.
Under the leadership of Presidents Francois Hollande

and Benigno Aquino III, France and the Philippines have
come together in a spirit of shared concern and commitment to address climate change, and the risks that
come with it. France lost 15,000 of its citizens in an
unprecedented heatwave during the summer of 2003,
but it has the resources to more effectively manage the
risks and to minimise the death toll from future disasters. The Philippines, year after year, is confronted with
the impact of rising sea levels and warming oceans on
the behaviour of the typhoon season. Even so, when
Typhoon Hagupit threatened the same swathe of territory as Typhoon Haiyan had done, the Philippines
showed that it could rise to the occasion by undertaking pre-emptive evacuations, saving many lives.
Indeed, lessons have been learned as the country has
gone beyond early warnings to early action. The waitand-see attitude, which proved fatal in the face of
Typhoon Haiyan, is hopefully now a thing of the past.
What these events reveal is that disaster risk is a social
construct. If the built environment is not capable of withstanding the hazards to which it is exposed then people are rendered especially vulnerable. The increasing
frequency of natural hazard extremes calls for a change
in mindset and in our approach to development.
All this must feed into the development agenda starting with the Third UN World Conference on Disaster
Risk Reduction taking place in March in Sendai, Japan,
which will adopt an updated version of the Hyogo
Framework for Action. Sendai will kick off the post2015 development agenda. A positive outcome there
can prepare the ground for a forward-looking agreement when the UN Climate Change Conference convenes in Paris in December. President Hollandes visit
to the Philippines in February will have helped in that
process. One thing is for sure: the Philippines and the
rest of the world will have to continue focusing on disaster risk management for many years to come. Climate
change is happening, but risk change has already happened, and we must both understand and manage it.
27
Economy
Rapid, broad-based growth continuing apace
Government looking to create PPPs in infrastructure
Improved emergency services to help development
A large qualified workforce key to continued expansion
New impetus to use growth to address wealth inequality
ECONOMY OVERVIEW
29
Growth is expected to stay at around 6% for the rest of the decade
Catching up
There are signs that the recent high growth rates may be sustainable
The Philippine economy continues to enjoy a period of
rapid, broad-based growth as the business process outsourcing (BPO) sector and growing remittances from
overseas workers drive growth in consumer-oriented
industries and construction. Although real growth decelerated in 2014 to 6.1%, it remained higher than Southeast Asian peers, and it is expected to remain near 6%
for the remainder of the decade.
The economy is overly concentrated in the Metro
Manila region, and major challenges lie ahead in overcoming long-standing infrastructure bottlenecks, and
developing stronger energy and manufacturing sectors.
Yet the government is increasing its efforts to spread
manufacturing and BPO growth across the country,
and clear obstacles to developing other sectors where
outlying regions have strong potential.
LAGGARD TO LEADER: The Philippines emergence as
a growth leader has been building gradually since the
1990s, after a long period of low growth and political
upheaval during which Philippine economists began to
refer to their own country as the sick man of Asia, borrowing a label originally applied to 19th-century China. Until the early 1990s the Philippines was dogged
by persistent high inflation, which averaged 14% in the
1980s, according to the IMF. Real growth averaged just
2% in the 1980s, while peers Malaysia, Indonesia and
Thailand all grew at average paces of more than 5.5%.
A breakthrough came in the 1990s as the central bank,
Banko Sentral ng Pilipinas, gained greater independence and inflation slowed to single digits. Some of the
large foreign investments flowing into South-east Asia
started to reach the Philippines, and the country began
to develop into a significant player in manufacturing
of parts for the globalising electronics industry. As
domestic money flowed into the banking system, growth
gained momentum and averaged 2.75% for the decade.
The Asian financial crisis of 1997-98 was a setback but
less of one than for other South-east Asian countries.
During the 2000s the Philippines found itself in the
middle of the pack of South-east Asian middle-income
countries in terms of its pace of growth, which averaged 4.5% over the decade, but failing to close the gap
that had opened during the long period of slow growth.
During this decade the Philippines growth model of
domestic consumption driven by labour exports began
to emerge as overseas workers moved into higher-paid
professions and Philippine call centres overtook their
Indian competitors in the US market.
In the 2010s improved governance under the administration of President Benigno Aquino III has helped to
further accelerate foreign direct investment (FDI) in BPO
while reviving FDI into the manufacturing sector. That
and a demographic bulge in the young adult bracket
helped bring the average pace of growth in the first
half of the 2010s to 6.3%, beating all of the countrys
main South-east Asian peers. That compares to 6%
average growth in Indonesia in 2010-14, 5.8% in Malaysia
and Vietnam, and 3.6% in Thailand. Across Asia, only three
countries with higher GDP per capita than the Philippines China, Mongolia and Sri Lanka grew faster.
CONSUMER-DRIVEN: Consumer-oriented sectors are
the largest and fastest-growing, reflecting the economys dependence on labour exports through BPO and
overseas workers. Household consumption came to
72.5% of GDP in 2014, according to the Philippine Statistics Authority (PSA), an extraordinarily high number
for an emerging market economy. The trade sector
produced P2.2trn ($49.5bn) or 17.8% of GDP at current prices in 2014, with real growth of 6%, after 5.7%
growth in 2013.
In other mainly consumption-oriented service sectors, transport and storage accounted for P445bn
($10bn) of gross value added or 3.5% of GDP in 2014,
with real growth of 10.9%, after 6.6% growth in 2013.
Growth has slowed, however, in the communications
sector, which had P343bn ($7.72bn) of gross value
added or 2.7% of GDP in 2014 and real growth of
4.1%, following 5% growth in 2013.
Food processing is another major growth sector as
rising incomes and urbanisation fuel purchases of packTHE REPORT The Philippines 2015
The Philippines emergence

as a growth leader has
been building gradually
since the 1990s, following
a long period of low growth
and political upheaval.
The average pace of

growth in the Philippines in
the first half of the 2010s
was 6.3%, compared to 6%
in Indonesia, 5.8% in
Malaysia and Vietnam, and
3.6% in Thailand.
30
Services sectors accounted

for 57.5% of the economy
by gross value added in
2014, up from 55.1% in
2010, with business
process outsourcing
accounting for a large
share of the growth.
ECONOMY OVERVIEW
aged food. Processed food, beverages and tobacco

accounted for P1.3trn ($29.3bn) of gross value added,
or 10.2% of GDP, in 2014. The sectors real growth was
8.5% in 2014, up from 3.6% in 2013. Many of the countrys largest business groups began as food or drinks
makers, including its largest company, San Miguel Corporation, primarily a beer and packaged foods maker.
The sector is also a successful exporter, with $3.6bn of
exports in 2013, according to UN Comtrade data.
SERVICES: Services sectors overall accounted for 57.5%
of the economy at current prices in 2014, up from
55.1% in 2010, according to PSA data. Besides consumeroriented services and the financial sector, which is
heavily invested in them, the export-oriented, foreign
investment-driven BPO sector accounts for a large
share of services growth. After many years of explosive growth, the BPO sectors expansion moderated
slightly in 2014, while remaining rapid. Service export
categories in the BSPs balance of payments (BOP) data
closely corresponding to BPO business services
exports and computer services exports showed
$12.1bn of export revenues in the first nine months of
2014, up 10% year-on-year in dollar terms. The $15.2bn
of exports in those categories in 2013 represented the
vast majority of the $15.5bn of total BPO revenues
counted by the Information Technology and Business
Process Association of the Philippines (IT-BPAP), the
main industry association. BPO sector revenues grew
by 17.4% in dollar terms in 2013, according to IT-BPAP.
The financial sector produced P984bn ($22.1bn) of
gross value added, or 7.8% of GDP, in 2014, with real
growth at 6.7%, down from 12.6% in 2013. The burst
of growth in 2013 was driven by a change in monetary
policy as the BSP freed up sterilised funds, which poured
into bank deposits and gave banks surplus liquidity.
The BSPs conservative regulation of the sector,
including an in-process early adoption of Basel III minimum capital standards, is driving consolidation among
smaller banks. In addition, it pushed much of 2014s

surplus liquidity into the emerging corporate bond sector. Annual inflation surged to 4.9% in July and August
of 2014, after registering a low of an average of 3% in
2013. After two 25 basis-point hikes of BSP benchmark
rates and the collapse of oil prices late in 2014, annual inflation fell to a new annual low of 2.4% in January
2015, according to the PSA.
Cristina S Ulang, the head of research at First Metro
Investment Corporation, told OBG; There is a lot of liquidity in the banking system and that has been holding real interest rates at very low levels. To make sure
that doesnt result in misallocation, the central bank
has been tightening rates and clamping down on banks
with stricter capital requirements and real estate exposure stress tests.
Education accounted for 3.9% of GDP in 2014, with
real growth of 2% after 10.3% growth in 2013, driven
by private investment in higher education. Bernardo Villegas, an economist who chairs the Centre for Research
and Communication at the University of Asia and the
Pacific, told OBG; Our most important challenge is to
continue improving our education system to advance
the skills of our young, growing, English-speaking population. This country thrives on its human capital.
Tourism is also important, accounting for 6% of gross
value added in 2013 and growing by 9.1% that year. The
health care sector, however, is unusually small even for
an emerging market country, accounting for P195.7bn
($4.40bn) of gross value added (1.5% of GDP) in 2014,
although real growth was strong for 2014, at 16.5%,
after 8.7% growth in 2013.
INDUSTRY: Industrial sectors accounted for 31.2% of
nominal GDP in 2014, which is among the lowest shares
in Asia. Yet these have been bouncing back since 2010.
As a whole they recorded 7.5% real growth in 2014 and
9.3% in 2013, ahead of the services sectors, which
recorded 6% real growth in 2014 and 7.2% in 2013.
Economic indicators, 2013-17

2013
2014
2015
2016
2017
GDP (current prices, P bn)
11,548.19
12,634.06
14,069.03
15,432.05
16,929.27
GDP per capita (current prices, P)
160,436.20
117,611.54
126,496.31
138,716.69
149,172.27
Total investment (% of GDP)
22.2
21.1
20.0
21.4
21.9
Gross national savings (% of GDP)
26.2
22.3
22.6
23.5
23.4
Ination, avg. consumer prices (% change)
3.0
4.1
3.9
3.5
3.5
Vol. of imports of goods/services (% change)
-0.651
8.032
8.91
7.977
8.107
Vol. of exports of goods/services (% change)
0.308
6.427
6.528
6.057
5.974
7.1
6.8
6.8
6.7
6.6
2136.30
2404.54
2637.96
2899.80
3188.54
Unemployment rate (% of labour force)

General gov't revenue (P bn)
General gov't revenue (% of GDP)
General gov't total expenditure (P bn)
18.499
18.865
18.75
18.791
18.834
2,151.68
2447.92
2778.28
3060.49
3363.08
General gov't total expenditure (% of GDP)
18.632
19.205
19.748
19.832
19.865
General gov't net lending/borrowing (P bn)
-15.377
-43.384
-140.322
-160.697
-174.547
General gov't net lending/borrowing (% of GDP)
-0.133
-0.34
-0.997
-1.041
-1.031
General gov't gross debt (P bn)
4514.60
4623.11
4769.15
4945.74
5124.28
General gov't gross debt (% of GDP)
39.094
36.271
33.898
32.048
30.269
Current account balance ($ bn)
9.423
9.184
8.548
7.636
6.336
Current account balance (% of GDP)
3.463
3.17
2.588
2.068
1.535
SOURCE: IMF, PSA
ECONOMY OVERVIEW
Electronics and electrical goods is the largest export

industry, with $37.6bn of exports in 2013, according to
Comtrade, equal to 13.8% of GDP. The sectors exports
grew by 8.1% in 2014, according to figures from the
PSA, which, however, significantly undercounts export
volumes at $25.9bn in 2014 and $23.9bn in 2013.
Although industry observers told OBG that 2014 was
a better year, the sector has struggled with relatively
high energy, labour and transport costs compared to
regional peers, and exports had been falling steadily
from a peak of $47bn in 2007, according to Comtrade.
The rebound in 2014 was led by diversification away
from the sectors traditional dependence on semiconductors into storage, printers and other higher-valueadded parts and devices.
Chemicals and chemical products are among the
other main products, accounting for P471bn ($10.6bn)
of gross value added or 3.7% of GDP. Petroleum and other fuel products, another important segment, recorded 5.4% real growth in 2014 after a 51% growth burst
in 2013 as new plants came on-line. Gross value added
by the total manufacturing sector, including food processing, came to P2.59trn ($58.3bn) or 20.5% of GDP
in 2014. The sector recorded 8.1% real growth in 2014,
down from 10.3% in 2013.
Construction has been a key growth driver, with gross
value added of P814bn ($18.3bn), or 6.4% of GDP, in
2014, and real growth at 8.5%, down from 9.6% the previous year. Gross sector output came to P1.42trn ($32bn)
11.2% of GDP in 2013, and recorded 10% real growth

in 2014, down from 10.4% in 2013. The construction
sector is especially driven by the BPO sectors demand
for office space and its workers need for apartments
and desire for retail outlets.
Mining has been a disappointment relative to its
potential, and the general trend of rising prices enjoyed
by the sector since 2009 reversed in late 2014 as Chinese demand slowed. The sector produced P124bn
($2.8bn) of gross value added, or 1% of GDP, in 2014,
with 3.5% real growth, after 1.2% growth in 2013.
ENERGY: The electric power segment has also seen
weak growth, with gross value added of P339.3 ($7.6bn),
or 2.7% of GDP, in 2014. Sector growth was just 2.6%
in 2014 after 5.2% in 2013, and the industry was expecting shortages in the 2015 dry season. Investment is
expected to catch up with demand by 2017 after a number of coal power projects cleared bureaucratic hurdles. Shanaka Jayanath Peiris, resident representative
of the IMF, told OBG; There are two stories behind the
slow investment in energy. One is that regulatory clearances are slow. The other is the cosy relationship
between a few players. Its a kind of monopsony.
AGRICULTURE: The weight of agriculture in the economy is shrinking but still large. Agriculture, hunting,
forestry and fishing accounted for P1.43trn ($32.2bn)
of gross value added, or 11.3% of GDP, in 2014, but
recorded only 1.1% real growth, down from 1.9% in
2013. Raw agricultural products are a major export, with
31
A key driver of the

economy, the construction
sector saw real growth of
8.5% in 2014 and gross
value added of $18.3bn, or
6.4% of GDP for the same
year.
32
ECONOMY OVERVIEW
Industrial sectors account for 31.2% of the economy
The national government

deficit has dropped from
2.0% in 2011 to 0.6% in
2014, which has helped
reduce national
government debt from
51.0% in 2011 to 45.4%
in 2014.
$3.4bn worth in 2013, according to figures from Comtrade. Plantation forestry and wood products are also
significant, and the latter is growing very quickly. Furniture and other manufactured wood and paper products accounted for P98bn ($2.21bn) of gross value
added, or 2.7% of GDP, and recorded 24.5% real growth
in 2014 and 24% in 2013.
The Aquino administration has been widely commended for its efforts to improve business conditions
and reduce corruption, while a relatively conservative
fiscal policy has helped boost the economys credibility and steer investment into the private sector.
The national government deficit has dropped from
2.0% in 2011 to 0.6% in 2014, which has helped reduce
national government debt from 51.0% in 2011 to 45.4%
in 2014. However, when computed at the general government level, general government debt to GDP declined
from 41.4% in 2011 to 37.3% as of end-September
2014. The IMF in October 2014 forecast general government debt to drop to 27% by 2019. Even compared
to other Asian emerging markets, the public sector is

small, but has been growing as revenue collection has
improved. Total national government expenditures
came to 16.3% of GDP in 2013, and were projected by
the government to reach 19.9% in 2017.
RATINGS WAR: The improved governance and sounder
debt profile led ratings agencies to upgrade the Philippines sovereign rating to investment grade in 2013, a
landmark event in the countrys economic history. In
2014 two major agencies raised its rating again: Standard & Poors upgraded it to BBB and Moodys to Baa2,
both one notch above the agencies minimum investment grade ratings. Ulang told OBG, The Aquino administrations biggest achievement is the huge increase in
investor confidence, reflected in credit ratings upgrades.
Ratings in international surveys of business conditions have also been rising rapidly. The Philippines made
the biggest upward move of any country in the world
in the World Economic Forums Global Competitiveness rankings between 2010 and 2014, according to
the groups 2014 report. It climbed to 52nd of 144 countries in 2014, from 85th of 139 in 2010. The upgrade
was mainly for improved institutions and reduced perceptions of corruption. Yet the Philippines still ranks
behind Malaysia, Thailand and Indonesia, which placed
20th, 31st and 34th in the 2014 report, respectively.
The Philippines was also the most improved country in the Heritage Foundations Economic Freedom
rankings between 2010 and 2015, rising from 115th
to 76th. In Transparency Internationals annual Corruption Perceptions Index, it climbed from 134th in 2010
to 85th in 2014. The Philippines has also improved its
rankings in the World Banks Doing Business survey,
which judges conditions for new small firms. It climbed
to 95th of 189 countries in the 2015 survey, from 144th
of 183 in 2010. It has also improved its ratings in the
World Banks Worldwide Governance Indicators, especially in controlling corruption and rule of law. The
National Competitiveness Council, set up in 2006, is
tasked with advising on how to improve the countrys
score in Doing Business and other global surveys.
ECONOMY OVERVIEW
CURRENT ACCOUNT: Another reason for the countrys

improving credit ratings is its relatively healthy balance
of payments, supported by large inflows of remittances
from overseas workers and migrs. Remittances came
to $23bn in 2013, equal to 8.4% of GDP, according to
the BSPs BOP data. Remittances came to $17.6bn in
the first nine months of 2014, up 6.1% over the same
period of 2013, while in 2013 remittances were up
6.8% from 2012. Remittances have allowed the Philippines to avoid relying on inward investment to fund
imports. This ability to fund imports from current income
is remarkable for a rapidly growing, highly consumerist
country that must import most of its fuel. It has been
crucial in helping the Philippines to avoid an outright
retreat of foreign financial capital since global investors
began positioning for a strengthening dollar in 2013
and reducing their exposure to emerging markets.
The trade deficit is difficult to measure, as the PSAs
trade data based on Customs reports undercounts both
imports and exports. Guided mainly by other BOP flows,
the BSP estimated the overall trade deficit in 2013 at
$10.65bn, or 3.9% of GDP, including a $17.7bn merchandise trade deficit and a $7bn services trade surplus. The BSP estimated an overall trade deficit of
$11.0bn (3.9% of GDP) for 2014. Over the same period, larger remittance inflows brought the current
account surplus to $12.7bn (4.4% of GDP), up from
$11.4bn (4.2% of GDP) in 2013. Yet other data, including a gradual decline of the BSPs foreign exchange
reserves since 2013, suggest the trade deficit is larger than estimated. UN Comtrade put the merchandise
trade deficit at $27.3bn (10% of GDP) in 2013. BOP data
includes $5.5bn of net unclassified items and a $2.86bn
drop in net reserves in 2014.
If those discrepancies in the BOP data were attributed to underestimation of imports, it would suggest
a 2013 merchandise trade deficit of $26.6bn, roughly
in line with Comtrade data. That would in turn suggest
the overall trade deficit was closer to 7.5% of GDP and
the current account balance was less than 0.5% of GDP.
Likewise, BOP data for the first nine months of 2014
continued to show very large net unclassified items
of $4.7bn. If those represent undercounted imports, the
overall trade deficit in the first nine months of 2014
would have been more than 7% of GDP and the current account surplus around 1% of GDP.
STABLE PESO: The trade deficit has been exacerbated by the BSPs policy of holding the peso roughly
steady against the dollar during the retreat of global
financial capital markets since 2013, which resulted in
steep devaluations of many emerging market currencies and would have devalued the peso by more had
the BSP not supported it. The BSPs foreign reserves
fell from a peak of $85.3bn in January 2013 to $81.3bn
in February 2015. During 2013 the BSPs interventions
held the peso to a gradual weakening from 40.57 to
the dollar in January 2013 to 45.4 to the dollar in January 2014. And as of February 2015 the BSP was holding the peso in the range of 44 to 44.5 to the dollar.
The pressure on the peso reflected a near stop of
investment inflows other than foreign direct investment
33
The peso has been relatively stable against the US dollar
(FDI) as global financial investors fled beginning in mid2013 from the emerging market asset class. Investment
inflows other than FDI averaged $8bn a year from 201012, but dropped to $758m in 2013 and a $1.8bn outflow in 2014, according to BOP data. Those include
foreign holdings of Philippine equities and bonds, and
foreign bank credit to Philippine banks and companies.
FDI: Strategic foreign investors, however, are increasing their commitment to the Philippines, lifting FDI
from $3.2bn in 2012 to $3.7bn in 2013, and to $4.9bn
in the first nine months of 2014. The Philippines had
long been the least successful major South-east Asian
economy in attracting FDI, due in large part to legal
restrictions, including a 40% cap on foreign investment
in companies that own land. The acceleration of FDI
in 2014 brought the Philippines up to a pace that is
now comparable relative to population with Indonesia, but still behind Malaysia, Thailand and Vietnam.
Strategic foreign investors

are increasing their
commitment to the
Philippines, with foreign
direct investment up from
$3.2bn in 2012 to $3.7bn in
2013, and to $4.9bn in the
first nine months of 2014.
Growth of GNI & GDP by sector, 2013-14 (%, at constant 2000 prices)
2013 Q4
2014 Q4
2013
0.9
4.8
1.1
1.9
Agriculture & forestry
2.3
4.7
1.2
2.3
Fishing
-4.4
4.8
0.7
0.3
Industry
7.6
9.2
9.3
7.5
-2.5
-3.2
1.2
3.5
Agriculture, hunting, forestry & shing
Mining & quarrying
2014
Manufacturing
12
7.3
10.3
8.1
Construction
-5.2
20.5
9.6
8.5
3.2
Electricity, gas & water supply
6.3
4.9
6.7
7.2
8.1
6.3
5.6
6.6
Trade & repair of vehicles, personal & household goods
6.4
5.3
5.7
Financial intermediation
10.7
6.6
12.6
6.7
8.1
Service sector
Transport, storage & communications
Real estate, renting & business activities
7.6
8.3
8.7
Public admin., defence, compulsory social security
-2.3
10.9
3.8
3.5
Other services
6.4
2.5
7.1
4.2
GDP
6.3
6.9
7.2
6.1
GNI
7.2
6.3
7.5
6.3
SOURCE: NSCB
ECONOMY OVERVIEW
34
Low savings and investment rates reflect high labour exports
The Aquino administration

drafted plans to accelerate
infrastructure investment
through PPPs using the
build-operate-transfer
model, but as of March
2015 only nine projects
had been awarded.
The pesos relative stability against the US dollar contrasts with most Asian currencies, and largely reflects
the Philippines large trade exposure to the US and China, which also has not devalued. China is the main market for the Philippines merchandise exports, taking
together with Hong Kong a 32.7% share of the total in
2013, Comtrade data shows. The US took some 12.9%
of merchandise exports in 2013, according to Comtrade,
and the US takes approximately 80% of BPO exports,
according to industry estimates.
INFRASTRUCTURE GAP: The main disappointment in
recent years has been the slow pace of investment, especially in infrastructure, which has long been one of the
economys weakest points and a major problem for
global supply chain manufacturers. Public sector construction accounted for P279bn ($6.28bn), or 20% of
the P1.4trn ($31.5bn) of gross value added by the construction sector, in 2014, according to PSA data.
Low public investment is one of the main reasons
why overall investment is persistently low, although it
is gradually rising. The share of fixed capital formation
in GDP reached 20.5% in 2014, up from 19.6% in 2012.
National budget gov't revenues & expenditures, 2005-13 (P bn)

Revenues
Expenditures
2000
1600
1200
SOURCE: NSCB
800
400
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
That compared to shares in the 26-29% range in

Malaysia, Thailand and Vietnam, and 34% in Indonesia,
according to World Bank data for 2013.
Some analysts argue that the Philippines low savings and investment rates reflect the economys focus
on labour exports and the fact that investments in
human capital are treated by conventional statistical
methodology as consumption.
Jose Cruz, the president and CEO of investment house
Amalgamated Investment Bancorporation, told OBG,
Theres a stereotype that overseas workers remittances are all being spent on consumption but a lot of
them are paying for private education for their children,
nephews and nieces.
Villegas told OBG; Using GDP as the denominator
to calculate the savings rate is very misleading, because
roughly 10m people are working abroad. If their income
is taken into account and gross national product is
used as the denominator, the figure is around 32%.
The Aquino administration drafted very ambitious
plans to accelerate infrastructure investment through
public-private partnerships (PPPs) using the build-operate-transfer (BOT) model, but it has been slow in bringing them to fruition.
As of March 2015 only nine PPP projects with estimated costs totalling P136bn ($3.06bn) had been
awarded, led by a P44.65bn ($1bn) extension of Manilas light rail system to southern suburbs. Peiris told
OBG, The biggest disappointment is that the expectations for PPPs were overblown. They were trying to
do it in the right way, and it is not easy to ramp these
things up quickly.
The administration is now rushing to bid and/or
award 16 more projects with total estimated costs of
P604.9bn ($13.61bn), which were being bid out or were
in final stages of preparation as of March 2015, according to the governments PPP Centre. The largest project out to bid was a P123bn ($2.77bn) highway through
a major suburban zone south of Manila. The highway
will run along the west shore of the Laguna de Bay, a
large lake, and will serve as a dyke to control flooding.
Several major conglomerates were reported to be bidding. However, the majority of another 33 PPP projects
at less-advanced stages were likely to be left for the
next president to complete, as Aquinos term will come
to an end in 2016 and second terms are not permitted under the constitution.
OUTLOOK: The Philippine economy is in a strong position with many factors in its favour, from positive demographics and growing bank penetration to improving
revenue collection and public governance. Risks exist
for example, remittances could stop growing, or
recent growth in real estate prices could lead to overinvestment. However, the authorities are generally looking after them and taking a cautious stance. There are
no obviously unsustainable factors behind the countrys recent high growth, and the diverse range of organisations reporting an improvement in its prospects are
unlikely to all be wrong. After too long spent as the slowest-growing major economy in South-east Asia,
the Philippines can finally look forward to catching up.
ECONOMY INTERVIEW
35
Cesar V Purisima, Secretary, Department of Finance
Window of opportunity
OBG talks to Cesar V Purisima, Secretary, Department of Finance
To what extent has good governance translated
into strengthened economic fundamentals and
improved revenue collection?
PURISIMA: Good governance lies at the heart of the
economic success of President Benigno Aquino IIIs
administration, having enabled us to create the fiscal
space to invest in infrastructure, social services and
our people. And due to the resulting confidence in the
financial markets, our interest expenses as a percentage of our budget decreased from more than 20% to
about 15%, allowing us to maintain our investment
grade and reduce borrowing costs. Good governance
has also reduced the cost of loans for corporate players, allowing them to cut down expenses and create a
stable platform for longer-term investments. Our citizens also have more confidence to make financial commitments in the form of housing or vehicles.
The best way to encourage the private sector is to
adhere to good governance to create a more stable
macro-economic environment. We are also using technology to improve the ease of doing business in the
Philippines; however, ultimately the major incentives will
be business opportunities and good returns, both of
which the Philippines can offer. To institutionalise good
governance it is essential to introduce meritocracy. In
the civil service, we now have performance-based budgeting, which requires a performance evaluation of
requests for funds. We are also introducing performance-based incentives to ensure that good governance
lasts beyond the current administration.
How is fiscal policy helping to stimulate economic

growth and encourage foreign direct investment
while ensuring diversification of the economy?
PURISIMA: The best incentive a country can give to
businesses is quality infrastructure. The government has
dramatically increased its infrastructure budget, aiming for 5% of GDP by 2016, up from the current 2%.
Furthermore, we have been quite aggressive in implementing our public-private partnership programme,
which has also generated several opportunities for

investors. Secondly, we have increased investment in
our people as they are the principal drivers of the economy. The Philippines has one of the largest populations in Asia and is about to enter its demographic
sweet spot, meaning the bulk of our populace will be
of working age. We have improved our education system by adding two years onto primary and secondary
schooling, and invested in teachers, classrooms and supplies. We also increased the number of scholarships that
are available at the vocational level, as well as better
aligning our educational system and industry. Existing
incentives and special economic zones will be maintained; however, the more lasting incentives will be
infrastructure and the quality of human capital.
What fiscal incentives are in place to encourage

local entrepreneurship and boost employment?
PURISIMA: The best way to nurture and promote small
and medium-sized enterprises (SMEs) is not fiscal incentives, but ensuring they can endure the challenges of
the marketplace by strengthening their ability to obtain
information and to facilitate access. The concern should
not be taxation, but SMEs capabilities to achieve competitiveness in a dependable manner. Our focus is on
ensuring SMEs are globally competitive, add value and
are sustainable. Additionally, the Philippines has one of
the highest penetration rates for microfinance in the
region and is similarly trying to expand microinsurance.
How will the National Single Window (NSW) and

Customs reform programme improve collection?
PURISIMA: We have started a reform programme in
the Bureau of Customs, consisting of changes in personnel and technology, which has led to unprecedented growth in revenue collection. The NSW aims to
streamline Customs processes as the country moves
towards electronic filing to allow for efficient and accurate collection of data, as well as minimise person-toperson contact, reducing opportunities for corruption.
36
ECONOMY VIEWPOINT
Ramon R del Rosario Jr, Chairman, Makati Business Club
Integrity matters
Ramon R del Rosario Jr, Chairman, Makati Business Club, and President
and CEO, PHINMA, on transparency and accountability
Good governance and transparency are driving the
change in the international perception of the Philippines and the resulting positive economic outlook. To
strengthen this agenda we have been strong advocates of the Freedom of Information (FOI) Act, which
will foster government transparency and accountability by allowing the disclosure of public documents and
holding officials accountable for their actions. Although
President Benigno Aquino IIIs administration has
adhered to these values, legislation would serve to
institutionalise these gains for future administrations.
While government mechanisms are important, the
private sector also needs to play a meaningful role. In
that spirit, the private sector has worked to complement these efforts by developing the Integrity Initiative, which seeks to improve the business culture of the
Philippines by establishing accepted and recognised
standards. Participation in the initiative begins with
signing a pledge, in which the signatory promises to be
a good corporate citizen and behave in an ethical manner, with around 3500 signatories to date. The initiative also requires a self-appraisal system that measures
compliance and adherence to a code of conduct that
is both universal and particular, depending on the industry. In addition, we have engaged third-party enterprises to support companies that are working to improve
their compliance and performance. Eventually, we want
to move towards a scenario where we have the equivalent of an ISO certification for compliant firms.
In order for the pledge to serve as a meaningful
mechanism for good governance, it needs significant
government cooperation and support. A successful
example of this is the Department of Public Works and
Highways, which now requires contractors that want
to do business with the government to sign the pledge
and actively participate in the initiative. Similarly, the
Department of Education and the Philippine Economic Zone Authority also require their suppliers and locators to participate in the initiative, demonstrating the
kind of support and recognition we hope will become
more widespread in government. It is crucial that the

government recognises the private sectors efforts, as
participants in some industries may find themselves at
a competitive disadvantage by following the rules compared to players that, for example, do not pay the 12%
value-added tax. We are hoping that the Bureau of
Internal Revenue and the Bureau of Customs will institute initiatives such as green lanes to facilitate the
movement of goods for recognised participants or a
preferential lane for signatories to pay their taxes.
Although the Philippines has been marked by booms
and busts, we are hopeful that the gains achieved in
the past four years will be sustained. We have been
strong advocates of measures in Congress to open up
the economy. The first step will be to remove constitutional restrictions and create the opportunity for future
legislation to open up specific sectors, such as public
works, education or media, to foreign entities. Furthermore, a Fair Competition Bill will create a more level playing field and signal that uncompetitive behaviour is
not the marketplace norm. While the details of the legislation are pending, the bill has long enjoyed the support of the countrys business community and is a
measure many ASEAN nations require and expect.
With the Philippines hosting the Asia-Pacific Economic Cooperation Summit, it is a great time to signal
to the world that we have the confidence to open up
our economy. To generate more inclusive growth
which means more jobs we need to accelerate the
level of investment coming into our country and reverse
our historically low foreign direct investment flows relative to the rest of ASEAN. At the end of the day, GDP
growth will not have an impact on peoples lives unless
there are jobs, and jobs will not be created without
investment. We need to continue encouraging domestic investment, while simultaneously opening up to the
rest of the world, particularly in areas where we need
not just foreign capital, but also technology and expertise both of which will strongly benefit the Philippines
economy and foster greater global competitiveness.
ECONOMY ANALYSIS
37
The country is considered to be highly vulnerable to natural disasters
Eye of the storm

Improved emergency response will be key to future economic growth
Battered every year by typhoons and prone to earthquakes, mudslides, floods and volcanic eruptions,
the Philippines is more vulnerable to natural disasters than many other countries throughout the world.
As such, it is crucial for the countrys economic
development to learn to better manage its disaster
risks and minimise casualties and destruction. Weak
defences against disasters is increasingly being recognised as a hurdle to economic development, especially in remote areas and for the lowest-income
segment of the population.
In its World Risk Report 2014, the UN Universitys Institute for Environment and Human Security
(UNU-EHS), gave the Philippines a natural disaster
exposure rating of 52.46%, significantly worse than
the next-most exposed major country, Japan, rated
at 45.91%. The institutes exposure rating takes into
account only the risk of natural disasters happening, not how well the country copes. Only the small
island nations of Vanuatu and Tonga, with populations around 250,000 and 100,000, respectively, are
more prone to natural disasters than the Philippines,
according to the report.
ALTERNATIVE PATH: Although Japan proves that
geography is not fate, there is a distressing correlation between the UNU-EHS natural disaster exposure ratings and income levels. The vast majority of
highly prone countries are middle-income or lowincome. Besides Japan, the only other major highincome countries with exposure ratings above 20%
were the Netherlands, Greece and Chile.
Indeed, high rates of natural disasters can be a kind
of income and development trap, as countries that
lack the capital and economic efficiency to respond
tend to be the most set back by disasters when they
strike. The UNU-EHS also rates countries by what it
calls vulnerability to natural disasters, which measures a nations capability to mitigate them or lack
thereof. Although its ability to cope with disasters is
far from the bottom of the rankings, the Philippines
vulnerability rating of 53.85% is still below the median, and compares to ratings below 30% for most
high-income countries. The result is an overall natural disaster risk rating that stands out over other
major countries. In the UNU-EHSs World Risk Index,
a composite of exposure and vulnerability, the Philippines was rated 28.25%, well above the next highest-rated countries, Guatemala and Bangladesh, with
ratings of 20.68% and 19.37%, respectively. Overall
the Philippines had the second-highest risk in facing natural disaster behind Vanuatu.
The difficulties that the Philippines faces and its
lack of preparedness for the worst were made devastatingly clear in November 2013 by Typhoon Haiyan,
one of the most powerful tropical cyclones in history with the highest sustained wind speeds at landfall of any cyclone ever recorded. Typhoon Haiyans
combination of intense winds and storm surges over
low-lying areas laid waste to large areas of the Western Visayas, killing 6300 by a conservative official
count and around 7500 when including people who
went missing. The worst hit areas were the island of
Leyte and Tacloban, a coastal city of more than
200,000 people that was largely flattened by a stormsurge flood with waves as high as 7 metres.
AGENCIES IN CHARGE: The tragedy of Haiyan has
led to a broad-ranging re-examination of disaster
management policies by the government, media and
civil society. The Commission on Audit (CoA), a constitutionally mandated government watchdog, has
produced multiple reports reviewing response and
disaster management policies generally. It mostly
praised the governments efforts, but pointed to
bureaucratic red tape holding up disaster relief. The
report said, The bureaucratic structure and reliance
on written guide permeate the difficult situation of
being able to respond immediately.
Disaster management is coordinated by the National Disaster Risk Reduction and Management Council, which has the authority to direct government
A study by the Commission

on Audit found that
bureaucratic red tape very
often limits disaster relief
and makes it difficult for
the government to respond
immediately.
38
ECONOMY ANALYSIS
From 1980 to 2010 natural disasters killed an average of 1000 people per year in the Philippines
Convincing people to
evacuate and assisting
those who lack the
resources are key factors
that could help to reduce
fatalities.
agencies and decide how to allocate resources. The

councils National Disaster Risk Reduction and Management Plan, published in 2011 and meant to guide
policy until 2028, was generally praised as forwardlooking. However, the core difficulty for the Philippines in dealing with threats like Haiyan is the large
amount of resources and the high level of institutional preparedness required to be able to organise
a large-scale evacuation in the short period of time
that authorities typically have between the recognition of a major storm threat and landfall.
COMMUNICATING RISK: Evacuation coordination
and the willingness of people to evacuate have
improved since Haiyan, and meteorological forecasts have been enhanced as international cooperation has grown. But it will continue to be difficult
for disaster management officials to predict early
enough where they need to evacuate people from,
as even the biggest storms make surprise last-minute
changes in direction or intensity. One of the main
reasons people die in hurricanes is that some choose
to ignore evacuation orders, often because they
have experienced previous evacuations they felt
were unnecessary. Another persistent problem is
the extreme vulnerability of the poorest segment of
the population, who are driven by poverty to crowd
in areas that are most flood-prone and who often
live in flimsy shanty housing. People from such communities tend to lose what little they have when
natural disasters strike, which then forces them into
temporary shelters with other families.
According to the UNU-EHSs 2014 risk report,
chaotic urbanisation has led to 540,000 people living in poorly protected riverbank zones that are
prone to flooding. Crowding along canals can be so
intense that it clogs the circulation of water and
exacerbates flooding. More than 1000 shanty
dwellers died in 2009 when two powerful typhoons
hit Manila in the same year. The government has
struggled to find a way to remove these slums, as
initial plans for outright evictions drew international condemnation. A second plan to entice people
away from slums with housing subsidies paid in cash
was protested by some locals who felt that rewarding illegal squatters would only exacerbate the problem. The governments latest plans include working
with international charities, such as Habitat for
Humanity, to move people into cheaply built, medium-rise buildings in the outer district of Metro Manila. The government pays the up-front costs of
P400,000 ($9000) per apartment which the new
owners must repay over 25 years.
TACKLING HURDLES: As the CoA stressed in one
of its reviews, the most important shortfall is the
Philippines lack of a comprehensive emergency management system that allows it to deal with a catastrophic disaster on the scale of Haiyan. In its 2014
report, Disaster Management Practices in the Philippines: An Assessment, the commission said disaster management agencies had limited capacity in
terms of staff, equipment and other logistics such
as warehouses, delivery vehicles, lack of a systematic distribution system, and an inadequately trained
and equipped response team.
Although typhoons on the scale of Haiyan are relatively rare, so-called super typhoons equivalent to
American category 4 or 5 hurricanes hit the Philippines regularly. Haiyan was the fifth typhoon to kill
more than 1000 people in the Philippines since 2006.
The north-west Pacific consistently has the worlds
largest and most powerful cyclones, and the Philippines and Japan are on the front lines of super
typhoon landfalls, where most of the damage is done.
On top of that, the Philippines is prone to powerful
earthquakes. The Bohol earthquake of October 2013
in the Central Visayas just a month before Haiyan
killed 222 people and displaced some 360,000,
according to the UN. The countrys deadliest quake
was in 1976 on the southern Moro Gulf, which killed
at least 5000 people, mostly in a resulting tsunami.
There is also the danger presented by volcanic
eruptions and mudslides. Eruptions themselves are
rarely deadly, with the exception of the 1991 eruption of Mount Pinatubo, near Clark and Angeles,
which killed 847 people in one of the biggest eruptions globally in recorded history. The massive ash
fallout also devastated the agricultural sector. However, the more frequent threat from volcanoes is
mudslides, known locally as lahar, in which heavy rains
break loose old deposits of ash from the sides of volcanoes that can then come sliding down valleys as
giant walls of mud. The worst recent lahar was set
off by a typhoon in 2006 on Mayon Volcano and
buried whole villages, killing at least 1000.
Overall the UN International Strategy for Disaster
Relief counted 363 natural disasters in the Philippines during 1980-2010 that annually affected an
average of 3.8m people and killed an average of
1000 per year. Storms accounted for about threequarters of damages and casualties, while mudslides,
floods and earthquakes accounted for 7-8% each.
ECONOMY DIALOGUE
Doris Magsaysay Ho, President and CEO, A Magsaysay
39
Jaime Augusto Zobel de Ayala, Chairman and CEO, Ayala Corporation
A careful balance
OBG talks to Doris Magsaysay Ho, President and CEO, A Magsaysay, and
Jaime Augusto Zobel de Ayala, Chairman and CEO, Ayala Corporation
How can the Asia-Pacific Economic Cooperation
(APEC) and economic integration be leveraged to
boost emerging economies competitiveness?
MAGSAYSAY: The goal behind the formation of an
integrated economic bloc is the lowering of barriers and
impediments to giving businesses greater access to
larger markets. One great example is New Zealand a
country with a small population but with the capacity
to produce goods and services beyond its needs. New
Zealand businesses and policymakers are major proponents of free trade as one of the founders of Pacific 4 which was the precursor to the Trans-Pacific
Partnership with the goal of increasing exports of agricultural and other products and services.
Thus economic integration through APEC, ASEAN
and trade agreements offers us significant opportunities if businesses look outward beyond our domestic
markets. However, I believe we must have a strategic
plan identifying sectors where we have a unique selling proposition and competitive advantage. One such
area is trade in services, where technology provides different sectors, like business process outsourcing and
creative industries, with amazing growth opportunities.
With inclusive growth being a theme for both APEC
and the APEC Business Advisory Council (ABAC) in 2015,
we also hope to develop the capacity of small and medium-sized enterprises to sell products and services
through the internet. Another strategy is to help young
Filipinos to be the best and brightest creators of innovative digital products. This convergence of global markets with technology is making it possible for anyone
to benefit from global trade, but we must focus on
building the systems to support them. This includes
having an elementary educational system that emphasises science, technology, engineering and mathematics (STEM) fields since the opportunities are changing
so quickly, and we must ensure our next generations
have a chance to participate and benefit.
The talent in the Philippine diaspora also offers us
another great opportunity to focus on certain sectors
of manufacturing and agriculture, but again business

and government should use 2015 to fast track the
implementation of strategies already defined. One way
to lower costs for power and transport and logistics is
to promote manufacturing and production hubs around
ports, while another is to create clusters of agricultural lands for production and processing so that logistics costs can be lowered. Today, we transport corn, feed
and hogs. Our domestic shipping industry vision is to
transport just the pork chop, or for that matter, disease-free chicken already skewered for yakitori restaurants in regional markets.
The anti-corruption and ease of doing business agenda of the government will be instrumental in making
the Philippines an attractive place to invest. There are
many measures already in place that we should put into
a to-do list and implement in 2015, such as the National Single Window for Customs, among many others.
ZOBEL: I think one of the main benefits of APEC is that
it provides emerging economies like the Philippines
with direct access to larger markets, and the opportunity to learn and apply global standards whether
through industry, society, or the legal and political
frameworks that have contributed to the advancement
of other countries. However, the challenge will be to
achieve a balance between the benefits of opening up
to free trade and the potential need to protect growing, nationally important sectors. Emerging economies
must be given the opportunity to increase their longterm competitiveness by developing their innate and
natural comparative advantages. Obviously, this must
be done within the context of World Trade Organisation regulations. Thailands automotive industry is a
good example of this. The Thais chose to prioritise this
sector in the 1990s, protecting it through government
policy and identifying a so-called champion model, a
pick-up truck, to build their supplier network around.
Nearly 20 years later, the country is now the automotive hub of South-east Asia and one of the largest automotive manufacturing centres in the world. In terms of
40
ECONOMY DIALOGUE
barriers, the Philippines, along with other developing

nations in the region, will have to continue building the
infrastructure capacity to fully leverage the opportunities provided by APEC. Political and economic stability will likewise be critical in enticing both foreign and
local long-term investments in the region. The current
administration has done much to address these two
challenges. The stable, positive environment that President Benigno Aquino III has provided has resulted in
increased interest from the global business community. Our stock market has reached record highs, and the
investment-grade improvements have helped tremendously in lowering the cost of doing business.
What connectivity infrastructure would help

strengthen the global supply chain integration and
sustainable development of the Philippines?
ZOBEL: Transport infrastructure will indeed be critical
to enabling the benefits of Asia-Pacific integration for
the Philippines. I recently read an Asian Development
Bank (ADB) study that put the cost of the countrys physical infrastructure requirements from 2010 to 2020 at
an estimated $127bn part of the $1trn in combined
infrastructure investment needed in ASEAN over the
same period. However, before we can even consider
building regional infrastructure networks, much work
needs to be done within each nation to build out and
optimise rail, sea and road transport. Several other
emerging ASEAN nations Malaysia ($188bn), Thailand
($173bn) and Indonesia ($450bn) also require a large
degree of investment in new infrastructure capacity
through 2020, according to ADB figures. Our country
continues to have broad transport infrastructure needs,
namely roads, railways and bridges. I do not think we
can prioritise one over the others. The growth of the
Philippines has been so expansive in the last several
years, and our infrastructure capacity needs to catch
up. A Japan International Cooperation Agency study
from 2014 pointed out how traffic congestion currently robs the Philippines of up to P2.4bn ($54m) per day.
Improving mass transit, whether via a robust road network or increasing the capabilities of our railway system, in order to decongest our highways will be very
important. A transparent, efficient and centralised public-private partnership (PPP) process, such as the one
being conducted by the current administration, would
best facilitate the development of the necessary infrastructure capacity. Indeed, the countrys PPP programme
has served as an enabling framework that has attracted many new private sector applicants to invest in our
national infrastructure.
MAGSAYSAY: A major factor for connectivity is transport and logistics for both exports and imports and for
domestic distribution. It is important for policymakers
to understand, however, that shipping and logistics follow trade. So strategic plans to develop manufacturing and agriculture are key for our competitiveness.
Developing these production clusters around hub ports
for our exports, and ports to serve cities and communities around the country to handle imports and domestic trade, will also allow us access to lower priced goods
and commodities. Because of the relatively small trade
volumes, the country is a feeder economy. This means
that we have an added cost of trans-shipment and do
not benefit from the lower cost of larger ships that serve
large economies. Other feeder economies in Asia are,
including Vietnam and Indonesia, working very hard to
increase ready trade to lower the cost of logistics all
around. One of the primary challenges for the Philippines is that it is relatively farther away geographically from markets so we must be even more aggressive
in our plans. Another thrust should be to develop production clusters and hub ports around the country so
we create wealth everywhere. One thrust of APEC and
ABAC in 2015 is to develop our ability to build imbedded services into the global value chain of companies
around the world. There is also a great role that bigger
business can play to develop value-driven partnerships
with smaller businesses so that we have more people
both participating and benefitting from global trade.
ECONOMY DIALOGUE
Another focus is the sustainability of our cities, not

only focusing on infrastructure deficits, but also the philosophy behind the way in which we design liveable cities.
Philippine cities place very little emphasis on public
places, sidewalks, parks and plazas, waterfronts, heritage conservation factors that make the experience
of a city great especially since investors also take liveability into account when making decisions.
In what ways can skilled labour mobility in the AsiaPacific region be encouraged, and what value proposition does the Philippines offer?
MAGSAYSAY: ABAC Philippines has been promoting
the need for a regional framework for labour mobility.
The initiative, called Earn, Learn and Return aims for
policies that are fair for sending countries, like ours,
receiving countries and the worker. Overseas workers
must also be briefed on the Philippines strategy, so that
they work abroad with the goal of learning global standards and practices and the aim of returning home to
participate in our economy. Sectors such as tourism,
health care and others are growing as key drivers of
our economy and are great sectors for overseas Filipinos
to return to as entrepreneurs or professionals.
The ideal future would be for this incredible talent
to form the foundations for us to offer services instead
of people. In shipping, Philippine companies are moving out of manning and crewing to ship management
services, for example. Whatever the case, the governments implementation of the K-12 programme, which
seeks to extend the length of public education, will be
a significant step towards giving future generations
the opportunities brought about by regional integration and global trade. There are a few easy just-do-it
action plans. For instance, let us capitalise on our bilingualism and require Philippine movies and TV shows
to have subtitles. This will also make them marketable
abroad. As part of APEC, there is a thrust toward regional harmonisation and recognition of skills, in addition
to the development of vocational learning. While the
41
Philippines has been historically US-oriented in its educational system, the country is increasingly looking
towards European models of vocational training. And
as I mentioned above, we must accelerate the focus on
STEM fields because that will be the way of the future.
ZOBEL: Labour mobility is a tricky issue. While allowing workers to move more freely across countries generally has a positive impact, this type of policy has historically been a target for citizens and politicians,
especially in countries where a significant portion of
the labour force stands to be displaced by cheaper or
more skilled foreign workers. I believe mobility of skilled
labour should be encouraged given that the benefits,
which include greater motivation among employees and
firms having a broader pool of talent to select from,
outweigh the costs. Governments across the region
need to enact policies that provide for the free movement of talent, while initially protecting (in the right
ways) the more vulnerable sectors of the labour force.
More importantly, countries should invest in the education that prepares young people to compete in this
new regional and global context. The Philippines, with
its service-based economy and its strong overseas
labour base, represents a rich source of skilled workers for the region. Other countries have long benefitted from the skilled, English-speaking workforce that
we continue to send abroad a workforce that now
numbers over 10m. In turn, we receive more than $22bn
in remittances per year, which has helped to fuel growth
at home. Within ASEAN, there is even more room for
Filipino worker employment to grow, as most overseas
workers, some 67% of all deployments, go to the Middle East. However, I believe such an arrangement has
a natural ceiling. If too many workers leave the Philippines, it puts a dent in the countrys potential for further economic growth, which has long been described
as brain drain. Meanwhile, in the countries that receive
large volumes of Filipino workers, a similar backlash may
also occur, as the influx of foreign workers could be
perceived as taking jobs away from qualified citizens.
42
ECONOMY ANALYSIS
Remittances are a major pillar of the Philippine economy
All in a days work

The country has long been known for its large, qualified workforce
In outlying rural areas,
overseas workers are often
central to economic
development as temporary
labourers often send back
more money than those
who migrate to Manila or
other urban centres.
Labour exports are usually thought of as signifying a

lack of opportunity in the domestic economy, and countries that do so are often seen as tacitly admitting that
they are unable to organise domestic production. Indeed,
the Philippines initiated its policy of labour exports in
the 1960s under dictator Ferdinand Marcos, largely
because he was desperately short of hard-currency
income and did not know how else to earn it. However, that the tide may be changing.
OLD STRATEGY: US immigration reform during the
1960s eliminated old race-based quotas and eased
immigration for skilled workers in professions that were
suffering from shortages. For the Philippines it was an
opportunity to send large numbers of women to work
as nurses in the US health care system and remit badly needed hard currency back home. The state invested heavily in nursing-education programmes that led
to US-standard certification. During the 1970s, the
Philippines began to send large numbers of mostly
male labourers to work mainly on construction projects in the Middle East. Over the decades the locations
and professions in which Filipinos work abroad have proliferated. The Commission on Filipinos Overseas estimated that in 2012, 4.22m Filipinos worked temporarily
abroad. The commission estimated that another 4.9m
ethnic Filipinos permanently live in other countries,
including migrs with foreign citizenship or permanent residency and their descendants, who are not
counted among the Philippines population. Because a
large number of permanent migrs still send money
to relatives in the Philippines, they are often lumped
together with temporary overseas workers in estimates
of total overseas Filipinos.
NEW OPTIONS: Advances in telecoms technology have
made it feasible to sit at a desk in the Philippines and
provide various kinds of services to customers anywhere in the world. In September 2014 the Philippines
business process outsourcing (BPO) sector reached
over 1m direct employees. The BPO sector has the
advantage that all of its costs and its workers incomes
are spent inside the country, but the disadvantage that

most of its workers earn less than overseas workers.
The income earned from labour exports and migrs
has become a vital pillar of the economy. Remittances
came to $17.6bn in the first nine months of 2014, up
6.1% over the same period of 2013, while in 2013 remittances were up 6.8% from 2012. In 2013, the BPO sectors revenues came to $15.5bn, according to the IT and
Business Process Association of the Philippines, the
main industry association.
PROFITABLE TREND: Workers abroad are especially
important to the development of rural areas, as workers who go abroad temporarily and leave their families
at home tend to bring much more money back to their
community than those who leave to Manila or other
urban areas with their families. Workers abroad also
tend to save up to invest in businesses at home, which
in turn depend on the remittances their communities
receive. As the importance of labour exports grow,
many Philippine economists and business people have
become unabashed supporters. Far from worrying
about a brain drain or citing the large numbers of foreign workers as evidence of domestic failures, supporters of labour export tout it as evidence of the
Philippines success in developing the human capital it
will need to increase productivity, reduce unemployment
and end poverty. Jose V Cruz, president and CEO of
Amalgamated Investment Bancorporation, told OBG
that overseas Filipino workers (OFWs) drive improvements in private higher education. He said, There is a
direct link between the spending of OFWs on their childrens educations, and the decisions by our top tycoons
to each buy their own major university. It has become
part of the universities business model.
Ironically, the shift in thinking on labour exports
comes as the traditionally weak manufacturing sector
is beginning to grow faster than the rest of the economy. The manufacturing sector grew by 8.5% in 2014
in terms of real value added, 2.4 percentage points
above the overall economys growth pace. Economists
ECONOMY ANALYSIS
have argued for decades that the Philippines will not

be able to catch up with its South-east Asian peers
until its economy is solidly grounded with a strong manufacturing sector. But though supporters of labour
exports are happy to see industrial sectors accelerating, they are not convinced that manufacturing is the
only route to development, and they counsel against
holding overly high expectations. Cristina S Ulang, head
of research at First Metro Investment Corporation, told
OBG, Our competitive advantage is in the human capital model and export of labour. Maybe manufacturing
is not really our strength, and that is okay.
CHANGING TIDE: Philippine economists are calling for
the concept of human capital to be taken into account
in conventional official statistics to better reflect how
the Philippines economy is developing. Although the
concept of human capital is widely used by mainstream
economists, the UN System of National Accounts (SNA)
that governs how standard measures such as GDP and
gross investment are calculated counts only physical
capital. Most importantly, the concept of human capital treats education as investment, whereas the UNs
SNA treats education as consumption. Domestic economists are also rebelling against the convention of
treating GDP as the primary measure of an economys
success. GDP measures only the value produced on a
countrys territory, excluding income earned on foreign
territories by its residents. Thus, the income earned by
overseas workers is not included in GDP.
DIFFERING FIGURES: The Philippines Statistics Authority (PSA) addresses the issue by giving equal prominence
in its economic reports to GDP and GNI. GNI equals GDP
plus income earned by Philippine residents working or
investing abroad, minus income earned by non-residents
working or investing in the Philippines. The PSA estimated that overseas workers earned a total of $63.4bn
in 2014, up from $61.7bn in 2013.
The PSE calculated the difference between GDP and
GNI, called net primary income, at P2.5trn ($56.25bn),
or 20% of GDP in 2014, up from P2.3trn ($51.75bn) in
2013. The use of GDP or GNI can have a large impact
43
Official estimates put overseas workers earnings for 2014 at $63.4bn
on how one assesses the Philippines economy. For

example, household spending compared to GDP makes
Filipinos appear extraordinarily consumerist. Household consumption came to 72.5% of GDP in 2014, higher than in the US. But that ratio is arguably overstated
because Philippine shoppers are spending money that
is not included in GDP.
The ratio of household consumption to GNI looks more
ordinary at 60.4% at current prices in 2014, but that
ratio is arguably understated because it does not include
temporary overseas workers in their host countries.
This can also lead to widely differing views of the extent
of savings and investment in the Philippines economy.
A standard used by the IMF counts investment as the
share of capital formation in GDP and gross national
savings as investment plus the current account. By that
method, Philippines investment was 19.7% of GDP in
2013, and gross national savings 36.2% of GDP in 2013.
However, these figures do not include savings of income
earned by overseas workers kept outside the Philippines.
Taking the concept of

human capital into account
could better reflect how
the economy is developing,
as well as allow for
education to be seen as
investment rather than
consumption.
44
ECONOMY ANALYSIS
The government is working to ensure wealth is spread more evenly
Closing the gap

Renewed growth could be the key to addressing inequality
According to official
statistics, 25.8% of the
population lived below the
poverty line of $39.50 per
person per month in the
first half of 2014.
The current run of rapid growth is an opportunity

for the Philippines to do something much more valuable than just advance material wealth and catch up
with middle-income peers. With the right policies,
the Philippines government believes that this could
be the era when the country is finally able to successfully address widespread poverty.
To stress the point, the World Bank titled its annual review of the Philippines economy published in
early 2015, Making Growth Work For the Poor.
Motoo Konishi, the World Banks country director,
said in a statement in January 2015 while releasing
the report, The Philippines has what it takes to sustain this high level of growth for many years. The
country is benefitting from low and stable inflation,
its finances are healthy, and debt levels are declining. It has a dynamic private sector that is seizing
global opportunities. Now is the time to move the
economy decisively onto a path that reduces poverty and creates more and better jobs.
The government sees the same opportunity and
has made the phrase inclusive growth one of its
most-popular slogans to describe its new economic policy goals. The government tracks a long list of
indicators of poverty reduction, including the UNs
Millennium Development Goals and its own list of
like-minded Philippine Development Plan targets.
These range from maternal and infant mortality to
access to safe drinking water, which the Philippine
Statistics Authority (PSA) publishes regularly on its
website along with accompanying green smiley faces
when there has been positive progress, and redfaced frowns where there has not.
UNEVEN DISTRIBUTION: The Philippines has long
had a reputation for extreme wealth alongside deep
poverty, and though much progress has been made
since the 1990s the stereotype continues to hold
some truth. According to PSA data, as of the first half
of 2014, 25.8% of the population lived below the official poverty line of $39.50 per person per month.
Meanwhile, a small number of families control a

huge portion of the countrys wealth, with the 20
richest Philippine citizens and their families having
a combined net worth equal to $62.9bn, or 22% of
annual GDP, according to Forbes magazine in August
2014. By comparison, the top 20 richest Americans
rated by Forbes in February 2015 had a combined
net worth equal to $774bn, or 4.4% of US GDP.
FACING CHALLENGES: The current administrations
policies are fundamentally economically conservative, and have a strong emphasis on market liberalisation. However, at the same time the government
puts a stronger focus on social policy, somewhat
similar to the policy mixes of European centre-right
parties or what in Europe is often called social liberalism. There is also an emphasis on sound fiscal
parameters and controls on public spending, but
also a pride that vastly improved tax collection systems are funding increased investment in public welfare, education and health care spending.
The World Bank report praises the governments
progress in making growth more inclusive and driving stronger job creation and faster poverty reduction. The average unemployment rate in 2014
dropped to 6.8% in 2014 from 7.2% in 2013 despite
a 1.7% increase in the size of the working-age population. The number of employed rose by about 1m
or 3.1% from 36.3m in 2013 to 37.3 in 2014.
Meanwhile, PSA data showed the proportion of the
population living below the official poverty line rose
to 25.8% in the first half of 2014, when it was
P1755.60 ($39.50) a month, up from 24.6% in the
first half of 2013, when it was P1605 ($36.11).
One way in which poverty is being reduced is
through governments rapid boost in the availability of cash income supplements to the poorest families. The number of households receiving them
jumped from 1m in 2010 to 3.9m in 2013. Poverty,
however, is unevenly spread across the country, with
only 2.6% of Metro Manilas families living below the
ECONOMY ANALYSIS
official poverty line in 2012, while the ratio was as

high as 37.1% in southern Mindanao, 37.4% in the
eastern Visayas and 48.7% in the Autonomous Region
in Muslim Mindanao. Poverty is generally greater in
the least developed regions that are most dependent on agriculture and fishing.
UNEVEN SPLIT: PSA data show that poverty rates
by profession are by far highest among farmers and
fishers, with 38.3% and 39.2%, respectively, of them
under the poverty line in 2012 compared to an average rate for all professions of 25.2%. Regionally
uneven development is one of the biggest challenges for the Philippines in reducing poverty. Metro
Manilas gross regional domestic product (GRDP)
accounted for 37% of national GDP in 2013, though
it is home to only 12.8% of the population.
The capital region enjoys a far higher GRDP per
capita than the rest of the country, at P342,170
($7698) in 2013, compared to P93,745 ($2109) in
Central Luzon, P58,451 ($1315) in Eastern Visayas
and P101,862 ($2292) in Central Visayas. The poorest regions were Bicol in the Visayas with GDP per
capita of P42,206 ($950) in 2013 and Muslim Mindanao with P29,608 ($666). The national GDP per
capita in 2013 was P117,603 ($2646).
Education is an area of particular focus. The government is targeting 99% enrolment in primary education and 71% in secondary education by 2016.
Enrolment in elementary schools fell from 95.9% in
2010/11 to 95.2% in 2012/13. However, the completion rate increased from 72.1% to 73.7%, which
may be attributed to the governments conditional
cash transfer (CCT) programme. Secondary enrolment
was also down slightly, from 64.7% in 2010/11 to
64.6% in 2012/13. This is expected to increase
because of the initiative to expand CCT coverage to
those 15-18 to enable them to finish high school.
The number of higher education graduates also
rose to 553,706 in 2013 from 498,418 in 2010, on
track to reach a target of 601,505 by 2016. Graduates of technical and vocational programmes leapt
from 1.34m in 2010 to 1.77m in 2013, far exceeding the original target of 1.38m by 2016.
The ratio of families with access to safe drinking
water and sanitary toilets has risen from 73% and
67.6% in 1990 to 83.8% and 92.2% in 2013. The government has also reduced the incidence of malaria, and the health care system has become better at
treating tuberculosis. However, the maternal mortality rate also increased from 162 per 100,000 births
in 2006 to 221 per 100,000 in 2011, giving little
hope of reaching a target of 50 by 2016. The prevalence of underweight children under 5 years of age
dropped only slightly from 20.6% in 2006 to 20.2%
in 2011, still far from the goal of reaching 12.7% by
2016. The percentage of families with low caloric
intake rose from 53.9% in 2003 to 66.9% in 2008 as
food prices rose. The target is 32.8% by 2016.
National health insurance enrolment also slipped
from 84% in 2012 to 79% in 2013, far from the target of 100% by 2016. School completion remained
45
The Philippine government has been urged to step up its commitment to infrastructure expenditures
poor, with elementary school completion rates rising slightly from 72.1% in 2010/11 to 73.7% in
2012/13, and rates for secondary school dropping
from 75.1% in 2010/11 to 74.8% in 2012/13. Those
ratios do not include children who do not enrol.
NEW SOLUTIONS: The World Bank also urged the
government to further accelerate public spending,
which lagged in 2014 largely due to a Supreme Court
challenge that delayed new packages for government
spending on reconstruction infrastructure in regions
hit hard by Typhoon Haiyan. The report recommended that the government aim to boost investment by
6.8% of GDP, with 2.5% of GDP going to infrastructure and 4.5% to social services. According to the
World Bank, tax administration reforms could generate an additional 3.8% of GDP of fiscal space in
the medium term, while tax hikes would be required
if the government is to generate the other 3% of GDP.
The banks report also recommended raising levies
on gasoline and eliminating any unnecessary tax
incentives, while simplifying tax procedures for smaller enterprises. It also urged acceleration of the
awards of public-private partnership (PPP) infrastructure projects, which have lagged behind the
governments announced plans, to reach 5% of GDP.
The World Bank also urged the government to
push for more comprehensive regulatory reforms,
while continuing to improve its revenue collection
systems. The report noted a range of obstacles to
trade, investment and new PPPs, while pointing to
liberalisation of telecoms as a catalyst that facilitated rapid development of business process outsourcing (BPO). The World Bank report also said, The success of the BPO industry highlights the large dividends
that can be gained from liberalisation. Going forward,
non-traditional and non-captured industries with
very large growth potential, such as tourism and
outsourcing of higher-value manufacturing, such as
design of electronics, could become key growth and
employment drivers if supported by a freer market.
Education is an area of
particular focus. The
government is targeting
99% enrolment in primary
education and 71% in
secondary education by
2016.
47
Trade & Investment

Foreign direct investment has jumped in recent years
Exports expected to maintain upward trajectory in 2015
Investment in the BPO sector a key growth driver
Plans to create a new metropolis in Central Luzon
TRADE & INVESTMENT OVERVIEW
49
The central bank has dipped into its reserves to stabilise the peso
Aiming higher
Gradual market reforms should see exports and investment rise
After years of lagging behind its South-east Asian peers,
the Philippines is seeing a long-awaited awakening of
foreign direct investment (FDI). Although FDI volumes
are still smaller than what countries in its peer group
attract, the Philippines has been catching up at an
impressive pace. Although many of the challenges that
impeded investment in the past have yet to be overcome, the faster economic growth of recent years and
stronger efforts to attract investment have improved
perceptions of the countrys prospects.
Human capital, young demographics and consumerist
culture are the countrys key strengths in both investment and trade. Growth has been led by investment in
the business process outsourcing (BPO) sector, but
recently investment in manufacturing has begun to
pick up after a long period of stagnation. Large numbers of Filipinos who leave for higher-paying work
abroad still contribute to the local economy by sending money home to their families worth more than 10%
of GDP, which supports a healthy consumer market
and a current account surplus.
LAGGING LEGACY: The Philippines comparatively low
FDI performance is a legacy of growth rates that were
well behind regional peers, especially before the 1990s.
It also reflects traditionally high obstacles to investment,
including a corrupt and slow-moving bureaucracy and
a somewhat more protectionist legal climate. Foreign
investment is restricted in many business areas, and the
countrys constitution bans foreigners from owning
land or from holding more than 40% of a company that
owns land. The Philippines has also struggled to compete as an export-oriented manufacturer due to its
paucity of domestic energy resources and chronic
underinvestment in infrastructure.
The discrepancy is most visible in the accumulated
stock of inward FDI, which is a long way behind other
large South-east Asian countries. The Philippines
$32.5bn stock of FDI at the end of 2013 was equal to
12% of GDP or $333 per capita, according to UN Conference on Trade and Development and IMF data. By
comparison, Indonesia had $230bn of FDI stocks, equal

to 26% of GDP or $929 per capita. Vietnams $82bn of
FDI stocks equalled 48% of GDP or $911 per capita; Thailands $185bn of FDI stocks represented 48% of GDP
or $2718 per capita; and Malaysias $145bn of FDI
stocks were equal to 46% of GDP or $4831 per capita.
CATCHING UP: In terms of FDI inflows, the country is
still at the back of the pack but has caught up rapidly.
Annual FDI rose from $1.1bn in 2010 to $3.9bn in 2013
and $4.9bn in the first nine months of 2014, according to balance of payments (BOP) data from the central bank, Bangko Sentral ng Pilipinas (BSP). That $4.9bn
inflow was equal to 2.4% of the periods GDP and an
annual pace of $66 per capita, and was on par with FDIs
contribution in Indonesia in 2013. At $18.4bn Indonesias investment stock was 2.1% of GDP or $74 per capita. Other peers are still well ahead: Vietnams $8.9bn
of 2013 FDI was equal to 5.2% of GDP or $99 per capita; Thailands $12.9bn represented 3.3% of GDP or $190
per capita; and Malaysias $12.3bn was equal to 3.9%
of GDP or $411 per capita in the same year.
SWEET SPOT: The turnaround has been gathering pace
since 2010 as economic growth has accelerated and
economic policies have generally improved. The results
have turned investors attention to the countrys positives, and it has become widely recognised the Philippines is in a sweet spot for rapid catch-up growth.
Demographics are very favourable, with 2% annual
population growth and a bulge in the young-adult
bracket. A relatively healthy banking system, relatively
low indebtedness and growing banking penetration
give the country plenty of room for credit expansion.
Greater orientation towards the US economy in the
Philippines than in other Asian countries is increasingly seen as an advantage, especially as the dollar has
strengthened. The Philippines has also seen more investment interest from Japan as large-scale quantitative easing has encouraged foreign investment and relations
with China have worsened. Japan historically and to
date is the biggest foreign investor in the Philippines.
Foreign direct investment

rose from $1.1bn in 2010
to $4.9bn in the first nine
months of 2014 as
economic growth has
accelerated and business
policies have improved.
50
The Philippines has seen its sovereign rating upgraded in recent years
The Philippines climbed to

52nd position out of 144
countries from 85th out of
139 in 2010 in the World
Economic Forums 2014-15
Global Competitiveness
Report. The country also
moved up from 115th in
2011 to 76th in 2015 in the
Heritage Foundations
economic freedom
rankings.
Theyve had some supply chain issues in Thailand and

their share of political risk in China, and that happens
to be working in our favour, Edwin Coseteng, president
of First Philippine Industrial Park, told OBG.
English-language skills are the best in Asia, especially for interacting with Americans, and the education
system is relatively strong and rapidly improving. The
large inflows of funds from overseas workers and migrs, and the recipients propensity to consume them,
make the Philippines a particularly attractive market
for producers of consumer goods compared to other
countries of similar size and wealth.
However, the flip side of the countrys high rate of
consumption is that investment as a share of GDP is
comparatively small. Our biggest problem is the overall rate of domestic investment is low, at around 19%
of GDP. The regional average is about 35% of GDP,
Bernardo Villegas, an economist who chairs the Centre for Research and Communication at the University
of Asia and the Pacific, told OBG.
RATINGS UPGRADE: The improved perceptions are
reflected most prominently in upgrades by the major
International trade, 2005-14* ($ bn)

Imports
Exports
SOURCE: Philippines Statistics Authority
64
48
32
16
2005
2006
2007
2008
2009
2010
2011
2012
2013 2014*
* Preliminary data for year to November 2014
80
credit ratings agencies of the Philippines sovereign

rating to investment grade in 2013. That was followed
by upgrades in 2014 to BBB by Standard & Poors and
Baa2 by Moodys, both one notch above the agencies
minimum investment grade ratings. The Philippines has
also improved its ratings in international surveys of
business conditions. The World Economic Forum noted in its 2014-15 Global Competitiveness Report that
the Philippines climb to a ranking of 52nd out of 144
countries in 2014 from 85th out of 139 in 2010 was
the biggest improvement of any country during that
period. It was driven largely by improved ratings of institutions, especially for lower perceptions of corruption.
The Philippines scored especially well for its macroeconomic environment (5.8 points out of the 7-point
maximum) and health care and education (5.4), while
infrastructure (3.5) and innovation (3.5) were regarded as the weakest points. The overall ranking was still
well behind peers Malaysia (20th), Thailand (31st) and
Indonesia (34th), which have traditionally ranked high
in the survey, but was ahead of Vietnam (68th).
Likewise, the Philippines was also the most improved
country in the Heritage Foundations economic freedom rankings between 2011 and 2015, moving up
from 115th in 2011 to 76th in 2015. And the Philippines has also advanced rapidly in the World Banks
2014-15 Doing Business rankings, to 95th out of 189
countries in the report (published in late 2014) from
144th out of 183 countries in 2010.
The Doing Business survey, which judges conditions for local small businesses, gave the Philippines
strong rankings for ease of getting power hooked up
(16th), resolving insolvency (50th) and foreign trade
(65th), but gave low scores for protecting minority
shareholders (154th) and starting a business (161st).
A National Competitiveness Council, established in
2006, is tasked specifically with advising the government on how to improve the countrys score in the
Doing Business rankings and other such surveys.
NEGATIVE LIST: The Philippines system of restrictions
on foreign investment has developed over decades
and is continuing to evolve. The core restrictions are
written in the constitution, which bars any foreign ownership of mass media and limits foreign ownership of
land, public utilities and educational institutions to 40%.
The constitution also requires that any natural resource
extraction business with foreign ownership of more
than 40% have a financial and technical assistance
agreement with the government, but that requirement has been interpreted liberally.
There are further restrictions adopted in various
laws. Roughly every two years the government publishes a foreign investment negative list, which summarises the constitutional and legislative restrictions and adds
a handful of others. However, there is an evolving tradition of interpretation, which can be more important
than the written legislation.
Besides mass media, foreigners are banned from
most licensed professions, as well as from private security, small retail businesses and small-scale mining. Foreign ownership of advertising businesses is capped at
52
Investment as a share of GDP remains low at around 19% of GDP
With seven investment

promotion agencies
offering a variety of tax
exemptions and other
benefits, the Philippines
has considerable incentives
to attract foreign
investment.
30%, and foreigners are limited to 40% ownership in

education, rice and corn processing, retail trade, government contractors, deep sea fishing, most small businesses, and arms and explosives.
PARTNERSHIPS: Infrastructure projects can be no
more than 40% foreign owned unless they are buildoperate-transfer (BOT) contracts, also called publicprivate partnerships (PPP), a method of financing
favoured by the government. What we really need to
develop is our infrastructure. Thats what I think we
should focus on for the rest of this administration,
Ponciano C Manalo, Jr, undersecretary at the Department of Trade and Industry and a governor at the Board
of Investments (BOI), told OBG. Foreign ownership
isnt an issue with BOT financing, but we were a little
slow off the starting block with PPPs. This government
would rather err on the side of transparency.
Foreigners can own up to 49% of lending companies
and 60% of finance companies and investment banks.
Many foreign banks entered the market in the 1990s2000s but most have left, reduced operations or stayed
very small. After a reform implemented in December
2014, publicly listed or state-owned foreign banks are
allowed to acquire full ownership of commercial banks,
and any foreign bank can establish a new fully owned
bank branch, which are limited to six sub-branches.
Other foreign investors are restricted to 40% of commercial banks and 60% of certain types of small banks.
A P17.92bn ($403.2m) deal signed in December 2014,
but under way since before the reform, was seen as a
sign of a new wave of foreign investment in the banking sector. Cathay Financial Holding, the parent of Taiwans Cathay United Bank, agreed to pay P18bn ($405m)
for a 20% stake in Rizal Commercial Banking Corporation, the seventh-largest Philippines bank. Joey
Cuyegkeng, chief economist at ING Bank in Manila, told
OBG, The interest is there. A lot of Asian financial institutions are looking at Philippines banks.
INCENTIVISING: The Philippines offers considerable
incentives to attract foreign investors and has relied
on these extensively to draw in both BPO and manufacturing investors. The availability of such enticements
has become so widespread that virtually every major
foreign investment receives incentives. The system is
complicated, with seven different investment promotion agencies offering a variety of tax exemptions and
other benefits, such as greater leeway to hire foreigners. The most active of those has been the Philippine
Economic Zone Authority (PEZA), which was originally intended to attract export-oriented investment to
high-priority areas and then created hundreds of socalled ecozones all over the country.
PEZA has been especially active drawing in BPO firms,
sometimes even creating a zone specifically for a particular investor. Since 2012 PEZA has stopped issuing
most privileges to new locations within Manila in an
effort to push investment out into less developed
regions. PEZA locators are required to export at least
70% of their output to receive incentives.
First Philippine Industrial Park operates a popular
industrial park in Batangas, south of Manila, which is
designated by PEZA as an ecozone. The company would
like to see PEZAs mandate changed to encourage
investment that initially targets the local market. In the
first stage of development businesses naturally want
to sell the domestic market. Its harder to make exports
work if access to the local market is restricted, Coseteng
told OBG. The idea is to structure the incentives to create jobs, and not just move them from a higher cost
base to a lower cost base.
The next-biggest investment agency is the BOI, which
offers incentives to invest in priority business sectors.
These include BPO, manufacturing, exports of any kind,
infrastructure, agriculture and fisheries, green initiatives,
research and development, tree plantation, printing,
waste management, disaster prevention or mitigation,
and creative businesses. Generally, BOI incentives are
less generous than those offered by PEZA. The BOI also
has a branch covering five regions of Mindanao that
offers somewhat better incentives.
MONETISING THE MILITARY: There are two agencies
that promote investment in projects converting former
military bases. The Clark Development Corporation
(CDC) is tasked with developing a 44-sq-km area called
the Clark Freeport Zone, including the 24-sq-km Clark
International Airport, although that is managed separately, and 20 km of land to the west of the airport. The
area was formerly Clark Air Base, a US military facility,
until 1991 and is located about 100 km north-west of
Manila near the city of Angeles.
The CDC is a subsidiary of the Bases Conversion and
Development Authority (BCDA), which is in turn a unit
of the armed forces and helps fund its budget. BCDA
is best known for the very successful Bonifacio Global
City and Newport City developments in Metro Manila,
which were previously parts of Fort Bonifacio and Villamor Air Base, respectively.
Near the Clark Freeport Zone the BCDA is taking on
a more ambitious, longer-term project to create what
it hopes will be the largest industrial and BPO centre
outside Metro Manila. Within a 315-sq-km area of
undeveloped land called the Clark Special Economic

Zone, the BCDA is planning to build an entirely new city,
Clark Green City. A first phase of the project is currently being tendered (see analysis).
The Clark project is linked to another conversion at
another former US military facility, the Subic Bay Naval
Base, 70 km south-west of Clark. The Subic Bay conversion is intended as a port and industrial zone, and
is connected to Clark by a four-lane expressway built
by the BCDA in 2005-08. The CDC and Subic Bay Metropolitan Authority offer investment incentives comparable to PEZA. There are two more locale-based
investment promotion agencies, the Authority of the
Freeport Area of Bataan and the Cagayan Economic
Zone Authority, which manage another two port and
industrial zone projects. Bataan is on the north side of
the entrance to Manila Bay, and Cagayan is on the
northern coast of Mindanao.
GLOBAL PULLBACK: While FDI has boomed, portfolio and other financial investment has slowed sharply
amid a global pullback from emerging markets that
began with the so-called taper tantrum in the spring
of 2013, when the US signalled it would phase out
quantitative easing and the dollar began to strengthen. The Philippines relatively strong financial position,
high growth rates and ties to the US economy have
shielded it from the stormy weather and helped it avoid
the more traumatic reversals of financial flows that
many other emerging markets have undergone.
Nonetheless, flows did slow sharply or reverse.
Portfolio investment had been quickest to respond
to the improving business climate as investors poured
money into emerging market funds and fund managers
overweighted the Philippines. Portfolio inflows averaged $4.5bn a year in 2010-12, according to BOP data.
They dropped to $363m in 2013 and $292m in the first
nine months of 2014 as fund managers continuing preference for the country was overwhelmed by large outflows from the emerging market asset class. Other
financial investment mainly loans, interbank credit,
non-residents deposits and trade credit averaged
$3.5bn a year in 2010-12 and dropped to $395m in 2013

and a $2.1bn outflow in the first nine months of 2014,
according to BOP data.
The nature of the outflow was unclear, as it was
marked as repayment of short-term interbank credit
by banks and appears as such in the BSPs gross foreign debt data, but does not figure in a separate BSP
report on bank balance sheets.
DOMESTIC INVESTMENT: Despite the lack of net financial inflows other than FDI, domestic groups are able
to raise funds and invest in major projects. Domestic
groups have, for example, been piling into power generation investments as the grid was facing an anticipated short-term shortfall. In three to five years well
be awash with power plants. Even groups that havent
traditionally been investors in the sector, such as San
Miguel, are going big into power plants, Villegas said.
First Philippine Industrial Park is affiliated with First
Philec, a leading power sector investor. The parks president told OBG the investment lag currently being seen
was mainly due to the lengthy process of organising
and getting approvals for investment in coal power. We
still need base load and coal is the cheapest, but lead
times for coal plants are longer, Coseteng said.
EXPORTS & IMPORTS: Even as investment in the
export-oriented BPO sector has been a key growth
driver, the share of trade in GDP has been in decline in
recent years as industries catering to the domestic
market have grown more quickly overall. Although BPO
has thrived and the electronics sector has recently
enjoyed a revival, overall export growth over the past
several years has been weak. Imports, meanwhile, have
increased at a pace closer to that of rising incomes,
leading to a widening trade deficit.
Although the country reports sizeable current account
surpluses, the true state of the Philippines international balances are subject to considerable uncertainty due to incomplete trade data. Evasion of Customs
duties leads to substantial undercounting of imports,
while transfer pricing leads to undercounting of exports.
Other countries data on their trade with the Philippines
53
While FDI has jumped,

portfolio and other
financial investment has
slowed sharply amid a
global pullback from
emerging markets.
Portfolio inflows averaged
$4.5bn a year in 2010-12,
but they fell to $363m in
2013 and $292m in the
first nine months of 2014.
54
Certain limits on foreign bank ownership were removed in 2014
The BPO sectors

contribution to exports
rose from $6.6bn in 2007 to
$15.2bn in 2013 an
average growth rate of 15%
a year. Exports of service
categories associated with
BPO were up 11.3%
year-on-year in the first
nine months of 2014.
and the BSPs gradually dwindling foreign exchange

reserves since early 2013 suggest that the trade deficit
is wider and the current account surplus much smaller than reported. The Philippines Statistics Authority
(PSA) cited $62.4bn worth of imports in 2013 and a
modest average nominal growth rate of 2% a year since
2007. Other countries reported $102.1bn of exports
to the Philippines in 2013 and a much stronger 7.8%
nominal growth rate since 2007, according to the UN
Comtrade database. The dollar value of Philippines GDP
grew at an average 10.6% rate during the period.
The Philippines and other countries trade data agree
that merchandise exports have been weak, but differ
on the details. PSA data show $56.7bn worth of exports
in 2013 and a 2% average nominal growth rate since
2007. Comtrade data shows $74.8bn of exports in 2013
and a 0.8% average rate of contraction since 2007. The
largest export destination is China, with 24.3% of goods
exports, or 35.6% including Hong Kong and Taiwan,
according to Comtrade data. The US and Japan took
12.9% and 12.4%, respectively, while ASEAN countries
accounted for 14.7% led by Singapore with 6.8%. Europe
took 11.3% of goods exports led by Germany with 4.2%.
Exports have struggled with high energy and logistics costs exacerbated by the strong peso. Real appreciation against the dollar averaged 4.1% a year in 2007
to 2013. Real appreciation against the dollar slowed to
about 1% in 2014, but the BSPs policy of holding the
peso in a range of 43 to 45 to the dollar led to substantial appreciation relative to other currencies that
devalued against the dollar in 2014, including those of
most of ASEAN, Japan, Taiwan, Europe and Australia.
Exports were improving in 2014, thanks largely to a
pickup in global demand for electronics, which is by far
the largest export industry (see analysis). PSA data
showed exports up 9.9% in the first three quarters of
2014 versus the same period of 2013, with electronics exports up 7.4%. Electrical and electronic goods
accounted for 50.3% of exports in 2013 according to
Comtrade data, while other machinery accounted for
17.4%, metal and mineral products for 11.7% and agriculture-related products for 9.1%.
Import growth is mainly of consumer goods, automobiles, construction materials and fuels. As with
exports, China is the largest source of imports, accounting for 19.5% in 2013, according to Comtrade, or 35.8%
including Hong Kong and Taiwan, which largely reexport mainland goods. About 20% of imports came
from ASEAN, led by Singapore with 6.6% and Thailand
with 4.9%. Japan, the US and Korea were also major
sources of imports, accounting for 9.5%, 8.7% and 8.6%,
respectively. About 8% of imports came from Europe.
BALANCING ACT: When calculating the merchandise
trade balance, the BSP makes large adjustments to the
PSA trade data to conform with other financial flows
in the overall BOP. The BOP data shows a substantial
merchandise trade deficit of $17.7bn or 6.5% of GDP
in 2013, compared to $14bn or 9.4% of GDP in 2007.
Comtrade data, however, shows a much larger merchandise trade deficit of $27.3bn or 10% of GDP in
2013, and there is good reason to believe that figure
could be more accurate. The BSPs BOP data have two
major discrepancies that are probably explained by
undercounted imports. First, the data show a $5.1bn
inflow into foreign reserves in 2013, although the BSPs
separate count of its stock of foreign reserves shows
they shrank by $600m. The BOP data also include $3.2bn
of unclassified items. If both those discrepancies were
added to the imports line, it would reduce the reported 2013 current account surplus from $10.4bn or 3.8%
of GDP to $1.5bn or 0.6% of GDP.
STRONG IN SERVICES: In services trade, the growth
of the BPO sector has sustained a substantial positive
balance, which came to $6.4bn in 2013, according to
the BSP. Counted as other business services and computer services in BOP data, the BPO sectors contribution to exports grew from $6.6bn in 2007 to $15.2bn
in 2013 an average growth rate of 15% a year. Exports
of service categories associated with BPO were up a
further 11.3% year-on-year in the first nine months of
2014. The rapidly growing BPO sector is in turn the
main driver of the construction industry and its demand
for imported building materials. About 80% of BPO
service exports go to the US, according to an industry
estimate. Services exports came to $22.6bn in 2013,
with travel and transport services the other major contributor at $6.6bn. Services imports have also grown
quickly, from $7.5bn in 2007 to $16.2bn in 2013, driven by booming outbound travel. Combining Comtrade
data on merchandise trade with BSP data on services
trade, total exports in 2013 came to $97.4bn or 35.8%
of GDP, while total imports were $118.3bn or 43.5% of
GDP and the trade deficit was $20.9bn or 7.7% of GDP.
INVESTMENT INCOME: In addition to the trade deficit,
the Philippines runs a substantial investment income
deficit. Income earned on outward investment came
to $1.3bn in 2013 and $1.1bn in the first nine months
of 2014, while income paid on inward investment stood
at $7.5bn in 2013 and $6.2bn in the first nine months
of 2014. However, the trade and investment income
deficits are funded by huge inward remittances from
Filipino overseas workers and migrs. Remittances

came to $28.6bn in 2013 or 10.5% of GDP, up from
$17.7bn in 2007. Also, a substantial portion of outward
investment income is re-invested. That has allowed the
Philippines to avoid the risky practice of relying on
inward investment flows to fund imports. Indeed, since
2013 outward investment has exceeded inward investment as the countrys major business groups have
acquired foreign businesses and moved some of their
cash offshore. Outward investment totalled $6.5bn in
2013 and $8.5bn in the first nine months of 2014,
while inward investment came to $4.2bn in 2013 and
$2.9bn in the first nine months of 2014, according to
BOP data. Outward FDI came to $3.8bn in 2013 and
$3.9bn in the first nine months of 2014.
The ability to fund imports from current income has
been crucial to avoiding a heavier pullback of global
financial capital. Still, the BSP has dipped into its foreign currency reserves to stabilise the peso, with reserves
dropping from a January 2013 peak of $85.3bn to
$80.2bn at the end of January 2015. Pressure on the
peso was expected to lighten somewhat in 2015 thanks
to a steep drop in oil prices and a slowdown of inflation. Net imports of oil and its products came to $11.1bn
or 4.1% of GDP in 2013, according to Comtrade data.
That suggests the 40-50% drop in oil prices in late 2014
will save the Philippines around 2% of GDP.
TRADE: The Philippines has a relatively open trade
regime, but with substantial room for improvement. The
trade-weighted average of applied tariffs was 4.2% in
2012, compared to 4.3% in Malaysia, 4.7% in Indonesia, 5.4% in Vietnam and 6.2% in Thailand, according to
World Bank data. Tariffs are highest for raw materials
and finished goods and lowest for intermediate goods,
according to a 2012 World Trade Organisation report.
The extent of undercounting of imports, however,
shows that tariffs on many goods are high enough to
incentivise evasion, which would skew trade-weighting. For example, foreign firms that were motivated by
high tariffs on assembled automobile imports to build
assembly plants in the Philippines have long complained
that large numbers of automobiles are imported through
secondary ports without being counted or tariffs being
paid. The Philippines is most restrictive on trade in rice,
which is subject to import quotas to protect a subsidised domestic industry. Plantation logs are subject
to a 20% export tax and exports of natural forest logs
are banned in an effort to slow deforestation.
ASEAN: As one of the original members of ASEAN, the
Philippines has had tariff-free trade with Singapore,
Malaysia, Thailand, Indonesia and Brunei since 2010,
and it is due to initiate tariff-free trade with Vietnam,
Myanmar, Laos and Cambodia at the end of 2015, when
the bloc will formally inaugurate the ASEAN Economic Community. However, to obtain tariff-free entry,
importers must obtain certificates of origin confirming that at least 40% of the value of the products were
produced within ASEAN, which is often not done.
ASEAN is expected to focus next on reducing barriers to trade in services, and attention is already being
given to restrictions on cross-border banking. The 2014
55
The Philippines largest export destination is China, followed by the US, Japan and ASEAN countries
reform liberalising foreign access to the Philippines

banking market was done largely in preparation for a
2020 target date when ASEAN countries have agreed
that banks chartered anywhere in the region will be able
to operate throughout the bloc. So far ASEAN banks
have made little headway in the Philippine market of
the two Singapore banks that entered in the 1990s,
one sold out completely and the other nearly completely, leaving Malaysias Maybank as the only ASEAN
bank with more than one branch location.
The Philippines is also part of ASEANs free trade
agreements with Japan, Australia and New Zealand,
which are relatively strong, and with China, Korea and
India, which are weaker. In 2012 ASEAN and those six
countries launched negotiations on a common, deeper free trade area called the Regional Comprehensive
Economic Partnership. The country has also expressed
interest in joining the Trans-Pacific Partnership, a rival
potential group involving the US, Japan and a dozen other countries on both sides of the Pacific.
OUTLOOK: FDI is likely to continue to grow as low oil
prices benefit consumers of the Philippines electronics and BPO services exports. The gradual market reform
policies of President Benigno Aquino III are widely
expected to be continued after his second and final
term ends in 2016, although there is no clarity as to
who would succeed him. The biggest visible risk to the
Philippines is that slowing Chinese growth could decelerate more rapidly and drag down other Asian economies
and financial markets, but the drop in prices in late 2014
for oil and other commodities that China imports should
give some relief. In the longer run, the Philippines success will depend on whether it tackles the tough issues
of institutional reforms and infrastructure investment.
The latter has been a disappointment in recent years,
as plans have been announced for infrastructure projects that foreign banks have shown clear interest in helping to fund, but few tenders have been issued. The
recent pace of progress is encouraging and also putting pressure on the government to take the next steps.
The central bank has used

its foreign currency reserves
to stabilise the peso, with
reserves dropping from
$85.3bn in January 2013 to
$80.2bn at the end of
January 2015. Pressure on
the peso is expected to ease
in 2015 due to the
significant drop in oil prices
and a slowdown in inflation.
Tariff-free trade has existed

among the original six
ASEAN members since
2010 and is due to be
extended to the rest of the
bloc in 2015, though at
least 40% of the value of
the goods imported must
be produced within ASEAN.
56
TRADE & INVESTMENT ANALYSIS
Clark Green City will benefit from energy-efficient urban planning
A city will rise

Development of a vast new urban centre is planned in central Luzon
The first, 12.5-sq-km phase

of Clark Green City should
be completed by 2019. The
long-term plan for the city
aims for it to house 1.12m
people in a 94.5-sq-km area
If anyone else in the Philippines had a plan as ambitious as Clark Green City, it would probably be regarded as unrealistic and unlikely to happen. Clark Green
City is a dream to create an entirely new planned city,
about 130 km north-west of downtown Manila.
Although near the twin cities of Angeles and Mabalacat, Clark Green City will be visually isolated from them,
over a river and in the foothills. Its backers are hoping
it will become one of the largest centres of business
process outsourcing (BPO) and manufacturing in the
Philippines outside of Manila.
Similar big ideas have gone nowhere, as investors are
typically reluctant to be the first to move to an empty
locale and public backers typically lack the resources
to fund up front the large investments in infrastructure needed to encourage private investment.
But this is a project backed by the Bases Conversion
and Development Authority (BCDA), the same body
behind Bonifacio Global City (BGC), where a new second central business district of Metro Manila has sprouted up where 10 years ago there were mostly fields. Still
swarming with cranes and only about half-built, BGC is
already rivalling the older business district of Makati
for the title of most desirable Manila business address.
The simple formula to BGCs success, all too rare in
Asian cities, is smart urban planning. The streets are a
sensible grid, walkable and wide enough for taxis to stop
without impeding traffic. Shopping and dining districts
are attractively laid out in a park setting.
ARMY BASE: For the BPO industry, locating in BGC has
been the obvious choice. About 50,000 sq metres of
floor space are being built every month, according to
BCDA, which developed BGC in a joint venture with private builders Ayala Land and Evergreen Holdings. That
does not include the ring of nine satellite projects developed by BCDA and various private builders. Altogether BGC and its satellites occupy about 4.5 sq km of land
formerly belonging to Fort Bonifacio, the national headquarters of the Philippine Army. The BCDA is a unit of
the armed forces, which helps fund the military by
monetising its large and underutilised land holdings,

most of which are former US military bases.
BIGGER & BETTER: BCDAs success with BGC has given it both credibility and the money to back up its talk.
Arrey Perez, business development manager at BCDA,
told OBG that the BGC was leading BCDA to operate
more like an endowment and less like a privatisation
agency. Were no longer interested in selling. We make
more money by developing and owning the property.
Prices and lease rates have gone up and up, Perez said.
A part of the military, BCDA carries considerable
weight with the state bureaucracy. For private developers having the BCDA as partner gives some security that the project will not get derailed. Perez said the
BCDAs experience with BGC has prepared it for a bigger project. We want to incorporate the best practices
that we developed here in Fort Bonifacio and duplicate
what we have done, only bigger and better.
LOCATION & PLANS: Clark Green City is a project on
an entirely different scale. The first phase, which BCDA
is in the process of tendering out and hopes to have
completed by 2019, occupies 12.5 sq km. The overall
plan for the new city would see it grow to 94.5 sq km.
That in turn is part of 315-sq-km of land allocated to
the BCDA in 1992 and designated for commercial development as the Clark Special Economic Zone. Metro
Manila, a sprawling city of 12m people, is only twice as
large. The long-term plan for Clark Green City aims for
it to house 1.12m people on a territory 15% as large as
Metro Manila. To achieve such figures the project would
need to draw far larger numbers of BPO and manufacturing investors than any city outside Manila has managed to attract. Inhabitants are likely to come from
nearby in central Luzon and northern Luzon, but the
city would also need to become a magnet for young
people from around the country to meet its ambitions.
The Clark Green City site is historically linked to the
former Clark Air Base, which the BCDA converted into
Clark International Airport soon after the US military
was ordered out in 1991. But Clark Green City will be
located well to the north on land that was held in

reserve and left undeveloped. A BCDA subsidiary called
the Clark Development Corporation controls another
20 sq km to the west of the airport which it has been
parcelling out to various private projects, including airport hotels and residential country clubs and some
industrial and BPO buildings. That property and the airport together comprise the Clark Freeport Zone.
PARK LIFE: With plenty of space to spread out, the BCDA
is planning a city-within-a-park model, centred around
an artificial canal. The broader site is bounded by the
ODonnell River, which will be a key feature of the citys
surrounding park. The project is also meant to be a
demonstration of energy-efficient urban planning that
encourages environmentally friendly lifestyles. We
want to promote a better quality of life and address climate change with a showcase development. The design
is compact for a low-carbon footprint, and promotes
walking and bicycles and mass transit, Perez said.
A plan published in 2014 featured five districts strung
along an artificial canal. The core is a central business
district, which will include BPO offices, industrial parks,
residential buildings and shopping. Government bodies will be located in a separate district, education and
research institutions in another innovation district,
an agricultural science district in a fourth, isolated district and an ecotourism centre set even further apart.
The BCDA can offer powerful tax and other incentives, drawing from the full offering of the Philippine
Economic Zone Authority and the Board of Investments

as additional powers granted to it by law. The BCDA can
exempt expatriate managers from visa requirements.
LABOUR & INFRASTRUCTURE: Perez said the BCDA
understands that investors will not locate in the area
unless there is a proven pool of qualified labour. That
is why it pushed for its first locator to be the University of the Philippines, the top state university. It already
has a small Clark branch near the airport in the Clark
Freeport Zone. Angeles and Mabacalat also have universities and colleges. The big test for the project will
be whether its high up-front infrastructure costs as a
greenfield project can be made attractive enough for
investors, especially given that higher environmental
standards typically mean higher up-front costs. The
project needs water supply, waste-water treatment and
power supply. Arnel Paciano Casanova, the president
and CEO of BCDA, told a news briefing in February 2015
that the agency would soon publish terms of reference
for a first portion of the project covering 200-300 ha
of the first phases 1250-ha total. He said the first
phase would cost about P59bn ($1.3bn), while the estimated cost of developing Clark Green City is $14bn.
Real estate firm Ayala Land has expressed interest
in bidding on the projects first phase, and other major
builders have done so privately, according to BusinessWorld, a local newspaper. Perez said that there will be
no restrictions preventing foreign-owned companies
from bidding, as land will allocated by 75-year leases.
57
The first phase of Clark

Green City is estimated to
cost around $1.3bn, while
the cost of developing the
entire project is forecast to
reach $14bn.
58
China receives the largest share of the Philippines electronics exports
Bouncing back
The local electronics industry is benefitting from higher global demand
The turnaround of the
countrys electronics
industry started in late
2013, and in the first nine
months of 2014 electronics
exports recorded a 7.4%
increase year-on-year.
Although global
semiconductor sales grew
by 9.9% in 2014, demand
growth has been forecast
to slow to just over 3% per
year in 2015-16.
After many years of struggling, the Philippines electronics industry appears to be finally making a turnaround,
thanks to an improving investment climate and strengthening global demand. Bankers, economists and business executives who follow the industrys fortunes say
the turnaround began in late 2013 and has been gathering pace since. The crucial question, which will only
be answered in time, is whether the Philippines is beginning to overcome the problems that have caused its
electronics industry to lose ground against competitors, or if it is merely enjoying a short-term bounce from
stronger global markets.
Trade data from the Philippines Statistics Authority
(PSA) showed electronics exports growing by 7.4% yearon-year in the first nine months of 2014, on track for
the best annual performance since 2010, when the global industry bounced back from a disastrous 2009. Even
more hopeful, Hong Kong, a major market, reported that
its imports of electronics from the Philippines were up
31% in 2014, according to the UN Comtrade database.
Japan reported that its imports from the Philippines were
up 5.1% in 2014, according to Comtrade, a decent performance considering the yens weakness. The electronics industry is a major component of the Philippines
economy, and its weak performance has been a significant drag on growth. According to the PSA, its export
earnings fell from a peak of $32.2bn, or 21.6% of GDP,
in 2007 to $26.6bn, or 9.8% of GDP, in 2013. Other
countries reports of their electronics imports from the
Philippines, drawn from the UN Comtrade database,
show that the Philippines electronics industry is much
bigger but fell even faster, from $47bn, or 31.5% of GDP,
in 2007 to $37.6bn, or 13.8% of GDP, in 2013. Even after
that decline, electronics exports still accounted for
53% of merchandise exports in 2013 using Comtrade
data, or 47% using PSA data. By comparison, the business process outsourcing sectors export receipts came
to $15.2bn in 2013, according to central bank data.
LOW VALUE ADDED: However, the Philippines electronics industry is mostly not high value added, and its
contribution to GDP is less impressive. According to the

PSA, the sector produced just P355bn ($8bn) of gross
value added in 2014, or 2.8% of GDP. That was up from
P330bn ($7.4bn), or 2.9% of GDP, in 2013 and P324bn
($7.3bn), or 3.1% of GDP, in 2012.
The Philippines electronics sector produces predominantly intermediate components, shipping them
primarily to the electronics manufacturing hubs of Asia.
China and Hong Kong are the biggest markets, taking
24.9% and 11.1% of exports in 2013, respectively, according to Comtrade data. Japan, Korea and Taiwan are also
important, taking 9.4%, 4.2% and 3.4% of 2013 exports,
respectively. In South-east Asia, Singapore, Thailand
and Malaysia took 11.1%, 3.1% and 2.2% of 2013 exports,
respectively. North America and Europe are also important markets. The US, Mexico and Canada took 10.2%,
3.1% and 1.7% of 2013 exports, respectively, while Germany received 4.5% and the Netherlands 2% of exports.
Until 2013 the Philippines had been losing out in the
competition with other manufacturers as costs rose
faster than productivity and low-cost players such as
Vietnam moved into its niches. Investors were frustrated with poor infrastructure and especially with the slow
pace and high cost of moving goods into and out of
the country, which is crucial for an intermediate producer in a complex supply chain. The Philippines also
appeared to be on its back foot when tablets and smartphones boomed as its plants were more geared towards
components for laptops and desktop computers.
GROWTH AHEAD: The global industry went through
a tough patch in 2011-13 as advanced economies
slowed. Global semiconductor sales grew by just 2.4%
in dollar terms between 2010 and 2013, according to
World Semiconductor Trade Statistics, an industry association. By contrast, global semiconductor sales grew
by 9.9% in 2014. However, the pace of global demand
growth was forecast to slow to annual pace just over
3% in 2015-16. The test for the local industry will be
whether it can sustain its strong 2014 performance in
years when global demand growth is unexceptional.
TRADE & INVESTMENT INTERVIEW
Alfred M Yao, President, Philippine Chamber of Commerce &

Industry
Tricks of the trade

OBG talks to Alfred M Yao, President, Philippine Chamber of Commerce
and Industry (PCCI)
How can the Philippines encourage the development of locally produced content and Philippinebranded products both domestically and abroad?
YAO: There are a myriad of local products that can
successfully compete against their foreign counterparts, including Champion for laundry detergents,
Hapee for toothpaste, EQ for diapers, C2 for flavoured
drinks and others. These are all well run, hyper-competitive and gaining market share. In addition, Kenneth
Cobonpue, Cora Jacob, Jean Goulbourn and 7D Mangoes are some of the other notable brands that our
export industry has produced.
This is multi billion-dollar proof that we can be globally competitive, and these companies have strategies
that are increasingly relevant as we open our borders
to ASEAN brands, products and services, and as we
compete in their local markets. Nonetheless, sustainability remains an issue that requires both the right business environment and the political will to sustain it.
What reforms would promote trade and complement ASEAN integration and trade agreements?
YAO: Full integration of the ASEAN Economic Community (AEC) in 2015 offers a golden opportunity to institutionalise reforms that will enable the Philippines to
maximise the benefits from trade and investment liberalisation and expansion. The adoption of trade facilitation measures, which aim to reduce transaction costs
associated with unnecessarily complex Customs and
border procedures and inefficient transit arrangements,
is paramount for the country to effectively utilise the
AEC and other economic partnership agreements, and
to fully participate in regional and global markets.
As a strong supporter of key trade reform initiatives,
PCCI urges the adoption of trade facilitation measures
such as the immediate automation of Customs procedures, the implementation of both the National and
ASEAN Single Window, and compliance with the Revised
Kyoto Convention, as well as other related protocols
through the passage of the Customs Modernisation Act.
These priorities mirror the business communitys

desire to lock in long-term, sustainable economic gains,
and will also pave the way for more effective participation in negotiations for advanced trade agreements
such as the Regional Comprehensive Economic Partnership Agreement, the Trans-Pacific Partnership Agreement and the ASEAN/Republic of the Philippines-EU
Economic Partnership Agreement.
To what extent can the advocacy for Philippinemade products strengthen domestic industry?
YAO: Under our Proudly-Philippine Made advocacy
and work programme, PCCI will craft the roadmaps to
provide small and medium-sized enterprises (SMEs)
with access to technology, common service facilities,
financing and other support to not only foster a competitive mindset, but help them find more niches for
further value and supply chain participation. This will
also facilitate the expansion, upgrade and meaningful
participation of SMEs in ASEAN integration.
How can the Philippines foster more investment,

bilateral trade and joint-venture opportunities?
YAO: The challenge is to effectively utilise business
councils and trade attaches, as PCCI has done through
our leadership in the ASEAN and Asia-Pacific Economic Cooperation Business Advisory Councils, and the
Confederation of Asia-Pacific Chambers of Commerce
and Industry. We have also worked to expand bilateral
cooperation with emerging markets like Brazil, Russia,
India, Indonesia, China and South Africa. We enjoin our
business councils to explore all of the available avenues
that these councils and other networks provide for
facilitating greater trade and investment.
For our part, we will keep working to attract nonASEAN firms to continue using the Philippines as a production hub for the export of their products to the rest
of ASEAN. This will not only promote more tie-ups with
local firms, but also spur the development of other
related industries and directly benefit the SME sector.
59
60
TRADE & INVESTMENT ROUNDTABLE
Arthur P Tugade, President and CEO, Clark Development Corporation
Deogracias G P Custodio, Chairman & Administrator, Freeport Area

of Bataan
In the zone
OBG talks to Arthur P Tugade, President and CEO, Clark
Development Corporation; Deogracias G P Custodio, Chairman
and Administrator, Freeport Area of Bataan (FAB);
Following the formation of export-processing clusters, how can economic zones transition into alternatives for urban and leisure development?
DE LIMA: In the past, the dominant trend has been
migration to urban centres and cities due to limited
job opportunities in the provinces. With our economic zones spread all over the country, we are bringing
jobs to the people, encouraging them to stay within
their provinces. As the population of people working
in economic zones expands, more areas become an
attractive market for various businesses and establishments such as restaurants, hotels, schools, commercial centres and other service providers, which in
turn creates more jobs.
This stimulates economic activity in an area, thus
uplifting the standard of living for the population.
Former third-class municipalities have evolved into
first-class municipalities because of these clusters of
development created by the presence of economic
zones throughout the country.
To complement this growth, PEZA has the flexibility to create economic zones (ecozones) anywhere in
the country, generating private sector-developed,
operated, and maintained areas, which in turn act as
pockets of development. The 314 existing PEZA ecozones throughout the Philippines operate at no cost
to the government, freeing limited public resources
to be used for other infrastructure projects that will
help to strengthen the viability of ecozones as an
investment alternative to urban centres.
We also promote the Philippines not just as a place
to do business but also a place of relaxation and enjoyment, where you can mix business with pleasure. This
is why many of our ecozones are surrounded by world
class recreational areas like gold courses, country
clubs, entertainment and commercial centres.
GARCIA: The main strategy of most ecozones has
been centred around attracting more industrial presence to fully maximise use of available land. Even so,
we recognise the potential of leisure centres, particwww.oxfordbusinessgroup.com/country/philippines-2015
ularly in Subic, catering to the meetings, incentives,

conventions and exhibitions market. For example, we
have experience hosting the 1996 Asia-Pacific Economic Cooperation (APEC) Summit and its strategic
location only 45 minutes away from the Clark International Airport (CIA). Subic Freeport would be particularly suited to capitalise on these market trends.
To maximise the potential for the tourism sector,
ecozones should enhance their entertainment infrastructure. For instance, Subic has developed five major
theme parks specifically targeting eco-tourism given
its geographic and environment surroundings, while
also increasing investment in infrastructure related to
the convention centre. Moreover, the ecozone has
maintained high standards in order to ensure locators are non-pollutants to avoid detracting from the
eco-tourism potential of those areas. This policy will
help the development of eco-tourism sites. Indeed,
Subic also intends to maintain its thousands of hectares
rainforest or else only accept a location that would
not disturb or destroy the ecosystem.
TUGADE: This can be done through early planning and
deliberate allocation of areas for the intended mix of
land use and provision of the necessary connectivity
and utilities. While the initial thrust for CIA was also
as a base for manufacturing activities, CIA is now
much more than an export processing centre.
The ecozone has everything that an investor needs
within about seven to 10 minutes driving time: an
international airport, commercial centres, golf courses, government offices, schools, hospitals and churches. It is a safe and secure place with century-old trees
and lots of open spaces. It has several facilities for
conventions, with one having a sitting capacity of
1700 and a total hotel accommodation in the zone
of 1900. Clarks successful hosting of the first APEC
Senior Officers Meeting during January and February 2015 attests to the fact that the ecozone has successfully transitioned from being a mere export processing zone to a complete urban and leisure estate.
Lilia B de Lima, Director-General, Philippine Economic Zone

Authority
Roberto Garcia, Chairman & Administrator, Subic Bay Metropolitan

Authority.
Lilia B de Lima, Director-General, Philippine Economic Zone

Authority (PEZA); and Roberto Garcia, Chairman and Administrator,
Subic Bay Metropolitan Authority.
How can connectivity to and from economic zones
be facilitated to complement growth?
TUGADE: Connectivity to and from the nations ecozones is important for ensuring the fast and efficient
delivery of goods and services, as well as the movement of people. Airports and seaports with complementing road network infrastructure are necessary.
The government should provide these facilities and
continually upgrade them. Some of the major road networks that could offer connectivity to the CIA and Subic
Port are the North Luzon Expressway, connecting
Clark to Metro Manila; the Subic-Clark-Tarlac Expressway, connecting Clark to Subic/Olongapo; and the
Tarlac-Pangasinan-La Union Expressway, connecting
Clark to North Luzon. Clark is within four-hours flight
time of key cities in Asia. In late 2014, the Clark Development Corporation (CDC) signed a contract for a 3ha container yard intended to further support connectivity and just-in-time processing in the zone.
CUSTODIO: Enhancing connectivity with Metro Manila is key because that is where shipping containers
from the vast majority of locators in ecozones go. Given significant bottlenecks at the Port of Manila and
the growing problem of congestion in the city created by ongoing infrastructure and road connectivity
projects, the opportunity has arisen to push containerised traffic to alternative ports to avoid road and
port congestion in Metro Manila, in addition to developing a containerised port or a roll-on/roll-off facility to complement growth in ecozones.
For the FAB, the construction of another port facility in 2015 in the freeport offers enhanced logistics
infrastructure that will complement its growth trend.
Increased connectivity to the FAB, which offers lower cost of doing business, creates the opportunity to
attract more investors, as other ecozones are starting to reach full capacity. Additionally, connectivity
would be a major enabler for the development of a
leisure component for ecozones, especially for the FAB,
complementing ongoing developments in gaming and
resort facilities. While the FAB is only a 25-minute drive

away from white sand beaches and hotel facilities
catering to their locators and an hour away from
Manila by ferry, increased connectivity will further
boost the entertainment potential in these areas.
Which sectors are best suited to benefit from

intra-ASEAN investment and competition generated by the ASEAN Economic Community (AEC)?
CUSTODIO: Certain sectors have already been identified as priorities, as they would benefit the most from
the impending integration of ASEAN. In the FAB, the
sectors that are expected to boom and generate additional investments are garments and textiles, electronics and electrical, and agriculture and fisheries as
well as services sectors, such as health care or business process outsourcing (BPO).
Health care presents an opportunity for ecozones
like the FAB, where the medical tourism angle can be
leveraged for growth. In particular, given that a sizable bulk of health care costs are accounted for by
rehabilitation and not just operations, the former can
be performed in Manila while rehabilitation can be
done in the FAB with its nice beaches, clean air and
lower costs, which is a draw for foreign consumers.
Manufacturing is also being promoted and has gained
noticeable traction. In the case of the FAB, growth has
continued in garments and textiles. Bags and purses
have generated higher volumes, with more high-end
brands starting manufacturing operations.
Moreover, the FAB has also begun to accommodate
the BPO industry after generating strong interest from
the Chinese market in 2014. With the establishment
of the AEC and subsequent liberalisation of the ASEAN
market, it is expected that the BPO industry in the FAB
will expand in the coming years and create thousands
of new employment opportunities. Consequently, we
have strengthened our communication lines with
both the Technical Education and Skills Development
Authority (TESDA) and our locators in regards to their
61
62
development plans in order to make sure we can meet

labour requirements in the future.
DE LIMA: Given their economies of scale and trade
experience, one of the sectors best suited to benefit
from ASEAN integration is the export manufacturing
sector. Through PEZA, the Philippines hosts a large
number of export manufacturing companies that also
support a range of different suppliers. The presence
of these firms in the country has become a magnet
for other export manufacturers given the already
existing infrastructure and emergence of supporting
industries in the archipelago nation.
In order to maintain the momentum of our exportoriented industry, our port infrastructure must be
able to cope with the increasing needs of our export
manufacturing sector. The use of alternative ports to
Manilas seaport, such as Batangas International Port
and other international seaports in Luzon, will considerably ease the movement of goods from the Philippines to the rest of ASEAN and the world. In addition,
another area to benefit from liberalisation is the agroindustrial sector, which has the greatest potential to
alleviate poverty within the Philippines.
How can economic zones keep their appeal for

investors once the AEC has been implemented?
DE LIMA: Although everyone speaks of ASEAN integration occurring in 2015, most of the tariffs have
already been removed and liberalisation has been an
ongoing process in recent years. The current landscape
thus creates an environment for both competition and
cooperation among ASEAN member countries. In this
context, the Philippines principal asset will be its
young, English-speaking workforce. This competition
has also translated into ecozones which have consistently been trying to outdo one another to attract manufacturers. For instance, several ecozones have been
boosting their services and amenities, and improving
their hotel infrastructure to attract more locators and
businesspeople, with positive results for end-users. The
result of these efforts can be seen in how, among all

locators in PEZA, more than 50% of annual investments
consist of reinvestments of companies. This demonstrates the existing confidence in the competiveness
of ecozones, and ensures their continued attractiveness after liberalisation.
GARCIA: Subic Freeport has a modern container terminal with a capacity for 600,000 twenty-foot equivalent units, as well as a strategic location to reach the
Asian market. Therefore, it presents fertile ground for
export industries to locate. The coming ASEAN integration in 2015 provides an opportunity for manufacturing and logistics hubs to make Subic an ideal
choice given its strategic location and advantages in
serving the ASEAN market. The unsustainable port congestion at the Port of Manila provides opportunities
for the increased use of other large trans-shipment
centres that serve the city and the surrounding area.
Of the 2.8m containers that passed through the Port
of Manila annually, some 45,000 currently come from
or are destined for Central and Northern Luzon. They
would thus substantially relieve both the port and
traffic congestion in Manila if they pass through Subic.
The availability of vital urban and leisure infrastructure within walking distance from one another in the
ecozone can also create the environment necessary
to become an attractive hub destination. However,
despite the ongoing progress of liberalisation efforts,
locators have not sought to arbitrarily open production sites all over the country, but they have focused
on plug-and-play areas and are willing to pay the premium for them. As a result, ecozones in Luzon are looking to invest in energy sources to supply affordable
power to electricity-intensive industries and contribute to a self-contained ecosystem for companies.
In addition to increasing manufacturing presence,
most ecozones are trying to incentivise high-value
industries, for instance ship builders. These industries require higher capital investments in the ecozone and represent opportunities for economies of
scale as the locators are now sourcing more of their

raw materials locally. This would make the overall landscape more efficient and competitive.
TUGADE: Ecozones will remain attractive because
they provide additional factors conducive to business
environment. More than liberalised trade rules,
investors still look for the basics: connectivity, accessibility, safety and security, competent workers, and
ease of doing business all factors that ecozones are
already ready to provide. Often, ecozones create a
different work culture from that of the host country.
It is a community that is efficient, autonomous and
adaptive to diverse cultures.
Clark will remain attractive, despite of the challenges brought about by the AEC, because of its unique
land use mix, support infrastructure, and the qualifications and culture of its people. Clark is more than
a building or an industrial zone, it is a complete worklive-play environment where almost everything an
investor and their family needs is within reach.
Clark offers better connectivity because of the presence of CIA, Subic Port and Clarks support container. We have utilities in place and an educated, skilled,
English-speaking workforce. Most importantly, we
provide government support to investors with the
CDC assisting locators to meet government requirements. The CDC instills a spirit of service and integrity among its employees. The company has already
adopted changes to improve services, including a 3050% reduction in processing time. CDC was also recently commended by FDi Magazine as Best in Reduction
for Regulatory Process. Given these factors, we believe
that Clark will still be attractive to investors even with
the full implementation of the AEC.
What opportunities do economic zones represent

for small and medium-sized enterprises (SMEs)
to act as suppliers and ancillary businesses?
GARCIA: SMEs can help to complete the supply chain,
provided these companies can supply resources or
equipment to multinational companies at a competitive price and faster than it would take to import the
products. The multiplier effects of locators within an
ecozone are not limited to SMEs, but also include
expanding the human capital pool, which will grow
and be developed through skills training and in partnership with the government.
For example, working alongside TESDA and partnering with the Commission on Higher Education, ecozones and their locators can work to improve existing curricula to fit current and future employment
needs, especially in high-growth areas such as shipbuilding in the case of Subic. Locators can also supply mentors or training programmes to these schools
and their students so as to improve the quality of
human resources in any ecozone.
CUSTODIO: The ongoing concern that exists about
the AEC is centred on the viability of SMEs, which
could be marginalised as the lager players stand to
benefit most from integration. However, the Authority of the Freeport Area of Bataan supports SMEs finding niches in the sectors least served by the bigger
players in order to also experience the benefits of liberalisation, which in the case of the FAB is higher-end
products at the right price, where the Philippines does
have a competitive advantage compared to other
countries in the ASEAN community.
For example, as a result of the manufacturing activities going on within the FAB, SMEs are looking into
the possibility of supplying domestic producers, such
as zippers and other necessary components for highend bags and purses. Additionally, a large number of
brands are already operating in the freeport due to
economies of scale, which is increasing the opportunities for new players to come in and take advantage
of a ready market. Similarly, small- and medium-sized
packaging companies are already in high demand,
and although Chinese locators continue to source
their packaging from China, as demand grows, it will
be more feasible for local suppliers to participate.
63
65
Banking
Peso-denominated deposits have doubled since 2008
Consolidation of smaller banks continuing apace
Key restrictions on foreign banks have been lifted
Basel III implementation taking place ahead of schedule
Target date for ASEAN banking integration set for 2020
Minimum capital requirements increase for small banks
BANKING OVERVIEW
67
Historically high inflation fell to an average of 3.8% from 2010 to 2014
Positives abound
Sector expansion continues as deposits and lending increase
As banks expand credit in the domestic economy, the
sector is enjoying a period of rapid catch-up growth. A
positive feedback loop is at work in which banks are
increasingly driving economic growth, supported by
inflows from foreign investment and Filipinos working
abroad, while growing trust in the banking system is
drawing greater volumes of savings.
Peso deposits have more than doubled since 2008,
rising from P3.2trn ($72bn) to P6.6trn ($149bn) in September 2014, according to the Bangko Sentral ng Pilipinas (BSP) the Philippine central bank. This has helped
bring down inflation even as the BSP has expanded the
monetary base. Bank lending has risen nearly as quickly, but at P5.5trn ($123.8bn) in September 2014 was
equal to just over 43.5% of GDP. That is about half the
level in Thailand and a third of the level in Malaysia, leaving considerable room for further expansion.
A changing financial climate in 2014 brought both
benefits and risks. The strength of the US dollar led some
to keep their savings in dollars as a precaution, even
though the peso held steady against the dollar, and the
economy and banking sector were not heavily dependent on foreign debt. The collapse of energy prices is
putting strong downward pressure on inflation, which
should further support the peso and sustain the trend
of growing trust in the banking system.
The Philippine banking system is currently the only
one of Moodys 69 jurisdictions with positive outlook.
The outlook represents Moodys forward-looking assessment of credit conditions that will affect banks creditworthiness over the next 12-18 months. It provides
the view of how the operating environment for banks,
including macroeconomic, competitive and regulatory trends, will affect asset quality, capital, funding, liquidity and profitability, and it also considers Moodys
forward-looking view of the systemic support environment for bank creditors.
POSITIVE FEEDBACK: The recent history of the banking sector is a demonstration of the kind of long-term
benefits a developing country can enjoy in the wake
of a long period of high inflation. For the Philippines,

the process began during the financial boom in Asian
emerging markets in the 1990s, culminating in the
Asian crisis of 1997-98. At the time, the country had a
far less developed economy, at roughly half its current
level of real output per capita. The banking sector was
both small and primitive, and trust in the peso had
been ravaged by high and erratic inflation, which spiked
to 50% in 1984 and averaged 14% in the 1980s.
Nevertheless, growing foreign investment in Asian
emerging markets spread to the Philippines, and by
the mid-1990s inflation had stabilised at a still high but
survivable range of 7-9%. Bank deposits and loans as a
share of GDP roughly doubled between 1990 and 1997,
as Filipinos learned to put their faith in bank deposits.
For banks, lending became profitable.
STRENGTHENING REGULATION: At the same time,
the BSP was gaining independence and improving regulation, showing notable foresight in limiting banks
exposure to real estate. Inward portfolio investment
flows proved fickle, cutting the pesos value by a third
when hot money fled the country in 1998.
But as banks and the economy of the Philippines held
up better than most of South-east Asia, the publics willingness to hold deposits continued. In the 2000s the
BSP followed the regional trend, further strengthening bank regulations. Inflation settled at around 5% on
average for the decade.
The positive feedback loop of growing bank deposits,
declining inflation and more robust banks was strongest
in its initial stages in the 1990s, though it continues to
operate as a force in the Philippines economic emergence. With real GDP roughly doubling between 1999
and 2014, bank deposits to GDP also rose, from 58.1%
in 1999 to 67.4% in 2014, according to BSP data. The
number of bank deposit accounts per 1000 adults
increased from 356 in 2004 to 542 in 2013. Meanwhile,
IMF data shows inflation fell to an average of 3.8% from
2010 to 2014 a respectable pace given average real
GDP growth of 6.3% and population growth of 1.8%.
Although bank lending has

risen quickly, to $123.8bn in
September 2014, it was
equal to just over 43.5% of
annual GDP. That is about
half the level in Thailand
and a third of the level in
Malaysia, leaving
considerable room for
further expansion.
With real GDP roughly

doubling between 1999 and
2014, bank deposits as a
share of GDP also rose, from
58.1% in 1999 to 67.4% in
2014, while the number of
bank deposit accounts per
1000 adults increased from
356 in 2004 to 542 in 2013.
BANKING OVERVIEW
68
Juan Placedo T Mapa III, vice-president and the head

of investor relations at Metropolitan Bank and Trust
Company (Metrobank), told OBG there was still plenty
of room to deepen banking penetration. If you look at
the raw number of deposit accounts in the country, it
is about 35m or 36m. We estimate that there is an
average of 2.5-3 deposits per person who holds at least
one account. That means there are 12m-15m people
using banks, out of a 100m population.
RECENT PERFORMANCE: The sector has decelerated
in 2014 amid global weakness in emerging markets
and a strengthening US dollar. Peso deposits grew by
15.8% in the first nine months of 2014, according to
BSP data, less than half the 34% growth recorded over
the same period in 2013 but similar to previous years,
with peso deposits increasing by an average of 15.3%
per year from 2009 to 2013. Meanwhile, foreign currency deposits were up 20.7% year-on-year (y-o-y) in
September 2014, compared to 28% y-o-y growth in September 2013 and just 11.3% growth in 2013.
Asset expansion also slowed slightly in 2014, though
lending growth held roughly steady at 12.1% in the first
nine months after 15.7% growth in 2013. Headline
financials weakened somewhat, as aggregate sector net
income fell to P97bn ($2.2bn) in the first nine months
of 2014, down y-o-y from P126bn ($2.8bn). However,
underlying profitability appeared to improve, with an
unusual P60bn ($1.4bn) gain on non-trading financial
assets and liabilities helping to make up the difference.
Bankers told OBG the slowdown in peso deposit
growth in 2014 was actually a relief, as liquidity had been
increasing more quickly than they could deploy it.
Indeed, peso deposits grew by some 37% in 2013, while
banks cash assets accounted for 25.6% of total sector
assets by the end of 2013. Reggie L Ocampo, president
of First Macro Bank, told OBG, We do no marketing to
attract deposits at all, unless you count offering services such as payment processing that the people who
use are likely to also bring in deposits, and we have still
been getting deposits faster than we can keep up with.
There is just so much liquidity out there.
STEPPING BACK: The 2013 surge in deposits was driven in part by a BSP decision to prohibit some invest-
Foreign currency deposits

were up 20.7% year-on-year
in September 2014,
compared to 28%
year-on-year growth in
September 2013 and 11.3%
growth in 2013.
Banking sector nancial assets, 2013-14 (P trn)*

2.5
1.5
SOURCE: BSP
1.0
0.5
0.0
Mar.
2013
Jun.
2013
Sept.
2013
Dec.
2013
Mar.
2014
Jun.
2014
Sept.
2014
Dec.
2014
*excl. equity investments, net of amortisation
2.0
ment trust funds from its special deposit account (SDA)

facility beginning in 2013. The operational adjustment
was motivated by the need to encourage trust entities
to shift funds to other investment vehicles and thereby help promote the development of domestic capital
markets and support domestic economic activity.
SDAs are similar to the interest-paying cash deposit
accounts many central banks offer to commercial banks.
But, unusually, SDAs are also offered to other financial
institutions and initially paid more significantly than
short-dated sovereign debt or retail bank deposits.
Until May 2013, SDAs could be de facto accessed by
corporate cash managers and higher-end retail investors
through widely offered pass-through accounts. The
BSPs move to ban pass-through accounts created a
surge in bank deposits and resulted in a temporary
increase in BSP measures of domestic liquidity,
The move happened to coincide with the onset of
the so-called taper tantrum, when the dollar began to
strengthen as the US signalled an end to quantitative
easing. This led to some investor flight from emerging
markets, which together with the surge in peso liquidity, weakened the peso by 7% in May-June 2013.
UP & AWAY: The hike in the BSPs benchmark interest
rate from its record low of 3.5%, in place since October
2012, to 4% between July and September 2014 helped
keep the peso stable in the range of 43-45 per dollar
through early 2015. The broad stability of the peso
during this period was supported by steady inflows of
foreign exchange from overseas Filipinos (OF), foreign
direct and portfolio investments, as well as receipts from
tourism and business process outsourcing.
By holding dollars, some Filipinos particularly beneficiaries of OF remittances were evidently hedging
against the risk of a change in BSP policy. However, the
collapse of oil prices in late 2014 should counter recent
depreciation and inflationary pressure on the peso.
THE BIG THREE: The banking sector is dominated by
three large private banks, which account for 38.4% of
sector assets (on a solo basis, excluding affiliates and
subsidiaries) as of September 2014, according to BSP
data. The top three are in a league of their own in terms
of penetration and the diversity of their businesses, and
all three are universal banks. Each is controlled by a major
local business group, with a minority stake floated on
the bourse, as are all private banks in the top 10.
The largest bank by assets, BDO Unibank, had P1.75trn
($39.4bn) in assets as of end-September 2014, or
around 16.3% of sector assets, including its BDO Private Bank and its BDO Elite Savings Bank subsidiaries.
BDO attained its leadership position with the support
of its parent SM Group, and through a series of mergers and acquisitions. BDO has since pulled further ahead
of the competition thanks to organic growth and small
acquisitions, and in January 2015 it was in the process
of acquiring a second savings bank. While BDO also has
leasing, insurance and investment banking subsidiaries,
and over 850 branches and 2400 ATMs.
Metrobank is the second-largest bank, with P1.2trn
($27bn) in assets, or 11.8% of the sector total, as of
September 2014, including its Philippine Savings Bank
BANKING OVERVIEW
subsidiary. Metrobank is a broader holding company

than BDO, owning a major electric power generator,
Global Business Power, plus an investment bank, securities broker, asset management company, investment
company, and a seven-branch bank in China. It also has
joint ventures in credit cards, leasing and motorcycle
finance. In addition, Metrobank and its parent holding
company, GT Capital, are partners in a life insurance joint
venture with AXA, and Metrobank also cooperates with
GT Capitals non-life insurance subsidiary and its automotive finance joint venture with Toyota. According to
Metrobanks Mapa, now is the perfect time to be
involved in the automotive lending business. As per
capita GDP crosses $2500, the economy gets into the
car acquisition stage. On top of that, there is a demographic bulge in the 25-35-year age bracket. Car sales
are up 40% over last year, he told OBG.
Bank of the Philippine Islands (BPI) is the third-largest
bank, with P1.1trn ($24.8bn) in assets as of September 2014, or 10.2% of the sector total. BPI includes subsidiaries BPI Family Savings Bank, BPI Direct Savings
Bank and BPI Globe BanKO. The bank is controlled by
the Ayala Group, one of the biggest local business
groups. BPI also acts as a broad financial holding company, owning a securities broker, a leasing company, a
foreign exchange trading firm and three investment
companies. The bank also has joint ventures in non-life
and life insurance with Japans Mitsui Sumitomo and Hong
Kongs American International Assurance, respectively.
THE PROUD MIDDLE: Another seven banks each control between 3% and 9% of overall sector assets. The
government and the central bank would like to see
more mergers of institutions in this range, as they
believe consolidation would allow larger banks to better compete with other ASEAN players, as the bloc
moves towards a 2020 target for banking integration.
However, banking executives and observers told OBG
that mergers of top banks are difficult because most
are owned by business conglomerates whose owners
are reluctant to give up their banking arms to rivals.
Furthermore, the BSP moved in June 2014 to lift restric-
tions on new branches in areas that had been designated as having a sufficient number of branches, which
serves to undermine some consolidation benefits.
Since branching was fully liberalised we do not
acquire purely for branch networks. Unless the branches are accompanied by an established deposit base, it
is easier for us to start from zero, Louis S Reyes Jr, the
senior vice-president and head of investor relations at
BDO Unibank, told OBG, Similarly, Mapa of Metrobank
told OBG. We opened 71 branches in the past two years.
That is the size of a number 12 to number 18 bank.
The most recent large merger was between the Philippine National Bank (PNB) and Allied Bank, which took
four years to clear regulatory hurdles, including those
of foreign regulators. PNB is now the fifth-largest bank,
with P581bn ($13.1bn) in assets, or 5.6% of the sector,
in September 2014, including its subsidiary Allied Savings Bank. The banks already had a common controlling shareholder, the LT Group, prior to the merger.
Number seven China Banking Corporation (Chinabank) could eventually be a merger target, as control is currently split between the SM Group and the
Yuchengco Group, which control the number one and
number seven banks, respectively. In January 2015 it
was in the process of acquiring its second savings bank,
Planters Development Bank. All told, Chinabank had
P389.1bn ($8.8bn) in assets, or around 4.1% of the sectors total, as of September 2014.
The number eight bank is Rizal Commercial Banking
Corporation (RCBC), with P365.6bn ($8.2bn) in assets,
equal to 3.9% of the sector, including RCBC Savings
Bank. RCBC is controlled by the Yuchengco Group in
an alliance with Taiwans Cathay United Bank. Cathays
parent, Cathay Financial Holding, signed a deal in December 2014 to pay P17.92bn ($403m) for a 20% stake in
RCBC. Cathay Financial has said it could increase its stake
to 30% by buying from the stock market.
Number nine was Security Bank, with P356.4bn
($8bn), or 3.8%, of sector assets, and number 10 was
Union Bank, with P334.8bn ($7.5bn) in assets, or 3.6%
of the total, including their respective subsidiaries, City
69
Consolidation could allow

larger banks to better
compete with players from
other ASEAN countries, as
the bloc moves towards a
2020 target date for
banking integration.
70
The government is
proposing to merge two
large state-owned universal
banks, arguing that it would
reduce duplication and
increase efficiency.
BANKING OVERVIEW
Savings Bank and Security Bank Savings. Union Bank

is controlled by the Aboitiz Group, while Security Banks
ownership is unclear. Another eight domestically owned
universal and commercial banks controlled P960bn
($21.6bn), or around 9%, of sector assets. Together,
the 16 private, domestically owned universal and commercial banks controlled 73% of sector assets.
PROPOSED MERGER: The government is proposing to
merge two large state-owned universal banks Land
Bank of the Philippines (Landbank), the fourth-largest
bank as of September 2014 with P911bn ($20.5bn) in
assets, or 8.7% of the sector total, and Development
Bank of the Philippines (DBP), the sixth-largest bank
with P437bn ($9.8bn) in assets, equivalent to 4.2% of
the sector. The governments Governance Commission
for Government-Owned or Controlled Corporations
proposed the merger in 2014, arguing that it would
reduce duplication and increase efficiency.
Landbank was originally dedicated to serving farmers and fishers, but has leveraged its large nationwide
branch network to transform itself into a major retail
bank as outlying areas have developed. DBP remains a
vehicle of state economic development, but has also
been developing as a commercially oriented retail bank.
One of the business areas that a merged government
bank might compete for is the many large infrastructure projects recently announced by the government.
Most of the big projects are public-private partnerships, with financing to come from the banking sector
in return for control of revenue streams such as highway tolls. The major private conglomerates that own
large banks have so far been the main bidders.
FOREIGN BANKS: Foreign-owned banks also have a substantial presence, and look set to grow after a major
liberalisation of foreign access in 2014 following the
enactment of Republic Act No. 10641, also known as
the Amended Foreign Banks Law. According to BSP, 19
foreign banks controlled 10.4% of sector assets as of
September 2014. Most foreign banks specialise in corporate lending or capital markets, with many focused
on serving foreign investors from their home countries. Most of these banks hold charters as branches
of foreign-owned banks, which limit them to a maximum of six locations, and these are the only variety of
new charters that the BSP will issue to foreign banks.
They had been unavailable for many years because the
total number of them was capped by law at 10 (not
including four branches of foreign banks present prior to 1948). However, the 2014 reform eliminated this
quota, and is expected to draw new foreign applicants.
Foreign-owned banks can also be chartered as subsidiaries of foreign banks. Such charters are crucial for
breaking into the retail banking market, as they do not
limit the banks number of locations. However, they
can only be obtained by acquiring an existing bank. That
said, most of the nine foreign banks that have ever
obtained such charters ended up selling out to locals
or not taking advantage of the branching privilege.
BANKING OVERVIEW
Four banks still hold such charters, but only two had
more than six branches as of January 2015: Malaysias
Maybank with 79 and Taiwans CTBC Bank with 24.
HSBCs subsidiary bank had six locations, while a subsidiary bank of Singapores United Overseas Bank had
just one after selling a 66-branch network to BDO in
2005. For their part, Banco Santander, GE Money and
Citibank sold their subsidiary banks to BDO in 2003, 2009
and 2013, respectively. Singapores DBS Group and
Hong Kongs Dao Heng Bank merged their subsidiary
banks in 2001 with BPI and BDO, respectively, and then
later sold their resulting minority stakes.
The 2014 reform, aimed at preparing for ASEAN
banking integration, seeks to revive broader foreign
investment in the sector by easing other obstacles that
have disadvantaged foreign banks. For example, the
reform introduced a mechanism through which foreignowned banks can foreclose on land, despite the constitutional ban on foreign ownership of land.
In terms of assets, the largest foreign banks are those
that have had the most success in corporate banking,
investment banking and/or capital markets. Citibank
is the leader, with P283bn ($6.4bn), or 2.7%, of sector
assets, as of September 2014. HSBC comes second, with
P186.5bn ($4.2bn), or 1.8%, of sector assets. By comparison, Maybank had just P74bn ($1.7bn), or 0.7%.
HUNDREDS OF SMALL BANKS: Consolidation is proceeding at a relatively fast pace among the smaller
domestically owned banks. Larger banks are strongly
encouraged to buy small banks, especially when the BSP
determines that a smaller bank is undercapitalised and
unable to raise financing except via a sale.
Recently, banks have been coping with two major central bank regulatory reforms: implementation of Basel
III, which is not scheduled in most countries until 2019,
and stress test limits that further tighten control of exposure to real estate, which became effective in July 2014.
Universal and commercial banks are required to adopt
capital adequacy standards under Basel III, while the
smaller banks including rural banks, cooperative banks
and stand-alone thrift banks are under Basel 1.5, a
simplified risk-sensitive capital adequacy framework.
Diwa Guinigundo, the BSPs deputy governor for
monetary stability, told OBG that Basel IIIs tighter riskweighting standards would bring down banks average
capital adequacy ratios by 100-200 basis points to
between 14% and 15%, compared to the standard Basel
III minimum of 10%. Most of our banks are already compliant, so why postpone it?
Many banks, however, are being forced to raise capital, and a niche business has emerged in arranging
Basel III issues of Basel III-compliant Tier 2 capital
instruments. Fitch Ratings wrote in July 2014 that there
had been P50bn ($1.1bn) of such issues to date, with
more expected in the future. For many smaller banks,
not meeting Basel III requirements will likely mean
greater pressure to merge. BSP has been busy arranging mergers among rural banks where it deems a combined bank would better weather stress (see analysis).
Excluding the 15 savings banks owned by universal
banks or foreign banks, there were another 54 savings
71
banks as of September 2014, with a combined P190bn

($4.3bn) in assets, or 1.8% of the sector total, according to the BSP. On top of those were another 516 rural
banks and 31 cooperative banks, with total assets of
P211bn ($4.7bn) as of September 2014, or just 2% of
the sector. That number of rural and cooperative banks
has fallen from 703 in 2008 and 809 in 1999 as a steady
stream have been liquidated or merged.
Major banks are also looking into buying small banks
in outlying areas. In January 2015 BDO was in the process
of buying the largest rural bank, One Network Bank
(ONB), which had 105 branches and micro-banking
offices, mainly in Mindanao. ONB had total assets of
P28bn ($630m) as of September 2014. While the asset
counts of universal banks listed above do not include
some of their rural bank subsidiaries, in most cases the
difference is negligible.
Savings banks, formally called thrift banks, are not
allowed to engage in asset management, securities
brokerage or retail foreign exchange. Small neighbourhood banks like rural banks and cooperative banks are
restricted to local currency deposits and lending to
individuals and small businesses. The rural name is misleading as urbanisation has turned many banks with
rural charters into de facto city neighbourhood banks.
Branch numbers give another indication of the relative scales of the different types of banks. The 15
domestically owned universal banks had a combined
5235 locations as of September 2014, or 349 each on
average, according to BSP data. Meanwhile, the five
domestically owned commercial banks had a combined
362 locations, for an average of 72 each.
For their part, the 67 domestically owned savings
banks had 1866 locations, or an average of 28 each,
while the 547 rural and cooperative banks had a combined 2556 locations, or an average of about five each.
Among foreign-owned banks, the four chartered as
subsidiaries had 110 locations, or an average of 28
each, and the 14 chartered as branches had a combined 38 locations, or an average of about three each.
OUTLOOK: Given the amount of ground that Philippine
banks have covered in such a short period of time, it is
inevitable that the pace of their growth will moderate
from here. Similarly, the BSP has enjoyed a long run of
favourable economic winds at its back that will be blowing less strongly in the future. Still, Philippine banks
have so much going for them: rapid economic development; a young demographic; a largely under-banked
country; and a government that is boosting infrastructure spending. Another positive is their strength relative to the government. While this has some downsides,
it could serve Philippine banks well in an environment
of regional integration, where rivals may be more accustomed to having government bring business to them.
Although Philippine banks have largely been sheltered
by restrictions placed on foreign banks, there is another reason that many foreign banks have withdrawn: it
simply is not that easy to compete with the countrys
local banks. Indeed, by the time regional integration
comes to pass, Philippine banks may be more competitive across South-east Asia than many are expecting.
The 2014 financial sector

reform, which is aimed at
preparing for ASEAN
banking integration, seeks
to revive broader foreign
investment in the banking
sector by reducing the
obstacles that have put
foreign banks at a
disadvantage.
72
BANKING INTERVIEW
Amando M Tetangco Jr, Governor, Bangko Sentral ng Pilipinas
Access for all

OBG talks to Amando M Tetangco Jr, Governor, Bangko Sentral ng
Pilipinas (BSP)
How can the BSP accelerate the financial inclusion
of the countrys Muslim minority?
TETANGCO: The BSP is committed to encouraging
Islamic banking and finance (IBF) as part of the overall agenda of enhancing financial inclusion in the country. Financial inclusion can be truly achieved if appropriate financial products and services are accessible to
a great majority of the population, regardless of income
class, geographic location and even religion. To accelerate financial inclusion, particularly for the Muslim
minority in the country, foremost on the BSPs agenda
is to work towards a clear legal/regulatory framework
for IBF. In this light, the BSP has three initiatives.
First, in the proposed amendments to its own charter, the BSP has included two provisions on IBF, specifically on the: (a) establishment of financial facilities
that cater to the requirements of and take into account
the peculiar characteristics of Islamic banks. Such facilities will enhance the ability of the BSP to help boost
IBF activities while at the same time help ensure stability and soundness of operations of IBF institutions;
and (b) issuance of regulations catering to IBF that will
help the BSP create an environment where Islamic
banking can operate alongside conventional banking.
In this kind of environment, inter-bank markets and other linkages will be accessible to IBF institutions, and conventional banks can operate Islamic banking windows.
Moreover, innovative products addressing the distinctive needs of the Muslim community will be available.
Second, the BSP is supporting initiatives to amend
the charter of Al-Amanah Bank, currently the only
Islamic bank in the country. Proposed amendments are
provisions that will: (a) authorise the government to
apply certain stipulations in the Al-Amanah charter to
other Islamic banks that will operate in the country in
the future; and (b) further enhance the ability of AlAmanah to offer Islamic bank products and services.
Third, the BSP is also supporting the proposal to have
a general law on IBF. Back in 1997, the BSP submitted
to Congress a proposed bill on Islamic banking. This bill,
however, has been archived, but the BSP supports calls

to revive this proposal in Congress. Meanwhile, besides
the push for a legal/regulatory framework in the future
that is geared toward the promotion of IBF, the BSP,
under its existing capacity, has implemented various initiatives aimed at accelerating financial inclusion.
First is a regulation allowing banks to establish microbanking offices (MBOs) in areas where it may not be
economically feasible to set up full-blown branches, such
as in some remote locations in Mindanao. By the end
of 2014, there were 80 MBOs operating in Mindanao.
Second is a regulation allowing non-bank agents to
perform electronic money (e-money) transactions,
such as remittances and payments. These non-bank
agents such as pawnshops, grocery stores, drug stores
have wide distribution networks, and so their authority to facilitate fund transfers significantly helps further
the goal of financial inclusion. As of 2013, there were
more than 945 e-money agents in Mindanao.
Third is putting in place an enabling policy and regulatory framework for microfinance, which has resulted in the growth of institutions offering microfinance
services and effective access to financial services for
those that need them. As of end-September 2014,
there were 179 banks in the Philippines with microfinance operations serving more than 1m clients, with
loans outstanding amounting to P9.4bn ($211.5m).
What changes to the regulatory environment would

better enable the broadening of financial products
to non-traditional customer segments?
TETANGCO: To serve non-traditional customers with
a broad range of financial products, the regulatory
environment must allow market innovations in product development, business models, delivery channels
and partnerships. Conventional products and delivery
channels are often too costly, inaccessible and unsuitable for their market.
In this light, the BSP, over the past decade, has issued
a number of regulations aimed at expanding the list of
BANKING INTERVIEW
financial products that can be accessed by non-traditional customers. These regulations have earned international recognition for the Philippines for having one
of the best enabling regulatory environment for financial inclusion. Some of the most recent regulations
toward this end are the following:
Waiving of the processing fees for banks that will
put up branches in unbanked areas.
Expansion of the: (a) list of approved activities for
MBOs. Previously, MBOs can extend only microfinance loans, but now they are allowed to offer other types of loans, such as health and emergency
loans, among others; (b) definition of low-income
households and micro deposits so that banks can
offer microfinance products to a wider segment of
the population; (c) list of identification cards considered valid for making bank transactions to now
include those issued by private institutions registered with or supervised by the BSP, Securities and
Exchange Commission, and Insurance Commission,
among others.
Enhancement of the procedures that banks should
observe in approving microfinance loans, with the
aim of increasing accessibility of this type of loans.
Establishment of regulatory framework for the use
of electronic money (e-money). The BSP is promoting the use of technology, such as mobile banking
and use of e-money, to more easily expand the reach
of financial institutions to unserved and underserved
areas.
These are just some of the regulations that the BSP
already has issued to enhance financial inclusion. Moving forward, the BSP will continue to review the regulatory environment to identify further measures that
can help enhance access to financial products and
services. Meanwhile, as the BSP pursues this goal, it also
understands that unrestricted innovation can pose
risks that may affect the publics trust in formal financial services. Therefore, side by side with BSP regulations that promote financial inclusion are regulations
73
aimed at safeguarding customer protection and the

overall stability of the financial system.
How much room is there for microfinance to grow

in the Philippines?
TETANGCO: In the Philippines, microfinance has great
potential to grow. Micro-enterprises account for about
91% of businesses in the country, but only 5.7% of micro
and small enterprises source funding from banks. The
BSP, therefore, has been encouraging financial institutions to create products and services tailor-made for
micro-enterprises and for the unbanked.
To expand the reach of microfinance, the design and
manner of delivery of financial products should match
the profile and needs of the target market. For instance,
microfinance loans are small in size and payable over
the short term, allowing frequent amortisation and
imposing minimal documentary requirements. These
features are ideal for the cash flow of low-income
households, and micro and small businesses.
Also, the extensive reach of mobile technology,
through which some microfinance products and services are delivered, provides the opportunity for these
products and services to easily reach the unbanked
households and micro-enterprises. The SIM card penetration rate in the Philippines stands at 110%. At the
same time, 60% of the unbanked population with mobile
phones keep some form of savings through informal
means and 13% borrow through informal channels.
While significant gains in the area of financial inclusion have been achieved over the years following
refinements to the regulatory environment, the challenge is to further scale up the reach of financial services to cover an even greater number of people. Given the wide disparity in economic conditions across
the country, the traditional brick and mortar approach
to banking may no longer be viable. As such, the BSP
will continue to promote financial inclusion through
appropriate regulations and initiatives that encourage financial institutions to embrace the same goal.
74
BANKING INTERVIEW
Hikmet Ersek, President & CEO, Western Union
Broad reach
OBG talks to Hikmet Ersek, President and CEO, Western Union
As one of the largest recipients of foreign remittances, what role might the Philippines play in new
technological concepts like digital money?
ERSEK: The large and growing remittance market in
the Philippines is inspiring a lot of innovation from
industry players. The Filipino diaspora are known to
keep in touch with their recipients back home via new
technologies smartphones are their primary tool to
access the web, followed by laptops. This provides a
robust platform and an accepting environment for new
innovations. Like Turkey, the Philippines has a very
young population 35% are under 15. Filipinos spend
an average of 6.2 hours a day online via desktop or laptop, and in 2013 they spent some $1.3bn online. In addition, the number of mobile phone subscribers in the
Philippines has topped 100m, and more than 8m of them
have signed up for a mobile money service. Clearly Filipinos are comfortable with new technology, opening
the door to new innovations like the movement of
money online and via mobile platforms.
As regional economic ties grow in Asian markets,

how can the Philippines advance its capacity to
play a bigger role in outsourcing?
ERSEK: The Philippines is well positioned to take advantage of the growing openness of the Asian region. It
has a solid structure in place to administer placement
of overseas workers. Pre-departure training programmes
are required for outgoing skilled workers. The Philippine government also extends its outreach to foreignbased Filipinos through its embassies and consular
offices around the world. The education system delivers skills including functional English literacy, which
helps Filipinos become productive in their host countries and find better jobs abroad. The young population is also an advantage. By 2015, more than half of
the population will be of working age. The Philippines
has a huge talent base. I believe that very soon both
governments and companies around the world that
need skilled workers will be turning to the Philippines.
How can large payments companies aid global

efforts against money laundering and fraud?
ERSEK: One of the most important things these
companies can do is uphold the highest standards
of integrity, which to me means investing in compliance. Compliance and consumer protection are not
just departments or sets of rules to follow; they are
at the heart of what it means to be a responsible
company. At Western Union, we are strengthening
our programmes, hiring more people and taking
more measures in a global regulatory environment
that is demanding, fast-changing and increasingly
complex. The financial services industry must work
harder than ever to protect the money transfer system from being misused and to educate customers
about fraud and money laundering not just because
it is required, but because it is the right thing to do
for business and for the millions of people around
the globe who depend on us.
In what ways can technology help small and medium-sized enterprises (SMEs) in emerging markets meet the challenges of expanding abroad?
ERSEK: Technology can help SMEs in many ways. In
more developed countries like the US, SMEs often
import goods and thus need to make payments in
several different currencies. They need access to a
variety of tools to help them pay online, track their
payments and manage foreign-exchange risk. SMEs
in emerging countries are often on the receiving
end of cross-border transactions. They need access
to technology that allows them to receive payment
in whatever currency they want, and also transparency in transactions so that they can be sure
they receive the amount they are supposed to. Not
just SMEs can benefit from these services; so can
entities like NGOs for example, Mercy Corps, which
needs to get funds to rural areas after a disaster. Technology can help them do that delivering funds in
minutes from around the globe for payout in cash.
BANKING ANALYSIS
75
In October 2014 the BSP raised capital requirements for small banks
Size matters
With increasing competition and tighter requirements, the number of
rural banks is in decline
As the countrys largest banks expand into ever more
remote areas, hundreds of small banks are wondering
if they have a future. Most of these small banks spread
across the country are tiny and operate in rural areas
mainly the product of a 1950s drive to bring basic
banking services to the countryside, by encouraging the
establishment of rural banks with low capital requirements and limited bank charters. These so-called rural
banks are a precursor to microfinance, similarly targeting farmers, fishers and merchants with small and relatively high-interest loans, albeit through the formal
institution of a traditional deposit-taking bank. According to the Philippine central bank, Bangko Sentral ng
Pilipinas (BSP), there were 514 rural banks as of January 2015, along with 30 similarly small cooperative
banks and 69 savings banks, which are larger on average but include many small banks serving remote areas.
CONSOLIDATION: This is down from 778 rural banks,
51 cooperatives and 117 savings banks in March 1999.
Their numbers are shrinking, as small banks face increasing competition from bigger players on the one hand,
and from non-bank microfinance and non-profit lenders
on the other. This is largely due to consolidation, a trend
that has been accelerating of late as the BSP has reacted to numerous small bank failures by tightening capital requirements and essentially arranging mergers
among small banks that cannot clear the new hurdle.
Consistent economic growth and liquidity allows
breathing room for domestic mid-sized banks, however, whenever growth slows down, the stricter regulations will weigh in more heavily and competition will
intensify, leading to consolidation, Roberto F de Ocampo, chairman of Veterans Bank, told OBG.
In October 2014 the BSP announced large, acrossthe-board increases in minimum capital requirements
for small banks. For rural and cooperative banks, minimum capital was raised from P5m-100m ($112,5002.3m) to P20m-200m ($450,000-4.5m), depending on
location and branch numbers. Minimum capital was also
increased for most savings banks, formally called thrift
banks, from P250m-1bn ($5.6m-22.5m) to P200m-2bn

($4.5m-45m), compared to average assets of P381m
($8.6m) for rural banks, P455m ($10.2m) for cooperative banks and P12.4bn ($279m) for savings banks as
of September 2014, according to BSP data.
To meet the new requirements, First Macro Bank
(FMB), a small neighbourhood bank in Manila, was planning to merge with another small bank. Both were
founded as rural banks, having transformed into city
neighbourhood banks as Manila expanded. Pateros district, where it is headquartered, is a bustling low-income
neighbourhood, where people looking for work in Manila are likely to find accommodation they can afford. Most
of FMBs loans go to small merchants and area homeowners who are building ad-hoc extensions to their
houses and renting out rooms to day labourers. Consolidation also fosters much-needed economies of
scale for resource-intensive operations. Brick and mortar is relevant in the Philippines to reach both individuals and smaller firms. However, physical branches are
also very expensive given the low interest rate environment. Because of this, the break-even deposit level per
branch has tripled, to as much as P150m ($3.38m), Abraham T Co, president of Asia United Bank, told OBG.
DECLINING NUMBERS: Beyond consolidation, rural
and cooperative banks appear to be receding. BSP data
show that rural bank locations, which peaked at 2619
in 2010, were down to 2441 by September 2014. Cooperative banks peaked at 167 in 2012 before falling to
159. The competition is driving some small banks out
of business, while giving others the opportunity to sell
at attractive prices. In late 2014 the Philippines largest
bank, BDO Unibank, announced it was buying the biggest
rural bank, One Network Bank. Many other large and
mid-sized banks have also bought rural banks, and private equity investors have been eyeing segment opportunities. Reggie L Ocampo, president of FMB, warned
that this trend will not last forever. I think there is
maybe a 10-year window for rural banks. After that, what
they have to offer to commercial banks will be gone.
The number of small banks

is shrinking, as they face
increasing competition from
bigger players on the one
hand, and from non-bank
microfinance and non-profit
lenders on the other.
The increasing competition

in the sector is driving some
small banks out of business,
while giving others the
opportunity to sell at
attractive prices.
76
BANKING ROUNDTABLE
Batara Sianturi, CEO, Citibank Philippines
Wick Veloso, CEO, HSBC Philippines
Opening the floodgates

OBG talks to Batara Sianturi, CEO, Citibank Philippines; Wick Veloso, CEO, HSBC
Philippines; Herminio Famatigan Jr, President & CEO, Maybank Philippines; and
Mahendra Gursahani, former CEO, Standard Chartered Bank Philippines
To what extent can further liberalisation strengthen domestic companies for ASEAN integration
and facilitate the entrance of more foreign players, particularly in the banking sector?
SIANTURI: Regarding opportunities generated by
ASEAN integration, there are three secular trends that
will shape the banking sector in the region: globalisation, urbanisation and digitisation. Globalisation
can be seen in portfolio flows to and from developed
and emerging markets, enabling banks to contribute
to their connectivity. With 45% of ASEANs 600m
population living in urban centres, urbanisation will
be key and global banks can play a unique role by
connecting cities around the world. Lastly, digitisation is an irreversible trend for corporate and retail
banking, with mobile internet and digital banking
shaping our future. Policies that will support this
trend will certainly enhance and strengthen the
upcoming economic integration.
VELOSO: ASEAN will become the worlds seventhlargest economy, and the main consideration for
banks ability to move from one country to another
will lie in how well they can raise capital, as more capital is required in any banking transaction right now.
As the BSP further liberalises the industry for foreign banks, so long as they comply with requirements like subsidiarisation, it is now important for
them to raise their own capital locally.
For ASEAN banks to be able to really have an impact
on the Philippine market, they have to take a look
at how their local economy enables intra-ASEAN
trade. Come ASEAN integration and the collapse of
tariffs among its members, a regional bank would
need to see what domestic commodities can be
shifted to the Philippines and vice versa.
GURSAHANI: Conceptually, ASEAN integration will
offer regional banks more opportunities to use their
liquidity to expand beyond their own shores and
become relevant in other ASEAN member countries.
Practically, however, integration in itself may not
incentivise Philippine banks to expand their operations and offerings beyond domestic opportunities.
Similarly, ASEAN integration will not confer any particular advantages on regional banks, as they will still
have to establish themselves to create scale, differentiate and compete with more established industry players. Likewise, it is difficult to see foreign
banks willing to participate as universal banks, which
would require massive capital investment even if
they were still unable to compete effectively with
more entrenched players. Unless one can bring something very specific, whether technical expertise,
product knowledge or new product offerings, it
would be difficult for a foreign bank to become relevant, particularly in the retail space.
What advantages do economies of scale and

greater regional penetration offer to international banks vis--vis domestic banks in terms of
products and services?
FAMATIGAN: Regional banks are strongly positioned
to take advantage of ASEAN integration for the simple reason that they have a presence in all ASEAN
countries. Anytime one liberalises or eases the flow
of capital from one country to another, banks physically positioned in the countries that are going to
be affected can theoretically better identify opportunities than banks that are not present. To not have
a branch in the country does not mean a bank cannot do business; however, a physical presence facilitates trade with counterparts and vice versa.
International banks would need to differentiate
themselves, and this will not depend on pricing.
Whereas rates may differ, consumer motivations are
largely similar, therefore competitiveness will lie in
the speed and frequency with which banks are able
to address customer fulfilment.
Regional banks can effectively deal with that
through process improvements, as they can directly apply best practices that have been tested, while
BANKING ROUNDTABLE
77
Herminio Famatigan Jr, President & CEO, Maybank Philippines
Mahendra Gursahani, former CEO, Standard Chartered Bank

Philippines
also increasing automation efforts and improvements in overall margins.

GURSAHANI: It is very rare for an international bank
to compete head-on with the larger domestic banks.
In the past, there has been an element of customers
feeling more secure with large international banks,
but this gap is narrowing as the technology they
have come to expect is just as accessible to local
banks. However, what domestic banks perhaps lack
is the exposure to advances in financial instruments
and products, and the ability to have them tried in
test markets. Therefore, the key advantage for international banks operating in the domestic market is
related to the franchise model. A local bank may
experience constraints in securing skilled employees to deliver innovative products, whereas internationals banks can tap into a wider resource pool.
Additionally, international banks can play a leadership role in delivering cross-border solutions, international trade finance and by providing the funding
for propositions like public-private partnerships or
infrastructure investment; the know-how to string
these together and introduce them into the marketplace; and the links with interested international
parties to facilitate their implementation.
ability of banking players to make services immediately available to customers.

Technology will be important; however, it channels
the very same products clients wanted 30 years ago
and will want 50 years from now. Banking will continue to be about people making sure they keep
their money with companies they trust, being able
to borrow what they have to, and having the convenience to pay for certain things. As an international bank, our advantage rests on having performed
these things in various markets across the region,
and our challenge now is to localise it to cater to
domestic customers.
SIANTURI: For a global bank like Citi, technology is
an area where we can bring value to the table because
of its worldwide footprint. We are in more than 100
countries and are in a strong position to leverage
that presence. For corporate banking, an international bank can bring technology applications to the
area of payments and settlement, while in retail
banking we can do so in the areas of internet and
mobile banking. Although a customer may prefer to
go to a physical branch, cutting-edge technology
has now enabled us to bring the bank experience to
the palm of his or her hand. There are big opportunities for banks in both digitisation and electronic
banking, especially as these serve to simplify products and make them more customer friendly, while
meeting new clients expectations for speedy delivery of services and products.
How can technological innovations and new

transactional platforms enhance accessibility to
banking services and products? In what ways can
it improve customers experiences?
FAMATIGAN: As the Philippine market moves forward, bricks and mortar are going to continue to be
important. However, digitisation or virtual banking
presents significant opportunities if done in the right
way. Although more and more things in the banking
industry are technology-driven, banks ultimately sell
the same product, namely the ability to borrow,
invest and make deposits. Additionally, peoples motivations do not change, as they will look for value,
speed and convenience. What has changed is the
What challenges and opportunities are involved

in expanding banking penetration and reaching
the unbanked population and informal sector?
How can this segment be better integrated?
GURSAHANI: It is massively challenging for international banks to play in that space, as a large part
of the unbanked and under-banked population lives
in rural communities where our reach is quite weak.
Foreign banks have limits not only to their licences,
78
BANKING ROUNDTABLE
but also to their ability to deliver the services needed at the grassroots level.
However, international banks can participate by
finding ways to fund microfinance institutions. Unlike
most economies in ASEAN, where big conglomerates
or multinationals do not drive the economy as much
as small and medium-sized enterprises (SMEs) do,
in the Philippines the SME sector is quite small. A
reversal of this may occur as multinationals bring
some of that ancillary industry into the Philippines,
making foreign banks want to work with mediumsized enterprises that they can help grow; however,
serving small companies will remain a challenge in
terms of reach and distribution.
SIANTURI: In 2015 the Philippines will have an ideal demographic window in which at least 64% of its
population will be within the ages of 15-64, representing an immense potential source of economic
growth. The key will be to provide jobs and support
for SMEs to grow into larger corporations that then
will require increased financing. The highly underpenetrated SME segment is an attractive opportunity given the liquidity of the domestic market.
Challenges for banks going into these areas lie in
improving credit bureaux and ensuring quality portfolios as banks compete to grow assets. Fortunately, the Philippine banking sector is well capitalised
to accommodate this growth.
VELOSO: At the end of the day, international institutions like us will not be able to cater to everyone,
primarily because of very rigid know-your-customer
rules policies that only aim to secure and protect
our valued clients. A foreign bank would need to be
able to establish that it is banking the right people
in the right segments. While there is a recognised
challenge in expanding penetration on the asset
side, foreign banks can further expand their reach
through credit cards, subject to and guided by the
same know-your-customer process and principles.
Outside of that, foreign banks will not have that kind
of magnitude, unless they can expand their presence

and popularity in each and every part of the Philippine archipelago, which is not exactly where we
would want to focus our efforts. Instead, we would
focus on connectivity between international countries that have good economic trade numbers.
How can new measures help to accelerate the

reversal of low loan-to-GDP ratios, while still
ensuring mechanisms to mitigate credit risks?
Which sectors have been neglected in this regard
and could present new opportunities?
VELOSO: In the Philippines, the BSP has carefully
watched the real estate market, implementing measures to prevent banks from overextending in this
space. In other areas, guiding sustainable growth is
a matter of encouraging more participation, allocating capital to critical infrastructure spending, agriculture and tourism, and focusing on the opportunities present in the Philippines.
Considering its population of 100m, the three
main requirements are power, water and transportation. Few companies have concentrated on these
critical economic areas, and these are where the
opportunities lie. Moving forward, ones ability to
raise capital onshore will increase given how abundant liquidity is, and opportunities will arise to transfer domestic capital into markets that are untapped.
FAMATIGAN: So long as banks stick to the way that
they have traditionally approached credit lending
to someone whom they deem creditworthy the
market will not overheat. One should not lend to certain businesses purely for speculative reasons, but
rather to companies that have viable business propositions and a fair chance of being successful, generating jobs and spurring further economic activity. In the aftermath of the 1997 Asian financial crisis,
bank managers at both domestic and international
banks have become very seasoned at applying risk
management systems and managing risk appetites.
BANKING ANALYSIS
79
Foreign-owned banks are now permitted to own 40% of sector assets
Changes ahead
Foreign investment regulations are being relaxed in preparation for
further regional integration
In a move to open its banking sector to foreign investment in 2014, the Philippines eased or lifted key restrictions that had kept foreign participation at a stunted
level, with gradual investments from foreign players
expected over the course of 2015 and 2016.
STEP BY STEP: A law adopted in July 2014 and implemented in December 2014 reduces or removes most
of the prior restrictions on foreign investment. Foreign-owned banks can now control 40% of total bank
assets, up from 30% an ambitious signal, as they controlled 10.4% as of September 2014. Since 2008 virtually the only way foreign banks could enter the market
was by acquiring an existing bank. The number of chartered branches of foreign banks was also capped, at
14. While the creation of new banks is still suspended,
the cap on foreign banks branches has been eliminated. However, the cap on the number of sub-branches
of foreign banks branches remains in place, at 6.
Under previous regulations, most foreign firms and
individuals were allowed to own no more than 40% of
a Philippine bank, with qualified foreign banks able to
buy up to 60% since 2007. To qualify, the foreign bank
had to be among the five largest in its country or 150
largest in the world, and be government owned or publicly listed and widely owned. Now, thanks to Republic
Act No. 10641, qualified foreign banks can buy up to
100% of a Philippine bank, with three modes of entry
now open, and they do not need to meet any of the
ranking criteria. Other foreign investors can buy up to
60% of rural banks, and multiple non-qualified foreign
investors can now buy up to a combined 60% of thrift
banks. Lastly, the constitution forbids more than 40%
foreign ownership of any land-owning company. The
2014 reform addresses this by permitting foreign banks
to control land for up to five years after a foreclosure.
Amando M Tetangco Jr, governor of the central bank,
told local press in November 2014 that several foreign
banks from Asia, the Middle East and Europe had already
expressed interest in applying for licences. In February
2015 the BSP approved the application of Sumitomo
Mitsui Banking Corp. to open full banking operations

making it the first foreign entity to gain entry since the
new law was passed. The BSP approved a second application in March 2015, for Shinhan Bank.
ASEAN INTEGRATION: The move is a response to an
ambitious plan to integrate the ASEAN banking sector
by 2020. Although the bloc moves gradually, the government wants to ensure that the Philippines banks
are prepared for international competition. Bank executives and other observers told OBG the liberalisation
was expected to attract foreign banks that had previously been prevented from operating especially large
banks from countries with substantial foreign investment in the country, most of which would be interested in niche corporate banking and trade finance.
Given that the Philippines does not have a comprehensive credit bureau operating efficiently for most
middle market accounts or the retail segment, international banks would probably prefer not to deal in this
space given the lack of credible and reliable financial
statements. As a result, international banks would most
likely participate in the corporate segment, which is the
most competitive market, and potentially also taken on
the credit card proposition, Justo A Ortiz, chairman
and CEO of Union Bank, told OBG.
Whether the reform will succeed in spurring foreign
acquisitions of existing banks is harder to predict. The
ban on foreign land ownership remains an obstacle, as
any foreign bank buying over 40% of a Philippine bank
must negotiate how to dispose of land it owns. An
agreement by Malaysias CIMB Bank to buy 60% of Bank
of Commerce fell apart in 2013 over land issues.
Some foreign banks have been gradually withdrawing or reducing their presence, while others like
Malaysias Maybank and Taiwans CTBC Bank have been
expanding their networks, which as of January 2015
totalled 79 and 24 branches, respectively. Continued
foreign interest was further confirmed by the $400m
sale in late 2014 of a 20% stake in Rizal Commercial
Banking Corporation to Taiwans Cathay Financial Group.
A law adopted in July 2014

and implemented in
December 2014 reduces or
removes most of the ways in
which foreign investment
was previously restricted in
the banking sector.
The ban on foreign land

ownership remains an
obstacle, as any foreign
bank buying more than 40%
of a Philippines bank must
negotiate how to dispose of
any land it owns.
81
Capital Markets
Domestic liquidity and foreign investors boost the market
Completing major technical upgrades in 2015
The exchanges blue-chip index hits a new record high
A new body to ensure cooperation of financial regulators
82
CAPITAL MARKETS OVERVIEW
As of February 2015 there were 271 listings on the exchange
Climbing higher
The market records a strong performance, with new trading options to
be introduced soon
Despite having one of the

oldest stock exchanges in
Asia and a relatively
advanced bourse for its
level of economic
development, the
Philippines lags behind the
leading South-east Asian
exchanges. Its 2014 trading
volume of $47.3bn is equal
to $483 per capita.
As domestic liquidity surged and foreign investors

gradually returned after a general flight from emerging markets in 2013, Philippine capital markets were
riding a wave of optimism in 2014 and early 2015.
The Philippine Stock Exchanges (PSE) blue-chip
index, the PSEI, hit a fresh all-time high in January
2015 and was continuing to rise in February, finally
putting behind it the taper tantrum that knocked
back all major emerging market indices in 2013.
Once known for its poor liquidity, the PSEs reputation in that regard has improved in recent years,
and equity trading volumes relative to population are
on par with Indonesia and ahead of Vietnam. The
exchange was preparing a technical upgrade in 2015
that will facilitate the introduction of advanced trading techniques including short-selling and options.
Domestic liquidity and limitations on bank lending
to affiliated groups are also fuelling rapid growth of
the corporate bond market.
EARLY LEAD: The country has long had a relatively
advanced stock exchange for its level of economic
development, a legacy of its political and cultural ties
to the US. The PSE is one of the oldest exchanges in
Asia, dating to the founding of its predecessor, the
Manila Stock Exchange, in 1927. A rival Makati Stock
Exchange was founded in 1963, and the two completed a merger in 1994 that created the PSE.
But the Philippines capital markets had been falling
behind as regional peers were developing more rapidly. Initially the lag owed mainly to the Philippines
weaker GDP performance, and as recently as 1996
the Philippines still had the third-highest ratio of
equity trading volumes to GDP in South-east Asia,
at 31%. That was behind Singapore and Malaysia but
ahead of Thailand, according to data from the World
Bank. Then the PSEs liquidity dried up in the wake
of the 1997-98 Asian financial crisis, and that ratio
dropped as low as 3.1% in 2003.
A rebound during the global financial expansion
that followed brought the ratio of trading volumes
to GDP back to 20% in 2007, and since then trading

volumes have roughly kept pace with GDP growth.
The ratio peaked at 22% in the turbulent year of
2013 and fell back to 17% in 2014, which was characterised by a slow and steady resurgence of prices.
The PSEI ended 2014 up 22.8% and gained another
8.2% in the first seven weeks of 2015.
Probably the fairest international comparison of
trading volumes is relative to national population. By
that metric, the PSEs 2014 trading volume of P2.1trn
($47.3bn), equal to $483 per capita, was roughly on
par with the $123bn of equity trading on the Indonesia Stock Exchange, equal to $492 per capita, and
ahead of the $35bn of equity trading on Vietnams
two exchanges, equal to $385 per capita.
The Philippines is still far behind the leading Southeast Asian exchanges. The Singapore Exchange had
$232bn of equity trading in 2014, or $42,963 per
capita, and the Bursa Malaysia had $172bn of equity trading, or $5677 per capita.
The Securities Exchange of Thailand is currently
the regions busiest exchange, with $314bn of equity trading in 2014, or $4687 per capita. All trading
volume numbers are from the respective exchanges.
LISTED COMPANIES: Total market capitalisation of
companies listed on the PSE reached P14.78trn
($332.55bn) as of February 20, 2015, or 105% of IMFforecast 2015 GDP. A little more than a third of that
is listed for trading on the exchange, and about a
quarter is true free float, as some strategic shareholders have acquired blocks of shares listed on the
exchange. Most listed companies have strategic
majority shareholders, and most of the rest are controlled by stable alliances of minority strategic shareholders who together own a majority.
There are 271 listings on the exchange, including
three secondary listings of foreign companies. But
the 30 members of the PSEI accounted for P8.97trn
($201.8bn), or more than half of the market capitalisation of domestic firms. The listed shares of the
PSEIs 30 members had a total market capitalisation

of P9.14trn ($205.65bn).
MARKET REGULATION: The Securities and Exchange
Commission (SEC), established in 1936 on the US
model, is the main industry regulator. It approves all
publicly listed securities and offerings and sets
mandatory standards for all publicly listed companies. It also polices the markets, with subpoena power to investigate suspected violations of securities
laws and the authority to impose sanctions.
The PSE was given formal status as a self-regulating organisation by the SEC in 1996, and was demutualised and reorganised as a stock corporation in
2001. Almost three-quarters of the PSEs own shares
are listed and traded on the bourse, and it is one of
the few companies on the exchange with a majority free float. A wholly owned subsidiary, the Securities Clearing Corporation of the Corporation, acts as
the central clearinghouse for trades on the PSE.
The PSE is aiming to merge with the other main
player in capital markets, the PDS Group, which has
three subsidiaries that play important roles in capital markets infrastructure. The Philippine Dealing
and Exchange Corporation (PDEx) is a fixed-income
exchange and foreign exchange market that handles
trading in debt securities and repo and exchanges
between the peso and US dollars. The Philippine
Securities Settlement Corporation is the central
clearinghouse for trades on PDEx. The Philippine
Depository and Trust Corporation is the depository
for corporate bonds traded on PDEx and for equities traded on the PSE and the clearing entity for
PDEx and other peso-dollar transactions.
The PSE owns 21% of PDS Group and launched talks
with the governments blessing to buy a controlling
stake in 2013. The other two major shareholders in
PDS Group are the Bankers Association of the Philippines, a non-profit organisation controlled by domestic commercial banks, and Singapore Exchange. Local
media have reported from time to time that the sides
were close to a deal, but as of February 2015 nothing official had been announced. Smaller players
include the Philippine Clearing House Corporation,
which handles electronic interbank payments of
pesos and dollars vital to foreign-currency trading,
and four foreign-exchange brokers.
RAISING FUNDS: Capital raised through the PSE
peaked in 2012 at P219bn ($4.9bn), which was also
the peak of global inflows into Asian emerging markets. It dropped to P175bn ($3.9bn) in 2013 and was
expected to come in somewhat below that in 2014
after hitting P128bn ($2.9bn) in the first nine months
of the year. Overall, 2014 was a relatively quiet year
for initial public offerings (IPOs), with only five smaller companies raising a combined P14.5bn ($326.3m),
while two listed by introduction. That compares to
eight IPOs that raised P61bn ($1.4bn) and one listing by introduction in 2013.
However, the PSE was targeting a rebound to
P200bn ($4.5bn) in 2015 as markets began the year
in an ebullient mood and a backlog of expected
83
The bourse monitors foreign ownership and must step in if the foreign stake in a company hits its legal limit
offerings were coming to market, many originally

planned for late 2014 and pushed back for various
reasons. San Miguel Pure Foods was expected to
raise up to $336m in a preferred share sale and
Profriends Group was anticipated to raise up to
$172m in its IPO, PSE CEO Hans Sicat told Reuters.
In addition, the PSE is also pushing to attract more
small companies to list on its board for small and
medium-sized enterprises (SMEs). Two of the 2014
IPOs were on the SME board, bringing the total number listed on it to four.
Meanwhile, fundraising in corporate bond markets
is surging. Net issuance jumped to $3.68bn in 2014
from $490m in 2013 and $2.89bn in 2012, according to the Asian Development Bank (ADB).
Whereas the strength in 2012 and weakness in
2013 largely reflected swings in global sentiment
towards emerging markets, the surge in 2014 was
driven mainly by domestic buyers (see analysis).
THE FOREIGN FACTOR: Foreign investors have a
powerful presence in the Philippines capital markets, and their tendency to move together into or
out of all of the countrys assets at once gives foreign sentiment a huge weight in overall market performance. That sentiment in turn is driven largely by
the cycles of global, and especially US, monetary
conditions. When US monetary policy is loosening
as in 2010-12 or when private US credit markets are
ebullient as in 2005-07, the dollar weakens and portfolio investment flows into emerging markets. When
US monetary policy begins to move towards a tightening phase as in 2013-14 or when private credit
markets contract as happened in 2008-09, the dollar strengthens and financial flows reverse. Inward
flows tend to build gradually, while reverses tend to
strike quite suddenly.
The strong 2014 performance was thus remarkable as it came during a year when globally emerging market equities continued to decline. The MSCI
Emerging Markets index, a 23-country index that
Fundraising in corporate
bond markets has recorded
significant growth, with net
issuance jumping to
$3.68bn in 2014 from
$490m in 2013 and
$2.89bn in 2012.
Foreign investors have a

powerful presence in the
market, and their
sentiment is driven largely
by the cycles of global
and especially US
monetary conditions.
84
The Philippine Stock Exchange introduced an online trading platform, PSETradex, in 2012
Established in February
2014, the Financial
Stability Coordination
Council is meant to ensure
the various financial
regulators cooperate to
identify and address risks
to financial stability.
includes Philippines equities, lost 1.8% in 2014 as

the US moved towards tightening and the dollar
strengthened. The MSCI Emerging Markets index
lost 2.3% in 2013, with markets reversing from gains
to losses in May in the taper tantrum, when the US
signalled it would end quantitative easing.
The Philippines strength owed partly to domestic investors taking charge, driven largely by a move
in 2013 by the Bangko Sentral ng Pilipinas (BSP), the
central bank, to boost liquidity. The BSP banned passthrough accounts that had allowed private investors
to access a relatively high-interest central bank
deposit account called special deposit accounts
(SDAs), used to sterilise excess peso liquidity. After
the move peso liquidity remained high into 2015.
But more importantly, foreign investors differentiated the Philippines from other emerging markets,
seeing it as relatively shielded due its high growth,
large remittances inflows and strong ties to the US
economy. According to PSE data, the foreign share
of trading on the PSE dropped slightly in 2014 to 49%
after growing steadily to 51% in 2013 from 32% in
2009. Foreign-owned brokerages dominate the brokerage business, with the top six brokers in 2013 by
equity trading volume all foreign-owned, according
to the PSE. They were units of Deutsche Bank, UBS,
CLSA, Maybank, Macquarie and Credit Suisse.
Net foreign buying dropped from P110bn ($2.5bn)
in 2012 to P15.6bn ($351m) in 2013 and recovered
to P55.4bn ($1.25bn) in 2014. The BSPs balance of
payments (BOP) data show $1.8bn of net cross-border inflows into Philippine equity and investment
funds in 2012, followed by a $34m withdrawal in 2013
and a $1.4bn inflow in the first three quarters of 2014.
Foreign trades are closely monitored due to limitations on foreign ownership of many companies.
Most prevalently on the PSE, foreign ownership of
companies that own land is capped at 40%.
The PSE monitors foreign ownership and it must
step in to prevent foreign investors from buying in
any company if the foreign stake hits its legal limit.

Some strategic foreign investors have found loopholes in the limits, but those are not available to foreign portfolio investors.
TAXES: Non-residents are subject to different dividend and interest tax rates than locals. Citizens and
formal residents pay 10% tax on dividends, de facto resident individuals pay 20%, non-resident individuals pay 25% and non-resident corporations pay
10% to 30%, depending on home-country dividendtax policy and any pertinent tax treaty.
Citizens and residents pay 20% tax on interest,
non-resident individuals pay 25% and non-resident
corporations pay 10% to 20% depending on any
applicable tax treaty. Certain special types of bonds
incur lower or no taxes. All investors pay a 0.5% stock
transaction tax on gross sales of shares listed on the
PSE, or up to 10% capital gains tax on shares not listed on the PSE, depending on the size of the gain and
any applicable tax treaty.
DEBT: In addition to the local corporate bond market, major Philippine companies and the government actively raise debt on international markets with
bond issues. Corporate issuers pulled back from the
international debt markets in 2014 as they switched
to domestic issues. Net issuance of foreign-currency corporate bonds was a negative $960m in 2014
after positive net issuance of $2.92bn in 2013 and
$440m in 2012, according to the ADB.
According to BOP data, Philippine banks drew a
net $2.8bn of foreign bank loans in 2012, repaid
$254m in 2013 and repaid $2bn in the first nine
months of 2014. Other sectors repaid $444m of foreign bank loans in 2012, drew $2.2bn in 2013 and
repaid $662m in the first nine months of 2014.
RECENT REFORMS: Among the major recent reforms
was the establishment in February 2014 of the Financial Stability Coordination Council (FSCC), a collaborative government body loosely modelled on the
US Financial Stability Oversight Council. The FSCC
brings together representatives from the SEC, the
Insurance Commission, the BSP, the Department of
Finance, and the Philippine Deposit and Insurance
Corporation. The council is intended to ensure the
various financial regulators cooperate to identify
and address important risks to financial stability.
Ephyro Luis B Amatong, an SEC commissioner, told
OBG the FSCC was so far looking mainly at exposures
to real estate. Philippines regulations have traditionally been relatively cautious on such exposures, but
the issue is receiving renewed attention as the business process outsourcing sectors rapid growth has
driven a flurry of construction.
Other recent reforms include an amendment to
the Code of Corporate Governance published by the
SEC in May 2014, which strengthened requirements
to disclose information adversely affecting a company or its shareholders.
Amatong told OBG the reform and others the SEC
was working on were aimed at aligning with best
practices in connection with ASEAN integration.
The foreign share of trading dropped slightly in 2014 to 49%
Mamangun said online accounts are especially

popular with Filipinos working abroad in the Middle
East and Singapore, many of whom invest through
tax-protected personal retirement accounts that are
similar to the 401K accounts that are common in
the US. He added that the PSE would like to see
greater domestic use of such accounts, especially
widespread adoption of employer contributions as
a benefit to supplement small public pensions.
OUTLOOK: The Philippine markets strong performance in a weak year for emerging markets bodes
well for the capital markets sector and was an important show of confidence by investors in the countrys broader economic prospects.
In addition, the development of a local corporate
bond market is also a promising sign and will reduce
the economys dependence on banks to finance
investment. The expected consolidation of the two
major exchanges would be in line with both regional and international trends and should make a
stronger and more resilient exchange business
better prepared to compete with regional peers.
Although retail investors

only accounted for around
10% of the market in terms
of trading volumes, their
share has grown quickly. By
the end of 2013 the
number of online accounts
reached 129,255, of which
more than 98% were
domestic retail investors.
Total market capitalisation of the PSE, 2008-14 (P trn)

15
12
6
SOURCE: PSE
The Philippines received low marks for disclosure

requirements in the World Banks 2015 Doing Business survey, which did not take the reform into
account. The Philippines also received low marks
overall for its protection of minority shareholders,
ranking 154th in that category out of 189 countries, down from 143rd in the 2014 survey.
In July 2014 the Insurance Commission permitted
insurers, reinsurers and mutual benefit associations
to invest in exchange-traded funds (ETFs), a move
that will support the PSEs efforts to encourage more
use of ETFs. Currently there is only one, First Metro
ETF, which tracks the PSEI, but it is lightly traded, as
international investors prefer to trade PSEI futures
listed in Singapore. Also, in March 2014 the SEC
began regulating domestic credit ratings agencies.
NEW TRADING PLATFORM & PRODUCTS: Meanwhile, the PSE was completing a major upgrade to
its trading platform. In December 2014 the PSE
began beta-testing its new PSEtrade XTS system,
which is a customisation of NASDAQs X-Stream platform. The new system replaced an NYSE platform that
had been introduced in 2010, and demonstrated the
PSEs commitment to catching up with the latest
exchange technology.
The PSE is planning to introduce equity lending for
the purpose of short-selling and developing an
options market after the new system is fully implemented, which was scheduled in 2015.
John Benette B Mamangun, the assistant vicepresident and investor relations officer at the PSE,
said the introduction of offshore products is complementary to the exchanges plans to introduce
share lending and derivatives.
It all ties together, facilitating the work of market-makers for ETFs and preparing the groundwork
for new derivatives products. We think it will make
the market more attractive for hedge funds and
increase liquidity by 5-20%, Mamangun said.
ONLINE PUSH: Another major project of the PSE has
been to promote retail online trading as a way of
boosting retail participation in equity markets. The
PSE introduced an online trading platform, PSETradex, in 2012, which allows brokers to offer online
trading services to their clients without having to
develop and host their own platform.
By the end of 2013 the number of online accounts
had grown to 129,255, of which more than 98% were
domestic retail investors. That was up by 51,061
from 2012, representing more than five-sixths of
the growth in total stock market accounts, according to the PSEs annual survey. The total number of
accounts grew from 525,850 in 2012 to 585,562 at
the end of 2013, with retail investors holding 96.2%
of the total accounts.
According to Mamangun of the PSE, in terms of
trading volumes retail investors still only accounted
for around 10% of the market, but their share was
growing most quickly. What were focused on is getting more liquidity in the market. Of course thats
easier when markets are going up, Mamangun said.
85
2008
2009
2010
2011
2012
2013
2014
86
CAPITAL MARKETS ANALYSIS
A total of 88 bonds were issued in 2014 compared with 59 in 2013
Growth factors
Year 2014 sees a surge in corporate bond issuance
Gross issuance through the

Philippine Dealing and
Exchange Corporation
fixed-income exchange
totalled $4.3bn in 2014, a
130% increase from the
$1.9bn issued a year earlier.
Domestic corporate bonds have a reputation as a small

and obscure niche market, but 2014 was a breakthrough year when the market finally appeared to be
finding its legs and growing into a major fundraising
venue. Gross issuance through the Philippine Dealing
and Exchange Corporation (PDEx) fixed-income
exchange came to P192bn ($4.3bn) in 2014, up 130%
from the P83.5bn ($1.9bn) issued in 2013. Outstanding issuance grew from 59 bonds issued by 21 companies worth P345bn ($7.8bn) at the end of 2013 to 88
bonds issued by 31 companies worth P470bn ($10.6bn),
according to PDEx. Remarkably, this happened during
a year when interest rates were expected to and did in
fact rise, which reduces the market prices of bonds.
GROWTH: 2014 was a very good year. The economy
has been very liquid, Renato H Peronilla, president and
CEO of PhilRatings, said. Executives involved in the market told OBG there were three factors driving the growth.
The first was that conservative fiscal policy had limited government issuance. The second was that many
of the major conglomerates have tapped out their ability to borrow from affiliated banks, which has been
more strictly limited by Bangko Sentral ng Pilipinas
(BSP), the central bank. The BSP prohibited banks from
lending more than 25% of their capital to a single borrower and has been treating all related parties as a single borrower. That mainly affects conglomerates that
own a bank and have used it to finance the groups
investments and business groups with large borrowing needs. Jose V Cruz, president and CEO of investment
bank Amalgamated Investments, told OBG that banks
are the main driver of the corporate bond market, supported by insurers and pension funds. He said that
banks often lay off bonds to their trust-account customers, whose investments do not count towards the
banks single-borrower limit. With interest rates rising, capital gains on fixed-rate investments arent great
anymore, but the deposit base is so strong banks dont
mind hanging on for three- to five-year maturities, he
said. The third reason for the growth is a surge in peso
liquidity since 2013, resulting from a BSP decision to

step back from use of special deposit accounts (SDAs),
interest-paying demand deposit accounts offered to
banks and other BSP-supervised financial institutions.
LIQUIDITY: SDAs were used to sterilise the BSPs interventions in foreign exchange markets through early
2013, when strong inward financial flows would otherwise have caused rapid peso appreciation. BSP assets
more than tripled between 2005 and 2012 from P1.3trn
($29.3bn) to P4trn ($90bn). The BSPs move to ban
pass-through accounts that gave broad access to SDAs
released much of that liquidity from sterilisation. Over
the 18 months after the BSP banned SDA pass-throughs,
SDA use dropped from P1.82trn ($41bn) in May 2013
to P957bn ($21.5bn) in November 2014. Most of the
released funds were shifted into commercial bank
deposits and the corporate bond market.
There has also been a surge in privately placed debt
securities, which are referred to as corporate notes.
Some public issues are structured as long-term time
deposits or short-term commercial paper, which are
grouped together with bonds in issuance data. Listed
issues require approval from the Securities and Exchange
Commission; privately placed corporate notes do not.
Even most listed corporate bonds are not actively traded. Although trading volumes have grown rapidly from
P11.1bn ($250m) in 2011 to P45.9bn ($1.03bn) in 2014,
that was still only 2% of equity trading volumes on the
Philippine Stock Exchange. For PDEx, corporate bond
trading made up 1% of its trading volumes in debt securities in 2014, 99% of which were in Treasury issues.
Lynette V Ortiz, managing director and head of global markets in the Philippines at Standard Chartered, told
OBG that most buyers are treating bonds as buy-tomaturity investments and strongly favouring the largest
companies. Buyers want the big names with sufficient
disclosure and a foreign rating or a strong local rating.
Ortiz said a more active repurchase agreement market would help liquidity and needs to develop first with
Treasury issues before moving into corporate bonds.
CAPITAL MARKETS INTERVIEW
Jose Pardo, Chairman, Philippines Stock Exchange
Opening doors
OBG talks to Jose Pardo, Chairman, Philippines Stock Exchange (PSE)
How can the ASEAN Corporate Governance Scorecard (ACGS) accelerate the establishment of an
ASEAN integrated market?
PARDO: The objective of integrating these economies
is not an easy task. With nearly 600m people, ASEAN
is indeed an attractive proposition. Over time, government functionaries and private sector business groups
have aligned themselves in terms of networks and trade
associations. This formation of ASEAN networks
inevitably creates standards to measure how one should
pursue work, and governance becomes a common
trend. One noteworthy initiative is ACGS, which enables
the formation of an integrated capital market by ranking the corporate governance of publicly listed companies within ASEAN and encouraging cross-trading
among investable firms.
In the case of the PSE, we are committed to the highest level of corporate governance, transparency and
integrity. We have also pushed for inclusivity so that
growth is not limited to one sector. In tandem with
higher levels of accountability and transparency, we are
now about to start our fourth year of the Bell Awards,
which identify companies, trading participants and
stockbrokers that excel. Within the next two to three
years, we will be able to identify companies that are
consistent in their standards and add them permanently to our corporate governance board.
How can the PSE encourage the inclusion of Visayas,

Mindanao or other non-traditional investors?
PARDO: The goal of the PSE has long been to expand
the investor base. Whereas previously we had half a million private investors, our goal is to reach the 3m mark
by expanding nationwide beyond Metro Manila.
The PSE has already extended its footprint into Visayas,
with a regional office in Cebu. To encourage Muslim
investors, who are mostly based in Mindanao, we have
a list of sharia-compliant firms that they can look at.
The PSEs decentralisation trend has largely been based
on urban centres, where growth originates. However,
as we see expansion in provincial centres, we respond

to market realities and seek out areas where we can
potentially sustain our presence. The exchange has
done extremely well compared to our peers, and the
best is yet to come.
What else can be done to expand access to capital

markets for medium-sized enterprises and nontraditional economic sectors?
PARDO: The goal is to attract new investors and protect them, especially those who are salaried workers,
have modest investable funds and have a more conservative risk appetite. We have advocated for and are
encouraging capital market players to launch new products that will ensure the safety of investments, such as
principal protect type of mutual funds, which will preserve the investors principal even if a stocks price falls.
Investors need to realise the availability of instruments
catering to specific needs and concerns. Only then can
they begin to learn how to hedge, read financial and
economic data, and make judgments on whether a
company represents a good prospect. Adhering to higher standards facilitates market education efforts, as it
restores confidence in the investor market.
Other instruments that could further deepen capital markets in the Philippines are the Personal Equity
and Retirement Account (PERA) law, which was enacted in 2008, and the real estate investment trust (REIT)
law. The PERA law provides tax incentives for contributions and earnings of funds invested in various PERAaccredited products.
The law applying to REITs has already been issued;
however, no company has yet registered due to some
stringent provisions. For instance, the tax structure is
deemed to not be competitive on a regional basis and
the law includes a provision that requires REIT companies to have a 67% minimum public float on the third
year of their rules listing. Due to this, property firms
have turned to other funding sources, and amendments to the law would prove favourable for investors.
87
88
CAPITAL MARKETS INTERVIEW
Eduardo V Francisco, President, BDO Capital & Investment

Corporation
Putting it all together

OBG talks to Eduardo V Francisco, President, BDO Capital & Investment
Corporation, and Co-chair, Capital Market Development Council
What changes or new developments can be expected from the domestic stock market?
FRANCISCO: The nations capital markets continue to
grow quickly, as can be seen through the year-on-year
(y-o-y) increase in bond issuances and higher numbers of initial public offerings. Our numbers still seem
small, relative to other countries, but they are understated. There is an abundance of domestic liquidity and
some clients opt not to go via capital markets, instead
utilising other options. For example, in many cases
when a client would normally want to issue a bond, banks
will instead offer a loan of up to 10bn ($225m).
As a result of this, the banking system is competing
with capital markets by making financing easier, which
creates the impression that our capital markets are
weak. However, once liquidity is reduced, we will see
normal capital market activity and higher numbers,
since banks are currently exceptionally strong and dominate the fixed-income market.
From the perspective of issuers, there are many
clients who are large enough to hit the capital markets
and be attractive to not just local investors, but also
regional ones. Thus, effort is going toward building
awareness among private firms, educating them about
the benefits of having new investors and the additional transparency requirements.
If a Filipino firm is listed, it enjoys a seal of good
housekeeping, access to capital and can be tapped by
foreign partners first. The benefits of listing are significant, but challenges remain, like changing the business culture and increasing disclosures. Consider the
bond market: y-o-y issuance growth has increased and
the Philippines is working to encourage smaller companies to tap the bond market, while also pursuing
cross-border listing opportunities.
What are the biggest challenges during the process

of regional capital markets integration?
FRANCISCO: The two areas we need to address during integration are the kinds of products and services
that will be offered in the equities and fixed-income

market, and the simplification of tax structures. These
go in tandem with the ongoing deployment of infrastructure and the development of a regulatory framework that makes the country more competitive.
From a private sector perspective, there is a willingness to pursue integration, and the Philippines presents a value proposition as an investment destination;
however, we first need to get our things in order. We
need to come up with more products and address existing regulatory issues, particularly related to the Bureau
of Internal Revenue, like the taxability of foreign
investors. Additionally, there have been efforts by the
Philippine Dealing Exchange to unify and simplify existing tax structures, as there are currently tax exempt
and non-tax exempt Philippine institutions that cannot trade among themselves. These issues confuse
local firms and would prove difficult for foreigners.
On the securities side, integration creates a situation
where the countries national priorities may conflict,
thereby creating the potential for smaller players to be
marginalised. For instance, the Philippines enjoys abundant liquidity domestically, but its product offering is
not diverse. When the Philippines is linked to other
countries in the region, if it does not exhibit the variety of investment products of its regional peers, ASEAN
neighbours may not invest in the country, while at the
same time, the countrys $40bn in liquidity could be
invested abroad. As a result, it is imperative to first fix
the domestic market, or else integration will see our
funds exit and we may not receive any in return.
Additionally, we have to educate our customers before
pushing for securities, because they are not yet sophisticated enough to buy equity, as they are accustomed
to fixed income. To protect customers, it would, for
example, be unwise to tell them to buy Malaysian-issued
equities or Islamic bonds, because they are not financially adept. The investor base will grow quickly from
its current 0.5% of the population, and this expansion
must be complemented with educational support.
CAPITAL MARKETS SHARE ANALYSIS

Share analysis & data provided by
BDO Capital & Investment Corporation
Aboitiz Power Corporation market ratios
AP price & index relative performance

8100
Price
Index
54
PERFORMANCE
Data as of October 27, 2014
Price (P)
40.25
6750
45
12M High
42.16
5400
36
12M Low
31.42
Market Cap (bn)
296.18
4050
27
MARKET RATIOS
2700
18
1350
Avg daily price (P)
Avg daily vol
0
Oct-13
Feb-14
Jun-14
3M
12M
38.97
36.80
3,631,418
3,421,851
Oct-14
Aboitiz Power
Power generation
THE COMPANY: Incorporated in 1998, Aboitiz Power Corporation (AP) operates as the power unit of
the Aboitiz Group. As a publicly listed firm, AP is considered to be one of the leading local players in the
power industry, with interests in a variety of privately owned power generation companies and distribution utilities throughout the country. APs power
generation business accounts for the bulk of the
companys earnings, contributing some 82% of its
total income in 2013. AP operates 39 generation
facilities across the Philippines, with an aggregate
capacity of over 2300 MW. The company also runs
seven distribution companies including the second and third largest in the country that service
over 800,000 customers.
PERFORMANCE: Consolidated net income amounted to P8.95bn ($201.4m) for the first half of 2014,
down 6% year-on-year (y-o-y). Excluding non-recurring gains and losses, net income came to P8.6bn
($193.5m), 21% lower than during the same period
in 2013. While income from APs power generation
business declined, it remained the largest contributor, accounting for 84% of the companys bottom
line. The weaker performance of the generation business was due to lower spot market sales, down 13%
y-o-y, and low water levels at two of the companys
hydropower plants, which constrained operations.
As 88% of APs overall generation capacity is contracted, the company is working to shift its supply
portfolio to capacity-based contractors and bilateral contracts for more stable and predictable cash
flows. The performance of APs distribution segment was down 11% y-o-y, from P1.63bn ($36.7m)
to P1.45bn ($32.6m) during the first half of 2014.
APs net income has been lagging since 2012, primarily due to the expiration of income tax holidays,
pricing structure changes and lower income contribution from power distribution. This has occurred
against the backdrop of insufficient power supply
in Mindanao and a lag in recovery of power costs in
the Visayas region. However, the completion of new

projects should improve performance going forward.
GROWTH DRIVERS: Based on the countrys 2012
Power Development Plan, peak demand for electricity is projected to rise by an average of 4.13% per
year in Luzon, 4.52% in Visayas and 4.75% in Mindanao, in line with positive economic growth in the
country. Rising income of Filipinos, mainly brought
about by the business process outsourcing industry
and overseas Filipino remittances, will also drive residential consumption. On the commercial and industrial side, at least a 10% rise in investment projects,
to P443bn ($9.97bn), was estimated for 2014, with
more business activities from both domestic and
foreign companies expected going forward.
AP is investing P80bn ($1.8bn) in greenfield and
brownfield projects across the country that will
increase its power generation capacity by about
2000 MW over the next five years. The company
recognises that demand for power will continue to
grow as the countrys economy accelerates, and is
prepared to seize the opportunity to meet this
demand. AP is well positioned to address the expected tightness in power supply in the country given
its large generating capacities, and its track record
and experience in the industry.
LOOKING AHEAD: AP has to contend with volatile
electricity spot prices, as it sells 12-13% of its capacity to the Wholesale Electricity Spot Market. Price
swings create uncertainty in the companys margins
and overall financial results. Additionally, price escalations for coal and oil could negatively affect income
from coal-fired and diesel-powered plants.
While APs new power ventures are not guaranteed to produce the expected returns, the group
has a strong track record over the past decade for
taking over old facilities and establishing new plants.
AP also ties up with key operating partners to provide relevant technical expertise and mitigate risks
associated with investing in new power ventures.
89
90

DMCI Holdings market ratios
DMC price & index relative performance

8100
Price
Index
18
PERFORMANCE
Price (P)
15.14
6750
15
12M High
16.63
5400
12
12M Low
9.37
Market Cap (bn)
201.02
4050
2700
1350
0
Oct-13
0
Feb-14
Jun-14
MARKET RATIOS
Avg daily price (P)

Avg daily vol
3M
12M
15.52
13.59
8,662,597
10,036,183
Oct-14
DMCI Holdings
Construction & power
THE COMPANY: Incorporated in 1995 to consolidate
the Consunji familys businesses, DMCI Holdings (DMC)
is a holding company engaged in construction, real
estate, water services, mining (coal and nickel) and
power generation. DMC has five operating subsidiaries:
D.M. Consunji (DMCI), DMCI Project Developers, Semirara Mining Corporation (Semirara Coal Corporation),
DMCI Mining Corporation and DMCI Power Corporation; and two affiliates DMCI-MPIC Water Company and Private Infra Development Corporation.
PERFORMANCE: DMC reported consolidated core
net income of P5.13bn ($115.4m) for the first half of
2014, nearly unchanged year-on-year (y-o-y) from
P5.14bn ($115.7m). The companys mining activities
significantly improved y-o-y, fuelled by larger sales volumes and higher average prices. Coal and nickel mining activities posted income growth of 542% and
708%, respectively. Likewise, DMCs real estate business increased by 29% thanks to higher sales from completed projects in the year to date.
However, these robust performances were offset
by negative income growth at the companys construction, power and water subsidiaries. Extended power
outages at the Calaca power plant brought down net
income of the power business by 94% y-o-y, while
lower reported completion revenue from new projects resulted in an 11% decline in construction income.
Headline net income also decreased, by 62% y-o-y, as
the company recognised a one-time gain from the partial sale of its water business in 2013.
GROWTH DRIVERS: Robust economic growth has
provided conglomerates with the opportunity to
expand and diversify into the most promising sectors,
such as mining, infrastructure, gaming and tourism,
and power and utilities. Their diversification strategy
also stems from the fact that there are declining
growth opportunities in their traditional lines of business, which they already dominate. Going forward,
engaging in these high-growth sectors bodes well
for financial performance as well as shareholders.
With over 40 public-private partnership (PPP) projects left to be tendered and the persistent need to
boost power capacity in the country, more Philippine
conglomerates are expected to get involved in these
activities, as they have the cash flows and financial
flexibility to take on capital intensive investments.
Projects in the pipeline include the construction and/or
rehabilitation of new or existing roads, ports, water
and power utilities, hospitals and transportation,
including rapid bus transit and elevated trains.
LOOKING AHEAD: DMC is reportedly bidding on the
LRT 2 PPP project alongside other conglomerates.
The winner would operate the existing 13.8-km LRT2 line from Recto Avenue to the Depot at Santolan
Street along Marcos Highway for 10 years, with a possible five-year extension. Furthermore, through its
subsidiary DMCI, the company aims to get involved in
construction and engineering for government PPPs.
Through Semiraras wholly owned subsidiary, Southwest Luzon Power Generation Corporation, DMC is
expanding its existing 600-MW Calaca coal-fired power plant in Batangas. The expansion will be carried out
in two phases, with the construction of two 150-MW
units during the first phase and two 350-MW units in
the second phase. This will bring the total expansion
of capacity to 1000 MW.
The operation of the plants first 150-MW unit,
which was originally scheduled to begin by December 2014, has been postponed until June 2015. In
spite of these delays, Semiraras medium-term outlook remains bullish, as it is one of the few power generation companies in the Philippines that stand to
benefit from the expected power supply shortage in
the Luzon area in the coming years.
In terms of its construction business, DMCs order
book as of end-June 2014 stood at around P20bn
($450m). Projects in the DMC pipeline include work
on the San Miguel Corporations NAIA Expressway
project, TPLEX Section 2, the NAIA Terminal 1 rehabilitation and two power plant projects in Batangas.

First Gen Corporation market ratios
FGEN price & index relative performance

8100
Price
Index
30
PERFORMANCE
Price (P)
25.65
6750
25
12M High
26.95
5400
20
12M Low
12.40
Market Cap (bn)
86.28
4050
15
MARKET RATIOS
2700
10
1350
Avg daily price (P)
Avg daily vol
0
Oct-13
Feb-14
Jun-14
3M
12M
24.60
19.47
3,921,853
3,929,070
Oct-14
First Gen
Power generation
THE COMPANY: Incorporated in 1998, First Gen Corporation (First Gen) has a portfolio of 18 power generation plants, which are predominantly contracted
for sale under long-term power purchase agreements or other energy sales agreements. First Gen's
power generation portfolio primarily relies on indigenous fuels or clean and renewable energy like natural gas, water, geothermal steam and wind.
The company is currently the leading clean and
renewable energy company in the Philippines, with
an installed capacity of 2948 MW. As of 2013, First
Gen accounted for about 17% of the total installed
capacity in the Philippines. Furthermore, according
to BusinessWorlds list of the top-1000 companies
in the Philippines in 2014, First Gen ranked 28th in
terms of gross revenue and 36th in net income.
PERFORMANCE: While revenues from the sale of
electricity in the first half of 2014 declined by 5%
year-on-year (y-o-y) to $935.47m, net income saw
robust growth of 32% y-o-y, to $102.59bn. The
decrease in revenues was mainly due to the lower
dispatch of the companys gas plants, a decline in
gas prices and reduced electricity generation following the temporary shutdown of Santa Ritas Unit 40.
First Gens strong profit growth is largely thanks
to the higher income contribution from Energy Development Corporation, FGP Corp and First Gas Power
Corporation, in addition to lower expenses of Red
Vulcan. This was partly countered by higher expenses incurred by First Gen coming from the interest
expense on its $300m fixed-rate bond issuance, as
well as the $7m expense on its various subsidiaries
due to the development of several projects.
After a challenging year in 2013, First Gen has
been in recovery in 2014, which will likely continue
in 2015. The companys weaker performance in 2013
was further aggravated by the impact of Typhoon
Hayain, which damaged some of the companys
assets. Over the medium term, First Gens share price
is likely to appreciate, driven by earnings growth
from new plant developments, which will add more

than 1300 MW in capacity over the next five years.
GROWTH DRIVERS: First Gen is continuing to pursue gas and renewable energy activities to boost its
capacity by around 30% in an effort to meet the
growing demand for power and expectations of tight
power supply in the country.
Investments to be made by First Gen and its renewable unit Energy Development Corporation (EDC)
will add 1342 MW of capacity by 2019, to bring the
capacity of the companys gas-fired facilities to 3000
MW. The expansion will include the 325-MW wind
and geothermal plants, the construction of the 100MW Avion plant in 2015, and the construction of the
414-MW San Gabriel gas-fired plant by 2016. There
are also plans to add another 100 MW of gas-fired
capacity by October 2015 and another 414-MW
gas-fired power plant in 2017.
These additions will largely depend on the level
of demand in the market, as well as the pace of
industry expansion. According to statements made
by the companys CEO, Federico Lopez, the Luzon grid
is expected to need another 600 MW of capacity to
avoid a power shortage in 2016.
Apart from the power plants, First Gen is also planning to develop a liquefied natural gas (LNG) import
terminal valued at $1bn in the vicinity of its three
gas-fired power plants in Batangas province. Slated
to start operations in 2018 or 2019, the LNG terminal will have an initial capacity of 1.5m tonnes per
annum, which will help supply the companys portfolio of gas-fired power plants.
LOOKING AHEAD: Utility companies in the Philippines are highly vulnerable to regulatory changes and
face the risk that the regulators could prevent a rate
hike or impose a price ceiling for their services. In
addition, any delays in the completion of the companys planned projects could mean that First Gen
would realise projected earnings at a later date,
which could in turn negatively affect its share price.
91
92

Lafarge Republic market ratios
LRI price & index relative performance

3000
Price
Index
12
PERFORMANCE
Price (P)
9.41
2500
10
12M High
10.13
2000
12M Low
8.293
Market Cap (bn)
54.802
1500
MARKET RATIOS
1000
500
Avg daily price (P)
Avg daily vol
3M
Oct-13
Feb-14
Jun-14
12M
9.78
9.33
630,450
1,013,825
Oct-14
Lafarge Republic
Building materials
THE COMPANY: Lafarge Republic, Inc (LRI), formerly
known as Republic Cement Corporation, was incorporated in 1966 and presently engages in the manufacturing, development and sale of cement, marble and
other kinds and classes of building materials for industrial or commercial purposes. LRI is a member of the
larger Lafarge Group, a global leader in building materials headquartered in France. The group operates in
64 countries, generating $21.5bn in sales in 2012.
Lafarge has four cement manufacturing plants in the
Philippines, located in Bulacan, Batangas and Rizal.
LRI's subsidiaries include Fortune Cement Corporation, Lafarge Iligan, Lafarge Mindanao, FR Cement Corporation and Lloyds Richfield Industrial Corporation. LRI
manufactures mainly Portland, Pozzolan and Type IP
cements. Cement is sold in 40-kg bags or in bulk, loaded
in bulk carriers at 800 and 1000 kg-equivalent bags per
load. Of the total revenues of LRI, cement accounts for
approximately 96%, with aggregates at 4%.
There have been talks of a global merger between
Holcim and Lafarge to create the worlds largest cement
maker, with both companies to consider whether further divestments would be necessary in areas where
there are overlaps or to satisfy regulatory requirements.
As part of the completion of the global merger, Holcim
Philippines is proposing to acquire three companies
under LRI that are engaged in cement-making and
related businesses, as well as a port terminal facility in
Manilas Harbour Centre, in line with the global merger of their parent companies.
PERFORMANCE: Net sales were up 4.68% in first-half
2014, mainly due to higher sales volume and higher
average selling prices. However, the cost of goods sold
and operating expenses grew at a faster rate of 5.78%
and 7.17%, respectively. This resulted in a 9% decline in
net income to P2.15bn ($48.4m). LRIs outlook remains
bullish given the expansion of its plant capacity and the
surge in construction activities in the country.
GROWTH DRIVERS: In 2013 gross value added of the
construction industry amounted to P377.74bn ($8.5bn),
up 11.13% y-o-y. This double-digit growth was driven

by the upsurge in both public and private spending, with
the former responsible for large-scale infrastructure
projects and the latter more concentrated on the housing, office and retail segments.
Construction activities in the country are expected
to remain strong going forward, supported by a
favourable macroeconomic picture. The Philippine Constructors Association predicted the industry would
grow by around 25%, from P300bn-310bn ($6.75bn6.98bn) in 2013 to P380bn ($8.55bn) in 2014.
The private sector will continue to account for a
large portion of growth, while construction activities
will be driven by infrastructure and construction spending, PPP projects and real estate development. The real
estate industry will be fuelled by growing remittances
from overseas Filipino workers (OFW), as well as growth
in the business process outsourcing industry, which
boosts demand for housing, office and retail spaces.
LOOKING AHEAD: To address cement demand growth
from massive infrastructure spending plans by both
the government and the private sector, LRI is investing in a new grinding mill in its Norzagaray plant to boost
production capacity. The new mill will have an 850,000tonne-per-annum capacity and is slated to start operations by the second quarter of 2015. The Teresa plant
in Rizal is also getting a new mill, with a target commissioning date of January 2015. It will also add 850,000
tonnes of capacity. Thanks to the two mills, LRIs production capacity will expand by 22% to 9.4m tonnes by
mid-2015, up from the current 7.7m tonnes.
Political issues are the primary concern for LRI, as
they have the potential to affect the timely rollout of
projects. Concerns over asset price bubbles in the real
estate sector are also at the forefront. Lastly, a sudden
reversal or slow down in global economic growth could
greatly impact the inflow of OFW remittances and the
number of firms coming into the country to outsource
some of their business functions both of which could
negatively affect demand for housing and office space.

Petron Corporation market ratios
PCOR price & index relative performance

8100
Price
Index
18
PERFORMANCE
Price (P)
11.86
6750
15
12M High
14.30
5400
12
12M Low
11.30
Market Cap (bn)
111.19
4050
MARKET RATIOS
2700
1350
Avg daily price (P)
Avg daily vol
0
Oct-13
Feb-14
Jun-14
3M
12M
11.97
12.80
10,639,061
6,854,388
Oct-14
Petron Corporation
Oil refining
THE COMPANY: Petron Corporation (PCOR) was
incorporated in 1966, with a 68% controlling interest held by San Miguel Corporation. PCOR refines
imported crude oil and is involved in the marketing
and distribution of a variety of petroleum products
in the Philippines and Malaysia.
PCOR is the largest integrated oil refining and marketing company in the Philippines, maintaining its
industry leadership with a market share of nearly 37%
and supplying almost 40% of the countrys oil requirements. The company operates the largest oil refinery in the country, the Petron Bataan Refinery (PBR),
with a rated capacity of 180,000 barrels per day
(bpd). They also have 30 depots and terminals scattered across the country, as well as over 2200 service stations, supplying assorted petroleum goods to
resellers and industrial customers.
PCOR acquired ExxonMobils subsidiary and downstream business, Esso Malaysia, in March 2012,
renaming it Petron Malaysia Refining & Marketing
(PETM). It is the third-largest oil company in Malaysia,
with a market share of almost 17%, behind Petroliam Nasional and Shell Refining Company.
PETM operates the Port Dickson Refinery (PDR),
which has a rated capacity of 88,000 bpd and produces an array of petroleum products. They also
have seven depots and terminals across Malaysia,
with more than 560 service stations nationwide,
providing commercial, industrial and retail fuels.
PERFORMANCE: PCORs net income grew by a robust
168% to P3.14bn ($70.65m) in the first half of 2014,
driven by greater sales volumes, a higher average selling price, better margins and a reduction in non-operating charges. The sales volume of the companys
Philippine and Malaysian operations increased by
10% and 6% y-o-y, respectively, to 25.1m and 18m
barrels each, on stronger industrial sales and a widening service station network.
Meanwhile, the impact of non-operating charges
on the companys bottom line over the period was
relatively significant, dropping from P2.91bn

($65.48m) to P1.82bn ($40.95m).
GROWTH DRIVERS: PCORs $2bn Refinery MasterPlan Phase 2 is 98% complete and on its final stages,
with full commercial operations expected in 2015.
It will utilise 100% of the 180,000-bpd capacity of
PBR, which is currently operating below 80%, producing less than 144,000 bpd. The upgraded refinery will provide the necessary flexibility to import and
process cost-efficient crude oil varieties from different country sources and convert low-margin fuel
output into a broader range of white gas products,
such as liquefied petroleum gas, diesel and gasoline.
This will also make PCOR the only company capable
of producing Euro-IV-compliant fuels.
In addition, PCOR plans to increase its service station network by 560 per year, to reach 5000 stations
by 2018, up from the current 2200 stations nationwide. The strategy is to initially build micro-filling
stations with just a few dispensing pumps that can
be easily scaled up as demand strengthens.
Turning to its international operations, PETM is
upgrading the capacity utilisation of the PDR, which
is currently operating at 51% of its 88,000-bpd capacity. At the same time, PETM is converting, renovating and expanding its service station network in
Malaysia. About $1.2bn will be invested in PDR, with
another $800m allotted for the service stations.
On the local front, stable demand for gasoline has
been seen, and vehicle sales for 2015 are expected
to increase to 300,000 units, up from an estimated
250,000 units in 2014. According to data from the
IMF, the Philippines has indeed entered the motorisation stage, having reached a real GDP per capita
of $4961.67 as of April 2014.
LOOKING AHEAD: Lower oil prices are likely to result
in a squeezing of margins for PCOR. Furthermore,
inventory losses are possible, as the company is
exposed to a 30-45 day lag between the pricing of
crude oil and the sale of refined petroleum products.
93
94

SM Prime Holdings market ratios
SMPH price & index relative performance

8100
Price
Index
24
PERFORMANCE
Price (P)
17.10
6750
20
12M High
19.58
5400
16
12M Low
14.10
12
Market Cap (bn)
475.71
4050
MARKET RATIOS
2700
1350
Avg daily price (P)
Avg daily vol
0
Oct-13
Feb-14
Jun-14
3M
12M
16.80
16.03
13,313,684
17,538,435
Oct-14
SM Prime Holdings
Mall operations
THE COMPANY: SM Prime Holdings (SMPH) is the
Philippines' largest mall operator. Publicly listed since
1994, SMPH owns and runs world-class malls all over
the country, providing millions of square metres of
floor area for fully integrated shopping, dining, and
entertainment experiences.
In 2013 SMPH was reorganised as the property
holding firm of the SM Group, absorbing SM Land,
SM Development Corporation, Highlands Prime and
SM Hotels and Convention Corporation, among others. The merged entity is better equipped to undertake integrated property developments or lifestyle
cities, which combine the offerings of malls, residences, offices, hotels, and convention and leisure
facilities. SMPHs total land bank now exceeds 900
ha. Over time the company aims to become one of
the largest property players in South-east Asia.
As of the end of March 2014, SMPH was 51.03%
directly owned by SM Investments Corporation (SM),
with another 25.72% held by the Sy Family. SM, effectively the parent company of SMPH, is a publicly
traded Philippine corporation, having listed its common shares in 2005. SM and its subsidiaries are
referred to as the SM Group.
PERFORMANCE: SMPHs net income grew by 11.72%
to P9.80bn ($220.5m) in the first half of 2014, mainly driven by a 7% increase in consolidated revenues
to P33.42bn ($751.5m). Rental revenues, which
accounted for more than half of the total, were up
12% to P17.67bn ($397.6m), thanks to the opening
of new malls and the expansion of existing facilities.
SMPH has a robust earnings outlook, as the property sector continues to benefit from the increasing affluence of Filipinos and strong business process
outsourcing growth, which fuels demand for housing, retail and leisure establishments. SMPHs residential segment is in recovery, while its investment
properties continue to provide steady growth.
GROWTH DRIVERS: SMPH unveiled a five-year
roadmap aimed at doubling its income from P16.2bn
($364.5m) in 2013 to P32bn ($720m) by 2018, and

boost its return on equity into the mid-teens, up
from the current 11%. Its strategy is to develop more
lifestyle cities similar to its Mall of Asia complex.
The companys capex is expected to total P162bn
($3.65bn) from 2014 to 2016, about 57% of which,
or P109bn ($2.45bn), will be spent on building more
malls. Around 29%, or P56bn ($1.26bn), will go
towards residential condominiums; 10%, or P19bn
($427.5m), will be spent on commercial office spaces;
and the remaining 4%, or P8bn ($180m), will be allocated for hotels and convention centres.
SMPH continues to channel most of its capex
spending approximately two-thirds of the total
into investment assets that help produce more stable rental income from its mall and office leasing
operations. SMPH is estimated to account for at
least 70% of retail mall space in the Philippines. As
such, we expect SMPH to be more resilient in case
of economic downturns that usually impact the
developmental residential and leisure segments.
The addition of new businesses to SMPH could give
the company a better earnings profile. Whereas
SMPH used to grow by a steady 10-12% every year,
the residential development, commercial space and
hotel segment could increase the companys annual growth to about 15-18%.
LOOKING AHEAD: To support its huge capex and
help meet debt maturities, SMPH will require nearly P100bn ($2.25bn) in additional capital between
2014 and 2016, which the company will likely raise
through a combination of debt and equity. SMPHs
debt level is expected to hit P140bn ($3.15bn)
by the end of 2014 and cross the P180bn ($4.05bn)
mark by 2017, as the group taps new borrowings
in support of its property portfolio expansion.
Nevertheless, SMPHs gearing ratio is expected to
remain manageable and its sizeable operating cash
flows P12.68bn (285.3m) as of June 2014 should
provide sufficient interest cover for the company.
95
Insurance
Industry grows despite the effects of natural disasters
Microinsurance penetration the highest in the region
State-run insurance scheme expands coverage
Higher capital requirements encourage consolidation
A new insurance code passed in 2013 is implemented
Coverage schemes based on weather data gain traction
96
INSURANCE OVERVIEW
Recent legislation on health insurance has expanded coverage
Steady through the storm

The industry expands despite the effects of natural disasters
Membership in the
state-run social health
scheme has risen steadily
from its inception, reaching
65.44m in 2013, or nearly
70% of the population.
Insurance penetration as a
portion of GDP stood at 2%
in 2013, after the industry
expanded by a
region-leading 38% in
2012, driven by sales of
equity-linked variable
insurance products.
With development dating back nearly 200 years, the

Philippine insurance sector is among the regions most
mature and competitive, expanding steadily in recent
years despite serious challenges in 2014. The nation
remains prone to natural disasters, as evidenced by
Typhoon Haiyan, a category-five storm that caused billions in damage when it struck in November 2013. It
cost the sector millions and dampened industry growth
the following year. The industry stayed resilient, however, with continuing growth in investment and assets
in 2014. While the life segment remains the driver, the
non-life segment holds considerable potential. State
investment in crop and health schemes underpins
efforts to expand critical coverage nationwide.
Meanwhile, the burgeoning micro-insurance segment has helped turn the Philippines into Asias leading market for microfinance. Although the industry
remains somewhat crowded and highly competitive, a
recent push for consolidation, including ongoing hikes
in capital requirements, should keep the sector on a
strong upwards trajectory in 2015 and beyond.
STRUCTURE: The Philippine insurance sector is supervised by the Insurance Commission (IC), which falls
under the Department of Finance (DoF). Established
in 1949, the IC supervises and regulates operations at
insurance and reinsurance companies, as well as preneed firms that provide contracts for the provision of
future payments to services including life, pension, education and interment. All agents, underwriters, brokers, adjusters and actuaries must be licensed, and all
licences must be renewed every three years.
The Philippines was an early adopter of social insurance schemes, beginning in 1937 with the Government Service Insurance System. In 1969 the Philippine
Medical Care Commission was created to oversee implementation of universal health insurance, and in 1995
the government passed reforms under the National
Health Insurance Act, which led to the creation of the
Philippine Health Insurance Corporation (PhilHealth).
PhilHealth was mandated with providing social health
insurance coverage to all Filipinos within 15 years, and

it has seen membership rise steadily since its inception,
reaching 65.44m in 2013, or nearly 70% of the population. This growth has been supported by recent legislation, including the passage of the National Health
Insurance Act in June 2013, which promises coverage
for all Filipinos, including indigents and the disabled,
and the introduction of expanded, lifelong health coverage for senior citizens in November 2014.
As of December 2013, the countrys insurance sector was composed of 63 brokers, 31 life insurers, 71
non-life insurers and one reinsurance firm, compared
to 29 life, 79 non-life and one reinsurer in December
2012. The life segment is dominated by foreign firms,
including Sun Life, American Life & General Insurance
and Frances AXA, and private firms have been in the
market since Lloyds set up operations in 1829. Local
insurers make up most of the non-life market, led in
gross written premiums (GWPs) by Malayan Insurance.
The non-life market is quite concentrated, with the
top-15 insurers holding nearly 70% of segment GWPs.
At present there are no restrictions on foreign direct
investment in the sector, though overseas firms must
meet higher capital requirements than locals. According to Swiss Re, insurance penetration to GDP stood at
around 2% in 2013, after the industry expanded by a
region-leading 38% in 2012, driven by sales of equitylinked variable insurance products, which offer aboveaverage yields amidst a low-interest-rate environment.
GROWTH: According to Fitch Ratings, the increase in
total premiums in 2013 was driven by strong growth
in the life sector, where variable-unit policies have
become increasingly popular. Meanwhile, the non-life
sector grew more slowly, due primarily to higher claims
from catastrophes, but also to the heavy tax burden
on insurers, which amounted to nearly 27% of premiums. Indeed, the Philippine tax rates on insurance,
which are among ASEANs highest, remain a major
industry concern: insurers pay 12.5% for documentary
stamps, a 12% value-added (or premium) tax, a 2% fire
INSURANCE OVERVIEW
services tax, local government taxes, a 30% corporate

income tax and a 20% tax on interest.
Data from the IC shows the industrys total assets
grew by 18.8% in 2013 to reach P891.8bn ($20.1bn),
rising by a further 17% by the third quarter of 2014 to
P1.04trn ($23.4bn), with the life segment accounting
for nearly 85% of the total. Although premiums increased
by 37.3% in 2013, to P198.13bn ($4.5bn), they declined
by 15.3% year-on-year (y-o-y) in the third quarter of
2014 to P132.87bn ($3bn). Losses incurred rose by
16.9% in 2013, to P63.65bn ($1.4bn), and were up
12.24% y-o-y in the third quarter of 2014, at P52.28bn
($1.2bn). Following 11.65% growth in 2013, to P14.65bn
($329.6m), net income shrunk by 15.6% y-o-y in the third
quarter of 2014 to P12.31bn ($277m).
LIFE & NON-LIFE: In the life segment, total assets grew
by 18.89% in 2013 to reach P738.52bn ($16.6bn),
increasing by a further 19% year to date in September
2014, to P878.85bn ($19.8bn). Premiums hit P171.21bn
($3.9bn) in 2013, a 42.27% y-o-y increase, but fell 19.4%
y-o-y in September 2014 to P109.25bn ($2.5bn), representing some 82% of industry premiums. Losses
incurred were up 13.9% in 2013, at P49.9bn ($1.12bn),
and up 12.1% y-o-y in the third quarter of 2014, at
P42.56bn ($957.6m). Net income in the segment rose
by 31.63% to P13.83bn ($311.2m) in 2013, but was down
10.5% y-o-y in September 2014, at P10.68bn ($244.4m)
For the non-life segment, assets were up 18.6% in
2013 at P153.28bn ($3.5bn), and increased by another 7.1% by September 2014, to P164.2bn ($3.69bn).
Meanwhile, GWPs grew by 4.4% y-o-y in 2013 to
P54.57bn ($1.2bn), and kept pace in the first nine
months of 2014, up 0.23% y-o-y at P41.77bn ($939.8m).
Losses incurred increased by 29% in 2013 to P13.8bn
($310.5m), and were up 12.85% y-o-y in the first nine
months of 2014, to P9.72bn ($218.7m). Net income fell
by 68.6% to P822.2m ($18.5m) in 2013 and was down
38.9% y-o-y in September 2014, at P1.63bn ($36.7m).
FUTURE PLANS: The IC hopes to see insurance penetration rise to 3% of GDP in the coming years, according to its commissioner, Emmanuel Dooc. Premiums
are expected to rise by 15-20% in 2014, Dooc told local
media, driven by new products and distribution channels, as well as micro-insurance growth. For its part, the
IC plans to introduce reforms, including new oversight
of health maintenance organisations previously the
task of the Department of Health and the establishment of the Earthquake Protection Insurance Corporation, set to provide mandatory earthquake coverage.
With ASEAN integration ahead and continued growth
in business process outsourcing, emerging risks such
as cyber crime, fraud or corporate liability are also likely to be on the horizon for the Philippine industry.
NEW CODE: Senate Bill 3280, approved in August 2013
and known as the New Insurance Code, is expected to
have a significant impact on revenues, penetration,
quality, stability and competitiveness. One notable
change is a measure to boost capitalisation and encourage consolidation. It also strengthens the ICs regulatory powers; broadens the self-insured definition to
protection of depositors, third parties and clients; and
97
Typhoon Haiyan, a category-five storm, caused billions in damage
permits new payment channels, like salary deductions.

Under the new law, the list of declarable assets has been
expanded to include mutual funds, real estate investment trusts, salary loans and special deposit accounts,
while the investment areas of insurance firms have
widened to include investments of up to 25% of declared
assets in obligations issued or guaranteed by local or
foreign banks. These changes are reflected in rising
industry investments, up 7.69% in 2013 and 8.87% yo-y in the third quarter of 2014 at P799.44bn ($18bn).
CAPITAL REQUIREMENTS: With the market at risk of
oversaturation and competition increasingly strong,
the government has supported industry consolidation,
most notably through new capital rules. In June 2012
the DoF enacted regulations raising capital requirements for both life and non-life insurers, using a staggered timeline later adopted in the New Insurance
Code. According to Fitch, these measures have made
it difficult for small players, with 32 firms placed under
conservatorship and liquidation processes at end-2012.
As such, consolidation will likely take the shape of some
small players ceasing to operate altogether, with merger and acquisition activity restricted to the top-20 firms.
Under the new rules, any company more than 60%
foreign-owned must have at least P500m ($11.3m) in
paid-up capital; those that are 40-60% foreign-owned
needed P400m ($9m) by the end of 2014. All firms with
Total industry premiums

reached $4.5bn in 2013, an
increase of 37.3% over
2012, while the value of
losses incurred rose by
16.9% to $1.4bn.
Insurance indicators, 2012-14 Q3 (P bn)

2012
2013
2014 Q3
Total assets
750.42
891.8
1043.08
Total liabilities
586.39
718.65
806.42
Total net worth
164.03
173.15
236.66
Total paid-up capital
35.95
37.33
39.49
Total investments
511.54
550.86
799.44
Total premiums
144.34
198.13
132.87
Total losses incurred
54.45
63.65
52.28
Total net income
13.12
14.65
12.31
SOURCE: Insurance Commission
98
INSURANCE OVERVIEW
The government remains dedicated to its policy of extending health coverage to every citizen by 2016
To reduce the burden on

hospitals, the state health
insurance company plans
to accredit a number of
local-level health centres,
birthing clinics and dialysis
clinics.
over 40% foreign equity will need P600m ($13.5m) by

end-2016, P800m ($18m) by end-2018 and P1bn
($22.5m) by end-2020. In contrast, capital requirements for locally owned firms stood at P250m ($5.6m),
although this rose to P400m ($9m) on December 31,
2014, and will follow the same increases, on the same
timeline as foreign companies, to reach the same minimum capital requirement of P1bn ($22.5m) by 2020.
All new insurers are required to have P1bn ($22.5m) in
capital, while existing micro-insurers are subject to 50%
of the rates of applicable minimum requirements.
NATURAL DISASTERS: According to Fitch, the non-life
sector is expected to report a net loss in the fourth quarter of 2014 due to claims from Typhoon Haiyan. Catastrophe risk modelling firm AIR Worldwide estimated that
insurers paid just a fraction of the $14.5bn-odd in damage caused by the storm, with the agency reporting in
2013 that Haiyan could cost the industry as much as
$700m, with insured losses of at least $300m. This was
largely mitigated by low insurance penetration.
Indeed, natural disasters represent a significant hazard for Philippine insurers. According to the Office of
Foreign Disaster Assistance and the Centre for Research
on the Epidemiology of Disasters, the country ranks third
globally in terms of the number of natural disasters it
experiences each year, and is under almost constant
threat of major disasters, with an average of 20 major
weather events annually. Its geographic location on
the Pacific Rim of Fire also leaves it vulnerable to earthquakes and volcanic eruptions (see Economy chapter).
The frequency of natural disasters, combined with
rising capital requirements, should cause a wave of
mergers and acquisitions in the industry, according to
Fitch. Some consolidation has already occurred in recent
years, with the number of active non-life companies in
the country falling from 79 to 71 y-o-y as of December 2013. In line with the IC, Fitch welcomes industry
consolidation, saying it views tightened regulation in a
positive light, as it weeds out under-capitalised players and should reduce industry overcrowding while the
Philippines prepares for the ASEAN Economic Community framework in 2015.

HEALTH COVERAGE: As the government remains dedicated to extending health coverage to every citizen by
2016, PhilHealth has become the largest recipient of
state subsidies more than half of the 2014 total at
P35.31bn ($794.5m), according to the DoF. Now in its
20th year of operation, PhilHealth has seen a sharp rise
in the number of citizens covered in recent years: membership grew more than sevenfold in the 10 years to
2013, reaching 65.44m from 8.8m in 2003. Such growth
has been driven in part by state subsidisation of premiums for indigent Filipinos under the Department of
Social Welfare and Developments National Household
Targeting System for Poverty Reduction, which provides coverage for an estimated 14.7m people.
Enrolment is set to grow further in 2015 following
a number of reforms announced in November 2014.
These include plans to expand coverage for senior citizens, establish new health care providers and introduce new benefits for members. According to Owen
Magalona, chief social insurance officer of PhilHealth
Bacolod, seniors who have been PhilHealth members
for at least 10 years will become lifetime members,
while member benefits will expand to include a P600,000
($13,500) package for catastrophe coverage.
To reduce the burden on hospitals, PhilHealth plans
to accredit several local-level health centres, birthing
clinics and dialysis clinics. It also relaunched its Primary
Care Benefit package under a new brand, TSeKap, which
covers indigent and sponsored members, members of
organised groups, non-maritime overseas Filipino workers and employees of the Department of Education.
Focusing on outpatient coverage, TSeKap aims to
increase the role of health centres, which will offer
hospital referrals if needed. PhilHealth has also pledged
to reduce average claim processing time from 60 to 18
days, while a new case rate system will offer fixed benefits for specific conditions.
MICROINSURANCE: Although overall penetration
remains low in the Philippines comprehensive policies are still viewed as more of a luxury than a necessity the microinsurance segment holds considerable
potential for low-income Filipinos. In December 2014,
the Economist Intelligence Unit reported that the central banks move to establish a financial inclusiveness
body has helped the Philippines become Asias leading
Life insurers by net worth, 2013 (P bn)*

1. The lnsular Life Assurance Co.
28.42
2. Philippine American Life & General lns.
26.46
3. Sun Life of Canada
12.89
4. Manufacturers Life lns. Co.
7.82
5. United Coconut Planters Life Assurance
7.59
6. BPI-Philam Life Assurance Corp.
3.53
7. Sunlife Grepa Financial
2.87
8. Philippine AXA Life lnsurance Corp.
2.6
9. Pru Life lnsurance Corp.
2.44
10. Benecial Life lnsurance Co.
1.54
SOURCE: Insurance Commission
*Based on submitted annual statements
INSURANCE OVERVIEW
Comprehensive insurance protection is generally viewed as a luxury
these is a data-based scheme called weather index

insurance (WII). In January 2014, the UN Office for Disaster Risk Reduction partnered with multinationals
Willis Group and Munich Re to develop a WII scheme
for the Philippines as way to deal with crop damage.
Under this plan, payments will be set at a predetermined
amount when a specific calamity threshold, such as rainfall or wind strength, is crossed (see analysis).
OUTLOOK: Despite a challenging year, the sector
remained healthy in 2014, with solid growth in the life,
health and micro-insurance segments underpinning
state efforts to expand coverage for low-income people through targeted investment. Although natural disasters remain a serious threat to the industry, new crop
insurance prototypes could see weather-index-based
offerings gain commercial traction in the coming years.
Meanwhile, the industry remains open to foreign investment, despite a high tax burden and rising capital
requirements. Indeed, recently enacted legislation,
though painful for some smaller players, should improve
industry stability and spur consolidation in 2015, keeping the industry on a steady long-term growth path.
The country has the

highest microinsurance
penetration rate in the Asia
and Oceania region, at
21.35% of the population,
well above Thailand
(14.02%), India (9.22%),
Bangladesh (6.2%) and
Malaysia (3.84%).
Total assets, 2012-14 Q3 (P bn)

Life
Non-life
1000
SOURCE: Philippines Insurance Commission
market for microfinance products, including microinsurance. The National Strategy for Microfinance, formed
in 1997, kick-started efforts to promote microinsurance, which were formalised by an insurance circular
in 2006 and amended by a second one in 2010.
The first of these set initial microinsurance parameters, such as caps on daily premiums and guaranteed
benefits which were amended by the New Insurance
Code in August 2013. Today, premiums are limited to
7.5% of the daily minimum wage for non-agricultural
workers. Benefits are capped at 1000 times this figure.
The second circular made the insurance market more
accessible to the public, offering accreditation for life
and non-life microinsurers, cooperative insurance societies and mutual benefit associations to sell microinsurance products. New distribution channels were also
approved, including microinsurance agents and brokers,
rural banks, microfinance institutions, non-governmental organisations and cooperatives. Capital requirements for microinsurance providers were lowered.
Microinsurance has grown rapidly as a result of public and private sector efforts. According to a 2013
report by the Registered Financial Planners Institute and
German development firm GIZ, which partnered with
the government and the Asian Development Bank to
develop the nations microinsurance industry, there
were 35 commercial firms selling microinsurance products as of end-2012, including 17 life and 18 non-life,
while the IC had approved 80 new microinsurance products, including 54 life and 26 non-life products. Another 17 mutual benefit associations had been licensed
to sell microinsurance products, the report said.
The IC reported in November 2014 that 27.96m Filipinos had microinsurance coverage in 2013, with penetration rising from 7.22% in 2009 to 28.62% in 2013.
According to a separate 2013 report by Munich Re, the
Philippines has the highest microinsurance penetration
ratio in the Asia and Oceania region, at 21.35% of the
population, well above Thailand (14.02%), India (9.22%),
Bangladesh (6.2%) and Malaysia (3.84%.) In a February
2014 report, Fitch lauded the administration of President Benigno Aquino III for its progress in promoting
microinsurance schemes, forecasting that strong growth
for the segment would continue in the coming years.
CROP INSURANCE: Though agriculture and fishing
account for 15% of GDP and one-third of the workforce,
Filipino farmers remain vulnerable to crop damage
caused by natural disasters. In November 2013, the UN
Food and Agriculture Organisation reported that crop
losses caused by Typhoon Haiyan reached $110m. Total
damage to the agriculture sector was more than twice
that, while the typhoon destroyed an estimated 153,495
ha of rice paddy, maize and high-value crops including
coconut, banana, cassava, mango and vegetables. In
December 2014, tropical storm Hagupit Filipino for
whip made landfall four times in the Philippines. Crop
damage in the eastern Visayas region alone was estimated at P385m ($8.7m) by the Insurance Journal,
while total economic damages stood at around 0.5%
of GDP, spurring the government and private sector to
ramp up offerings in disaster crop insurance. One of
99
800
600
400
200
2012
2013
2014 Q3
100
INSURANCE ANALYSIS
Insurance policies based on weather indices are gaining traction
Against the worst

The range of schemes for natural disaster insurance broadens
The state-owned crop
insurance company insures
agricultural assets against
natural disasters at
prevailing industry rates,
benefitting farmers hit by
recent typhoons.
Under weather index

insurance, all policyholders
in a defined area receive
payouts based on the same
contract and
measurements via the
same weather station for
an agreed time period.
Given the high risk of natural disasters in the Philippines,

agricultural insurance represents a high-potential
growth channel and a vital support system for the sector. For decades, the Department of Agriculture has
sought to raise agri-insurance penetration through its
state-run scheme. In recent years, though, a rising number of private firms have begun promoting coverage
based on weather indices, which should furnish muchneeded insulation from some of the worst natural disasters. According to a 2013 report by the Asia-Pacific
Adaptation Network (APAN), losses to major crops due
to climate-related events cost the country millions each
year. Between 2007 and 2011, typhoons wrought $1.2bn
in losses for rice paddy crops alone. More recently, crop
losses from Typhoon Haiyan, which struck the Philippines in November 2013, totalled $110m, the UN Food
and Agriculture Organisation estimates.
GOVERNMENT SCHEME: The state-owned Philippines
Crop Insurance Corporation (PCIC) was set up in 1978
to implement the governments agricultural insurance
programme. Its chief mandate was to insure farmers
against losses arising from natural calamities, plant diseases and pest infestations of palay (unhusked rice),
maize and cash crops. Today, its offerings include palay,
maize and high-value commercial crop insurance as well
as coverage for livestock, non-crop assets, fisheries
and term packages. As of 2012, the PCIC covered 6%
of the countrys paddy farmers, with plans to expand
this to 9-10% in the coming years and introduce coverage for high-value coconut crops, according to APAN.
NATURAL DISASTERS: One of the PCICs most useful
schemes is insurance of agricultural assets against natural disasters, offered at prevailing industry rates. Such
policies have benefitted farmers hit by recent typhoons.
In October 2014, the PCIC awarded P1m ($22,500) in
indemnity cheques to farmers in Tuguegarao City whose
crops had been damaged by Typhoons Luis and Mario
in September 2014. In the aftermath of Typhoon Haiyan,
the agriculture registry granted P28m ($630,000) to
Cebu Province, whose Governor Hilario Davide III also
announced plans to renew P8m ($180,000) worth of

agriculture and fisheries premiums in October 2014.
Under PCIC policies, payments to Cebu for destroyed
rice crops will average around P40,000-50,000 ($9001125). In December 2014, PCIC said it had paid P30m
($675,000) to agricultural claimants in the western
Visayas region since January 2014, benefitting 7407 policyholders, mostly rice farmers. With state subsidies and
climate change awareness rising, the PCIC expects
nationwide enrolment to reach 1m farmers in 2015.
BY THE WEATHER: Conventional crop or livestock
insurance relies on direct measurement of damages
incurred, yet field assessments are costly and often
unfeasible, especially in areas with lots of small-scale
farmers. Weather index insurance (WII), by contrast, pays
claims based on objective weather data, such as rainfall or temperature. All policyholders in a defined area
receive payouts based on the same contract and measurements via the same weather station for an agreed
time period. By eliminating the need for in-field assessments, WII has thus become an attractive and viable
channel for agri-insurance in the country.
In recent years, it has been catching on. The PCIC partnered with the International Labour Organisation to run
a pilot WII project in select communities, completing
three test cycles by March 2013, and also partnered
with German development firm GIZ to roll out an AreaBased Yield Index Insurance in South Leyte. The private
sector has been kicked off programmes such as the
Philippines Coop Life Insurance and Mutual Benefit
Services, launched in partnership with GIZ and Munich
Re with the aim of protecting cooperatives loan portfolios against weather-related losses of palay and maize
crops. In January 2014, the UN Office for Disaster Risk
Reduction announced plans to roll out a WII scheme
in partnership with private multinationals. Perhaps
most promising, in September 2014 PGA Somo Insurance Company said it would launch the countrys firstever WII policy for farmers on Mindanao Island, setting
the stage for more commercial activity in the segment.
102
INSURANCE INTERVIEW
Peter G Coyiuto, President & CEO, First Life Financial Company
Something to protect
OBG talks to Peter G Coyiuto, President and CEO, First Life Financial Company
What potential is there for growth in the life insurance segment, and how can penetration be raised?
COYIUTO: There is a strong positive correlation between
insurance penetration and per capita GDP growth.
Whatever the sophistication of products or strength
of distribution networks, for protection products to
become viable basic necessities first need to be covered and disposable income available. Once the population has protectable assets and income, insurance
can play a role in nurturing wealth creation. The Philippines is one of ASEANs most underpenetrated markets for insurance, whether measured by number of people insured or the ratio of premiums to GDP. Malaysias
per capita GDP of roughly $11,000 and Thailands of
about $6000 are reflected in their higher respective
insurance penetration levels.
Pushing financial literacy is one way to accelerate penetration, yet this will not generate significant results
unless people first have money to invest. In countries
like China, only once per capita GDP picked up did financial literacy have an impact on penetration growth. The
Philippines susceptibility to natural disasters has led
to some growth in overall awareness of the value of
protection products, in both the life and non-life segments, but not enough to create an inflection point in
insurance penetration. Even overseas Filipino workers,
despite their higher incomes as reflected in remittances, do not carry much weight in insurance companies premiums income. This remains a tough segment
to tap given regulations that make it hard for local
insurers to engage with overseas Filipinos. Traditionally, such workers are reached via manning agencies and
show the most presence in medical premiums.
A chief enabler of income growth is improved infrastructure, driven by both public and private spending.
If development of infrastructure is not pushed, GDP will
not grow more than 5-6%, whereas in a country like the
Philippines it should amount to 8% considering its population growth rate of 2%. Once per capita GDP is
improved, one can talk more about protection, as there
is then something to protect. Otherwise, commoditised investment tools like variable unit-linked products
will dominate. Better infrastructure would strengthen
connectivity and unlock the potential of economic sectors that will then generate more wealth and more
insurable citizens. It would also enable the flow of capital from main cities into provincial areas, thus decentralising premiums from Metro Manila.
How can insurance companies better align their

strategies and products with new market segments
and with conditions specific to the Philippines?
COYIUTO: Although some customisation can be done
to adjust products to cater to the mass market, real
growth in penetration will ultimately depend on traditional distribution channels, whether professional agencies or bancassurance. There have also been developments in other channels such as micro-insurance,
shopping centres or pawnshops. Solving infrastructure
bottlenecks, however, would enable the country to
move beyond dependence on business process outsourcing and remittances from overseas workers by
nurturing sectors like tourism to provide increased
opportunities for wealth generation. The governments
plan to boost infrastructure spending to 5% of GDP is
a major push to address this. Even from a distribution
perspective, infrastructure is key, as this enables agents
and distribution channels to reach potential clients.
In what ways can ASEAN integration spur diversification and cross-border trade in the sector?
COYIUTO: The domestic insurance industry is preparing for ASEAN integration by sizing up and capitalising
on local networks to boost their competitive edge vis-vis foreign players. It is also asking for incentives from
the state to be able to compete with banks on trust
functions; currently non-banking institutions cannot
operate trusts. Although the sector has been largely
liberalised in the Philippines, ASEAN integration
will bring further imperatives for domestic companies.
103
Energy
Increasing reliance on foreign petroleum imports
Diplomatic tensions affect offshore exploration
Competing proposals to increase generation capacity
Incentives granted for renewable energy production
104
ENERGY OVERVIEW
Domestic production of oil has risen modestly since 2010
Watts next?
With oil production set to remain flat, a shift to new sources is seen as
necessary to reduce dependence on foreign imports
The largest single consumer
of natural gas in the
Philippines is the electricity
generation segment, which
consumed 116,549 mmscf
of domestic natural gas
in 2013, equal to 97.7% of
the 119,250 mmscf
consumed over the year.
Although new exploration

blocks offered up in 2013
could provide more
technically challenging
opportunities in the coming
years, the majority of the
most coveted offshore
areas remain off-limits due
to territorial disputes.
Strong economic growth and a rise in energy demand

have exerted pressure on the Philippines energy sector in recent years. With large, easily accessible oil and
gas discoveries long since picked over, a continued
decline in petroleum production has encouraged a
heavy reliance on imports. The substantial reserves in
the Malampaya gas fields have given rise to a resurgence in domestic production, although output is
expected to dwindle over the next 15 years. While new
exploration blocks offered in 2013 could provide potential for more technically challenging opportunities in
the coming years, the majority of the coveted offshore
areas remain off-limits due to territorial disputes.
NATURAL GAS: Most hydrocarbons production in the
Philippines is supplied by the natural gas segment,
which plays a crucial role in supplying the domestic market and providing relief for the countrys heavy reliance
on fuel imports. Unlike crude oil, natural gas output has
remained robust over the past decade with production
exceeding 100,000 standard cu feet (mmscf) every
year since 2005, according to the Department of Energy (DoE). Domestic production peaked at 140,368
mmscf in 2011 when the countrys largest gas field,
Malampaya, reached peak production. Output has since
declined, to 134,563 mmscf in 2012, 123,944 mmscf
in 2013 and 30,943 mmscf by end-May 2014.
Natural gas production is currently dependent on the
expansive Malampaya gas play, which accounts for virtually all output. The San Antonio gas field situated in
the Cagayan Valley yielded a total of 3541.3 mmscf of
natural gas during its 15-year lifespan, with a peak of
375.9 mmscf in 2000, but was closed in 2008. More
recently, the Libertad gas field located in Northern
Cebu came on-line in 2012 but produced just 72,424
mmscf in its first year. The Libertad gas field is operated by the UK-based Forum Energy under service contract (SC) 40 with production sold to Filipino company
Desco as fuel for gas-to-electricity power generation.
The fields reserves are currently estimated at 0.9bn cubic
feet (bcf) for proven reserves and 4.1 bcf for proven,
probable and possible estimates. Indeed, from February 2012 until the end of 2013, commercial production at the Libertad field totalled 151 mmscf of gas.
By far the largest single consumer of natural gas in
the Philippines is the electricity generation segment,
which consumed 116,549 mmscf of domestic natural
gas in 2013, good for 97.7% of the 119,250 mmscf consumed over the year. Industrial use of gas accounted
for another 2.23% (2665 mmscf), with the transportation sector using 35 mmscf, primarily in the form of compressed natural gas (CNG). Other proven reserves are
located in the Iloilo and Central Luzon basins, where
oil and gas resources were discovered in 1953 and
1979, respectively, but not yet been developed.
MALAMPAYA: The most significant energy project in
recent decades is the development of the Malampaya
natural gas field operated by a consortium of Shell
Philippines Exploration (45%), Chevron Malampaya
(45%) and the state owned Philippine National Oil Company (PNOC, 10%). Situated north-west of Palawan
Island at a depth of approximately 3000 metres below
sea level, Malampaya is a crucial contributor to the
countrys electricity production, supplying nearly half
of the Luzon power grids electricity requirements.
The total natural gas off-take dipped to 119.67 bcf
in 2013, down from 130.28 bcf in 2012 and the 140.37
bcf produced in the projects peak year of 2011. Condensate sales also declined from 4.58m barrels in 2013
to 3.82m barrels in 2012 due primarily to a 30-day
maintenance shutdown conducted from November to
December 2013. The gas raised from the Malampaya
field is used primarily to fuel three gas-fired thermal
power plants supplying the Luzon power grid: the 1200MW Ilijan power plant; the 1000-MW Santa Rita power plant; and the 500-MW San Lorenzo power plant. A
smaller portion is transported via pipeline to the Pilipinas Shell Petroleum refinery in Tabangao, while other
supplies are converted into CNG to be used as fuel for
a pilot phase of the CNG public transport project. So
as to maintain a sufficient number of supplies for these
ENERGY OVERVIEW
power plants, operator Shell is currently in the midst

of Malampaya Phase 3 (MP3) expansion. This expansion, and the drilling of two infill wells for the Malampaya Phase 2 (MP2) project are expected to improve
the gas supply by countering naturally occurring
decreases in volume and pressure as the field matures.
Original estimates placed reserves at 2.7trn-3.2trn cubic
feet (tcf) of natural gas and 85m barrels of condensate, though at least 1tcf was already raised by 2014,
with the remaining supplies expected to be depleted
by 2030, depending on the rate of production.
OIL RESERVES: Limited discoveries of new oil reserves
in recent decades have led to an increasing reliance on
foreign imports for crude and refined petroleum products. Although domestic oil production experienced a
modest uptick in 2010 as the result of new output from
the Galoc field, it remains a fraction of what it was during peak production in the 1970s, when the country
produced 8.57m barrels in 1979 from the Nido field.
Now long past its prime, Nido has not produced more
than 100,000 barrels per year since 2009, while other
small plays, such as Matinloc, Tara, North Matinloc and
West Linapacan, are all producing less than 100,000
barrels per annum or have shut down altogether.
The lone bright spot in the sector (excluding condensate from the Malampaya gas field, which dwarfs
traditional petroleum production in the Philippines) is
the Galoc development located in Palawans proven oil
and gas fairway, at a depth of approximately 290 metres.
A joint venture between Galoc Production Company (a
wholly owned subsidiary of Otto Energy) with a 33%
stake, Galoc Production Company (26.8%), Nido Production (22.9%), Oriental Petroleum & Minerals Corporation/Linapacan Oil Gas & Power Corporation (7.8%),
the Philidrill Corporation (7.2%) and Forum Energy Philippines (2.3%), production from Galoc grossed 1.72m
barrels in 2013, up from 1.48m barrels in 2012, according to Forum Energy. Proved and probable reserves
were estimated at 25.4m barrels as of January 2013,
according to operator Otto Energy, and the field is on
pace to produce a total of 2.9m barrels in 2014.
This recent uptick in production can be attributed
to the second phase of the fields production, initiated in June 2013 with the drilling of two additional production wells, Galoc 5 and Galoc 6. This saw a surge in
production from the four operating wells to 14,500
barrels per day (bpd) in October 2013, before output
tailed off slightly to stabilise at around 9800 bpd at years
end, while also extending field life by three years to 2020.
A third phase of development is possible in the future,
pending the results of exploratory efforts in another
prospect adjacent to the active field. Ever since the startup of production in October 2008, the Galoc oil field
has produced a total of 13.3m barrels of crude oil
through June 2014, at which point in time production
was averaging approximately 8450 bpd.
New exploratory efforts are also being carried out
in the West Linapacan block in the north-west Palawan
basin by operator RMA Energy Group. If these tests
prove promising, this could signal a revival of the block,
which has been inactive since 1997 after a five-year
105
production run that topped out at 3.16m barrels of oil

in its initial production year of 1992. Other encouraging results have also been received of late for the
Gas2Grid project in Cebu (SC 44), and further exploratory drilling is expected in other contract areas, such as
Frontier Oil Corporation in north-west Palawan (SC 50)
and Otto Energy Investments in east Visayas (SC 51),
with drilling also expected in at least three other blocks
located off Palawan Island (SC 54, 58 and 63).
A variety of other relatively unexplored areas also hold
considerable promise for the future, including several
offshore blocks offered up for bidding in mid-2014
(see analysis). In addition to the blocks tendered out
in the contested West Philippine Sea, other candidates
for big payoffs include a 13m-ha area located off Luzon
Islands eastern seaboard, known as the Benham Rise,
and the Scarborough Reef off the west coast of Luzon.
TOWARDS NATURAL GAS: As the Philippines and the
global energy market as a whole shifts its energy priorities away from crude oil and towards cleaner, more
plentiful natural gas, the DoE has set out a road map
to establish a network of pipelines to transport gas
around Luzon from 2017-22. The interconnected web
of nine different pipelines will initially be built to supply industrial consumers with excess supplies from the
Malampaya field as early as 2017 though industry
experts told OBG that this timeframe may be too ambitious with the goal of eventually integrating liquefied
natural gas (LNG) regasification terminals, production
fields, industrial clients and power plants. These will supplement the 530 km of natural gas transmission pipelines
already constructed in order to transport gas from the
Malampaya gas field to fuel three power plants.
GAS REQUIREMENTS: As laid out in the DoEs Philippines Energy Plan (PEP) 2012-30, the initial stages of
development will include the construction of the 105km-long, high-pressure Batangas-Manila 1 (BatMan 1)
to serve as the networks backbone. Projected to be
on-line by 2017, the $2.1bn BatMan 1 will supply gas
requirements to the economic and industrial zones
As the country shifts its

energy priorities away from
crude oil and towards
natural gas, the DoE has
set out a roadmap to
establish a new network
of gas pipelines to transport
gas around Luzon from
2017 to 2022.
Natural gas production & consumption, 2000-14* (mmscf)

Consumption
Year
Production
Power
Industrial
Transport
2000
376
376
376
2001
4951
5551
5551
2002
62,205
56,270
56,270
2003
94,807
87,422
87,422
2004
87,557
84,344
84,344
2005
115,966
111,398
525
111,923
2006
108,606
103,217
2193
105,410
2007
130,211
123,203
3316
126,519
2008
137,073
129,044
2932
15
131,990
2009
138,030
130,653
3019
18
133,690
2010
130,008
121,924
3044
15
124,983
2011
140,368
133,226
3288
47
136,561
2012
134,563
127,765
2473
51
130,289
2013
123,944
116,549
2,665
35
119,250
2014*
30,943
28,937
838
29,778
SOURCE: Department of Energy
Total
*Through May 20, 2014
ENERGY OVERVIEW
106
Coal-fired thermal plants account for 32% total power supply
Due to the island geography

of the Philippines,
electricity interconnection
remains fragmented, with
the majority of power
allocated to three main
power grids: Luzon,
Mindanao and Visayas.
located along the route from Tabangao, Batangas to

Sucat, Paranaque as well as for the transport sector.
The feedstock for this transmission line will initially
be derived from the Malampaya gas field, but with supplies there expected to be expended by 2030 at the
latest, long-term plans call for additional supplies be
fed into the system via LNG imports by 2020. The second major phase of development will be the 140-kmlong Bataan-Manila 2 (BatMan 2), which is slated for
completion by 2020 to supply markets in Subic and Clark,
along with the Limay combined-cycle power plant that
could be converted from coal to natural gas. The proposed trunk pipelines linking BatMan2 to Subic (40
km) and Clark (25 km) are projected to be completed
in 2021 and 2022, respectively. The primary transmission lines BatMan 1 and BatMan 2 are scheduled
to link up in 2022 via the 40-km undersea BataanCavite (BatCave) interconnection and through the 35km Rosario, Cavite, Laguna (RoBin) line. Like BatMan
1, BatMan 2 will also include an LNG regasification terminal located in Limay, Bataan.
Additional pipelines in the PEP include the 35-km
Sucat-Malaya pipeline (2017), an underwater, highpressure gas transmission pipeline from Sucat,
Paranaque to service the Malaya Plant in Rizal (needs
to be converted for natural gas and likely to be mothballed in 2015); the 15-km Sucat-Fort Bonifacio pipeline
Electricity sales & consumption by sector, 2008-13 (MWh)

2008
2009
2010
Residential
16,644,230
17,503,744
18,833,007
18,693,546 19,694,896
20,613,717
Commercial
14,136,004 14,756,204
16,260,562
16,623,834
17,777,222
18,303,747
Industrial
17,030,903
17,084,427
18,576,307
19,333,954 20,070,972
20,676,799
Others
1,394,977
1,523,466
1,595,892
1,446,257
1,667,527
1,971,349
Total sales
49,206,114
50,867,841
55,265,769
56,097,591
59,210,618
61,565,612
Own-use
3,934,746
3,524,366
4,676,820
5,398,480
5,351,152
5,959,405
System loss
7,680,125
7,542,224
7,800,170
7,679,579
8,360,241
7,740,825
60,820,985
61,934,432
67,742,759
Total consumption
2011
2012
2013
69,175,650 72,922,011 75,265,842
that will service commercial establishments in the Bonifacio Global City (2017); and the EDSA-Taft Gas Pipeline
Metro Manila city gas distribution network (2020).
The countrys first regasification project is expected to begin importing gas by 2015 as part of a new
600-MW gas-to-power project in Pagbilao, Luzon. Developed by Australian-headquartered Energy World Corp,
the $1bn project will have a capacity of 3m tonnes per
annum (tpa) and is being partially financed by the Development Bank of Philippines to the tune of $550m. Additional proposed LNG projects include Shell's 4m-tpa
floating storage and regasification unit, expected by
2016 in Batangas, and PNOC's 3.5m-tpa LNG hub in
Bataan, originally planned by 2018, but now on hiatus.
POWER SUPPLY: Due to the island geography of the
Philippines, electricity interconnection remains fragmented, with the majority of power allocated to three
main power grids: Luzon, Mindanao and Visayas. In
terms of capacity and demand, the largest is Luzon,
which remains chronically undersupplied, to the extent
that emergency measures are being implemented to
avert blackouts (see analysis). Accounting for roughly
three-quarters of the countrys total power output,
the Luzon network generated 54.82 GWh of electricity in 2013, or 72.8% of the total generated in the Philippines that year, according to the DoE.
Generators connected to the Mindanao grid supplied 11.1 GWh, 14.75% of the domestic total, with
power producers in Visayas accounting for the outstanding 9.35 GWh (12.42%). The country had a total combined installed capacity of 17,325 MW at end-2013,
though the actual amount of dependable power is in
fact significantly less, as many older plants have less
dependable and efficient equipment, prone to both
scheduled and unscheduled maintenance stoppages.
Traditional coal-fired thermal power plants are the
largest contributor in terms of capacity, accounting for
32% (5568 MW) of the Philippines power supply, with
oil-fuelled power plants contributing another 19%
(3353 MW). Power producers have taken advantage
of the active geologic conditions within the country by
developing one of the most productive geothermal
networks in the world. The 1868 MW of installed capacity in 2013 accounted for less than 11% of all power
capacity, while large hydro power projects contributed
another 3521 MW, good for just over 20% of total
capacity. Natural gas-fired power plants have expanded over the past decade with the commercialisation of
the Malampaya gas to power project, which employs
a network of three gas pipeline-fed power plants: the
1060-MW Santa Rita power plant, the 530-MW San
Lorenzo power plant and the 1271-MW Ilijan power
plant. Coal was the predominant fuel in 2013 with
32,081 GWh produced, accounting for 42% of all electricity. Natural gas generators supplied another 18,791
GWh, good for 24.9% of the total, followed by hydro
with 10,019 GWh (13.3%), geothermal with 9605 GWh
(12.8%) and diesel generators with 3805 GWh (5%).
Much has been accomplished already to promote
investment in the sector. Most notably, the Electric
Power Industry Reform Act was passed in 2001 as a
ENERGY OVERVIEW
means to finalise the transition from state to private

control of domestic electricity assets. As a result, the
Philippines has one of the most liberalised electricity
markets in Asia, resulting in private ownership of generation assets, as well as unbundled transmission and
distribution services. Independent power producers
can sell output to local distributors though power purchase agreements or sell on the electricity market.
COMING ON-LINE: With easy access to cheap fuel and
potentially large power generation capacity, new coaland natural gas-fired thermal power plants are proving attractive to developers. A host of greenfield and
brownfield projects are in various stages of construction, including a 414-MW gas-fired San Gabriel combined-cycle power plant, a 100-MW Avion power plant
in Batangas City, a new 430-MW unit at the Pagbilao
coal-fired power plant and a 4x138-MW coal project
in Mindanao. Several other coal-fired plants are also
being constructed in Mindanao, including a 105-MW
plant by Alcantara and Aboitizs 2x150-MW project.
Other projects are advancing more slowly due to
approval hurdles. San Buenaventura is seeking approval
from the Energy Regulatory Commission of its power
sharing agreement with Meralco for a 460-MW coalfired plant in Quezon, while a 600-MW one in Subic just
got the environmental go-ahead, but will likely remain
a target of environmental groups. Expansions of existing plants are also slated to take place, such as the 150MW expansion planned for an existing 164-MW power plant in Iloilo City, Visayas, a 350-MW expansion of
the Calaca coal-fired plant to 1200 MW and a 600-MW
expansion of the Masinloc power plant to double output, though progress has largely halted on the latter.
While renewable energy capacity does not generally pack the same punch as a stand-alone, 1000-MW
thermal power plant, alternative power generation is
expected to take on an increasingly significant role in
the countrys future primary energy mix. Although the
majority of renewable energy in the Philippines is now
being supplied by the large hydro and geothermal power plants, newer, more intermittent technologies are
being rolled out across the country in large part due
to new incentives granted to the sector via the 2008
Renewable Energy Act (see analysis).
WIND & SUN: The initial 13-MW stage of the countrys first renewable energy project within the feed-intariff scheme, the San Carolos solar project, came online in May 2014, followed by the 9-MW second stage
in July. The project is operated by renewable energy
developer Bronzeoak Philippines, and it represents the
first in a portfolio of renewable projects that the firm
and others like it are developing in the Philippines.
Other solar ventures operated by Bronzeoak include
an 18-MW farm located in La Carlota, Negros Occidental (which could later be expanded to 40 MW) slated
to come on-line in July 2015, a 22-MW project in Manapla (with a possible expansion to 45 MW) scheduled
for completion by 2016, as well as two more stages of
development at the Socasol site which could boost
capacity there to 45 MW. Looking to diversify yet further, Bronzeoak is also building biomass power plants
107
Coal-fired thermal plants have proven attractive to developers
at each solar site, with the three power plants projected to combine for 70 MW of installed capacity, as well
as a 60-MW wind farm also slated for San Carlos in 2016.
A 40-MW rooftop solar farm developed by the Majestic Energy Corporation in Cavite province is also scheduled to begin operations in 2015.
Wind was a bright spot in the renewables segment
in 2014, with significant capacity coming on-line. The
race for feed-in-tariff eligibility saw several hundred MW
of capacity built with equity, with the 150-MW Burgos
Wind Project and the 81-M Caparispisan Wind Energy,
both in Illocos Norte, among the winners.
OUTLOOK: Crude oil production should stay relatively flat in the coming years, with marginal increases in
existing fields off-setting their decreased productivity,
while natural gas supplies from the Malampaya field
continue to decline over the next decade as it matures.
Exploration in new, primarily frontier areas could
mitigate the countrys increasing reliance on foreign
energy sources to some degree, although any significant reserves are likely to remain tied up in territorial
disputes for the foreseeable future. It is clear that several challenges remain with respect to the countrys
electricity supply in the short term, particularly in Luzon.
However, the implementation of new projects and
incentives should help to alleviate the shortfall in
the medium-to-long term, even as energy demand
continues to climb at a rate in excess of 4% per annum.
Crude oil production should

remain relatively flat in the
coming years, with marginal
increases in existing fields
offsetting their decreased
productivity. Natural gas
supplies from the
Malampaya field are
expected to continue to
decline over the next
decade as it matures.
Breakdown of installed generating capacity, 2008-13 (MW)

Oil-based
2008
2009
2010
2011
2012
2013
3353
3193
3193
2994
3074
3353
Hydro
3291
3291
3400
3491
3521
3521
Geothermal
1958
1953
1966
1783
1848
1868
Coal
4213
4277
4867
4917
5568
5568
34
64
73
117
153
153
2831
2831
2861
2861
2862
2862
15,681
15,610
16,359
16,162
17,025
17,325
New renewable energy

Natural gas
Total
108
ENERGY ANALYSIS
New exploration could stave off dependence on foreign imports
Stemming the tide

Diplomatic disagreements have overshadowed the opportunities
opened up by the exploration of new territory
The Department of Energy
opened up its 5th Philippine
Energy Contract Round in
May 2014, offering up 11 oil
and gas blocks that will
remain open for bidding
until the first quarter of
2015, at which time
contracts will be awarded
to qualified applicants.
The Philippines supports

the territorial guidelines laid
out in 1982 by the UN
Convention on the Law of
the Sea, which defines
sovereign territorial seas as
all waters located within 12
nautical miles (22 km) from
a countrys coastline,
including islands.
While hydrocarbons production in the Philippines has

declined in recent decades, the exploration of new territory holds the potential to stave off dependence on
foreign imports, if not reverse the trend altogether.
Unfortunately, a host of obstacles will need to be overcome in order to achieve any significant improvement
even in the short-to-medium term. Among the most
relevant of these challenges are the profitability of
marginal fields in the current energy market, adherence
to strict requirements for potential exploration and
development companies, and territorial disputes with
other countries over certain areas.
NEW OFFERINGS: The Department of Energy (DoE)
opened up its 5th Philippine Energy Contract Round
(PECR) in May 2014, offering up 11 oil and gas blocks
that will remain open for bidding until the first quarter of 2015, at which time contracts will be awarded
to qualified applicants. The 11 areas encompass a total
area of approximately 47,840 sq km and are mainly
located in frontier regions. They have an average size
of 4350 sq km per block, with the largest covering
5760 sq km. The PECR 5 round is the first round of blocks
offered up by the DoE since PECR 4 was launched in
2011. Only four of the 15 blocks from PECR 4 resulted
in service contracts due in part to the DoEs strict application guidelines used in reviewing potential bids.
While these requirements are unlikely to change in
the near future, the approval process is undergoing
improvements intended to streamline and increase the
transparency of the entire process. This includes a pilot
project which posts the status of the application online,
such as which department is reviewing documents and
how long they take to carry out these procedures, with
the ultimate goal of including contracts from all energy projects oil, gas, coal and electricity in this online
service. Other setbacks in exploration and production
have been the result of litigation by indigenous groups
as well as between rival companies. Initial interest for
PECR 5 has been shown in blocks 8-11, running contiguously south to north in the West Philippine Sea off
the west coast of Luzon Island within the West Luzon

Trough basin. A number of other offshore blocks
numbered 4, 5 and 6, and located within the East
Palawan basin in the Sulu Sea have attracted attention. Blocks 1, 2 and 3 are spread out to the east around
the Visayas area in the South-east Luzon basin (Block
1) and the West Masbate Iloilo basin (Blocks 2 and 3).
DIPLOMATIC TIES: Among the areas on offer is the
468,000-ha Block 7, located some 80 nautical miles (148
km) west of Palawan Island in the West Philippine Seas
Reed Bank. Nestled amongst the previously awarded
blocks 72, 55 and 63, this latest offering is located atop
a geological formation thought to hold large amounts
of oil and gas. Estimates based on initial exploratory
work of the Reed Bank (also known as the Recto Bank)
and disputed Spratly Islands to the south-west vary
widely. However, the US Geological Survey estimates
that the areas total crude oil reserves could reach 28bn
barrels and as much as 266trn cu feet of natural gas.
Given these stakes, diplomatic ties have become
strained as different states vie for the right to commercialise these potentially lucrative prospects. Six states
bordering the South China Sea (known locally as the
West Philippine Sea) have registered claims over portions of this territory including Vietnam, Malaysia, Brunei
and Indonesia, as well as the Philippines and China. Oil
exploration vessels plying the waters of SC 72, operated by the UK-based exploration and production outfit
Forum Energy, and bordering Block 7 on its northern
border, have been repeatedly harried by Chinese-flagged
vessels in recent years. These aggressive Chinese
manoeuvres are the result of its Nine Dash policy,
through which it lays claim to much of the area.
Conversely, the Philippines supports the territorial
guidelines laid out in 1982 by the UN Convention on
the Law of the Sea, which defines sovereign territorial seas as all waters located within 12 nautical miles
(22 km) from a countrys coastline, including islands.
Each nations exclusive economic zone thus extends
200 nautical miles (370 km) from its respective coast.
ENERGY INTERVIEW
109
Edgar O Chua, Country Chairman, Shell Companies in the Philippines
Fuelling growth
OBG talks to Edgar O Chua, Country Chairman, Shell Companies in the
Philippines
How will a liquefied natural gas (LNG) import terminal help the Philippines meet its energy security goals and develop the local natural gas industry?
CHUA: Natural gas is abundant and is the cleanest-burning fossil fuel, emitting about 50% of the CO2 released
by coal-fired power generation and can be used across
multiple sectors, ranging from road transport to the
marine industry, residential and power. Based on International Energy Agency (IEA) analysis, there are sufficient technically recoverable natural gas resources to
last for at least the next 230 years at current consumption levels, ensuring energy security and reliability. However, infrastructure challenges exist to exploiting gas.
For instance, we piloted a programme for the use of
compressed natural gas for government transport, but
the absence of a pipeline network in the Philippines
will continue to make the programme a challenging one.
For the country to attract investment in import and
regasification terminals, firm energy policies are needed. We need the government to implement a balanced
energy mix policy consisting of coal, renewables, natural gas and other sources to ensure that one type of
fuel does not dominate. The challenge with crafting an
energy mix policy lies in balancing the competing policy objectives of affordability, supply security and sustainability. A recent Department of Energy study shows
that if we do nothing, coal would account for up to 70%
of the power mix by 2030. Without policy change that
encourages investment in gas-fired capacity, in a high
coal scenario, coal plants would operate in both the
base load (~80% load factor) and mid-merit (~40% load
factor) space, despite gas being more efficient at midmerit. Coal plants are not designed to be load-following and this mode of operation affects their reliability.
Moreover, the higher capital associated with coal means
that higher utilisation is required for the investment to
pay for itself. So at mid-merit, where utilisation is in
the range of 40% to 50%, gas-fired generation would
be cheaper than coal on a long run marginal cost basis.
In 2011 researchers from the Harvard Medical School
found that coal generation results in quantifiable costs

from the health and the economic impact of emissions.
When considering the costs of emissions, natural gas
is also competitive at base load in the Philippines.
In the absence of any intervention, an ongoing tight
power balance and a growing reliance upon coal-fired
generation will result. The positive benefits which natural gas-fired generation have provided to the Philippines stable, clean energy supply will decline with
Malampaya production over the course of the next
decade. Thus, the government needs to look at implementing policies that incentivise gas-fired generation.
How can the Philippines meet higher fuel standards and boost value-added downstream output?
CHUA: The growth of the Philippine economy is a major
catalyst for rising energy demand. For every 1% increase
in GDP, demand for fuel and energy grows by 0.5%.
Additionally, new developments in the mining sector
or other energy-intensive industries produce a higher
rate of demand growth. There is a lot of potential for
organic growth in the downstream segment, as demand
for products is driving smuggling that accounts for
20% to 30% of sales. It is unrealistic to aim for no smuggling, given that the Philippines is an archipelago, but
this poses challenges to under-resourced authorities.
Still, the level can be brought down to 10% or less.
The two oil refineries in the country are capable of
meeting the Euro IV fuel compliance requirements by
2016; however, due to smuggling, there will be no additions to capacity, only facilities upgrades. The main
entry points for smuggling have been the special economic zones (SEZs). Manufacturers pay taxes on imports
of crude oil and can claim refunds when they export
refined products, while importers with no value-added
activities do not pay taxes, as their imports are presumed
to be used in an ecozone or are re-exported. In 2012
a value-added tax for finished petroleum products,
even in SEZs, was imposed. This leveled the playing field
among oil players and significantly reduced smuggling.
110
ENERGY INTERVIEW
Francis Giles B Puno, President and COO, First Gen Corporation
In a sustainable fashion
OBG talks to Francis Giles B Puno, President and COO, First Gen Corporation
To what extent will the award of the feed-in-tariff
(FIT) encourage investment in renewable energy?
PUNO: As a country, the Philippine needs to acknowledge it is not rich in fossil fuels, but in renewable energy, and promote an environment where renewables
play a greater role in the energy mix. The DoEs approach
in awarding the FIT on a first-come-first-served basis
was unconventional, as it generated a race to build
capacity by those hoping to receive the FIT. The new
regime attracts investors with the capability to push for
renewable energy. Solar energy was one of the energy sources that benefitted from the FIT scheme, with
interest set to rise as the cost of panels and installation decreases. Conversely, hydroelectric presents more
challenges for execution, so racing for FIT allocation
can pose a risk to the projects bankability. The Philippines is also home to the worlds second-largest geothermal company, Energy Development Corporation
(EDC), a subsidiary of First Gen. Geothermal plants are
used as base loads, which can compete effectively
against coal generation while still being more environmentally sustainable. To develop more geothermal
domestically, it may be good to introduce a FIT for this
technology as well. Given its vast experience, EDC is now
venturing overseas to pioneer in the geothermal industry in countries like Peru, Chile and Indonesia.
How important is the adoption of natural gas for

the Philippines long-term energy sustainability?
PUNO: First Gen is a strong supporter of the Philippine
natural gas industry, principally through the construction of the 1500-MW Santa Rita and San Lorenzo natural gas-fired plants, which enabled the development
of indigenous natural gas from the Malampaya field and
have delivered reliable electricity supply to the Luzon
grid for almost 15 years. We are now developing additional gas-fired plants, including the 97-MW Avion and
414-MW San Gabriel projects, which will be completed within two years. These show that natural gas is an
alternative for power generation and is attractive due
to its higher efficiency, greater operational flexibility

and lower carbon emissions.
With limited supply of domestic gas from Malampaya,
First Gen has conducted feasibility studies to develop
our own liquefied natural gas (LNG) regasification terminal near our plants in Batangas. We hope to complete the facility in 2020 and build enough operating
experience to prepare for our natural gas needs postMalampaya. The expected future LNG reliance of Asian
nations will fare well for the country, as it will possibly
enjoy more competitive prices.
Despite the announcement of new plants and the
risk of overcapacity, power plants under construction
remain limited. The usual approach for developing largescale power projects is to first get a power purchase
agreement (PPA) and fuel supply to make the project
bankable and determine the timing of execution. These
take a long time and may result in further delays. However, with a deregulated energy law, which has allowed
for the formation of the Wholesale Electricity Spot
Market, it is no longer just the government entering
PPAs, but individual power distribution utilities, cooperatives and industrial users.
What are the relative advantages of gas-fired plants?

PUNO: There are three segments in the daily electricity market. The base load plants operate for 24 hours
and the mid-merit plants operate for 12 hours a day,
while the peaking plants operate for fewer hours. The
Philippine market is a relatively peaking market: for
instance, the Luzon grid peaked in 2014 at 8616 MW,
while the grids real base load was only 4900 MW, showing a swing of 3700 MW. A right technology is needed
to operate during peak or mid-merit periods. Unlike
coal plants which operate continuously, gas-fired plants
can respond immediately to rising demand, by being
able to operate during the day when demand is higher and shut down at night. Technology advances and
environmental sustainability are key to gas-fired generation. The country can definitely benefit from this.
ENERGY ANALYSIS
111
Electricity sales increased by 3.89% annually from 2001 to 2013
Power outage
Generation capacity has not kept pace with economic growth, leading
to potential shortfalls
As the economy has continued its robust growth over
the past decade, and spending among the expanding
middle class has increased, demand for electricity has
risen accordingly. However, while sales have gone up
by an annual average of 3.89% from 2001-13, according to the Department of Energy (DoE), power generation capacity growth has lagged far behind, at 2.2%.
CAPACITY CONCERNS: Taking into account DoE
assumptions of electricity demand-to-economy elasticity in Luzon of 0.6, the countrys GDP growth rates
of 6.8% in 2012 and 7.2% in 2013 equate to an estimated average rise in consumption of 4.1% and 4.3%,
respectively. These estimates are within a percentage
point of power consumption figures recorded by the
DoE. These trends are widely expected to have serious
consequences for the sector beginning in 2015. Most
concerns are focused on the island of Luzon, which
accounts for around 70% of electricity consumption.
The peak demand season starts in March and lasts as
late as July. Current projections by the DoE for this fivemonth period indicate that there will be 14 weeks out
of 22 where available capacity will be less than the
Luzons contingency reserve of 647 MW (4% of peak
demand), with the system peak demand during the
first two weeks in April expected to actually exceed available capacity. As a result, load shedding and brownouts
have become a very real possibility for the Luzon grid
during peak demand, and emergency measures are
being explored in order to best combat the situation.
On paper, the Luzon grids installed capacity of 12,769
MW easily outpaces estimated system peak demand in
March 2015 of 8201 MW. In reality, however, much
official installed capacity is offline or unreliable due to
planned maintenance and antiquated facilities. Around
89% of installed capacity, or 11,389 MW, are rated as
dependable. The major culprits include fossil fuel-fired
thermal power plants, the largest being the 350-MW
unit 1 at the Malaya thermal power plant, considered
unreliable since March 2014 due to high turbine vibrations. Malayas 235-MW unit 2, on the other hand, is
projected to be a reliable contributor for the summer

of 2015, despite of concerns that it may not be up to
the task after constant use during the summer of 2014
extended it beyond its normal operational parameters.
MAINTENANCE WORK: Planned outages due to routine maintenance will exacerbate the problem, as some
substantial contributors to the grid are pulled offline.
These in include back-to-back shutdowns of the Pagbilao coal-fired thermal power plants units 1 and 2 (382
MW each) from May 30 to July 3 and from July 4 to July
31, along with a combined five weeks of down time for
two coal-fired 315-MW units at the Masinloc power
plant from January to March, and a 326-MW coal unit
at GNP Powers for all of February. One combined-cycle
unit will be pulled out of duty for a week in March as
well when the Santa Rita power plant completes work
on a 265-MW unit. Two hydro power plants have also
scheduled outages with the San Roque power plant carrying out work on three of its 137-MW units for a combined total of 19 weeks from end-January to June 26.
Another hydro plant, Magat, will carry out maintenance on its 90-MW unit 3 for five weeks starting in
May. The effect will be forced outages ranging from an
estimated 631-858 MW each month between March
and July 2015, down from the level of actual forced outages seen during the same period in 2014 of 12511624 MW. These deficits come despite the new capacity scheduled to come on-line by early 2015, which is
expected to bring hundreds of megawatts to the grid.
WEIGHING THE OPTIONS: Although the exact timing
and duration of any outages or shortfalls remain a
question of conjecture at this junction, substantive
measures will need to be in place by March 2015 to
alleviate the expected deficit. Two competing proposals were being considered by the government as of
November 2014 to head off this impending crisis.
COMPETING PROPOSALS: The first of these is a proposal from the current administration in September
2014, asking Congress to grant the executive branch
emergency powers to contract additional power of up
Planned outages due to

maintenance will
exacerbate the problem of
low power generation
capacity as a number of
substantial contributors to
the grid are taken offline for
routine maintenance.
Most concerns for sector

capacity are focused on the
island of Luzon, which
accounts for around 70%
of electricity consumption.
The peak demand season
starts in March and lasts as
late as July.
112
ENERGY ANALYSIS
Much of the official installed capacity is offline or unreliable
Section 71 of the Electric

Power Industry Reform Act
states that Congress may
authorise the establishment
of additional generating
capacity if there is an
imminent shortage in the
electricity supply.
to 900 MW. Although the government is barred from

directly participating in the power generation market
by the Electric Power Industry Reform Act (EPIRA), the
president has cited Section 71 of EPIRA, which states
that Congress may authorise the establishment of additional generating capacity if there is an imminent supply shortage. Once installed, the additional capacity
would serve as a reliable stopgap for both base load
and back-up reserve capacity in peak months.
However, beyond the dangers of creating an essentially open-ended loophole in EPIRA no termination
date or timeline for the emergency powers was included in the request to Congress there are financial
drawbacks to this plan. Notably, any generating capacity would likely have to be contracted for at least two
years, meaning that for the majority of non-peak
demand time it would sit idle. The DoE estimates that
the lease and installation of the requisite diesel-fired
modular generators would cost up to P6bn ($135m).
The second avenue being explored is a dramatic
expansion of the interruptible load programme (ILP)
which relies on large, high-power consumers such as
hotels and shopping malls to voluntarily operate their
existing back-up generators during peak demand times
to alleviate overall demand. Aggregate demand will
thereby be reduced to a more manageable level, helping ensure the availability of supply during peak demand
season. In return, participating generators would be
compensated by the government according to a formula that pays 0.34 litres of diesel per KWh (prices were
around P40 [$0.90] per litre in late 2014), along with
a maintenance stipend of P0.32 ($0.01) per KWh. Fuel
costs are based on litres, as fuel prices fluctuate. Similar programmes have been employed in Mindanao and
Cebu, where there were significantly fewer ILP participants, but also lower peak demand. An economic
advantage of this scheme is that the generators are
only run and paid for during peak demand times. As
such, while overall reserve capacity will remain relatively low, generators will only be used for short durations
during the crucial summer period, rather than acting
as a standby sunk cost throughout the whole year.
NEGOTIATIONS: As of October 2014, Luzons primary
power provider Meralco had registered 155 MW of ILP
participants and was continuing negotiations for another 81 MW of capacity operated by 57 other customers.
However, as the majority of these self-generating facilities (SGF) are limited to a four-hour operational span,
the ILP power to the grid at any one time is likely much
lower than Meralcos planned 236 MW, with conservative DoE estimates placing it at 118 MW. These figures do not, however, take into account other potential ILP sources, such as contestable customers within
the Philippine Economic Zone Authority, the Semiconductor and Electronics Industries in the Philippines
Incorporated and the Retail Energy Supply Association,
and 319 MW of potential SGF capacity from the Subic,
Cavite and Baguio ecozones. Some 60 MW of SGF power located in Batangas, Labuna and Pasig City has also
been committed by the domestic conglomerate JG
Summit, which also owns a 27.1% stake in Meralco.
While the ILP should provide the Luzon system some
relief for its impending power supply shortage, uncertainty over the exact levels of power committed to the
grid in times of crisis could also increase the possibility of unstable voltage and frequency levels within the
system, particularly if an SGF were to experience an
unexpected failure of its generator. Whether the government ultimately decides to go the ILP route or contract additional emergency generation units directly,
the problem will likely extend beyond 2015 alone.
ENERGY ANALYSIS
113
Renewable energy developers can benefit from tax incentives
Opening up
Renewable energy has enjoyed its most productive year to date
Forces coalesced in 2014 to grant the Philippines
renewable energy industry its most productive year to
date. Spurred on by mounting concerns over the looming energy shortfall, the Energy Regulatory Commission
(ERC) has opened the sector to investment by boosting the renewable capacity approved for the renewable energy incentive scheme ten-fold in many cases.
However, with solar, wind, biomass and small hydro
contributing only 153 MW of installed capacity at end2013, further investment will be needed to achieve
the governments target of 15,304 MW of by 2030. As
Ernesto B Pantangco, executive vice-president of the
Energy Development Corporation, told OBG, The energy sector does not have subsidies, but the government
can target priority areas, like export-oriented firms,
with subsidised rates to maintain competitiveness.
GRANTING INCENTIVES: Originally passed in 2008,
the Renewable Energy Act grants incentives to renewable projects through a feed-in-tariff (FIT) system that
provides approved producers an additional revenue
stream for each hour of renewable energy produced.
The act also established the Philippines' National Renewable Energy Board (NREB), tasked with the administration, regulation and promotion of renewable energy
resources development in the country. Broken down
by generation technology, the act targets a 75% increase
in geothermal capability, along with a 160% boost in
hydropower capacity by 2030. The less well-established
technologies of wind and solar are projected to add
2345 MW and 1528 MW, respectively, alongside an
additional 277 MW of biomass power plants and the
countrys first ocean-powered generation facility.
Since being established in 2010, FIT rates have fluctuated as the ERC performed an ongoing balancing act
to find the optimal price points to create investor interest while keeping a lid on consumer prices. Rates were
reduced significantly from the early levels projected by
the NREB in 2008 to the first implementation in 2012.
When the scheme finally commenced operations, the
rates were P9.68 ($0.22) per KWh for solar, P8.53 ($0.19)
per KWh for wind, P6.63 ($0.15) per KWh for biomass
off-take and P5.9 ($0.13) per KWh for hydropower. Other caveats restricting FIT eligibility include stipulations
that hydropower projects must be run-of-river plants
(as opposed to impoundment facilities) with installed
capacity of 1-10 MW; solar projects must be ground
mounted with 500-KW capacity or greater; and biomass
power plants must be powered by solid, not liquid fuel.
Large-scale, reservoir-based hydropower projects
are omitted from the scheme due to their ability to compete head-to-head economically with conventional
power generation. Rates are expected to be further
adjusted by the ERC in early 2015, with new solar FIT
rates projected to be reduced to P8.5-9 ($0.18-0.19)
per KWh. Another measure is the decline in FIT value
over time. This is meant to protect consumers and
encourage investors to focus their efforts earlier, thereby avoiding speculators. This provision progressively
reduces the tariff rate to ensure that rapid movers benefit more than slower-developing projects.
CONSUMER COSTS: Due to the continued revision of
FIT rates and the cap on eligible capacity, some unpopular consequences, such as excessive rates of return
and spiralling consumer cost, have largely been avoided. The total impact of FIT is only around 1-2% of the
wholesale price on the Wholesale Electricity Spot Market, said Don Mario Dia, director of renewable power
developer Bronzeoak Philippines. In fact, the price
should decrease in the long run if you replace all the
dirty and expensive diesel power with renewable. Other incentives include a seven-year income tax holiday
followed by a 10% corporate tax rate, duty-free imports,
a special real estate tax rate of below 1.5%, accelerated depreciation of assets, tax exemption on carbon credits, and tax credits on domestic capital equipment and
services. Generators are also assured priority access to
grid connections, and the purchase and transmission
of their electricity by the grid-system operator.
FIT SCHEME PARTICIPATION: Participation in the
scheme was initially capped for each technology due
With solar, wind,

biomass and small hydro
contributing only 153 MW
of installed capacity at the
end of 2013, significant
further investment will be
needed to achieve the
governments target of
15,304 MW of installed
renewable capacity by 2030.
114
ENERGY ANALYSIS
The Philippines commissioned its first solar photovoltaic farm in 2014, with 22 MW of installed capacity
According to the National

Renewable Energy Board,
the feed-in-tariff policy has
attracted more than
$800m in direct
investments, aiding rural
economies by creating over
3500 construction jobs
countrywide as of
February 2014.
Many smaller developers

are finding it difficult to
obtain financing from local
banks as institutions have
so far been reluctant to
lend money for projects in
an untested market,
particularly for
smaller players.
to concerns that excessive uptake could lead to unacceptably steep price spikes in the consumer market.
These ceilings limited competing developers to a total
of 250 MW each for run-of-river hydro and biomass,
200 MW for wind farms, 50 MW for solar farms and 10
MW for ocean thermal energy conversion power.
However, strong developer interest and the growing
power shortage prompted the ERC to rethink its position in 2014. Proposed solar photovoltaic projects that
exceeded 1 GW in combined capacity were planned as
of early 2014, and several FIT-approved projects came
on-line in the beginning of the year. With the original
50-MW threshold to be abolished by mid-year, the ERC
(following NREBs recommendation) moved to boost
this figure to 500 MW through end-2015. This was followed by a decision by NREB in October 2014 to expand
the wind power cap from 200 MW to 500 MW. With
these obstacles now removed, developers are rushing
in to fill the gap and take advantage of the numerous
incentives available to qualified power producers.
Even so, many small developers have found it difficult to obtain financing from local banks given reluctance to lend money for projects in a relatively untested market, particularly for smaller players. A significant
impediment arises from the act, which requires that
80% of the facility be built before the owner may even
apply for the FIT, after which the FIT could still be denied.
This uncertainty leads to considerable variation in initial business plans and the return on investment projections. As a result, the majority of projects have been
funded by other means. Awarding the FIT once almost
80% of a renewable project has been completed allows
for the real players to come in and develop projects,
K. K. Ralhan, the group chairman of Kaltimex Energy,
told OBG, However, banks need to understand that they
need to finance projects under these conditions to
really create the opportunities to develop projects.
MOVING QUICKLY: Although progress in the sector has
been moving at a fairly slow pace since the incentives
were first proposed in 2008, clarification of secondary
legislation and permitting processes have recently

opened the door for more renewable developments.
According to NREB, the FIT policy has attracted over
$800m in direct investments and aided rural economies
by creating over 3500 construction jobs across the
Philippines as of February 2014. This includes 638 separate projects awarded under the renewable energy law,
with a combined total installed capacity of more than
10 GW. Of this, 2350 MW was installed as of October
2014, according to the DoE. That said, the majority of
this capacity is derived from geothermal power plants,
which accounted for 79.4% of output (1866 MW) and
are not FIT eligible though geothermal producers are
able to take advantage of other non-FIT incentives.
In terms of FIT recipients, biomass plants, primarily
located in sugar plantations, led all technologies with
291 MW of installed capacity (148 MW of grid connected and 143 MW of own-use power) of total
approved potential of 343 MW spread over 78 grid
and own-use projects. Grid-connected small hydro was
the second-largest contributor, with 119 MW of installed
power, though this is just a fraction of its awarded
potential, with 394 projects totalling 6199 MW. Wind
projects contributed another 52 MW of installed capacity out of 55 awarded projects, tallying 1548 MW.
PHOTOVOLTAIC POTENTIAL: The Philippines successfully commissioned its first solar photovoltaic farm in
2014, with 22 MW of installed capacity, and 74 on- and
off-grid solar farms totalling 1204 MW have been
approved for development. Developers have also
received the go-ahead to build the countrys first ocean
energy plants, with 25 MW spread over five projects.
Despite the overcapacity of approved renewable
projects as compared to the cap of FIT-eligible capacity, investors have continued to show an interest in the
segment, including another 135 projects currently
pending approval under the renewable energy law,
equivalent to 1256 MW of potential capacity and a further 698 MW of installed hydropower capacity. Meanwhile, other potential projects are expected to include
107 hydro projects with a combined 869 MW; 15 solar
projects totalling 221 MW; five biomass projects totalling
99 MW; two new geothermal plants totalling 60 MW;
and a 6-MW ocean energy project.
One of the major impediments to building new generation including renewables is the lack of available transmission capacity. This is a direct result of the
privatisation of the transmission system, which created a long lag in investment in the system. At present,
any major power plant under consideration must also
take on the cost, risk and responsibility for building its
own connection to the grid without adequate assurance of repayment. Often, this aspect of the project is
more challenging than constructing the power plant
itself, and remains a major cause of concern for lenders,
especially with respect to the timely acquisition of
rights-of-way. At the wind farms in Northern Luzon, for
example, while the proponents were able finished their
respective transmission lines on time, most of the energy was still excluded from the grid due to the National Grid Corporation of the Philippines unfinished lines.
115
Industry & Retail

Emphasis on competitiveness and adding value
Local demand to boost motor vehicle manufacturing
Encouraging industries with the most growth potential
Retail sales expansion continues to present opportunities
116
INDUSTRY OVERVIEW
Manufacturing recorded 12.3% growth in 2013, up from 5.5% in 2012
Reversing the trend

Industrial policy is reviving the sector with a special focus on segments
with scope for growth
The country jumped from
59th to 52nd place in the
World Economic Forums
2014-15 competitiveness
rankings due to continued
improvements in corporate
governance and business
friendliness.
Recording an average
growth rate of 5% between
2010 and 2013, food
manufacturing is
responsible for around 45%
of output, and makes up the
largest production segment.
Growing an impressive 7.2%, the Philippines was one

of Asias best-performing economies in 2013. As growth
has given rise to increased business activity and boosted consumer spending power, the question that arises is whether this newfound domestic demand will be
for goods and materials produced locally or exported
from abroad. This is an issue that will become even
more important in 2015 as ASEAN Economic Community (AEC) integration further opens the market to
imports from regional manufacturing powerhouses.
While the Philippines boasts a large domestic population, a competent and proficient workforce, and
proximity to fast-growing Asian markets, it also faces
challenges that erode its manufacturing competiveness
and limit investor confidence when it comes to committing capital expenditure to plants and facilities. In
particular, supply deficits and high costs associated
with power and logistics are two of the main issues that
will need to be addressed going forward.
SUPPORT FOR MANUFACTURING: The administration
of President Benigno Aquino III aspires to achieve inclusive, broad-based growth, a goal which necessitates a
strong manufacturing base that presents employment
prospects for skilled, semi and unskilled workers. According to the Philippine Statistics Authority, services account
for nearly 57% of total GDP, which is nearly double that
of industry (31%). Crisanto Frianeza, secretary-general of the Philippine Chamber of Commerce and Industry, believes that the gap between the two needs to be
closed, as an over-reliance on the services sector to fuel
the economy is risky and could ultimately be less sustainable. Much of our GDP expansion has come from
the business process outsourcing (BPO) sector and
foreign remittances. Our worry is that the BPO sector,
especially call centres, is plateauing. More efforts should
be exerted to shore up manufacturing to achieve inclusive growth, he told OBG. Barring food processing and
electronics, most of the Philippines manufacturing
segments, especially those that are labour-intensive,
have been facing stagnation or decline since the turn
of the millennium. This is a trend that industrial policy

is looking to reverse and combat through industry-specific road maps that target moving into higher-value
activities. It appears that revitalisation is on track. Manufacturing growth of 12.3% for 2013 far surpassed the
5.5% recorded in 2012, and more broadly, the sector
expanded by an average of 7.9% in value added terms
between 2009 and 2013, according to Deloitte.
OPPORTUNE TIMING: Food manufacturing, which
accounts for around 45% of output, makes up the
largest production segment. This is followed by radio,
TV and communication equipment and apparatus (otherwise commonly referred to electronics and semiconductors), and the chemical and chemical products
subsector. According to figures from the National Statistical Coordination Board, food manufacturing experienced a three-year average growth rate of 5% between
2010 and 2013, electronics and semi-conductors grew
3%, while chemical and chemical products expanded
by 39%. The most rapidly growing subsector over this
period, albeit from far a lower base, was furniture and
fixtures, which was up by 57%.
With approximately 90% of the Philippine food and
beverage processing industrys output consumed
domestically, strong growth of the segment is likely to
continue thanks to economic growth and the large
consumer base. A and B clients are more health-conscious and inclined to the market of global brands like
Coca-Cola and Pepsi. Smaller local players focus on the
C and D markets, which comprises the bulk of the population and has led the global brands to diversify their
products to try to tap them, Gerry T Garcia, executive
vice-president and chief operating officer of Asiawide
Refreshments Corporation, told OBG.
Meanwhile, investment rating upgrades and the
improvement in the World Economic Forum (WEF) competitiveness rankings from 59th to 52nd place in 201415, which is based on an evaluation of continued
enhancements in corporate governance and business
friendliness, put the Philippines in a strong position to
INDUSTRY OVERVIEW
attract manufacturing capital. In 2013, investment in

capital formation for durable equipment expanded by
14.4% compared to 8% in 2012.
There is cause for optimism about inbound investments as regional producers seek alternatives to their
traditional manufacturing bases. China, due to wage
increases, is facing rising costs, while Thailand continues to be affected by political instability. According to
research from Deloitte, manufacturing unit costs in
China have gone up by around 50% since 2008 compared to 6% in the Philippines, with wages expected to
rise by a factor of three until 2033 against a factor of
two for the Philippines. We dont want to wish anyone
ill, but issues around unrest in Thailand and anti-dumping laws being levied against China present us with an
opportunity, Dan C Lachica, the president of the Semiconductor and Electronics Industries in the Philippines
Foundation (SEIPI), told OBG.
EXPORTS: According to statistics from the OECD, around
one-third of total gross exports are comprised of foreign inputs, while the share of domestic value added
to gross exports is 61.6%. This demonstrates strong
integration into global value chains.
With a population approaching 100m, the 12th
largest in the world, and an expanding middle class, the
Philippines is fortunate to have a domestic market that
provides sufficient economies of scale for affordable
mass-market consumer goods such as food and beverages. Others, such as electronics, rely primarily on overseas markets. According to the Department of Trade
and Industry (DTI), merchandise exports reached
$53.29bn in 2013, up 3.6%. This fell short of the 10%
GVA by subsector, 2013 (P bn, constant prices)

Low-technology manufacturing
Food
555
Beverages
59
Tobacco
Textiles
26
Wearing apparel
33
Footwear, leather & leather products
Wood, bamboo, cane & rattan articles
13
Furniture & xtures
77
Paper & paper products
13
Publishing & printing
Medium-technology manufacturing
Petroleum & other fuel products
43
Rubber & plastic products
23
Non-metallic mineral products
41
Basical metal industries
31
Fabricated metal products
14
High-technology manufacturing
Chemical & chemical products
184
Machinery & equip. (except electrical)
21
Office, accounting & computing machinery
21
Electrical machinery & apparatus
33
Radio, TV & communications equip. & apparatus
262
Transport equipment
27
Misc.
40
SOURCE: NSCB
117
target set out and was lower than the 7.6% growth
posted in 2012. The drop-off could be attributed to a
slowdown in expansion in China and the US, two key
trading partners, as well as a 2.5% decline in electronic exports. Electronics exports constitute around 45%
of all exports, and the industry is currently undergoing
a trying period as it adapts to a shift in demand for component parts away from laptops and towards tablets
and smartphones (see analysis). Looking forward, factors that could impact export swings in 2015 include
Japans quantitative easing and a further depreciation
of the yen, as the Philippines is a significant supplier
of parts to Japanese exporters. The performance of
the peso may also play a role too. Following a marked
appreciation in 2012 that negatively impacted exports,
however, the peso has since held relatively steady within a comfortable band relative to the dollar.
LABOUR ABSORPTION: The population has a median
age of 23, according to the 2010 census, and 34% of
Filipinos are under the age of 15. Accordingly, the Philippines youthful make-up could prove to be either a
major asset or a significant burden, with much riding
on the degree to which its future graduates can find
adequate employment. Formal unemployment for the
country is measured at around 8%, with approximately 3m Filipinos considered jobless and an additional 7m
deemed to be underemployed. Of the 500,000 college
graduates coming to the labour market each year, manufacturing is said to absorb just around 20,000. It is estimated that in total for the country, an additional 14.6m
jobs will need to be created by 2016.
In the WEF competitiveness rankings, the Philippines
ranked 91st in the labour market category. While faring relatively well in the assessment of wages and productivity, rigid labour regulations are considered to
hamper its overall labour competiveness and deter
some prospective investors from labour-intensive industries. Another challenge facing the labour market is that
the countrys reputation for good workers results in a
large number of the more talented Filipinos opting to
work overseas in countries where they can earn higher salaries. When the AEC happens, the brain drain could
be even worse, said SEIPIs Lachica, referring to the liberalisation of regional labour mobility that will come
about once ASEAN integration takes effect.
POWER PROBLEMS: Power and logistics are invariably
cited as the two primary concerns by manufacturers
OBG has spoken with, and President Aquino, in a speech
delivered at the 40th Philippine Business Conference
in October 2014, acknowledged that both inputs need
to be addressed going forward.
Electricity costs in the Philippines are among the
highest in the world, and its power rates are considered to be the most expensive in Asia. Electricity for
general use in Manila comes out to $0.23 per KWh, compared to $0.07 in Hanoi and Ho Chi Minh, $0.08 in
Bangkok and $0.11 in Kuala Lumpur. The higher rates
stem in part from higher production costs due to a lack
of domestic hydrocarbons resources, while they also
have to do with a conscious decision on the part of
the government not to subsidise tariffs for end-users.
According to Deloitte,
manufacturing unit costs in
China have risen by 50%
since 2008 compared to 6%
in the Philippines. Wages in
China are expected to rise
by a factor of three until
2033 compared to a factor
of two for the Philippines.
INDUSTRY OVERVIEW
The majority of cargo transits through the congested Port of Manila
Batangas, the alternate ports have been designated as

extensions of the city of Manila. Meanwhile, higher
storage fees for the Port of Manila have been imposed
as a means of discouraging cargo owners from using
its terminals as virtual warehouses.
A MATTER OF PREFERENCE: The EU was the Philippines fourth-largest trade partner in 2013, with total
trade valued at $15.10bn. The Philippines has qualified
under the EUs generalised system of preferences (GSP),
which affords 2442 products duty-free export status
to the 28-nation bloc. In 2015 the Philippines is expect
to accrue an even more favoured trade position when
the EU parliament ratifies its status as the first Asian
country to be included in the list of GSP+ beneficiaries. Under the GSP+ regime, the number of products
eligible for duty-free status is set to reach 6247, and a
selection of industries are expected to grow their export
volumes to the EU as a result. The DTI forecasts that
exports to the EU will expand by 20%, in turn creating
as many as 270,000 additional jobs. The industrial sectors expected to benefit most from the removal of tariffs are textiles and garments, bicycles, processed fruits
The high cost and limited

availability of power, along
with infrastructural
constraints, especially at
the Port of Manila, present
major challenges for the
sector. The WEF index ranks
the Philippines 91st out of
144 countries surveyed for
its infrastructure
competitiveness.
Approved foreign investments by source, 2014 Q1 (%)
China
24.2
Japan
22.3
Others
11.8
Singapore
11.4
US
9.1
Netherlands
7.6
Germany
UK
Australia
SOURCE: NCSB
The government argues that offering energy subsidies provides industry with an artificial, unsustainable
advantage and would contribute to an unmanageable
current account deficit in the long term.
Advocates of a subsidy regime counter that the cost
has to be weighed against the benefits in terms of job
creation and the economic multiplier effect. Despite
some of the advantages of the Philippines, Samsung
recently chose Vietnam over us for a $2bn smartphone
manufacturing facility purely because of more favourable
energy costs, SEIPIs Lachica told OBG. Whether or
not you agree with governments rationale to reduce
electricity subsidies, Samsung is not here contributing
to the economy, and thats what matters.
In 2015, electricity availability rather than price is likely to dominate the narrative. A supply shortfall in the
most populated and main industrial province of Luzon
is expected to lead to rolling brownouts of one to three
hours a day from March to May. The president is seeking approval from Congress for emergency powers permitting the government to pursue power purchase and
generation deals for the first time since the power sector was privatised in 2001. As an interim measure and
a potentially more achievable solution, it has been indicated that large companies within the province will be
called to run their own stand-by diesel-fuelled generators to ease demand on the provincial grid, which is
responsible for supplying electricity for nearly half of
the countrys households (see Energy chapter).
LOGISTICS: The WEF index ranks the Philippines 91st
out of 144 countries surveyed for its infrastructure
competitiveness, with its airports (108th) and seaports
(101st) in the bottom third. The majority of cargobound imports and exports, which grew by 8.3% and
5.4%, respectively, through the first six months of 2014,
depart from the Port of Manila. With a utilisation rate
exceeding 100%, the gateway port is facing major strain.
Inefficiency is compounded by congestion, particularly given delays to an elevated road network connecting the ports to other parts of the capital. According
to a September 2014 article in The Wall Street Journal,
the Philippine Economic Zone Authority (PEZA) has
said that port congestion resulted in 20,000 private sector workers being laid off from economic zones around
Manila, while the Bureau of Internal Revenue attributes
falls in tax revenue to the same problem.
In February 2014, the mayor of Manila declared a ban
on heavy vehicles (those weighing over 4500 kg) from
driving on city thoroughfares between 5am and 10am
and from 3pm to 9pm on Monday to Saturday. While
intended to reduce gridlock on the road network, the
controversial truck ban, which was lifted in mid-September, came at a substantial cost for firms reliant on
in- or outbound shipments. The Philippine Franchise
Association stated that its members suffered P3bn
($67.5m) in losses as a result of having to pay more for
imported goods, while SEIPA reported that the disruption in the delivery of raw materials cost electronics
companies as much as $100,000 a day.
To ease congestion and migrate cargo traffic from
the Port of Manila to the nearby ports of Subic and
119
2.7
120
A number of locations have

been designated as special
zones by the Philippine
Economic Zone Authority
and offer tax and other
fiscal and non-fiscal
incentives. There are
around 300 designated
zones catering to more
than 3300 companies.
INDUSTRY OVERVIEW
and fisheries. Under GSP, textiles and garments, which

accounted for $150m worth of exports in 2013, are
subject to tariffs in the 8-10% range, while duties levied
against processed fruit and fruit juices stand at 30%.
The fisheries sector faces 20% tariffs, and the countrys tuna industry could stand to gain substantially as
the EU is the worlds biggest market for canned products. In the case of Ecuador, tuna processing capacity significantly increased when GSP+ status was conferred, Christopher Po, the president and CEO of Filipino
food company Century Pacific Food, told OBG. The
Philippines exported $230m worth of fish product in
2013 to the EU in 2013, with the bloc consuming around
40% of the countrys tuna catch.
There is concern, however, that it could miss out on
the preferential status if it fails to meet an EU ultimatum to rein in illegal fishing, which could result in import
bans and sanctions. In 2012 fish products from Belize,
Cambodia and Guinea were sanctioned when they did
not adhere to the stipulations.
ASEAN INTEGRATION: Closer to home, AEC integration provides the opportunity for the Philippines to
penetrate fast-growing regional markets and reduce
its reliance on exports to the EU and US. The run-up to
AEC implementation has generated considerable debate
over which members stand to gain and lose the most
from intra-regional trade liberalisation, and in the Philippines case, there are concerns that the country may
be in a slightly disadvantageous position.
Places like Thailand are far ahead of the curve when
it comes to industrialisation and will enjoy first-mover
advantage, the Chamber of Commerces Frianeza told
OBG. That said, we need to learn to compete with others and raising our standards compliance both for goods
and services is critical if the Philippines is to maximise
benefits from this regional trade arrangement. In the
long run, it can only help.
SME BACKBONE: Around 99.6% of companies in the
county are small and medium-sized enterprises (SMEs),
of which 89.8% qualify as micro-SMEs (MSMEs), according to DTI statistics. Many operate in the informal sector, and according to Frianeza, If we do not prepare
them for the AEC, they will get run over. We must expose
them to technology and guide them on quality. Chambers of commerce can provide the networks for MSMEs
to access best practices, technology and other expertise needed to compete under this arrangement.
As is the case in many emerging markets around the
world, problems accessing finance, insufficient training and administrative burdens are considered to be
barriers to the development of SMEs. At the moment,
the supply chain does not integrate well with SMEs. Companies like Canon are instead bringing in their own suppliers from overseas, Lachica of the SEIPI told OBG
when discussing the local electronics manufacturing
landscape. Our SMEs lack funding and are unable to
meet original equipment manufacturer standards. The
threat is that with ASEAN integration, even more foreign suppliers will arrive to take their place.
In anticipation of the AEC and to support local SMEs
in gaining a foothold in overseas markets, the Departwww.oxfordbusinessgroup.com/country/philippines-2015
ment of Science and Technology (DOST) has initiated

the Small Enterprise Technology Upgrading Programme,
which aims to assist SMEs at becoming more technologically adept. The programme provides training and
support in the areas of product standardisation, laboratory testing and analysis, packaging and labelling.
For small food and cosmetics cosmetic companies,
accreditation and certification can be an expensive
process, the same with packaging and patent registration. Chambers of commerce can work with DOST to
provide MSMEs with the common service facilities
needed to achieve efficient production and also compliance with required standards, said Frianeza.
ZONING IN: To promote export-oriented manufacturing, a number of locations around the country have been
designated for tax and other fiscal and non-fiscal incentives by the PEZA. PEZA-designated zones and concessions also extend to the services sector, in particular
the BPO sector (see BPO chapter), as well as some
tourism and medical related investments. There are
currently around 300 designated zones actual office
spaces in city centres can be afforded status on their
own as IT parks/buildings catering to more than 3300
companies. PEZA-registered investments rose 6.2%
year-on-year from January through September 2014
to reach an investment total of P148.21bn ($3.3bn) compared to 139.59bn ($3.1bn) over the same period in
2013. According to the authority, around 60-65% of the
funds went to expansion plans for existing locations.
OUTLOOK: The countrys demographic dividend, attractive workforce, projected economic growth and the
continued improvement of its business environment are
combining to generate investor interest. Industrial policy and road maps, formulated and implemented with
input and buy-in from industry associations, will support the country as it works to develop segments that
have high job absorption capacity, multiplier effects and
scope for growth. However, until power and logistics
deficiencies are addressed, some manufacturers will
remain reluctant to commit significant capital expenditure to plants and facilities. Meanwhile, ASEAN integration offers newfound market access to a wide and
emerging consumer base, and the Philippines will need
to ramp up its manufacturing competitiveness to ensure
it becomes a net exporter, rather than a pure importer,
of value-added products moving throughout the region.
Merchandise trade by country, Jan-May 2014 ($ bn)

Exports
Imports
Japan
5.72
2.06
7.78
US
3.43
2.51
5.94
China
3.2
3.85
7.05
Hong Kong
1.86
0.6
2.46
Singapore
1.84
1.79
3.63
Korea
1.12
2.32
3.44
Thailand
1.07
1.28
2.34
Germany
1.07
1.13
2.2
Netherlands
0.79
0.15
0.93
Total
24.36
26.63
51
SOURCE: Export Marketing Bureau
Total trade
INDUSTRY & RETAIL INTERVIEW
Hikosaburo Shibata, President & CEO, Mitsubishi Motors Philippines
A market accelerates
OBG talks to Hikosaburo Shibata, President and CEO, Mitsubishi Motors
Philippines
The Philippines is among the fastest growing car
markets in Asia. What is driving this growth, and what
characterises the domestic market?
SHIBATA: Sustained economic growth and subsequent
higher disposable income for Filipino households has
generated significant growth momentum and opportunities for expansion in car sales. In 2014 the January
to October period saw total demand for car sales grow
by 28%, outpacing the performance of similarly sized
markets elsewhere. After Thailand, Malaysia and Indonesia, the Philippines is the next country in the region
undergoing motorisation, incentivising manufacturers
and car dealers to pursue expansion. Historically, countries have undergone rapid motorisation when GDP
per capita reaches $3000; in 2014 the figure for the
Philippines was estimated at $2913, according to the
IMF. While Manila and Luzon account for the majority
of new car sales, expansion into provincial and rural markets offer significant growth potential.
Whereas the large families and strong ties that
typically characterise Filipino households have led to
the popularity of seven- and eight-seater SUVs, demand
for A and B segment cars is also rapidly increasing as
higher disposable income translates into demand for
smaller and more fuel-efficient cars.
Environmental friendliness is another major global
trend for the car industry. However, the Philippines still
needs significant support, both legislative and infrastructural, to encourage the large-scale adoption
of environmentally friendly models. From the government standpoint, there has been an environmental
law drafted in Congress, that could boost developments in environmental sustainability and increase
awareness of pollution reduction.
In what ways do unauthorised imports and the

formation of grey markets affect the automobile
market in the Philippines?
SHIBATA: Currently, the majority of used car imports
are luxury models, particular coming to the northern
part of Luzon, in Cagayan. In the past, there was a higher incidence of second-hand SUVs being imported from
Japan: however, Executive Order 156 and its ban on the
importation of used vehicles was able to curb this.
Nonetheless, around 40,000 to 50,000 second-hand cars
are imported from around the world. Given the fact
that new car sales are expected to reach roughly
260,000 by the end of 2015, the used car market
would still represent around 17% of the market. Unlike
in Indonesia, Malaysia or Thailand, where local car
manufacturing is protected from the used car markets,
there is still room for further strengthening the
implementation of the ban in the Philippines.
In addition, the Philippine second-hand car market
is not mature. Whereas dealers in neighbouring countries generally offer used cars and the option for consumers to trade in their used vehicles, in the Philippines
used car transactions still tend to occur outside of the
dealership businesses.
To what extent can the development of a roadmap

for the auto industry incentivise automotive
companies to invest in manufacturing facilities?
SHIBATA: We have the longest history as an original
equipment manufacturer operating in the Philippines.
The acquisition of the former Ford plant is a strategic
decision to invest and increase our current production
capacity to up to 100,000 units. However, this will not
materialise in the absence of a roadmap for the
automotive industry. Although the country is recognised
as an important market, the Philippines currently
produces roughly 80,000 units compared to the
production of 2m units in Thailand.
Furthermore, manufacturing activities are important
because they create jobs: not only tier 1, 2 and 3, but
a wide range of employment opportunities from
logistics providers to the chemical industry. The Philippines exhibits a real opportunity to capitalise on
manufacturing, provided the right framework is put
in place to give support to the growth of the industry.
121
122
INDUSTRY & RETAIL INTERVIEW
Ben Chan, Chairman and CEO, Suyen Corporation
Experiential shopping
OBG talks to Ben Chan, Chairman and CEO, Suyen Corporation
How has retail liberalisation altered the domestic landscape, and what role has franchising
played in bringing foreign ideas to the market?
CHAN: The results of retail liberalisation have been
nothing less than dramatic. The retail landscape of
the Philippines is barely recognisable from the way
it was just 10 years ago. Whereas many Filipinos
used to travel to Hong Kong or Singapore for a global shopping, dining and leisure experience, now we
have all of that in Metro Manila.
The most striking feature of this liberalisation is
how global it is. The foreign retail market used to be
dominated by US brands and a handful of really wellknown European ones. Now we have Scandinavian,
Japanese, Australian, South American, Canadian,
Israeli and other foreign-owned franchises competing side by side in one mall.
Franchising has played a huge role in making this
happen. Our company both franchises its own brand,
Bench, and acquires foreign ones. This practice has
created a dynamic exchange of ideas within our
company, something that is replicated in the retail
market as a whole. Each franchise comes with its own
business model and its own point of view, so when
one franchiser or franchisee exchanges business
models with another, much growth and learning
comes as a result. The consumer benefits from this
immensely, as standards are raised, quality is
improved, and knowledge is shared and imparted,
which in turn fuels growth and more demand for other new ideas and concepts.
How has the proliferation of malls affected retailers? What are the challenges in further extending penetration outside Metro Manila?
CHAN: We are now very motivated to fill those new
mall spaces with the most exciting and inspiring
retail concepts we can find in the world. The new
malls are providing customers with a complete
lifestyle experience, where you can spend a whole
day there and have all your needs met, from shopping and dining to lounging and entertainment. It is
completely aspirational. As a retailer, you have to
cater to that desire and take a lifestyle approach to
the way you do retail. You have to be very meticulous about the lifestyle message that your store
wants to deliver, because if it resonates with the
lifestyle to which your target customer aspires, then
you will have an increasingly loyal clientele who will
keep coming back for more.
Advancing outside of Metro Manila is an organic
process that will take more time, since customer
habits there are a bit slower to adapt. The malls in
the second and third biggest cities, Metro Cebu and
Metro Davao, will inevitably carry the biggest and
most successful brands already found in Metro Manila, and will usually follow the trends set by Manila.
What have been the challenges to building brand

loyalty and consciousness in the Philippines?
CHAN: The biggest challenge is that there are no
longer any set rules or formulas for establishing
brand loyalty and brand consciousness. There used
to be a sort of tried and tested technique to creating brand awareness and public relations, but that
is now giving way to new methods of promotion
thanks to the internet, blogs and social media. Nowadays, a retailer is not just a purveyor of products and
services but also a disseminator of information. You
have to keep feeding the public with posts on Facebook, Twitter and Instagram; you need to upload
videos on YouTube; you need to be in the news; you
need to be on top of celebrity culture. Your customers appreciate it when you send them text messages and emails about the latest offerings in your
store. You get instant feedback as well, which keeps
retailers on their toes. Because of this flow of information, retailers are now working at a very fast pace.
Brand loyalty is an elusive thing given that customers
are more responsive than ever to new products.
INDUSTRY ANALYSIS
123
Demand for vehicles is expected to increase in line with income levels
A steady drive
Establishing a stronger base for vehicle and components manufacturing
In 2013, the Department of Trade and Industry (DTI)
was allocated P2.3bn ($51.8m) from the Department
of Budget and Management towards its manufacturing resurgence programme. The programme will support the implementation of a number of industry road
maps that have been formulated by the Board of Investments (BOI) with input from technical working groups
including industry representatives. In all, 22 manufacturing road maps have been submitted to the DTI-BOI
so far. One stand-out programme is the Comprehensive Automotive Resurgence Strategy (CARS), which is
receiving attention in light of the multiplier effect a
strong domestic vehicle and components manufacturing base provides, and the market access and supplier integration opportunities set to come about via
ASEAN Economic Community (AEC) integration.
DEVISING A PLAN: Establishing an automotive manufacturing base is not without its challenges, and the
country has some catching up to do with the regions
more established vehicle producers. According to ASEAN
Automotive Federation data, the Philippines assembled 79,169 vehicles in 2013 compared to 2.46m in Thailand, 1.21m in Indonesia and 601,407 in Malaysia.
Thailand is the regions leader, a position that
observers attribute to the implementation of dynamic and focused industrial policy. Considering the extent
to which the automotive industry relies on global supply chains, as component companies cluster around their
original equipment manufacturer (OEM) customers,
the Philippines is looking to emulate the Thai example,
as well as those of countries such as South Africa and
Brazil that have emerged as regional production success stories by integrating into the networks of leading multinational automotive makers.
SEEKING DIRECTION: As part of the CARS programme,
the establishment of an industry support fund potentially totalling $600m is being considered. The final version of the industry road map has not yet been released,
but indications are that it will entail a combination of
income tax holidays and tax credits. Wooing OEM brands
to relocate to the country, however, is not as simple as

offering preferential terms and financial incentives.
The DTI has stated that reward packages will likely be
offered to companies producing a minimum of 200,000
units of a particular vehicle model over a five-year period. Yet high-volume production depends on a strong
local supply base, which at the moment the country
does not possess across the board. A car, on average,
has around 30,000 component parts, and production
of these relies on viable chemical, plastic, textile, rubber, glass, steel, electrical and other manufacturing
subsectors or supply chain linkages.
The Philippines does have a local petrochemicals
sector that produces the ethylene and polyethylene that
go into manufacturing rubber and some engineering
plastics. This could change, however, when a $800m
cracking facility being built by JG Summit Holdings,
which is expected to produce 320,000 tonnes per year
of ethylene, comes on-line.
Due to proportionally higher energy and other input
costs, studies reveal production costs in the Philippines
for an average passenger vehicle are around $1000 more
than in other ASEAN producer country, a margin that
incentives would be difficult to offset.
LOCAL MARKET: Perhaps the countrys biggest draw
for multinational OEMs is the growth potential of the
domestic market as at some point economies of scale
could tip the balance in favour of local assembly over
imports. Despite a population of close to 100m, income
levels have lagged other countries in the region and
motor vehicle ownership is comparatively low. Thailand, for example, with 67m people, has 40% more car
sales than the Philippines. Low saturation, however,
makes the Philippines one of the more promising car
markets when evaluating scope for expansion, as the
country is viewed to be on the cusp of motorisation
a term referring to when car ownership spreads beyond
urban centres and becomes more commonplace.
According to figures from the World Bank, gross national income per capita totalled $3270 in 2013, which is
The regions more

established vehicle
producing nations include
Thailand, Indonesia and
Malaysia, which assembled
2.46m, 1.21m and 601,407
vehicles, respectively, in
2013, compared with
79,169 in the Philippines.
124
INDUSTRY ANALYSIS
Achieving a high volume of automotive production depends on having a strong local supply base
With the creation of the

ASEAN Economic
Community in 2015,
intra-regional imports will
be subject to zero tariffs,
presenting opportunities
for manufacturing
exporters.
up substantially from $2480 in 2009 and almost treble the amount recorded in 2003.
More earnings, consumer confidence, low interest
rates and the increased ease of getting loans are generating new demand, Renato Pizarro, the senior vicepresident at Hyundai Philippines, told OBG.
According to the Chamber of Automotive Manufacturers of the Philippines, sales of passenger and commercial vehicles from January through September 2014
increased almost 30% year-on-year. In 2014 sales
increased by 29.5% to 234,747 units, while 272,000 units
are expected for 2015, a growth rate of 16%.
IMPACT POTENTIAL: A situational study included in the
road map proposal concludes that industry savings of
P759bn ($17.1bn) could be achieved by 2022 if 400,000
completely built units are made locally instead of being
imported. At the same time, an estimated 300,000 jobs
could be created domestically and the industrys contribution to overall GDP increased to 2.2%. A separate
study released by the University of Asia Pacific and referenced by the BOI reveals that every P100bn ($2.3bn)
in investment in the industry creates an estimated
170,000 additional direct jobs.
In 2013, employment in the industry was broken
down into 8000 workers directly employed in auto
manufacturing, 68,000 in the auto parts sector and
340,000 indirectly employed in supporting industries.
AEC: Any OEM brand evaluating between competing
investment markets within ASEAN will likely be assessing the regional market as a collective, as once the AEC
is formalised in 2015, intra-regional imports will be
subject to zero tariffs. Manufacturers will have to rethink their regional set-up, said Pizarro. Competing
Japanese brands that manufacture and import to the
Philippines from Thailand will suddenly become a lot
cheaper than European or Korean vehicles imported
from their home or a non-ASEAN country.
ASEAN pooled population of 600m people presents
attractive prospects for whichever members emerge
as net exporters. Deutsche Bank forecasts ASEAN car
ownership to grow 10% year-on-year to reach 40m

units in 2015 and 44m by 2050. Consultancy Frost &
Sullivan anticipates ASEAN will emerge as the sixthbiggest automotive market globally by 2018.
ELECTRIFYING NICHE: Considering the barriers that
need to be overcome to catch up with the likes of Thailand as a major automobile producer, perhaps the more
viable course of action for the Philippines is to hone in
on one or two vehicle types where it can achieve a competitive edge through specialisation.
Looking back at Thailands journey into becoming a
global competitor, it first forayed into vehicle manufacturing by focusing on cost-effective pick-up trucks used
for its own agriculture sector. In a similar vein, a logical starting point for the Philippines could be in producing and eventually exporting electronic versions of
the jeepneys and motorised tricycles that dominate the
countrys public transportation landscape. The origin
of the colloquial term jeepney is rooted in their first
conceived versions having been re-assembled from US
military jeeps left after the Second World War. These
iconic and colourful bus-van hybrids are uniquely Filipino, and deemed a practical, efficient and affordable
means of moving people in urban and rural settings
where commercial bus fleets have not hit critical mass.
There are an estimated 370,000 jeepneys on the
nations roads. Many are approaching the end of their
shelf life, and are noisy and highly polluting. According
to estimates from the Department of Environment and
Natural Resources, the 55,000 jeepneys serving Manila account for around 80% of the capitals carbon emissions. In order for jeepneys to retain their prominence
within the transportation network, modernisation is
needed, and the Electric Vehicle Association of the
Philippines believes that electric versions offer a sustainable solution. The association is targeting to have
1m electric vehicles in the Philippines by 2020. Prototypes have been developed, and while costing about
P300,000 ($6750) more than a traditional jeepney, the
initial outlay will be recouped in lower petrol and maintenance costs over the vehicles life span.
The Philippines is home to 3.5m motorised tricycles
(trikes), and they function similarly to Thailands tuk tuks
and Indias rickshaws, with the main physical difference
being that the passenger carriage is attached to the
side of rather than behind the driver. The Asian Development Bank is providing $300m towards a $500m
plan to introduce an initial tranche of 100,000 e-trikes
by 2017. There are currently three Japanese e-trike
manufactures that have invested in the Philippines,
and expectations are that they will be looking to eventually export models to other regional markets.
While analysts applaud the efforts to further promote e-vehicles for local use, some are reserving enthusiasm until there are more clear signs that the support
infrastructure, such as plugin stations, can be put in place
nationwide. Although manufacturers can tap into certain supply-side incentives from the BOI as it is eager
to encourage environmentally friendly investments,
some argue that demand-side incentives are required
to encourage potential owners to incur the expense.
INDUSTRY ANALYSIS
125
The country is looking to boost competitiveness and add more value
Changing with the times

New growth segments are emerging in the electronics industry, with
efforts also under way to move up the value chain and boost exports
Prior to the business process outsourcing (BPO) boom
that took hold in the early 2000s, the semiconductor
and electronics industry had served as the countrys
main economic growth driver for nearly four decades.
At its peak earnings in 2010, with export receipts of
$31.44bn, it accounted for 61% of exports, a ratio that
by 2013 had dropped to 40% ($21.8bn). Although we
still make up the largest export category, our concern
is not about percentage contribution, as we are happy to see other export categories grow as well, but
about the fact that overall the industry is on the cusp
of a downtrend, Dan C Lachica, the president of the
Semiconductor and Electronics Industries in the Philippines Foundation (SEIPI), told OBG. Demonstrating the
importance of reversing this downtrend, a hypothetical scenario study conducted by the University of Asia
and the Pacific in 2013 found that if the industry was
to disappear entirely, GDP would fall by 28%. In terms
of employment creation, SEIPI measures the number
of direct and indirect workers that the industry is responsible for at 2.1m. Lachica pointed to the need for joint
government and industry intervention and the formulation of a national strategy that provides the country
with a compelling competitive proposition.
CHANGING FORTUNES: In the 1970s, electronics manufacturers began shifting their production facilities to
emerging economies in pursuit of cost savings, and the
Philippines became a desired location for component
manufacturing due to its cost competitiveness, widely spoken English and proximity to large Asian producers of finished goods. The government also created a
framework of incentives for prospective investors,
which in 1995 were transferred under the auspices of
the Philippine Economic Zone Authority. By 1996, the
semiconductor and electronics had surpassed agriculture as the countrys largest export earner.
The industry is divided into two categories. The semiconductor manufacturing service (SMS) grouping comprises semiconductor components and devices for
which the Philippines has earned a global market share
of around 10%. This is the larger of the two segments,

and in 2013 accounted for 73% of electronic exports,
according to figures from SEIPI.
The second category, electronics manufacturing
service (EMS), includes computer-related products,
office equipment, consumer electronics, telecoms,
communications/radar, control and instrumentation,
automotive electronics and solar/photovoltaic.
Leading global SMS producers with an active manufacturing presence in the Philippines include Texas
Instruments, ON Semiconductor, Amkor Technology
and NXP, while Samsung, Toshiba, Western Digital, Canon
and Epson constitute some of the more recognisable
global brands in the EMS field.
OBSTACLES: In recent years, a confluence of factors
including rising power tariffs and subsidy reductions,
logistics bottlenecks and a shortage of raw materials
has prompted some companies to exit the country and
relocate. In terms of productivity, the Philippines is
one of the highest in ASEAN. Unfortunately, because
of the way energy costs are structured in the Philippines, they do not allow the country to supply a more
diverse product mix because more and more of the
requirements for high quality and reliability entail a
certain level of automation using energy-intensive
equipment. As a result, to move up the value chain
would put the Philippines at a disadvantage versus its
regional neighbours, Arthur R Tan, president and CEO
of Integrated Microelectronics, told OBG. A major blow
came in 2009 when Intel closed its semiconductor
plant. Whereas during 2010-12 average annual investment in the industry was in the $2bn range, this figure
dropped to $919m in 2013. According to SEIPI, every
P1bn ($22.5m) of investment in the industry contributes
between 620 and 1408 jobs to the economy.
Integrated circuits, circuit boards and data storage
producers have long been the mainstay of the electronics industry. Most Philippine-based players took a hit
in 2013 as they were focused on desktop and laptop
computer components while demand shifted to tablets
The semiconductor and

electronics industry
accounted for 40% of
exports with $21.8bn in
2013, compared to
$31.44bn and 61% in 2010.
126
INDUSTRY ANALYSIS
An electronics industry road map aims to boost annual exports to $37bn by 2016 and $52bn by 2022
Areas of the electronics

industry that are
earmarked for global
growth include advanced
robot systems, automotive
electronics, the smart
energy market, and
connected devices and
wearables.
and smartphones. The first half of 2014 offered some

relief to the industry as a whole, as risings costs in China and a territorial dispute between China and Japan
contributed to exports increasing by 4.2% year-on-year
for the period, according to analysts.
ADDING VALUE: According to Lachica, due to prohibitive power costs, barring a few exceptions, most of the
Philippines SMS industry centres around testing, assembly, cleaning and packaging. SEIPA measures total electronic imports as accounting for 21% of the import total
from January through to August 24th, and based on data
from the World Bank, imported parts make up in excess
of 80% of the value of the Philippines electronic exports,
a reflection of the fact that components undergo limited value-adding assembly and packaging before being
sent abroad. These are activities that Lachica labels as
low-margin, commoditised, and more susceptible to
price and demand swings. In addition, they are considered to be more mobile in the sense that factories can
more easily pack up and leave to a more affordable destination. To facilitate a transition up the value chain, the
Department of Trade and Industry has formulated an
electronics industry road map that aims to increase
annual exports to $37bn by 2016, $52bn by 2022 and
$112bn by 2030. The road map seeks to guide the electronics industry as it moves up the value chain, develop new growth areas within the existing sector and
enhance its competitiveness to seize opportunities
that will be available with the ASEAN economic integration. Interventions identified include capacitybuilding, research and development, policy reform, and
harmonising existing mechanisms and institutions.
PRODUCT DIVERSIFICATION: Running parallel to revitalising the SMS space is a strategy to boost the share
of EMS devices, and here particular promise is being
shown in the office equipment and automotive components subsegments. Office and desktop printer
exports are categorised as office equipment by the
Philippine Statistics Authority and accordingly export
figures are not reflected in semiconductor and elec-
tronics data. If they did, they would provide a rosier picture for the industry, with exports jumping 137% in
2012 and a further 5.7% in 2013. Recent investors in
the office segment include Epson, which opened a
$110m inkjet printer plant in 2011, and Brother, which
completed a $54m inkjet cartridge plant in August
2013 and is building a $62m inkjet printer and printer-copier-scanner plant. Canon announced in 2012 it
would spend $220m on a laser printer facility.
ON THE RIGHT PATH: Cheaper electricity and lower
wages make it difficult to compete with the likes of Vietnam and Indonesia in the lower-value assembly and
package space. Thailand, with strong inter-industry linkages, established infrastructure and a reputation for
quality, is positioned as the regions leader when it
comes to high-technology semiconductor activities.
For Lachica, this leaves the Philippines with little competitive alternative but to deliberately hone in on a
niche, similar to what Malaysia has done with wafer fabs.
In order to ascertain the product lines and technologies where the countrys electronics industry can carve
out an economically rewarding niche, Lachica believes
it necessary to study where the global industry is headed in terms of future end-product demand and identify a technological trend that the country possesses the
competencies to exploit. SEIPI has commissioned a
research assessment called Product and Technology
Holistic Strategy and is seeking funding and support
from outside parties such as the US Agency for International Development. It will also be calling on local government agencies to leverage the studys outcomes and
recommendations to guide investment promotion and
industry marketing as well as influence infrastructure
investment decisions. The education system, meanwhile, will be tasked with matching their science, math
and technology courses. Although the study has not
yet ended, areas of the electronics industry that are
earmarked for global growth include advanced robot
systems, an automotive electronics market that is moving towards autonomous driving systems, the smart
energy market, and connected devices and wearables.
The industry road map seeks to develop new growth areas

RETAIL OVERVIEW
127
Gross value added in retail trade expanded by 6.8% in 2013
Good prospects
Rising incomes bode well for the sector, while mall expansion is shifting
out of the urban centres
With a young, rapidly growing and consumption-driven market of nearly 100m, an expanding middle class
and positive consumer sentiment, the Philippines
demographic and socio-economic status makes it one
of the regions more promising retail destinations.
Consultancy A.T. Kearney, in its 2014 Global Retail
Development Index, ranked the Philippines 23rd out
of 200 emerging economies evaluated, based partly
on expectations of retail sales growing 10% per annum
for the next three years. The report predicts another
five to 10 years before the market approaches maturation, making the coming period the optimal time for
new entrants seeking to gain a foothold and existing
retail groups looking to expand their presence amidst
more favourable trading conditions.
Adjusted for inflation, figures from the National Statistical Coordination Board show gross value added in
the retail trade expanded by 6.8% in 2013. This growth
is expected to continue as remittances from Filipinos
overseas and the business process outsourcing (BPO)
sector the two underlying factors driving the performance of the sector show no signs of slowing.
ADAPTING TO TRENDS: Going forward the retail landscape is expected to see greater competition and gain
in sophistication. A third of the countrys population
falls in the 20- to 30-year-old age bracket the socalled retail sweet spot and is considered more brandconscious and prone to adapt to and demand new
retailing trends. The population is young, the workforce is growing, and if you get it right as a retailer, you
will grow, Paul A Santos, the national vice-president
of the Philippine Retailers Association (PRA), told OBG.
The Philippines offers arguably the most Westernised culture and the strongest English language skills
in Asia, and as a result international brands and concepts have had a high success rate. However, taking
on the local retail incumbents, many of which are affiliated with large conglomerates, can prove a challenge,
especially when it comes to securing retail space in
the more sought-after malls and shopping districts.
GROWTH DRIVERS: Buoyed by an optimistic consumer outlook and strong consumerist culture, the
World Bank forecasts private consumption to contribute more than half of GDP growth in 2015. The
Philippines gross national income per capita totalled
$3270 in 2013, which is substantially up from $2480
in 2009 and almost treble the amount recorded in
2003. A second-quarter 2014 survey released by the
central bank, Bangko Sentral ng Pilipinas (BSP), reported consumer expectations for the next 12 months to
be upbeat based on improved prospects for job security and more investment in the country.
At any given time, it is estimated that approximately 10% of all Filipinos are working abroad as overseas
foreign workers (OFWs). The earnings they send home
make up around one-tenth of the economy, and a
large proportion goes towards retail spending. Cash
remittances increased 6.4% in 2013 to reach record
levels, and the BSPs Department of Economic Statistics predicts 2014 remittances to expand a further 5%
to reach $23bn for the year.
The BPO sector is the second-largest economic contributor after remittances. According to the IT and
Business Process Association of the Philippines, the
industry was responsible for $15.5bn in revenue in
2013 while employing 900,000 people a dramatic
increase from the $3.2bn of revenue and 240,000 jobs
it accounted for in 2006. According to BSP figures, the
average salary of a BPO worker in 2012 came out to
$8849, which is nearly triple the minimum wage in
Metro Manila. Most BPO workers are in their mid-20s
and early 30s, and many are living at home with high
disposable incomes. Retail is really feeling the effect
in a positive way, Christopher Po, president and CEO
of Century Pacific Group, told OBG.
As with OFWs and BPO workers, tourist arrivals, in
both the leisure and business segments, are also on
the rise, with the Department of Tourism reporting the
number of foreign visitors to have grown by 9.5% in
2013. This provides an additional budding shopper
The Philippines retail sales

are forecast to grow 10%
per year for the next three
years, with the market not
expected to approach
maturation for another five
to 10 years.
128
RETAIL OVERVIEW
In addition to becoming more competitive, the retail landscape is expected to gain in sophistication
Given the resources of the

dominant retail players and
the competition to expand
their presence
geographically and enter
into new categories, the
sector has seen
consolidation in recent
years, with the larger
players absorbing specialist
and regional outfits.
base for retailers to capture, justifying the further

development of retail space in both business centres
and tourist hotspots.
MONETARY MATTERS: Mounting consumer demand,
while supporting sales, is also driving inflation. Price
increases reached a two-and-a-half-year high in May
2014, rising to 4.5% year-on-year from 4.1% in April,
with bubbling consumer demand cited as one factor
stoking inflationary fires. As a substantial portion of
retail goods are imported, logistics costs factor heavily into merchandise pricing, and port bottlenecks and
disruptions also contributing to inflationary pressure.
According to the Philippine Franchise Association
(PFA), its members suffered P3bn ($67.5m) in total
losses as a result of having to pay more for imported
goods reaching their stores over the course of a truck
ban in Metro Manila that took place between February and September 2014.
With inflation potentially creeping towards the high
end of the BSPs 3-5% target band, this could prompt
a raising of key interest rates, which could, in turn, curb
the appetite for spending amongst credit card holders and those with household debt. The effect would
likely be limited, however. Interest rates do not have
much influence on retail sales outside of the wealthier catchments of Metro Manila as most Filipinos earn
and spend in cash, Sam Christopher Lim, the chairman for ASEAN integration at the PFA, told OBG.
Exchange rates, for the most part, have not been a
major issue for retail imports over the past few years,
with the value of the peso staying relatively stable
against the US dollar since 2012.
DOMINANT INCUMBENTS: The Philippines retail landscape is dominated by four major domestic players,
each of which has a diversified portfolio covering a
mix of retail categories and format types.
The SM Group, whose parent company also has
interests in the banking, property and hospitality sectors, is considered to be the largest of the four retail
players. As of June 2014, the retail and mall giants ownwww.oxfordbusinessgroup.com/country/philippines-2015
ership footprint consisted of 50 shopping malls and a

total of 240 retail stores.
The Ayala Corporation, arguably the countrys largest
conglomerate, owns and operates a significant mall
portfolio under its Ayala Land real estate arm. To complement its mall offering, it is increasingly venturing
into starting up or partnering with existing retail chains
to leverage the lease space it has available in its soughtafter mixed-use developments.
Robinsons, the third major competitor, develops
and manages its own branded malls, supermarkets
and department stores throughout the country. Rustans, the last of the big four, is considered the leader
in the higher-end retail and fashion space, representing more than 70 foreign brands.
Considering the diversified interests of these groups
and the tendency in the Philippines for mall and retail
property owners to also own or partner with store
franchises, penetrating the market for independents
presents its challenges. The groups are understandably prioritising their own brands and granting them
more desired mall locations, the PRAs Santos told
OBG. While some international brands, like H&M, have
been able to negotiate better slots and better rates
as the landlords understand they can help drive footfall, local unaffiliated players find things challenging.
Given the resources of the dominant sector players
and the race amongst them to spread their footprint
geographically and enter into new retail categories,
the trend in recent years has been one of consolidation, with the larger players absorbing smaller specialist and regional retail outfits.
RETAIL SPREAD: The Philippines displays a marked contrast between urban and rural income and development levels, an attribute that is evidenced in the large
concentration of malls amongst the major population
centres. As of the end of 2013 real estate service firm
Jones Long LaSalle (JLL) measured total shopping mall
space at 13m sq metres, of which more than half (7m
sq metres) was located in Metro Manila, while the bulk
of the remaining space was in the secondary cities of
Cebu, Davao, Cavite and Pampanga.
By 2015, JLL expects new supply of 1.4m sq metres
to hit the provinces, drawing level with Metro Manila.
For the first time, wealth is being distributed outside
of the capital. In the past, the regions were stagnant.
Now there is an aspiration shift, and this is being seen
in the pace of malls opening in the provinces, George
Royeca, a business development associate at IT com-
Convenience store expansion, 2014-20

Company
By end-2014
Expansion target
7-Eleven
1300
2000 by 2017
Mini Shop
500
750 by 2016
FamilyMart
130
500 by 2018
All Day
100
400 by 2016
Circle K
10
TBD
Alfamart
TBD
Lawson
500 by 2020
SOURCE: Company reports
RETAIL OVERVIEW
pany IPVG Corporation, told OBG. In addition to rising

wages and disposable income levels, the attraction of
the provinces for mall developers is the lack of saturation and the comparative opportunity for growth.
Based on projections of per capita retail floor space,
some analysts are concerned about the risk of oversaturation in the capital.
In Metro Manila people have more choice and the
mall offering is more commoditised, so one tends to
go to whichever mall is closest to home or work, said
the PRAs Santos. In second-tier cities, however, there
are not only fewer shopping malls to choose between,
but less public spaces and parks. In turn, the major malls
become a place of leisure to spend evenings and weekends with family and friends.
MEGA-MALLS: While the pace of development of
new malls in the provinces is expected to surpass that
seen in urban centres, developers are far from packing up and shifting their focus entirely to remoter
areas. The springing up of planned satellite townships
in and around Manilas outskirts and other secondary
cities still provides ample scope for development.
Case in point is the town of Eastwood City in southern Quezon City. Little more than a plot of abandoned
factories two decades ago, spurred by the BPO boom,
Eastwood has morphed into a mixed-use node where
60,000 people work at 59 firms located in a cluster of
office towers spread over 17 ha. They, along with the
developments 20,000 residents, have 500 shops to
choose amongst. Similar sites that have grown off the
back of the BPO sector include Bonifacio Global City
and Alabang. The Bay City and Newport City precincts,
in addition to housing commercial offices catering to
BPO firms, have large resort and gaming components.
Another unique trait of the Philippines is that developers and shoppers alike prefer their malls big. In a
2012 ranking compiled by real estate data mining company Emporis, the country was home to three of the
worlds 10 largest malls as measured by floor area. The
SM Groups Megamall, City North and Mall of Asia
properties ranked third, fourth and ninth, respectively. These three malls along with Filinvests Festival Mall
and the Ayala Groups Greenbelt also made it onto
international lifestyle website Complex.coms 2013 list
of the worlds 50 coolest malls.
According to third-quarter 2014 report by property firm Colliers, 56,000 sq metres of retail space came
on-line in the preceding six months, bringing greater
Manilas total retail stock to 5.8m sq metres, while an
additional 167,000 sq metres was expected for delivery by year-end. Demand for retail space in 2013 was
strong over the course of 2013, keeping vacancy rates
below 5%, according to CBRE. Average rents remained
stable, however, due to a glut of supply hitting the
market towards the tail end of the year.
FOREIGN BRANDS: Developers confidence that new
malls will have uptake is also being fuelled by the arrival
of international chains, which for brand positioning purposes, are quite selective in where they choose their
sites. Demonstrating that expansion is taking place in
multiple categories by retailers hailing from a number
129
The country offers relatively affordable lease rates in comparison to more developed Asian retail centres
of regions, 2013 and 2014 saw the arrival of fashion

brands from the US (American Eagle Outfitters and BH
Fashion) and Sweden (H&M) as well as international
jeweller Claires, Korean bakery Tous Les Jours, Japanese convenience store chain FamilyMart and Hong
Kong supermarket Wellcome to name but a few. Ten
years ago, there was definitely a cultural predisposition towards American brands. But as Filipinos become
more cosmopolitan and are exposed through the internet and media to more trends, country of origin has
less relevance, said the PRAs Santos.
On top of an emerging consumer base, an additional appealing attribute of the Philippines is that it offers
relatively affordable lease rates in comparison to more
developed Asian retail centres. Acquiring a square
metre of rental space in Manila costs about $390,
compared to $1200 in Bangkok, $5000 in Singapore
and $5370 in Shanghai.
LOCAL PARTNERSHIP: As in any emerging market,
affordability is critical for the countrys retailers, whose
business model requires economies of scale and a
large mass-market footprint. This prevents general
merchandisers from entering, and explains the prevalence of high-end fashion brands that are comfortable
operating with higher-margin, lower-volume turnover.
As low income levels for the majority of the population translates to food accounting for a large proportion of household expenditure, food retailers have
strong prospects for growth, so long as they can adapt
to meet local market particularities. We have been
dubbed a sachet economy as purchases for basics like
laundry detergent and instant coffee are mostly done
in small package sizes, the PFAs Lim told OBG.
For the PRAs Santos, complicated and fragmented
trading conditions between the urban centres and the
provincial islands results in a tendency for international brands to pursue partnering with an established
domestic group as a means of gaining local market
knowledge. Local partnerships take on greater importance for brands looking to secure strategic store space
In addition to rising wage

and disposable income
levels, the attraction of the
provinces for developers is
a lack of saturation and
comparative opportunity
for expansion.
130
RETAIL OVERVIEW
As a substantial portion of retail goods are imported, logistics costs impact merchandise pricing
Informal sari saris are

estimated to account for
around 70% of the market,
and in rural areas they,
along with pavement
vendors and open-air
markets, dominate the
retail landscape.
With one of the lowest

penetration rates of
convenience stores per
capita in East Asia, major
retail groups are
partnering with foreign
players or opening their
own chains.
in desired locations as it is difficult to do so without

having a partnership with an entrenched conglomerate that also has a property portfolio.
Adding to the impetus for local partnerships are
legislative requirements that any retailer aspiring to
operate in the Philippines under full foreign ownership status must commit paid-up capital of $2.5m and
make one-third of their shares available to the public
within eight years of setting up. Other stipulations
include terms that the retailer must have been in business for at least five years; operate at least five stores
globally, or at least one store with capital of at least
$25m; and invest at least $830,000 in each store in the
Philippines. The law is more lenient for foreign retailers of luxury goods, which face no divestment requirement, need a net worth of $50m and must commit a
minimum paid-up capital of $250,000 per store.
The foreign ownership law does not deter the big
retailers, and besides, there are tricks and ways to skirt
the law, said the PRAs Santos.
SARI SARI: While international and local chains battle it out in for share of formal retail spend, it will take
some time before the community role of traditional
mom and pop shops (referred to colloquially as sari
saris) is rendered obsolete. A.T. Kearney estimates
informal sari saris account for around 70% of the market, and in rural areas they, along with pavement vendors and open-air markets, dominate the landscape.
Puregold Price Club, a locally listed firm specialising
in hypermarkets and currently expanding into supermarkets and smaller retail formats, has grown from a
single store in 1998 into the countrys largest standalone retail company. Much of its success has been
built on catering to the Philippines informal sari sari
market, which accounts for an estimated 35% of its
total sales. There are about 1m sari saris in the country, and the number is growing. They are small and challenging to reach, and so far Puregold has managed to
gain around 230,000 of them as customers, Leonardo B Dayao, president of Puregold Price Club, told OBG.
CONVENIENCE COUNTS: Urbanisation, densification,

and changing work and lifestyle habits are contributing to an increase in convenience stores (c-stores), and
Puregold and the other major local retail groups are
looking to tap into this trend by partnering with or
launching their own c-store chains.
According to 2012 figures from research firm Nielsen,
the Philippines has one of the lowest penetration rates
of c-stores per capita in East Asia, something that
looks set to change with the proliferation of new outlets popping up throughout the country. Whereas two
years ago the field consisted of just two chains, the
local franchise of the USs 7-Eleven and Mini Stop,
owned by Robinsons, there are currently seven competing players in the segment. Analysts predict the number of stores will double to reach around 4000 over
the next four years. This is a very exciting segment.
In the past, the market was dominated by 7-Eleven.
Now others have arrived and are expanding aggressively, said the PRAs Santos.
Indeed, the list of new challengers battling it out with
the two entrenched players represents a whos who
of leading c-store chains found throughout the region.
Japanese heavyweight FamilyMart, working in partnership with an Ayala Land and Rustans joint venture,
has announced plans to expand its base from 130 to
around 500 stores by 2018.
Lawsons, another Japanese chain that has partnered with Puregold, is expected to open its first store
in early 2015, and the company has stated that it will
launch 500 by 2020. The SM Group has invited Indonesias Alfamart as its partner brand for foraying into the
segment, while Super 8 Retail acquired the USs Circle Ks Philippine interests in March 2014. Lastly, Mercury Drug, the countrys largest pharmacy chain, is
getting in on the action by converting some of its
pharmacies into pure c-store outfits.
According to a study by the International Labour
Organisation, 42.6% of the Philippines BPO sector
employees work night shifts, and, as a result, most cstores in commercial areas are open 24 hours a day.
Food retailers have especially strong prospects for growth

RETAIL OVERVIEW
FRANCHISING MODEL: As is happening in other

emerging markets, the spread of formalised retail is
generating debate as to whether this is eroding the
role of traditional markets, and in the Philippines case
in particular, whether this could lead to the pushing
out of family-owned sari saris. Proponents of retail
modernisation argue that consumers stand to benefit from the lower prices achieved through scale as well
as the greater choice and quality of stock that the
larger retailers bring. For the PFAs Lim, modern trade,
when operating under a franchise model, actually
allows entrepreneurs and owners of sari saris to participate in the industrys transformation.
For many franchisor sari sari owners are the ideal
franchisee candidates as they are entrenched and
trusted in the local community. The benefits that franchisees stand to gain, according to Lim, include better access to finance as banks recognise that the franchisor would have performed their own due diligence
on the applicant beforehand, as well as a higher success rate compared to a pure start-up as a franchisee
is replicating a successful model.
According the PFA, the Philippines has 1400 franchise concepts representing some 125,000 franchise
operations that contribute 1m jobs. Of this, 43% are
food concepts, 28% retail chains and 21% services
such as education centres, daycares and travel agencies. When the ASEAN Economic Community is in place
at end-2015, barriers to regional franchises entering
the Philippines and Philippine franchises launching in
other member states will be reduced.
ASEAN presents a potential market of around 600m
people. So far our local franchises are not well represented outside of the country, said Lim of the PFA.
One of the challenges is that we dont even have that
many truly national chains due to our being an archipelago, while another is that we are quite culturally
different from the rest of ASEAN, especially when it
comes to our food palate.
ONLINE SALES GROWTH: Although growth came off
a very low base, internet retailing expanded by 13% in
2013 to reach sales worth a total of P11bn ($247.5m),
according to figures of Euromonitor. While the Philippines very much retains a mall-going culture in that
most Filipinos enjoy shopping, online transactions are
starting to become more commonplace, prompting
leading Asian online retailers such as Zalora and Lazada to establish a presence in the country to cater to
this nascent but growing market.
BPO workers are interacting with computers all day
and becoming quite techy. They are living at home
with their parents and have high disposable income.
The e-commerce retailers definitely have this segment
in mind, George Royeca, a business development associate at IT company IPVG Corporation, told OBG.
Logistically, one major barrier to e-commerce reaching critical mass is a lack of credit card penetration in
the country. So far, online retailers are circumventing
this challenge by accepting cash on delivery, and it
should become less of an issue over time as internet
payment systems, such as PayPal, become more com-
131
The Philippines has an estimated 1400 franchise concepts representing some 125,000 franchise operations
mon. Even if the transactions are not done online, given the growing ownership of inexpensive smartphones
and the increasing access to the internet via 3G coverage, retailers are developing websites to showcase
their products for consumers who like to browse online
prior to making an in-person, brick-and-mortar purchase. A 2014 study carried out by On Device Research
estimated smartphone penetration in the Philippines
at around 15%, one of the lowest rates in Asia; however, growth is expected to be amongst the fastest in
the region, reaching 50% by 2015.
The biggest challenges for the development of
Philippine e-commerce are the transaction payment
and inadequate infrastructure, which affects the cost
of delivering goods. Filipinos shop by researching online
but transacting offline. However, e-commerce offers
huge potential if the payment scheme is improved,
especially as the current domestic credit card utilisation is low and many people still have trust issues with
credit card payments done online. The huge youth
demographic, which is technologically savvy, will be a
significant market for retailers to tap through e-commerce, Bernie H Liu, the chairman and CEO of fashion retailer Golden ABC, told OBG.
OUTLOOK: The Philippines demographic dividend, a
consumerist culture and economic expansion all add
up to positive signs for retailers. Although the retail
sector is relatively well developed, modern trade is
mostly concentrated in the province of Luzon and a
few other commercial centres, presenting retail chains
and franchises with the opportunity to expand their
footprint to smaller towns and secondary islands.
Despite some restrictions on foreign ownership,
international retailers are making the country a top
expansion priority and are often looking to partner with
established incumbents that can offer local insights
and access to store sites. The development of malls is
expected to taper off, but a thriving BPO sector and
provincial growth present opportunities for retail
property in new commercial and residential districts.
E-commerce sales
expanded by 13% in 2013
to $247.5m. Low credit card
penetration has been a
barrier to growth; however,
online retailers are
circumventing this
challenge by accepting
cash on delivery.
133
Tourism
New investment focused on bringing in more visitors
Manila and other cities offer attractive MICE options
Transport infrastructure will need to be expanded
Ecotourism is set to be a major segment in the future
134
TOURISM OVERVIEW
The country is an archipelago that includes some 7100 islands
More fun under the sun

The government is stepping up its commitment to bringing in
more visitors
The sector has been
identified as a vehicle for
rural development. The
World Economic Forum
ranked the Philippines
82nd overall and 16th
regionally, with the country
also ranking 15th in terms
of government support.
The direct contribution of

travel and tourism to GDP
in 2013 totalled $10.63bn,
which makes it
the fourth-largest earner
after exports, remittances
and outsourcing.
One year after the devastation of Typhoon Haiyan, the

performance of the Philippines tourism sector is
matching the resilience shown by those affected. In
2013 visitor numbers rose 9.5% to reach just under
4.7m. While slightly below the Department of Tourisms
(DoT) target of 5m in light of the damaging effect of
the typhoon and a 7.2-magnitude earthquake that
ravaged the popular tourist destination Bohol Island
in the same year, both the authorities and industry
stakeholders can take solace in the years results and
feel confident about future demand projections.
Despite boasting a range of attractions and a reputation for hospitality on par with its regional competitors, the Philippines tourism industry has a long
way to catch up with nearby powerhouses such as Thailand and Malaysia, which receive in excess of 20m international visitors annually and for which the aggregate
and relative contribution of tourism revenue to GDP
far exceeds that of the Philippines.
STATE OF AFFAIRS: Under the administration of President Benigno Aquino III, the sector has been identified as a vehicle to be prioritised for the positive
impact it can have on inclusive economic growth, and
efforts appear to be bearing fruit. The Word Economic Forum (WEF), in its Travel & Tourism Competiveness Report 2013, ranked the Philippines 12 places
higher than in 2012 at 82nd overall and 16th regionally the largest improvement of any country within
the Asia-Pacific Region. One metric for which the
Philippines fared particularly strong, achieving a ranking of 15th out of 140 countries, was the governments
prioritising of the industry. Indeed, thanks to an aggressive and highly successful global marketing campaign,
brand awareness is on the rise. Momentum looks to
continue as 2015 has been designated Visit the
Philippines Year and is set to include a slate of events
throughout the calendar year that commenced with
a visit from Pope Francis in January 2015.
As an archipelago of some 7100 islands and not
belonging to a continuous landmass, nearly 99% of
foreign arrivals reach the country by air. As such, conversion of newly generated demand into actual arrivals
is constrained by a lack of adequate transport infrastructure. Airport handling capacity into and within
the country is insufficient, and the shortage of efficient sea and road connections between local destinations limits the ease of intra-country travel. This
places a strong impetus and sense of urgency on all
government departments to accelerate public works
on key transport projects and create a conducive environment for private sector participation considering
that public finances are strained. The DoT claims that
around half of all government infrastructure projects
are aligned towards improving access to the countrys
cluster tourist destinations.
A MATTER OF RANKINGS: According to the World
Travel & Tourism Council (WTTC), the direct contribution of travel and tourism to GDP in 2013 was P472.3bn
($10.63bn), making it the fourth-largest foreign
exchange earner after exports, overseas remittances
and outsourcing. This made up 4.2% of the total economy, a ratio that is forecast to remain steady, with the
WTTC projecting the sectors economic contribution
to increase by 5.6% per annum to reach P843.3bn
($18.97bn), or 4.3% of total GDP, by 2024.
The Philippines ranked in the top quartile (35th)
globally out of 184 countries surveyed in terms of the
absolute value of the tourism sector, but trails regionally behind Thailand (14th), Indonesia (16th), Malaysia
(19th) and Singapore (26th). In relative terms, it ranks
only 70th globally, and regionally falls behind Vietnam
and Cambodia, as well as Indonesia, Malaysia and Singapore. With the exception of Thailand, which faced
stagnant growth in 2013 due to political unrest, the
Philippines tourism industry experienced the lowest
growth rate in 2013 among ASEAN members.
In terms of employment generation, over the course
of 2013 travel and tourism directly supported 1.2m
jobs (3.2% of total employment). This is expected to
rise by 2.5% per annum to reach 1.6m jobs by 2024.
TOURISM OVERVIEW
SHIFTING GOALS: Since the Aquino administration

took office in 2010, year-on-year (y-o-y) growth in foreign arrivals has hovered around the 10% mark. The
DoT is aiming for growth to continue in the doubledigit range until the administrative term ends in 2016.
The administration is seeking to achieve the ambitious
target of hosting 10m foreign visitors that year, which
would be more than double the volume being handled at present. The WTTCs projection is more modest at just under 8m foreign arrivals by 2024.
Given that much of the necessary infrastructure is
not yet in place, realising the 10m visitor mark by
2016 will be a challenge. The industrys focus should
be rather to boost tourism receipts by increasing the
average length of stay, said Benito C Bengzon Jr, assistant secretary at the DoTs Market Development Group.
One could easily spend a month in the country taking in a diverse set of unique sights and activities. Motivating visitors to stay longer and travel to more locations within the country, he said, is the more
immediately achievable path to growing tourist
receipts, and helps compensate for inadequate supply. Over the last few years we have been seeing more
equitable distribution of visitors throughout the archipelago and will see more as regional infrastructure is
further developed, Bengzon told OBG.
DoT figures show that the average length of stay
for long-haul arrivals was 10 days in January-October
2014, an increase of two days over the same period
the previous year. In June 2013 the Bureau of Immigration (BoI) introduced an allowance for foreigners
meeting certain specifications to receive a six-month
tourist visa. According to Bengzon, seasonality is
becoming less pronounced as the country draws
tourists from a wider variety of source markets that
have differing outbound holiday periods. The government is in the midst of considering altering the academic calendar to coincide with the US rather the Asian
school system. If this takes place, seasonality could
be balanced even further as East Asians, who collectively make up the largest source market, would be
visiting during periods that do not compete with the
busier domestic holiday season.
ABUNDANT ASSETS: The Philippines jumped 12 spots
to 82nd place in the WEFs 2013 tourism competitiveness rankings. Areas in which it ranked highly
included the strength of its natural resources (44th),
price competitiveness (24th) and government prioritisation of the industry (15th), with the report also
revealing that the Philippines is first in the world in
terms of government spending on the sector as a
percentage of GDP. Today, the world has more of an
appreciation for us and we have a more compelling
proposition. The proof is in the awards we have been
receiving for our attractions and marketing campaign.
We have become a serious player, said Bengzon.
Recent accolades bestowed include travel guide
publisher Lonely Planet placing the Philippines on its
list of top 10 countries to visit in 2015, while luxury
travel magazine Cond Nast Travellers Readers Choice
Awards voted Palawan and Boracay 1st and 12th on
135
The government is aiming to double growth in the sector by 2016
its list of the worlds top islands. With over 7100

islands and a coastline of 36,000 km, the Philippines
has already garnered a reputation as one of the top
sea and sun destinations in the world.
The DoT is also looking to promote non-beach natural and historic attractions to showcase the variety
of activities on offer. These include the Banaue Rice
Terraces in Luzon province and the Puerto Princesa
Subterranean River National Park, both of which have
been awarded UNESCO World Heritage Site status, as
well as the Spanish colonial town of Vigan in Ilocos
Sur, which has UNESCO status and is vying to be named
one of the New Seven Wonders of the World. Sports
is another potential source of growth. While international sporting events are valuable for boosting
international tourism, local and regional events offer
opportunities to build up domestic tourism, which is
just as, if not more, important, Ricardo Garcia, Chairman of the Philippine Sports Commission, told OBG.
SPREADING THE FUN: In 2012 an international, socialmedia routed promotional campaign centred on the
slogan Its more fun in the Philippines was launched
and has so far received much praise for its creativity
According to the
Department of Tourism, the
average stay for long-haul
arrivals was 10 days for
January to October 2014,
which marked an increase
of two days over the same
period in 2013.
Tourist arrivals, 2012-14 (000)

Jan-May
Top 10*
2012
2013
Share (%)
Growth (%)
2013
2014
Share (%)
1. Korea
1031.16
1165.79
24.9
13.06
489.39
453.28
21.99
2. US
652.63
674.56
14.41
3.36
306.06
327.7
15.9
3. China
250.88
426.35
9.11
69.94
168.88
198.95
9.65
4. Japan
412.47
433.71
9.26
5.15
179.98
188.94
9.17
5. Australia
191.15
213.02
4.55
11.44
88.19
96.66
4.69
6. Singapore
148.22
175.03
3.74
18.09
70.47
74.71
3.62
7. Canada
123.7
131.38
2.81
6.21
61.09
67.93
3.3
8. UK
113.28
122.76
2.62
8.37
52.38
60.31
2.93
9. Taiwan
216.51
139.1
2.97
-35.75
79.3
55.54
2.69
10. Malaysia
114.51
109.44
2.34
-4.43
45.45
54.42
2.64
Total arrivals
4272.81
4681.31
100
9.56
2011.52
2061.14
100
SOURCE: DoT
*Ranking based on Jan-May 2014 arrivals
TOURISM OVERVIEW
and effectiveness. Marketing intelligence service company Warc awarded the initiative third place in its
ranking of the top 100 global campaigns for 2013, stating that using Filipinos themselves as the inspiration
for the campaign [it] captured the attention of the
whole nation and the world.
The second phase of the campaign, which took
effect over the course of 2014, transitions from national to destination-specific marketing. Boracay, Davoa,
Cebu and Manila are each receiving their own international television commercials that, while aligned to
the more fun theme, showcase and capture what is
unique about each destination. Boracay is being branded Asias 24/7 island; Davao is a place for nature,
eco-adventure, wellness and relaxation; Cebu is being
promoted for its pristine diving and musical heritage;
and Manila is being marketed as a Capital of Fun by
virtue of its cosmopolitan shopping, nightlife, art, culture and business features.
CONTINUING MOMENTUM: With 2015 having been
designated as Visit the Philippines Year, the DoT will
be hosting 35 events throughout the calendar year.
Festivities kicked off with a four-day visit by Pope
Francis in late January 2015 to coincide with World
Youth Day, and in November the country will be hosting the Asia-Pacific Economic Cooperation ministerial meetings and leaders summit. Scheduled for April
2015, Madrid Fusion Manila is being dubbed by the
DoT as the biggest culinary event in the world.
The success of the More Fun campaign, alongside
the Visit Philippines events being staged in 2015,
affords the private sector a real opportunity to piggyback on the momentum being created and to develop our own products and events that match up with
the themes and message, John Paul M Cabalza, the
president of the Philippines Travel Agency Association
(PTAA), told OBG.
MAKING A GAME OF IT: Within Manila, a substantial
portion of new stock will be dedicated to hotels in and
around newly established entertainment and gaming
districts. Entertainment City, a government-driven
project set on 8 sq km of reclaimed land, is expected
by Colliers to be the location for just over half (56%)
of the metropolis new rooms. Supplementing the
citys prospects of emerging into a premier regional
hub for gaming is City of Dreams. Undertaken by the
local subsidiary of Hong Kongs Melco Crown Resorts,
Travel & tourism indicators, 2013 & 2024 (P bn)

Direct contribution to GDP
Total contribution to GDP
2013
2024
472.3
843.3
1288.90 2299.10
Direct contribution to employment (000 jobs)
1227
Total contribution to employment (000 jobs)
4295
1595
5491
Visitor exports
221
455.7
Domestic spending
719.3
1200.70
Leisure spending
668.9
1198.50
Business spending
271.4
458
Capital investment
81.3
123.9
SOURCE: WTTC
137
Each of the Philippines regions has its own themed campaign
the $1.3bn development that opened in February

2015 includes six hotel towers with 950 rooms that
are managed by internationally recognised names
such as Nobu and The Hyatt. A few miles away in Pasay
City, situated adjacent to NAIA, another casino resort,
Resorts World Manila, has been operating and gaining popularity since 2010. Anchored in terms of accommodation by a Maxim Tower and Marriott, properties
slated to be managed under the Hilton and Sheraton
brands are presently being constructed.
Looking to the future, it appears that another major
international gaming operator could be joining the fray.
In late October 2014 the senior management of the
USs Caesars Entertainment announced that it met
with President Benigno Aquino III and other top officials in an effort to secure permission to set up within Entertainment City. The government has stated
that any interested casino licensees must now commit to a minimum of $1.5bn for their project, $500m
more than what was required from the three flagship
investors that have committed to the complex to date.
DOMESTIC AFFAIRS: As the countrys populace is
approaching 100m citizens, which means that the
country has the second-largest population in Southeast Asia, the Philippines would be remiss not to also
focus efforts on expanding its domestic travel base,
which in 2013 was responsible for 76.5% of tourism
receipts, according to the WTTC. The DoT is also looking to improve travel within the country by Filipinos
themselves by 8% y-o-y to reach 52m in 2015, while
also increasing domestic travel spending by 14% to
reach a targeted P1.41trn ($31.73bn).
In 2010 there were only around 22m domestic
tourists, and the near doubling since then in volume
has been attributed to rising levels of discretionary
income and consumer confidence over a period that
has also coincided with the launch of domestic budget airlines competing aggressively on fares. Domestic tourism now plays an important role in our tourism
industry, and we encourage our fellow Filipinos to see
In 2015 the country is

planning to host 35 events
as part of Visit the
Philippines Year, which will
include the Asia-Pacific
Economic Cooperation
summit and a major
culinary festival.
TOURISM OVERVIEW
138
Investment in transport infrastructure will be key for the sector
In terms of source markets,

South Korea was
responsible for around a
quarter of foreign arrivals
in the period from
January to October 2014,
followed by the US, Japan,
China and Australia.
the rest of the country as part of each individuals contribution to nation-building, Cabalza told OBG.
Additionally, with more than 4m Filipinos living in
the US and Canada alone, there is a large segment
eligible for visiting friends/relatives visas that the DoT
is encouraging to spend more in and visit more of the
country. We tend to market to this segment in much
the same way as we do to foreigners, as most are now
second- and third-generation immigrants. Ironically,
the buzz and excitement generated by non-expatriate Filipinos oversees makes the expatriates appreciate their country of origin even more and they are
now staying longer and visiting destinations outside
of where their relatives reside, said Bengzon.
When assessing the split of tourism spending
between the leisure and business segments, the former accounts for 71.1% of receipts based on WTTC
figures. Both segments are expected to concurrently rise to match the pace of GDP growth estimated
to be between 6% and 7% as the country expands
as both a business and leisure destination.
SOURCE MARKETS: South Korea, responsible for just
under a quarter of foreign arrivals, remained the top
source market in January-October 2014, supported
by a new air service agreement between the two
countries. Next came the US (14.97%), followed by
Japan (9.67%) and China (8.95%), with Australia, Singapore, Hong Kong, Canada, Malaysia and the UK
rounding out the top 10. The prominence of visitors
from North-east Asia is partly to do with proximity. With
flight times from most major East Asian cities taking
Projected accommodation supply by region, 2012-16

Existing (2012) In the pipeline
Total
Planned expansion Total to 2016
Northern Philippines
71,803
8215
80,018
3311
83,329
Central Philippines
61,978
5129
67,107
5146
72,253
Southern Philippines
28,622
1686
30,308
2061
32,369
Total
162,403
15,030
177,433
10,518
187,951
SOURCE: UNWTO
less than four hours and an increasing choice of flight

options, a visit to the country can easily coincide with
a reasonably affordable long weekend visit.
According to DoT figures, in 2013 Canadians were
the highest spenders, with an average outlay of $1393
per visit, followed by Australians, Germans, Americans and British, something that intrinsically makes
sense as longer-haul visitors will be more inclined to
spend more time per visit to offset the lengthier travel time required to reach the destination. For Cesar
Cruz, president of the Philippines Tour Operators
Association (PHILTOA), another marked difference
between Asian and Western visitors is a higher propensity for the former to opt for packaged over independent itineraries. Chinese, Koreans, and to a lesser
extent Eastern Europeans, book through tour operators in their home country. While this benefits the
hotels and airlines, local operators do not see a piece
of the pie, he told OBG.
ASEAN INTEGRATION: In 2015 ASEAN will enact
measures towards the formation of a single market
bloc, presenting both opportunities and threats to the
Philippines tourism industry. The freer movement for
ASEAN citizens between member countries should
improve the ease and lower the costs of intra-regional travel. The Philippines current share of intra-ASEAN
travel is the lowest of the grouping, so there is plentiful room to grow, Bengzon told OBG. For Cruz, an
untapped opportunity within ASEAN exists in capturing a greater share of Muslim tourists from Malaysia
and Indonesia. At the moment, there are only a few
hotels and restaurants in Manila with halal catering
and certification. We could do more, especially on
the islands, he told OBG.
Guiller B Asido, assistant chief operating officer for
the DoTs Tourism Infrastructure and Enterprise Zone
Authority, agrees with others that the ASEAN market
offers potential, but cautions that the boost in visitors will not be on par with other members due to comparative logistical constraints. We will not benefit
from cross-border flows in the same way landlocked
ASEAN countries will, Asido told OBG.
The DoT has been lobbying the Department of Foreign Affairs to introduce a single visa scheme among
ASEANs 10 member states that is similar to Europes
Schengen visa. When you have a single visa, the tendency for tourists, for example, is to say, Im in Thailand, but my visa is good for 10 countries, so I might
as well go through all 10, Ramon Jimenez Jr, secretary of tourism, told the local press. Due to technical
and security issues, the establishment of such a system is not likely to reach fruition for a few years. But
in the meantime, the Philippines has taken steps to
liberalise its own visa regime by allowing more nationalities, such as Russians, to receive a visa on arrival,
while allowing others, such as Indian nationals, to
enter the country should they have successfully
acquired visas to places such as the US and Australia.
STAFF WANTED: Board an international cruise line
or check into a hotel in Singapore or any Gulf country and there is a chance one will find Filipino staff
TOURISM OVERVIEW
there. Our hospitality trait is innate and something

that comes naturally to Filipinos. That, along with
strong English-language proficiency, makes us a popular choice as hospitality workers abroad, said Cabalza.
While this reputation bodes well for foreign remittances, ASEAN integration could further the talent
drain, as restrictions on employing Filipino nationals
in other ASEAN nations will be liberalised. In places
like Thailand and Indonesia, where English is not well
spoken, there will be a particularly strong demand for
Filipino staff, without mentioning their genuine and
natural hospitable attitude, Laurent Lamasuta, president and CEO of El Nido Resorts, told OBG.
For Cruz, despite a language and service mentality advantage, the country has catching up to do when
it comes to the basic education of entry-level workers a factor that will require integration with ASEAN
common standards. We are lagging behind our Asian
neighbours since we have just started our K-to-12
system, Cruz told OBG, referring to recent reforms
that will add an extra two years to secondary education. However, Bengzon is optimistic that as the industry grows, more opportunities for employment at
home will reduce the temptation for Filipinos working in the hospitality trade to pursue employment
abroad. But he cautions that inconsistent levels in
quality and training between hospitality staff in the
major cities and the provinces could dent the prospects
of ensuring that a visitor to the country has a consistent experience throughout.
MAKING PLANS: Bolstering human capital, both in
terms of numbers and skill sets, forms one of the
three pillars of the National Tourism Development
Plan. Running from 2011 through to 2016, the three
components of the plan entail: developing and marketing competitive tourist products and destinations;
improving market access, connectivity and destination infrastructure; and improving institutional governance and human resources. Under the first pillar,
the strategic tourism products to be promotion include:
nature and cultural tourism; sun and beach; leisure and
139
With plans to increase the number of arrivals, existing airport infrastructure must be better integrated
entertainment; the meetings, incentives, conferences

and exhibitions segment; health, wellness and retirement; cruises and nautical activities; diving and marine
sports; and education tourism.
CRUISE CONTROL: While ample coastline, an island
geography and a proliferation of nationals employed
as crew members on leading lines throughout the
globe places the Philippines in a prime position to
establish a flourishing cruise market, this segment
has been underrepresented due to a lack of deep sea
docking infrastructure, as well as challenges related
to the threat of piracy. The DoT indicates that 2013
saw only 17 cruise ships make a port of call in the country, a figure that was set to jump to 23 in 2014. Carnival Cruise Lines has announced that it will start
including a selection of Philippine islands in their
route offerings in 2016, while the Royal Caribbean and
Norwegian Cruise lines are also interested in developing the country as a prime cruise destination.
A HEALTHY RETIREMENT: Hard pressed to match
Thailand and Singapore, which have established themselves as the regions top players in the cosmetic and
invasive treatment markets, respectively, the DoT is
in the process of compiling a study to uncover niche
segments that the country should focus on to secure
a competitive advantage in the medical tourism field.
Boasting qualified physicians and a reputation for
producing highly qualified and trained nurses, the
main shortcoming cited by those OBG has spoken to
that limits the prospects of expanding further into
mass-market medical tourism stems from a lack of
globally recognised facilities. While we have very
good hospitals, the link between travel agents and hospitals has to be improved so that agents can help sell
the services. Wellness tourism proves much easier to
market and is something the Philippines is already
associated with, Cabalza told OBG.
As English is widely spoken, relatively low cost of
living, a variety of entertainment options and a general friendliness towards expatriates, the Philippines
The sector has been looking to tap into the health tourism segment
The country has sizeable

potential for cruises, given
its long coastline and island
geography. Some 17 cruise
ships stopped in the
Philippines in 2013 and this
figure is estimated to have
reached 23 in 2014.
140
The government is
exploring potential for
education tourism,
particularly in
English-language
instruction. Many South
Koreans already choose to
send their children to the
country for language
instruction.
TOURISM OVERVIEW
has emerged as a popular retirement destination. In

recognition of the prospects for attracting more
retirees, the BoI offers a special resident retirement
visa that is aimed mainly at pensioners, but is also at
those as young as 35 years of age who are eligible as
long as they can prove sufficient income.
STUDY ABROAD: Due to strong business interests,
South Koreans make up the largest expatriate community in the Philippines, and many South Korean
families opt to send their children to the Philippines
at some point for language instruction due to strong
English proficiency levels there. As English is our second language, in addition to the proximity we offer,
Korean and Chinese citizens prefer to come here to
learn the language as they find the instructors to be
more patient, Bengzon told OBG. For the same price
as studying in the UK, Australia or the US one can get
one-on-one instruction instead of in a classroom setting. And depending on your lifestyle preference, you
can study in a cosmopolitan environment like Manila, or get a beach experience in a place like Cebu.
SAFETY & SECURITY: Somewhat dampening the positive sentiment generated by the successful marketing campaign and upbeat demand projections has
been a series of kidnappings in the archipelagos
south. These and other incidents have led some governments in key source markets to issue warnings or
outright travel advisories against travel to the Philippines. The source market most affected has been that
of China. Following a travel warning issued by Beijing

on September 12, 2014, Boracay, a popular destination for Chinese visitors, saw monthly arrival numbers
fall from 18,479 in August to less than 7000 in September, prompting carriers including Cebu Pacific and
AirAsia to either suspend or reduce intra-country
flights. Though most observers concur that political
gesturing linked to tensions over territorial disputes
has played a contributing factor in the Chinese governments rhetoric over security concerns, with visitors from the country accounting for almost a tenth
of the Philippines tourism intake, the negative impact
is something of a concern for industry players.
OUTLOOK: Amidst all the hype surrounding the
impressive economic expansion that is being fuelled
by the business processing outsourcing sector, tourism
and other contributors poised for further growth can
occasionally glanced over by outside analysts. However, this is far from the case for the current administration, and the sector has been prioritised as a key
growth pillar. With plentiful natural endowments and
a cultural propensity for service and hospitality, the
Philippines is fortunate to possess assets that serve
as demand drivers. Keeping the tourism sector back
from reaching its full potential is handling capacity,
which is in the process of being ramped up, but has
a ways to go in providing the infrastructure to ensure
more seamless and efficient movement and to host
visitors throughout the Philippines various islands.
TOURISM ANALYSIS
141
The government has set up a MICE and Business Development Unit
Lets meet up
The country offers an attractive proposition for the MICE segment
In the early 1980s the Philippines was considered Asias
undisputed leader when it came to hosting international events and conferences, with Metro Manilas 4000sq-metre Philippines International Convention Centre
(PICC), constructed in 1976, the first of its kind for the
region. In subsequent years, as other countries ramped
up their efforts to expand their share of the increasingly lucrative meetings, incentives, conferences and
exhibitions (MICE) market, due to a confluence of factors, the segment found itself slipping from the tourism
authorities priority list.
In 1982 Manila was rated as the top Asian city for
conventions by the Union of International Associations
annual listings. Over three decades later, in 2013 it
dropped to 18th on the International Congress and
Convention Associations (ICCA) latest rankings for the
region. As a country, the Philippines played host to 53
ICCA-certified conferences in 2013 and placed 49th
globally, trailing ASEAN leaders Singapore (175 events)
Thailand (136), Malaysia (117) and Indonesia (106), each
of which were the venue for more than double the
number of large-scale events that year.
GETTING BACK ON TRACK: Despite being one of the
pioneers in the region when it came to establishing a
body specifically tasked with bidding for events on a
national level, in 2009 the Philippine Convention and
Visitors Corporation was put under the purview of the
Tourism Promotions Board (TPB). When President Benigno Aquino III took office in 2010, it was announced that
the MICE market would be reprioritised as a key mandate of the Department of Tourism (DoT), and the TPB
is looking to ramp up its promotional efforts to once
again have the country positioned as a top MICE destination. This has coincided with an organisational
restructure under which a MICE and Business Development Unit forms is one of the TPBs three core divisions, along with the Tourism Promotion Department
and the Corporate Affairs Unit. The department has been
allocated a budget of P90m ($2.03m), and while indications are that it will eventually develop a brand and
campaign specifically focused on MICE, in the meantime it is piggybacking on the successful Its more fun
in the Philippines campaign by employing the tagline
Business meets fun in the Philippines.
BIG YEAR AHEAD: With 2015 being promoted as Visit Philippines Year, the initiative involves hosting several large-scale events throughout the year and will be
leveraged to showcase the archipelago as a viable MICE
market. The Asia-Pacific Economic Cooperation ministerial meeting and leaders summit is arguably the most
important event and will take place in November 2015.
According to Guiller B Asido, assistant chief operating
officer of the DoTs Tourism Infrastructure and Enterprise Zone Authority, the summit will be hosted at venues across the country to demonstrate the existing
MICE infrastructure in multiple destinations.
PLENTY OF OPTIONS: The PICC no longer holds the
exclusive position of the sole venue for international
events, with a number of private sector facilities popping up throughout the country. The Philippines real
estate boom is characterised by greenfield mega developments. Many of these budding mixed-use precincts,
in addition to office parks, condominiums and massive
shopping malls, contain a hotel, entertainment and an
events component. The 46,647-sq-metre SMX Convention Centre in Metro Manilas Pasay City is located
beside the SM Mall of Asia, which is among the worlds
largest shopping centres as measured by gross leasable
area. The SM Group, a large conglomerate with a strong
property portfolio, also owns convention centres in the
Manila suburbs of Taguig and Bacolod, as well as one
in Davao City. City of Dreams Manila and Resorts World
Manila, two newly constructed entertainment and gaming districts, also offer conference facilities. For more
exhibition-oriented venues within Metro Manila, the
World Trade Centre in the financial district Pasay, Blue
Leaf Filipinas in Taguig and the SM Megatrade Hall in
Ortigas each offer 4000 sq metres of hall and pavilion
space. Arenas and concert halls include the SM Mall
of Asia Arena and SMART Arenata Coliseum in Cubao.
As Manilas rating among

Asian cities as a MICE
destination has been
slipping in recent decades,
the government has
decided to reinvest in
facilities.
The Philippines
International Convention
Centre is no longer the
sole venue for large
international events in
Manila, as new greenfield,
mixed-use developments
are popping up all over
the country.
142
TOURISM INTERVIEW
Ramon R Jimenez Jr, Secretary, Department of Tourism
Reaching all corners

OBG talks to Ramon R Jimenez Jr, Secretary, Department of Tourism (DoT)
What potential does the recently signed Comprehensive Agreement on Bangsamoro (CAB) unlock
for the tourism sector in Mindanao and the Visayas?
JIMENEZ: The CAB will provide a tremendous boost to
tourism, as a more peaceful and stable environment
will enable Mindanao to attract a greater number of
foreign and domestic tourists, while providing a significant boost to local job creation. After signing the CAB,
stakeholders both from the private sector and the local
government units (LGUs) have stepped up their own
promotional efforts. For example, over the last year, a
number of delegations from Mindanao have joined the
DoT in travel exhibitions around the world. We are confident Mindanao will obtain a larger share of inbound
traffic, as we convince network planners from foreign
carriers in the region to start direct flight routes to
Davao and other parts of the islands.
The extensive coverage of Typhoon Haiyan in the
global media has also contributed to a greater level of
awareness of the Philippines as a whole and Eastern
Visayas in particular. As a result, we have seen the willingness of many foreigners to contribute to the extensive rehabilitation efforts in affected areas through
phenomena such as voluntourism. Many tourists have
also availed themselves of tour packages not only in
affected areas but also to other destinations in the
country, where a percentage of proceeds from tourism
will go towards rehabilitation. The DoTs goal is to accelerate the development of the Visayas by encouraging
tourists to return to affected areas. Another initiative
has been to encourage regional cruise companies to
increase the number of stops in the Visayas.
How can the increased participation of LGUs help

promote site-specific tourism in the Philippines?
JIMENEZ: The Philippines is an archipelago consisting
of 7107 islands, and as such it contains an incredible
amount of natural and cultural diversity. This has allowed
us to provide a range of offers that can target different segments of the market, as seen in our already
successful Its more fun in the Philippines campaign.

Indeed, there has been a natural transition from this
campaign to our next phase of site-specific promotions,
beginning with Boracay, Davao, Manila and Cebu.
Destination-specific campaigns have allowed for a
greater degree of involvement by LGUs and the private
sector, who have embraced these campaigns and enthusiastically participated in the promotion efforts. Ever
since we started destination-specific marketing, we
have found that LGUs and local executives have felt a
deeper sense of ownership of tourism campaigns, as
they provide an opportunity to reach out directly to the
market and promote local areas. Most importantly, it
then becomes incumbent upon the local community
to make sure that tourism can flourish in a conductive
environment, namely to address such vital issues as security, cleanliness and pricing.
What more can the Philippines do to improve its visibility as a meetings, incentives, conventions and
exhibitions (MICE) destination?
JIMENEZ: The MICE segment is higher yielding than the
bulk of the tourism sector: as such, it represents a priority for the domestic development of tourism. In the
Philippines, meetings, conventions and exhibitions tend
to take place in larger cities such as Manila and Cebu,
as this is where you are more likely to find large convention centres and the suitable infrastructure.
However, with regards to incentives, one finds that
the incentive groups are going to locations such as
Boracay, Bohol, Palawan and Davao. We have therefore
segmented MICE and developed a strategy to tap into
its markets. We must formulate a strategy that takes
into account that the people who come to the Philippines for meetings, conventions and incentives may be
looking for different attractions. For example, not all
of them may require large facilities. Indeed, most groups
are looking for a unique experience, which can only be
found in such tourist destinations as the Chocolate
Hills in Bohol or the Underground River in Palawan.
TOURISM ANALYSIS
143
The government is aiming to ensure airport traffic bypasses the city
Looking up
Increasing both connection options and accommodation will be key to
future growth
Upgrading and developing new transport and hospitality infrastructure is essential to unlocking the
Philippine tourism sectors undeniable growth potential. Without adequate infrastructure to move people into and within the country, and the hotel and
leisure offerings to accommodate and entertain them,
many of the attributes that make the industry primed
for sustained expansion could be negated. With public coffers strained and multiple sectors competing
for state funding, the government is looking to hand
over development, management and maintenance
responsibilities to the private sector.
And with a strong assurance of pent up demand,
there is a sound business case for prospective
investors. We are not interested in operating and
managing tourist facilities. We will provide support
infrastructure and incentives, but the push will come
from the private sector, Guiller B Asido, assistant
chief operating officer of the DoTs Tourism Infrastructure and Enterprise Zone Authority, told OBG.
ROUTES REVIVAL: Geographic barriers and infrastructure shortcomings are invariably sighted as the
main impediments to meeting the ambitious tourist
arrival growth target of 10m by 2016. And while
progress is being made to ramp up the required supply-side infrastructure, the to-do list will take some
time until completion. Some recent good news came
in April 2014, when the EU took Cebu Pacific Air off
its list of banned airlines. This move was followed by
the USs Federal Aviation Authority relaxed limits on
the number of flights from the country.
For several years, our airlines had limited direct
access to the EU and US. Being able to land in key
aviation gateways like London will make a huge difference in opening up hub and spoke traffic, Benito C Bengzon Jr, assistant secretary at the Market
Development Group at the DoT, told OBG.
In 2016 Manila will play host to Routes Asia. Dubbed
as the largest event of its kind, the conference focuses on the development of global air services and will
be leveraged by the local authorities to showcase

Manilas and the countrys aviation credentials and
ambitions. In the meantime, the ASEAN Open Skies
agreement taking effect in 2015 should contribute
to more intra-regional routes launching, while on a
bilateral level the government has been busy concluding air negotiations with the likes of Hong Kong,
South Africa, Macau, Canada, Myanmar, New Zealand,
Singapore and France.
GATEWAY BOTTLENECKS: According to the DoT,
99% of foreign visitors arrive by air, a large proportion of which enter or transit through Manilas Ninoy
Aquino International Airport (NAIA), which handles
around 80% of total available national air seats. With
a throughput capacity of 30m passengers a year, the
current handling volume is deemed to be insufficient
for a city of Manilas size when also considering that
it serves as the countrys primary gateway.
Complicating matters further is that NAIA, as currently constructed, consists of four terminals sharing use of two runways. This raises fuel prices as
planes often have to circle prior to landing or wait in
a queue to take off Cesar Cruz, president of the
Philippine Tour Operators Association (PHILTOA),
told OBG. Laurent Lamasuta, president and CEO of
El Nido Resorts, told OBG that the requirement for
international visitors to pass through Manila on route
to an island destination presents further hassles and
inconvenience as the terminals have not been interconnected. He explained, One has to disembark from
the international terminal, clear immigration, grab
their luggage and take a taxi through what can be
intense traffic to the domestic terminal where they
then go through security again.
To alleviate congestion, an upgrade of Terminal 1
is under way and expected to be completed to coincide with the hosting of the Asia-Pacific Economic
Cooperation Summit in November 2015, while an
elevated highway linking Terminals 1, 2 and 3 to Skyway and Manila Bay is tapped for completion in 2016.
With 99% of foreign visitors

arriving by air and around
80% of those entering
through Manilas Ninoy
Aquino International
Airport, investment in
expanding passenger
capacity is a priority.
International visitors are

required to transit through
Manila before travelling to
other islands, leading to
additional congestion as
the terminals are not
interconnected.
144
The country currently has

80,162 hotel rooms, while
demand stands at 121,875.
In 2014, 2038 rooms were
added to Metro Manilas
stock for a total of 19,373,
with an average of 3580
new rooms expected to hit
the capital annually over
the next four years.
TOURISM ANALYSIS
However, NAIAs location amidst the sprawl of Metro

Manila complicates the feasibility of overly ambitious
expansion plans. At present there is no interim solution to add new airport capacity serving the capital
as authorities continue to deliberate over competing proposals. We dont need a band-aid solution,
Cruz told OBG. We need to find a new slot and start
constructing. And once a slot is selected, there must
be restrictions on residential buildings [being constructed] nearby so that if the airport needs to expand
in the future we wont run into the same problem.
Longer-terms proposals include a greenfield airport in Manilas southern suburbs and a plan to convert Clark International Airport a sprawling former
US military base situated 100 km north of and a oneand-a-half-hour drive from Manila that handled 1.2m
passengers in 2013 into the countrys main airport.
Any of these projects would cost several billion dollars, not including transit links to Manila, and the
government is expected to opt for an investorfinanced, build-operate-transfer model.
DIVERTING TRAFFIC: The immediate solution to
offsetting NAIA congestion is to have the airport
bypassed entirely by those not travelling to the city,
said Bengzon. Secondary locations outside of Manila currently equipped to handle international traffic
include Mactan-Cebu International Airport (MCIA),
Francisco Bangoy International Airport in Davao and
Puerto Princesa International Airport (PPIA). Each
are experiencing passenger volumes surplus and are
being tapped for expansion programmes, to take
shape under public-private partnership arrangements
with the hope that they could emerge as significant
international gateways to compliment NAIA. Filipinoowned Megawide Construction in a consortium with
Bangalore-based GMR Airports was awarded a contract in 2014 for the expansion of the MCIA to 8m
passengers per annum valued at P14.4bn ($324m),
while PPIAs $82.9m design-and-build upgrade contract was awarded to South Koreas Kumho Industrial Company and GS Engineering & Construction.
In addition to bolstering the international handling

capacity of secondary airports, new domestic airports, such as one to potentially be located on the
Panglao Island in Bohol Province, are in the proposal stage. Overall, the Philippines is deemed to have a
strong competitive landscape of rival low-cost carriers serving domestic routes, a factor that has contributed to a rapid rise in Filipinos themselves flying
more than ever before.
Domestic flights are in good supply and come at
reasonable fares. If you book enough in advance, you
can fly Manila to Boracay and return for under $70,
John Paul M Cabalza, the president of the Philippine
Travel Agency Association, told OBG. To complement
airport developments and facilitate intra-modal transport, maritime, road and rail projects are also expected to be put up for concession.
TAKING STOCK: Hotel rooms, as with transport infrastructure, are also lagging demand. The country currently has 80,162 rooms available, while demand
stands at 121,875, according to DoT figures. In 2013
the DoT called on hospitality developers to increase
the number of beds, anticipating a gap of 32,023
rooms by 2016. Hotel groups appear to be taking
heed: in Metro Manila alone, according to a Colliers
International report for the fourth quarter of 2014,
over the course of the year 2038 rooms were added
to Metro Manilas stock for a total of 19,373 rooms,
with an average of 3580 new rooms expected to hit
the capital annually over the next four years. According to the report, the majority of new properties are
expected to be managed by international brands.
It appears that new stock is pacing slightly ahead
of growth in tourism arrivals, with Colliers estimating that occupancy rates in Metro Manila declined
to 65.6% in 2014. Generally speaking, 70% is considered the benchmark rate that the tourism industry
aspires to as it represents a comfortable middle
ground of neither over nor under supply. More hotels
means more choice, which is good news for operators as it leads to room rate competition, said Cruz.
TOURISM ANALYSIS
145
In 2014, $324m was allocated to improving access to tourism sites
Natural beauty
Responsible development and protecting environmental attractions
will be a priority moving forward
The Philippines exhibits a marked discrepancy in
income, living standards and access to basic infrastructure between urban and rural locations, and
tourism has been identified as one means of helping to lift more remote regions out of poverty. When
considering that natural untouched settings and
traditional culture are some of the main drawing
cards for visitors to more isolated areas, the impetus is to manage development in a responsible and
sustainable manner through principles adhering to
the Ecotourism Philippines philosophy.
Indeed, the campaign features prominently in the
Department of Tourisms (DoT) National Tourism
Development Plan 2011-16 (NTDP) and is tapped to
play a significant role in helping to rebuild the areas
that were most devastated by the 2013 Typhoon
Haiyan and Bohol earthquake.
ZONING IN: To improve access among a captive visitor base, the NTDP has selected 20 clusters in which
more secluded areas possessing ecotourism potential will receive improved road links to established
tourism destinations nearby. In 2014 the government planned to spend more than P400bn ($9bn),
or 3.1% of GDP, on infrastructure. To support the
tourism industry, P14.4bn ($324m) worth of funding is being allotted to the Department of Public
Works to spend on the construction and maintenance of 679 km of access roads.
Guiller B Asido, assistant chief operating officer
of the DoTs Tourism Infrastructure and Enterprise
Zone Authority (TIEZA) the agency tasked with
identifying and facilitating investment into Tourist
Enterprise Zones (TEZs) referenced the example
of the municipality of San Vicente in explaining the
methodology being followed. Occupying 14 km of
unspoiled white sand beach, San Vicente is set to
have its own airport completed in 2015, as well as
a highway that should see the drive time to Puerto
Princesa the closest major city and a tourism
hotspot located 186 km away from four to two
hours. The master development plan is in place,

and locators (i.e., hotels and other tourist facilities)
will be entitled to a range of fiscal and non-fiscal
incentives, said Asido. As we have already gotten
buy-in from local government, they can also come
directly to us for one-stop approvals.
TIEZA guidelines, in addition to a job creation
measurement, call for investments to exceed $5m
and cover 5 ha of land to be eligible for the range
of incentives on offer. However, the Bureau of Internal Revenue has delayed making these terms official over concerns that the incentives would cut into
revenues. Laurent Lamasuta, president and CEO of
El Nido Resorts, believes incentives are essential to
attracting investment capital, but argues that packages should not be limited to designated areas. He
said, There are many places developers might want
to put up properties. TEZs make sense for starting
up a specific destination, but it is difficult to designate where a tourist will eventually opt to go.
As President Benigno Aquino IIIs administration
has generally been cutting back access to tax incentives, the implementation of a 2009 law meant to
grant tax holidays to hotel and resort investors has
also faced delays. Developing a property, especially in a less-developed area, takes up to three years
before profits are realised as one needs to invest in
transport and other support infrastructure, said
Lamasuta. The government, when offering a standard six-year tax holiday, is essentially only pushing
back three years of tax earnings. But without the tax
break, it risks losing a lifetime of tax revenue from
a project that might decide not to enter otherwise.
ECODIVERSITY: According to conservation group
the Tarsier Foundation, of the Philippines total land
area of 30m ha, slightly over half (15.8m ha) consists of tropical forests. The country boasts impressive biodiversity with 556 recorded species of birds,
180 mammals, and 293 species of reptiles and
amphibians, while about 67% of its flora and fauna
As part of the National

Tourism Development Plan
2011-16, 20 sites are set to
receive improved road links
in order to boost their
tourism potential.
Recent government efforts

to reduce the use of tax
incentives have delayed the
implementation of a 2009
law that offers tax holidays
for hotels and resort
investors.
146
TOURISM ANALYSIS
Around 67% of the archipelagos diverse flora and fauna are found nowhere else in the world
The Philippines is at risk for

a number of natural
disasters, and in 2013 the
country was hit by both a
severe typhoon and a
7.2-magnitude earthquake.
Under the Integrated

Coastal Resources
Management Project 22
sites are being developed,
with volunteer tourism
being a central component
of the programme.
is endemic. Furthermore, its surrounding waters harbour over 300 fish species and is surpassed by only
Australia in terms of seagrass diversity.
In appreciation of the need for marine conversation and the tempering of man-made deforestation,
the DoT released a code of ethics for Ecotourism
Philippines in 1994, followed in 2012 by the formulation of Executive Order No. 111, an ecotourism
strategy that emphasises sustainable management
of destinations, education and awareness, involvement of local communities and development of
tourism products. The country has been working to
secure recognition as a leading player in the field,
hosting the 5th World Ecotourism Conference in
February 2014 in the island-province of Cebu.
A GREEN REBUILD: According to risk research firm
Maplecroft, the Philippines is the most at risk country in the world for natural hazards, and 2013 saw
the country hit extremely hard by devastating natural catastrophe. Typhoon Haiyan, which has been
labelled the worst recorded storm to ever hit land,
tragically brought about the loss of 7000 lives and
caused the destruction of 10,000 homes. It struck
areas in Cebus northern island where resorts were
heavily concentrated, in the process damaging a
number of historic churches and tourist sights.
Bohol Island, where tourism is estimated to contribute 20% to the local economy, also suffered the
misfortune of having its infrastructure and attractions severely damaged in 2013, this time by a 7.2magnitude earthquake that occurred in October.
Although the typhoon and the earthquake collectively affected only six of the countrys more than
7100 islands, the events lead to a number of holiday cancellations throughout the country shortly
thereafter. About 5% of the DoTs budget is going
towards Ecotourism Philippines development and
promotion, while a further 5% is allocated to the
rehabilitation and restoration of historic sights. We
are undertaking heritage reconstruction projects
for earthquake-affected areas, which also includes

a three-year project to digitise, scan and archive historical archives, Asido told OBG.
NOT WORKING ALONE: The governments largest
ecotourism project, the Integrated Coastal Resource
Management Project (ICRMP), is supported by funding from the Asian Development Bank and the Global Environment Facility. The project has developed
22 ecotourism sites in areas that are largely off the
beaten path and mostly clustered around Cebu,
Davao, the Zambales region of west-central Luzon,
Masbate in Bicol and Cagayan on the northern tip
of Luzon. Volunteer tourism is considered a core
component within the ICRMP and the overall Ecotourism Philippines proposition, as it aligns with the
ethos of conservation and cultural immersion. It also
offers a way to replace visitors who opt to stay away
from areas affected by natural disasters with those
presenting the added bonus of wanting to contribute
directly to reconstruction efforts.
In the case of Bohol, the US Agency for International Development, the DoT, the UN World Tourism
Organisation and the Pacific Asia Travel Association
are collaborating on the Bohol Tourism Recovery
Plan. Edgar Chatto, the provinces governor, told the
local press that the lull in tourism affords an opportunity to strengthen the areas where we have gaps.
While there are no additional incentives or
allowances granted to private sector driven projects
specifically focused on or qualifying as Ecotourism
Philippines developments, investors in remote areas
where natural beauty is the main draw are doing so
of their own volition to help preserve pristine areas.
One of the countrys largest real estate companies,
Ayala Land, which operates the eco-friendly El Nido
Resort on the remote south-western island of
Palawan, is in the process of developing a 325-ha,
ecotourism-driven, mixed-use complex that will
include hotels, restaurants, shops and residential
properties. A total of P6bn ($135m) has been allocated to the project, with the group expecting the
area to handle 20,000 tourists a year and contribute
to the creation of 6000 direct and indirect jobs. We
want to contain the number of properties and visitors and promote experiential tourism, Lamasuta told
OBG. Some islands in the country were allowed to
develop too fast and uncontrolled, and today face
environmental degradation as a result.
A PASSING GRADE: The continued arrival of wellknown global hotel and resort chains to Manila provides assurance to visitors that they can anticipate
international standards. Bolstering expectations of
quality nationwide is the DoTs initiative to convert
to a new hotel accreditation system that will be led
by a team of third-party assessors from the UK, Canada and Australia. Switching to the more globally
accepted star classification system will reduce confusion among guests, as well as opportunities for misrepresentation among operators, Lamasuta told
OBG. If you want to be a serious global tourist destination you need to follow international standards.
TOURISM DIALOGUE
Cristino L Naguiat Jr, Chairman and CEO, PAGCOR
147
Stephen Reilly, COO, Resorts World Manila
Transforming tourism
OBG talks to Cristino L Naguiat Jr, Chairman and CEO, Philippine
Amusement & Gaming Corporation (PAGCOR), and Stephen Reilly,
COO, Resorts World Manila
To what extent will Entertainment City and the
expansion of leisure infrastructure enhance Manilas status as a regional destination?
NAGUIAT: Entertainment City looks set to transform
the face of tourism in the Philippines. While initial plans
anticipated the projects completion by 2018, all four
operators will not stop improvements to their projects
after this date, having already invested more than $1bn
above the figure stipulated in their contract. Although
most tourists have tended to overlook Manila as a business destination, Entertainment City and the integrated resorts it will host are set to complement existing
tourist sites in Manila, such as Intramuros, Corregidor
Island and the expected redevelopment of Roxas Boulevard. Alongside these developments, the Department
of Tourisms campaign will highlight activities, as
opposed to destinations: this is where the casino and
entertainment industry can play significant role.
REILLY: While prominent international players were
interested in investing in an integrated resort and casino complex when PAGCOR awarded the first licences
in 2008, the public was initially more reluctant. This was
primarily due to the decision to have Pasay and not
downtown Makati as the designated destination.
However, despite some initial uncertainty regarding
the viability of the project, the integrated resort complex has turned out to be a very attractive proposition
for visitors. Moreover, with the ongoing construction
of the NAIA expressway linking Entertainment City with
the airport terminals, Manila is in now in an excellent
position to become an international hub.
How can the Philippines boost its visibility as a gaming destination, and what benefits does this generate as compared to other parts of the sector?
REILLY: The integrated resort complex contains both
retail and theatre components, which are all interconnected. The concept is simple and reminiscent of a
cruise ship, where all components, namely leisure, retail,
entertainment and gaming, are all integrated in the
same structure, to cater to every member of the family. Indeed, the nature of tourism in the Philippines has
experienced dramatic changes in the past two decades.
It was initially difficult to attract visitors due to negative perceptions of the Philippines. Many visitors do
not expect the Philippines to offer high standards of
entertainment or hospitality, but are pleasantly surprised when they do arrive. Moreover, all the operators
will continue to benefit from each others operations
and the continued entrance of new players, given that
international tourists will not go to just one property
but instead to an overall destination.
NAGUIAT: Most large international hotel chains are
looking at the Philippines to consider investments not
only in Entertainment City itself, but also in the surrounding area. Indeed, Entertainment City will develop its
own ecosystem to diversify entertainment venues and
tourism products for Manila. Within Entertainment City,
9.6 ha will be set aside for a theme park called Nayong
Pilipino, which will showcase the diversity of local culture. Moreover, the casino and entertainment complex
enables us to complement gaming with theatre and
musicals, in this way turning Manila into the Broadway
of Asia. The operator, Resorts World, is looking at a
seating capacity of 4000 for its theatre while Solaire
has a 1700-seat theatre undergoing expansion.
On a nationwide level, many of the licenses for casino operators that are set to expire soon will be renewed
only if investment is increased to around $100m-150m.
We have created a frame of reference to encourage
other casino operators to adhere to higher standards
and guidelines, so they can replicate the model of
Entertainment City and develop their own sites.
How can investment in hotel infrastructure complement growth in tourist arrivals while at the
same time ensuring the quality of new players?
NAGUIAT: Entertainment City comprises a major part
of the goal of the Department of Tourism to attract 10m
visitors by 2016, as it will provide the necessary boost
148
TOURISM DIALOGUE
in room numbers. From the moment we stated the

Terms of Reference, we stipulated that operators could
increase their gaming areas based on the number of
hotel rooms they would add. To increase gaming area,
they would have to develop more hotel rooms or retail
opportunities. After all, gaming is not our primary focus
and only makes up 7.5% of the total Entertainment City
complex. Large hotel chains are looking at the Philippines for luxury projects, and the four project operators have been successful in enticing many prominent
international brands. With all the infrastructure developments taking place in the complex, we will have at
least 5000 rooms in five or six industry-standard hotels
by the time of completion. Our marketing campaign for
the Asian market needs to pace itself with the development of hotel infrastructure, or else we will not be
able to cope with the growth in numbers. Further to
this, there has been a proliferation of budget hotels,
guaranteeing a range of choices for different market
segments. This trend is expected to continue, as occupancy rates are very high for all hotels in the country.
REILLY: Hotel rooms have been at close to full capacity. For example, when we first opened, the Marriott had
342 rooms, and was not able to cope with the demands
of an integrated resort and casino. As a result, we
rushed the construction of the Maxims hotel with 172
rooms and thereafter opened 712 rooms at the Remington hotel. All three properties are currently above
occupancy ratios of 90% and engaged in their respective ongoing expansions. The opening of a ballroom at
the Marriott and the entrance of other international
brands into the integrated developments has opened
many opportunities for the meetings, incentives, conferencing and exhibitions (MICE) business, in turn generating opportunities for hotel infrastructure developments to cater to business travellers. Accordingly,
Entertainment City should not simply be branded as a
large casino complex, as its offerings will also extend
to shopping and the MICE segment, all of which
will tend to attract more visitors than the casino alone.
What can be done to attract the best human capital to work in the Philippines tourism sector?
REILLY: The hospitality workforce in the Philippines
has traditionally been characterised by high quality,
with talented, English-speaking and well educated
employees. In addition to the availability of a talent
pool that could be trained quickly, overhead costs are
very competitive for the industry, enticing many international players to enter the sector.
Many of the regional tourism players and casino
operators have already been capitalising on Filipino
labour as part of their hospitality-related ventures due
to their reputation for discipline. Due to the construction and expansion of Entertainment City, many of
these workers have been absorbed by the domestic hospitality industry. At the same time, finding the volume
of labour that is required for an integrated resort complex is very difficult, and so we have also built training
camps at the Genting-Star Tourism Academy to build
the pipeline for culinary and gaming professionals and
feed our own needs. Operators have also partnered with
local universities to ensure a supply of qualified workers for high-growth areas within hospitality and to provide them with certifications. Entertainment City will
employ between 35,000 and 40,000 people. However,
it will also benefit all the supplier communities that provide the supply chain needed to support operations.
Moreover, many of the jobs in an integrated resort
do not require a college degree, thereby creating opportunities for unskilled or under-skilled workers to be
employed in different functions in Entertainment City.
NAGUIAT: The Philippines currently boasts excellent
human resources capacity: most of its staff have served
on the front lines in Macau and Singapore, and received
excellent training and are now returning home, given
the rapid growth of the domestic hospitality industry.
Entertainment City will thus not be a stand-alone project but rather a destination, providing a critical mass
for a range of different areas within the hospitality
and culinary industry, in addition to supplier industries.
149
Transport & Infrastructure

The sector bounces back as investment increases
Creating new and better connections between islands
Alleviating traffic around ports will improve efficiency
Focusing on training programmes for maritime workers
150
TRANSPORT & INFRASTRUCTURE OVERVIEW
Nearly $3.9bn of FDI flowed into the country in 2013
On the up
Steady progress is being made and the sector is on its way to seeing
more rapid growth
Between 1998 and 2007,
private sector players
contribution to transport
infrastructure was 1.9% of
GDP, which was only slightly
higher than the public
sectors contribution of
1.6% for the same period.
The Department of
Transportation and
Communications is charged
with overseeing regulation,
planning and coordination
of the transport sector.
Though still trailing its neighbours, the transport sector in the Philippines is in the process of modernising
as the current government continues to fast track relevant infrastructure projects, while also taking modest
steps to improve inter-agency cooperation and good
governance. The sector is a key component of the
national economy, which will be better able to achieve
its potential through improved linkages between economic centres and cities on the archipelago.
Road transport remains by far the most dominant
mode of travel, and, according to the Asian Development Bank (ADB), road transport accounts for 98% of
passenger traffic and 58% of cargo traffic. However,
due to a lack of adequate financing, levels of servicing
have fallen behind. The World Bank has predicted that
the economy will grow 6.7% in 2015 although this
growth will depend on the governments ability to
improve spending and encourage public-private partnerships (PPPs). Regulatory uncertainty and convoluted bidding procedures have hindered the progress of
such projects so far and must be righted so that the
advantages of private sector interest can be realised.
GLOBAL PLAYER: In the area of logistics, the Philippines ranked sixth among ASEAN-6 countries and 57th
overall in the World Banks 2014 Logistics Performance
Index (LPI), which shows that there is still much work
to be done. Improvements within the maritime transport sector will be crucial to boosting these ratings, while
the building of secondary airports will also improve
economic potential. Such an overhaul will be key if the
Philippines is to realise its potential as an investment
destination and increase the cost-efficiency of its transport system. Nearly $3.9bn in foreign direct investment
(FDI) flowed into the country in 2013, the highest in
more than a decade. This indicates the depth of investor
appetite and the importance of creating an attractive
environment for investment. However, in the first nine
months of 2014 total approved FDI reached P91.8bn
($2.06bn), a 35.4% drop over the same period in 2013,
according to the Philippines Statistic Authoritys figures.
PARTICIPANTS: The Department of Transportation and

Communications (DoTC) is the agency in charge of regulating, planning and coordinating the modernisation
and expansion of the sector. The Department of Public Works and Highways (DPWH) is the next most authoritative body in the sector, and is currently developing
IT-enabled planning and programming systems with
the support of the ADB and the World Bank. It is hoped
that greater reliance on e-governance and monitoring
will improve the efficiency of budget disbursement,
which has been a problem in previous years.
The Bases Conversion and Development Authority,
the Philippines Ports Authority (PPA), the Philippine
National Railway (PNR) and various civil aviation authorities all play a complementary role in the management
of the sector. In shipping, the Maritime Industry Authority is under the DoTCs purview and is the single administration in the Philippines that deals with domestic
shipping, overseas shipping, shipbuilding and maritime
manpower. Finally, local government units (LGUs) are
tasked with the development and management of local
roads and other transport infrastructure components.
Intermodal integration and connection is another area
where there needs to be better communication so that
there is a coordinated approach between the DPWH,
the DoTC and LGUs in the future.
PRIVATE & INTERNATIONAL: While the strength of
the private sector in providing transport services is
clearly dominant, its role in providing transport infrastructure has been less assured. Between 1998 and
2007 private sector investment in transport infrastructure was equivalent to approximately 1.9% of GDP, only
slightly higher than public sector investment for the
same period at 1.6%, which was one of the lowest in
the region, according to an ADB report. However, since
then the private sector has become actively important
in promoting transport sector policy reform in order to
catalyse development. For example, private sector
involvement was instrumental in bringing about the necessary changes in policy to support the development
of the roll on/roll off (ro-ro) system through the Strong

Republic Nautical Highway programme and the establishment of open skies agreements for the development
of secondary airports into international gateways.
GOVERNMENT EXPENDITURE: With public infrastructure spending rising to 4.1% of GDP in 2015 and 5% in
2016, greater private sector participation is crucial to
ensuring efficient and effective delivery of projects. The
country has been operating under a build-operatetransfer (BOT) law since 1990, which aims to tap and
mobilise private resources for the purpose of financing the construction, operation and maintenance of
infrastructure and development programmes normally implemented by the government.
While such a law, also used by Malaysia, China and
Japan, has the potential to significantly fast track the
infrastructural development of a country, it is still heavily reliant on effective government authorisation, monitoring and the eventual transfer of projects back into
the hands of the government. In the Philippines years
of poor performance in this area have led to it falling
behind its competitors. A primary example is the condition of keystone transport hubs such as Ninoy Aquino
International Airport (NAIA), which faces significant
challenges that can hamper connecting flights. For
those projects that have been completed using the
BOT law such as the Manila Metro Rail Transit (MRT)
3 commuter line that was financed and constructed
by the Metro Rapid Transport Corporation (MRTC) poor
financial management has often left the government

saddled with the excess costs.
Tangible progress has been made by the current
administration of President Benigno Aquino III during
its 2010-16 term, and the state has sought to catalyse
private sector participation in large-scale projects
through the creation of a dedicated PPP Centre, boosting spending and willingness to seek expertise from
international partners. However, realisation remains
relatively slow and while the PPP Centre has some 66
projects, only eight had reached completion of the bidding and contract award stage as of January 2015. A
number of delays are due to corruption scandals among
major agencies, such as the DoTC.
In terms of international investment prospects, the
Philippines has benefitted from investment-grade sovereign credit rating upgrades in 2013, as well as hosting the World Economic Forum (WEF) on East Asia in
2014. While poor relations with China over the South
China Sea have deprived the country of access to the
inexpensive loans and development assistance that
neighbouring countries such as Indonesia can take
advantage of, it has nonetheless benefitted elsewhere.
One of the most promising partnerships has been
with the Japan International Cooperation Agency (JICA).
Collaboration between the Philippines and Japan
includes developing a sustainable transport network
in Metro Manila, increasing disaster resilience, boosting energy efficiency and maximising value through
151
The countrys
build-operate-transfer law
is aimed at tapping private
resources to finance the
construction, operation
and maintenance of
infrastructure and
development programmes
normally implemented by
the government.
152
The Metro Manila area

faces serious challenges
due to congestion, losing
an estimated 4.6% of GDP
every year due to traffic.
With vehicle ownership
increasing by 29% in 2014,
the problem is likely to get
worse going forward.
PPPs. Furthermore, in mid-2014 the National Economic and Development Authority board, chaired by President Aquino, approved the Roadmap for Transport
Infrastructure Development for Metro Manila and Its
Surrounding Areas. The World Bank and ADB have also
participated in the creation of informative studies
specifically addressing domestic transport infrastructure needs, which remain the largest impediment to
more evenly distributed growth.
At the end of 2014, the Aquino administration and
PPP Centre were pushing to amend the BOT law with
the aim of attracting more investors to participate in
projects valued at over P200bn ($4.5bn). The proposed
PPP Act would strengthen the institutional and regulatory environment surrounding PPPs and lead to a
more accommodating environment for private sector
engagements in the long term.
ON THE ROAD AGAIN: As the dominant form of transport in the Philippines, covering around 98% of passenger traffic, roads are the most crucial aspect of the
national transport network and have been slowly, but
steadily, improving in quality. This has been evidenced
by a jump in the quality of roads ranking in the WEFs
Global Competitiveness Index from 100th in 2011-12
to 87th in 2014-15. A total of P230.4bn ($5.18bn) has
been budgeted for transport in 2015. The national road
network extends approximately 215,000 km, with 15%
of arteries classified as national roads and under the
jurisdiction of the DPWH. The remaining 85% are local
roads managed by LGUs, which means that only 18%

of such roads were paved with asphalt or concrete,
according to an ADB report. The report also revealed
that LGUs only spend about 4.5% of their budget on
road investment and 1.9% on road maintenance. Over
50% of barangay (district) roads are unpaved and dedicated to allowing access to villages. They were previously built by the DPWH but are now delegated to LGUs.
IN A JAM: Congestion on roads in urban areas is particularly bad, with Metro Manila losing an estimated 4.6%
of GDP to traffic annually. Despite vehicle ownership
in the Philippines being among the lowest globally with
47% of households not possessing a car, ASEAN Automotive Federation data for 2014 revealed a 29% rise,
or 234,747 units, in vehicle sales compared to the same
period in 2013, making it the fastest-growing auto and
motorcycle market in South-east Asia, outpacing Vietnam, Singapore, Malaysia and Indonesia.
For transnational travel, highways such as the PanPhilippine Highway, also known as Maharlika Highway,
are the primary routes. The Pan-Philippine Highway is
a 3517-km network of roads, bridges and ferry services that connects the islands of Luzon, Samar, Leyte and
Mindanao and serves as the countrys principal transport backbone. The next most important is the Epifanio
de los Santos Avenue, which serves Metro Manila and
passes through six of the 17 settlements in the region.
A number of modern expressways also make up part
of the national road network, mostly connecting urban
areas across the main island of Luzon, with many more

being planned via the PPP Centre, which is fast tracking such projects to ensure bid completion before the
end of President Aquinos term in 2016.
One example is the current construction of the third
stage of the P26.5bn ($596.25m) Metro Manila Skyway (MMS), a 14.8-km elevated expressway, which
began in mid-2014 and is planned to open in 2017. The
MMS will connect the Southern and Northern Luzon
Expressways, two major traffic arteries that link the
capital city to regional urban centres.
One particular breakthrough outside of urban areas
in recent years has been the addition of the Strong
Republic Nautical Highway programme. The project
links many of the islands road networks through a
series of ro-ro ferries, which allow cars to roll on and
off without the time-consuming unloading of cargo. As
for the larger problem of poor road quality and durability, one of the major causes is the overloading of
trucks. Axle-load surveys conducted by the DPWH in
2005 showed that 11-12% of all trucks were overloaded, and it is likely that this situation has worsened
since then. Damage done to already poor-quality roads
results in a high number of traffic accidents, with an
estimated 20 road deaths per 100,000 people, according to 2011 World Health Organisation data. However,
it has since been announced that the DPWHs 2015
budget of P174.5bn ($3.92bn) for roads and bridges
will consider new construction design specifications,
such as increasing the thickness of concrete pavement

from 230 mm to 280 mm to prevent the early deterioration of roads caused by rampant overloading.
URBAN TRANSPORT: The Philippines, in which nearly
50% of the population live in cities, is currently seeing
rapid urbanisation that is causing productivity-damaging levels of congestion. There are more than 120 cities
in the country, including 16 in Metro Manila, which is
the only metropolitan area. Though Davao, Cebu and
Iloilo can also be considered metropolitan areas, they
are yet to be formally classified as such by the government. Transport systems in all cities are almost entirely road based, with the exception of Metro Manila,
which possesses an MRT and a commuter rail service.
Road transport services consist mainly of jeepneys
(public utility vehicles), taxis, motorised tricycles and
pedicabs. Almost all road-based transport in urban
areas is provided by the private sector. In Metro Manila there are an estimated 433 bus companies operating 805 routes, while privately owned jeepneys serve
785 routes. The central strategy for dealing with the
evolving problem has been proposed by JICA. The agency
has created a Roadmap for Transport Infrastructure
Development for Metro Manila and Its Surrounding
Areas in coordination with the DoTC, DPWH and the
Metro Manila Development Authority.
The central aim of the roadmap is to introduce strategies that will reduce traffic congestion before it impacts
lower-income groups, which will be the main victims
153
Most public transit systems

rely on road transport,
including jeepneys, taxis,
motorised tricycles and
pedicabs, nearly all of
which are run by private
players.
154
While users of
metropolitan rail lines have
long enjoyed the lowest
fares in South-east Asia, in
2015 LRT and MRT fees
were increased in order to
offset debt due to the
MRTs privatisation and
maintenance.
of congestion. The JICA study concluded that without

intervention traffic costs will likely rise to P6bn ($135m)
per day from the current level of P2.4bn ($54m). Preliminary analysis in the study showed that the average
low-income household has to spend at least 20% of its
total monthly income on transport costs. Without intervention, traffic demand will likely increase by 13% by
2030, and transport costs will be 2.5 times higher.
LOOKING FURTHER ABROAD: The roadmap also
emphasises the need to establish better north-south
connectivity and an appropriate hierarchy of different
transport modes such as roads, railways and other transit systems. These initiatives together form the Dream
Plan to have a modern, affordable, well-coordinated and
integrated transport system for the Greater Manila
Area by 2030. Of all the projects envisaged under the
Dream Plan, the most viable is a bus rapid transport (BRT)
system, which has been successfully implemented in
countries like Brazil. Such a project would develop
defined corridors for bus transport while integrating
jeepneys. According to the DoTC, the BRT project would
cost an estimated P4.8bn ($108m), with 32 stations
across 13 km from Recto to Quezon City. Currently, the
journey takes over one hour and 30 minutes; however, the BRT would reduce this to 45 minutes while being
able to transport some 290,000 passengers per day.
RAILWAY: The railway network of the Philippines currently serves only the urbanised areas of Metro Manila and Luzon and includes three networks, namely the
Manila light railway transit system (LRT-1 and LRT-2),

MRT-3 and the PNR. Boasting the first metro system in
South-east Asia, the Philippines LRT-1 and LRT-2 are
owned and operated by the government, while the
MRT-3 was financed and constructed by the MRTC, but
is operated by the government under a BOT agreement. The LRT lines, both of which have been in need
of upgrading for years, carry 579,000 per day, while the
MRT carries around 400,000, according to the ADB
report. While there are planned upgrades and extensions for all three metropolitan lines, in September
2014 the P65bn ($1.46bn) LRT-1 Cavite Extension project was awarded to the Light Manila Railway Consortium with a planned completion date of 2019.
Users of the metropolitan lines have enjoyed some
of the lowest fares in the region for many years due to
the debt of government-owned and controlled corporations being serviced by annual allocations in the state
budget, which has the effect of subsidising the operations of the light rail systems.
However, LRT and MRT fares were both hiked at the
start of 2015 to offset debt incurred after the MRTs
privatisation and maintenance costs. In 2014 the national congress allowed P1.2bn ($27m) under the 2014 supplemental budget and another P10.6bn ($238.5m) in
the 2015 national budget for the repair and rehabilitation of the LRT-1, LRT-2 and MRT-3.
In terms of heavy railway the PNR, which is one of
the oldest railways in the world, operates commuter lines
that serve areas such as Luzon south of Metro Manila. The Metro South Commuter Line extends as far
south as Calamba City, Laguna, and transports approximately 100,000 commuters every day. The popularity
of the line has increased in light of heavy road congestion caused by construction on the Skyway project
across Manila. The rehabilitation of the Caloocan-Alabang section of the commuter line, along with the
introduction of new rolling stock via development assistance financing, has helped mitigate the spike in ridership, but only for the time being.
The other main line operated by the PNR is the Bicol
Express, which links towns in the Bicol region with
Manila; however, the line has been plagued with difficulties. It was damaged by the typhoon in the 2006,
and after being successfully revived in June 2011, it suffered a train derailment in October 2012 that resulted
in services being suspended. In June 2014 trial runs
resumed on the 422-km line; however, a full reopening is yet to occur. As for future PNR plans, the DoTC is
focusing on reviving the long-defunct northern railway
line via the North Rail Project and expanding lines outside of Luzon. It has clearly communicated that it is looking to increase coordination with the private sector in
such development, as well as in other areas of freight
operation and maintenance. However, there has been
scepticism about new rail projects in light of the need
to upgrade existing lines and the lack of confidence in
the DoTCs bid and project management.
SAFE HARBOUR: Ports make up an essential part of
the Philippines transport network as connecting hubs
for the 3219 km of navigable water. There are currently nine major ports that handle the majority of domestic and international cargo: Manila, Subic, Batangas,
Cebu, Davao, Zamboanga, Cagayan de Oro, Iloilo and
General Santos. In addition, there are approximately
1300 ports of varying sizes, of which 1000 are government owned. Of the state-owned ports, about 140 fall
under the jurisdiction of the PPA and the Cebu Ports
Authority, while the remainder are the responsibility of
other government agencies or LGUs.
The Philippines is considered fairly well-connected
with the global container shipping services network. It
ranked 66th out of 159 countries in 2012, according
to the UN Conference on Trade and Developments Liner Shipping Connectivity Index (LSCI). The LSCI score
indicates how well countries are connected to global
shipping networks based on their maritime transport
sector. However, on a contextual level, according to the
WEFs Global Competitiveness Index, the Philippines
ports continue to rank lowest out of its 13 regional peers.
One of the main reasons for the low regional scoring is the high level of congestion at ports, which has
a knock-on effect for overall efficiency. Michael Kurt
Raeuber, group president and CEO of Royal Cargo, told
OBG, The problem with port congestion is that it generates a reduction in the productivity of trucks and
delays the moving of supplies in the Philippines. And
these problems in the Philippines supply chain will persist, and may even further aggravate in high trade seasons, if the root cause of the port congestion is not
155
Nine ports handle the majority of domestic and international cargo
recognised in a coordinated way. It is clear that the present situation is not a port capacity issue, but the confluence of a lack of proper coordination between the
national and local government, real time and misplaced
regulatory restrictions, and the absence of long-term
strategic planning and infrastructure development.
Clearance time with physical inspection was five days
in the Philippines compared to just two days in Vietnam, according to 2014 World Bank LPI data. Located
close to the busy metropolis of Manila, the Port of
Manila has been struggling to accommodate the flow
of cargo required to supply a country for which consumption amounts to 60% GDP.
Furthermore, a policy decision by Manilas government in February 2014 to ban trucks during certain
hours of the day to reduce the amount of traffic on the
roads during rush hour highlighted the urgent need for
the completion of port and road infrastructure upgrading if demand for consumer goods is to be fulfilled.
LEGISLATIVE HURDLES: In terms of the regulatory
landscape, the current administration is considering a
relaxation of cabotage law, which precludes foreignflagged vessels from serving domestic routes. The
rethink follows a study conducted by the Joint Foreign
Chambers of Commerce in the Philippines, which
showed the high cost of domestic shipping compared
with the cost of shipping via foreign trans-shipment.
The Department of
Transportation and
Communications plans to
revive the long-defunct
northern railway line via
the North Rail Project.
Metro, light rail & Megatren passengers & revenues, 2007-12

2007
2008
2009
2010
2011
2012
Passengers (m)
142.8
149.5
Revenues (P bn)
1.72
1.85
151.9
153
159.8
174.5
1.87
1.90
1.96
2.14
Passengers (m)
118.6
Revnues (P bn)
1.71
138.1
149.4
155.9
156.9
170.7
1.96
2.11
2.23
2.29
2.51
Passengers (m)
Revenue (P bn)
52.9
58.6
62.1
63.4
63.8
70.3
0.75
0.82
0.84
0.86
0.86
0.94
Metro rail transit (Metrostar)
Light rail transit
Megatren (LRT Line 2/Purple Line)
SOURCE: NSCB
156
Under current cabotage law, foreign-flagged vessels are not allowed
The shipping industrys

main challenge is the
accessibility and
serviceability of domestic
ports, with many
waterways relatively
shallow and ports lacking
certain equipment.
It is hoped that a relaxation would increase the industrys competitiveness, and therefore lower costs. Even
though the Philippines is the fifth-largest shipbuilding
country in the world, it is dominated by ships with a
capacity of 200- to 300-twenty-foot equivalent units
(TEUs), which are less cost-effective than the 5000-TEU
capacity typical of more modern ships.
Jose Go II, the president and CEO of Oceanic Containers Lines, told OBG, The local shipping industry relies
on 200- to 300-TEU ships, which cost a lot of money
to operate, and unfortunately local ports do not have
the equipment necessary to handle larger vessels.
These limitations reduce efficiency and mean domestic shipping liners end up having to charge higher tariffs to remain profitable.
However, a relaxation of the cabotage law would
increase the requirement for more accurate monitoring of vessels and smuggling activity, while some domestic ships could opt to reflag elsewhere in order to avoid
paying taxes. The Philippines only has 160 vessels in
the flag registry (it previously had 700), whereas landlocked Mongolia has 800 vessels. Mike Camahort, the
Transport & storage gross value added, 2012-14 (P bn)*

*At current prices
150
120
90
SOURCE: NSCB
60
30
2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
president and chief operating officer of courier, cargo

and remittances services LBC Express, told OBG, The
Bureau of Customs has to complement increased trade
traffic through expediency, with timing of clearance
processes having increased from two days to five days.
Additionally, given the manpower deficit at the bureau
and a high number of holidays, when it shuts down, the
backlog has worsened during peak holiday months.
OVERCOMING OBSTACLES: Challenges for the shipping industry mostly lie in the accessibility and serviceability of domestic port infrastructure. One of the
main obstacles for the country is that the majority of
the waterways are only accessible by low-draft vessels
(less than 1.5 metres). Furthermore, ports are generally insufficiently equipped. This includes the Port of
Manila, which still has only two gantry cranes. Because
most ports lack the necessary facilities, many ship owners must buy vessels with cranes or install cranes on
their vessels. This increases shipping costs in general
while also increasing the amount of time it takes to
unload vessels. Other ports suffer from simple over
crowding, such as Cebu Port, where incoming ships
have to wait for hours before being allowed to berth.
While the PPA has championed the ports at Batangas and Subic, particularly during the duration of the
truck ban, which placed excessive strain on the Port of
Manila, there are limits to their potential. The main limiting factors are their capacity to accommodate larger vessels due to their low draft rate and insufficient
equipment, as well as location. The distance from Manila is a considerable disincentive for companies, and
while the PPA has attempted to offset these by cutting
port costs, the savings are only negligible.
What is needed is for Batangas to be developed to
become a more viable international and domestic port
by encouraging the development of manufacturing
sites around the area. The same is true for the LuisitaClark and Clark-Subic corridors, which are ideal for light
industries, and could be well served by the upgraded
North and South Luzon Expressways. Go told OBG, To
turn to the immediate use of Batangas and Subic will
create an increase in transport costs because a lot of
the factories sending finished goods to the provinces
are clustered around Metro Manila. Initially, this will
have an impact on inflation and eventually the overall
economy, as consumption accounts for 60% of GDP.
For the majority who will continue to ship into the
more strategically positioned Port of Manila, port operator International Container Terminal Services (ICTSI)
has completed a $35m, 9-ha yard expansion project,
which is part of a larger plan to spend $330m on upgrading port infrastructure over the next 10 years. The new
space will be used as an empty container depot (ECD)
with the capacity to store up to 4300 containers, which
will ease pressure on the surrounding roads. The operator will soon add an additional 2 ha to the ECD as it
begins construction of the much-needed Berth 7. When
this round of expansion is finished in 2016, it is estimated that the upgrade will add roughly 500,000 TEUs
worth of yard space to the facility. ICTSI has also disclosed plans for an inland container depot that will be
developed 160 km away from the Port of Manila in

Laguna with an area of 21 ha, for which $30m has been
earmarked. Such plans for offsite facility constructions
come as the space available for development at the
Port of Manila becomes squeezed. As for the issue of
congestion around the port, narrow access to the north
and heavy congestion going south to Luzon have resulted in frequent gridlock for trucks. However, access to
the South Harbour, which is operated by Asia Terminals (ATI), has been significantly worse.
IMPROVEMENTS ELSEWHERE: As for Batangas Port
in the north, the road network is similarly inefficient.
Current roads connecting to Batangas port to the manufacturing centres in the Calabarzon Region south of
Manila handle about 50% of the areas container traffic, while the other 50% goes to Manila. For all containers from this region to move through Batangas Port,
the roads would have to handle double the current
truck traffic, and there are currently no visible plans in
place for an upgraded road or train option.
Though there has been talk of expansion of the port
at Davao, where there is already high congestion driven by a rise in international shipping and surrounding
industry, this situation would eventually mirror that of
the Port of Manila due to the limitations of building in
a confined urban area. It has been suggested that it
would be more constructive to seek FDI investment to
develop a new facility either north or south of it.
While ports may continue to invest in upgrading their
existing facilities, improved road infrastructure and the
construction of new, modern ports are required to take
the sector to the next level. Erry Hardianto, managing
director at Maersk Filipinas, told OBG, Mindanao offers
tonnes of potential, and the country needs to unlock
it and build the necessary infrastructure. However, the
development should be in accordance with market
potential. We should not be fooled that we need 1mTEU terminal in Davao if the cargo potential is far less.
Also, if one plans to build it in the city, one has to make
sure to build access roads and covers the whole chain.
FRIENDLY SKIES: There are 215 airports in the Philippines, of which 84 are owned and controlled by the government, with the rest privately owned and operated.
Of the government-controlled airports, 10 are designated as international airports, 15 are Principal Class
1 airports, 19 are Principal Class 2 airports and 40 are
157
Of the 215 airports in the Philippines, 84 are government-owned
community airports. The countrys busiest airport is

Manilas NAIA, followed by the Mactan-Cebu International Airport (MCIA) and Clark International Airport (CIA)
in north-west Manila. The government liberalised the
domestic air travel sector in 1995 with the aim of
increasing competition.
However, due to several underlying disincentives that
worked to hinder the entry of other international carriers, domestic carriers undoubtedly benefitted the
most. In February 2014 the top 12 carriers serving the
domestic market commanded over 92% of all weekly
seats and flights, according to air travel analysis website Anna.Aero. Dominant player Cebu Pacific Air is
three times larger than the second-biggest carrier, PAL
Express, formerly known as Airphil Express and the lowcost arm of Philippines Airlines.
Cebu Pacific Air operates at 61 domestic airports
and has a 50% share of all weekly seats and flights in
the Philippine market. The airline also serves 33 international routes, with Hong Kong being the top foreign
destination with a total of 45 weekly flights from Manila, Cebu, Iloilo and Clark. While domestic air travel
remains dominant, accounting for 71% of all weekly seats
in 2013, this is expected to change in light of incoming ASEAN integration and increasing GDP per capita.
Improvements to road
infrastructure, investment
in existing port facilities
and the construction of
new ports will take the
sector to the next level.
158
The government has opened up aviation to more foreign carriers
With the MRO segment

seeing annual growth of
7-8% in Asia, the
Philippines has become a
centre for the industry,
largely due to its strategic
location and widespread
English fluency among its
population.
OPEN AIR: As of 2015 the Philippines had yet to commit to an ASEAN multilateral open skies agreement,
which would allow foreign carriers to introduce additional flights in the Philippines that would create a free
market environment in the airline industry to drive
tourism, increase competition and maintain lower airfares for passengers. However, the government has
stated that it is not ready and that further patience is
required. Local carriers in the Philippines continue to
oppose the agreement as it will not provide a level playing field for privately owned Philippine carriers that
would be going head to head with South-east Asian carriers that enjoy strong government backing and financial assistance. In terms of contextualising regional
growth, routes to, from and within the Asia-Pacific
region will see an extra 1.8bn annual passengers by 2034,
for an overall market size of 2.9bn, according to the
International Air Transport Association.
LOOKING TO ALTERNATIVES: However, regardless of
the current administrations reluctance to sign up to
the ASEAN Open Skies, progress has been made as
Philippine authorities have taken steps to gradually
open up the sector to an increased number of foreign
players over the years. In particular, it has been promoting the development of secondary international
gateways through negotiating bilateral pocket open

skies agreements. These agreements now cover all
secondary international gateways in the country and
have led to substantial increases in travel through these
airports. In 2013 the government also dropped discriminatory taxes that were being levied against foreign carriers, known as the Common Carriers Tax and Gross
Philippine Billings. The law was signed by President
Aquino with expectation of achieving 10m foreign visitors a year by 2016, up from 4.3m in 2012.
The sector also received a major boost in April 2014,
when the Philippines regained its aviation rating upgrade
from US authorities, allowing local carriers to launch
and add flights to the worlds largest economy. The
upgrade was a result of considerable improvements
among national carriers, which helped to meet the
international safety standards set by the UNs International Civil Aviation Organisation. The upgrade from
Category 2 came just as the EU lifted a ban it imposed
on Cebu Pacific Air, allowing it to enter Europes airspace again. Burkhard Andrich, president and CEO of
Lufthansa Technik, told OBG, Return to Category 1
increases the number of destinations, but it does not
necessarily increase passenger demand. In my opinion
it will not increase passenger demand, but it will increase
competition in the [maintenance, repair and overhaul]
MRO industry, since new airlines with their own MRO
services will be coming to the country.
The Philippines is the centre for MRO in Asia, which
is experiencing the highest MRO growth in the world
at 7-8% per year. The main reason for the advantage
of the Philippines is a widespread fluency in English and
its strategic location. However, human capital remains
a challenge, with young workers requiring costly and
time-consuming training. This has been exacerbated
by the contingent of workers who go abroad, making
the retaining of qualified individuals more difficult.
Abdallah Okasha, the former Philippines country manager for Qatar Airways, told OBG, Unemployment rates
in the Philippines explain the reason why there are
250,000 [overseas Filipino workers] OFWs in Qatar. The
Philippines has, officially, 7.5% unemployment, while in
Qatar it is only 0.5%. The high number of OFWs in Qatar
has acted as a link between both countries and as a
way to connect both economies. Bilateral trade, for
example, is expected to reach $1bn by the end of 2014.
NEW OPTIONS: Despite concerns over congestion,

NAIA remains the primary airport in the Philippines,
handing around 30m passengers in 2013. However,
since completion of the P1.9bn ($42.8m) rehabilitation
works at NAIAs Terminal 3, international traffic is now
being diverted away from Terminal 1. Terminal 3 became
fully operational in August 2014 and has since welcomed
a number of international carriers, including AirAsia,
KLM, Emirates Airline, Singapore Airlines and Cathay
Pacific. This move has significantly reduced passenger
flow and vehicular traffic at Terminal 1 and allowed for
the fast-tracking of ongoing renovation works that
have been stifled by congestion.
In another move to reduce queuing time at the overburdened Terminal 1, the Manila International Airport
Authority successfully negotiated for terminal fees paid
by departing international passengers to be incorporated in the price of airline tickets in October 2014. A
one-year transition period will take place before full
implementation in October 2015.
NEW HUB: Elsewhere, CIA is making headway amid the
current expansion of its terminal to accommodate at
least 4m passengers annually. Between 2005 and 2012,
its number of passengers more than quadrupled from
230,000 to over 1.3m. The increase in passenger volume has been largely anchored by the additional flights
launched by AirAsia Philippines, Airphil Express, Dragonair, Zest Air, Asiana and Seair. The entry of Emirates
Airlines and Qatar Airways in October 2013 paved the
way for an increased number of long-haul flights from
the Middle East. CIA has also improved its viability as a
major MRO facility in the Asia-Pacific with the entry of
the $40m Hong Kong-based Metrojet Engineering Clark
in a 3-ha area at the Clark Civil Aviation Complex.
However, connectivity remains an issue for CIA in
terms of hitting its passenger goals due to it being a
two-hour drive to the north of Makati. While the Aquino
administration has been looking into a rail link to connect CIA with Manila and NAIA, feasibility studies indicate the project would be too expensive.
It seems more practical to develop CIA as a hub for
the 23m people who live in the North Luzon region,
while continuing to expand NAIA to accommodate the
27m inhabitants of the South Luzon region. The JICA is
championing a new airport to replace NAIA, to be located at Sangley Point, Cavite City, and targeted to open
in 2025. As for MCIA, a P17.52bn ($394m) contract has
been awarded in the form of a PPP for the construction of a new terminal building. On the regulatory front,
the Air Passenger Safety Bill of Rights is being reviewed
for proposed amendments in 2015. The changes would
include provisions to stop overbooking of flights while
increasing charges for flights that are late.
At the end of 2014, the DoTC reported that it had
fully rehabilitated three airports damaged by Typhoon
Haiyan. The Civil Aviation Authority of the Philippines
has assisted in the full reparation of Kalibo International Airport, Roxas Airport and Busuanga Airport. Repairs
to the asphalt overlaying Tacloban Airports runway are
ongoing, limiting operations to small aircraft. The airports at Kalibo and Busuanga cater to tourists visiting
159
The government is looking to expand rail line services to areas throughout the Luzon region
the countrys renowned beaches, while Roxas Airport

serves over 200,000 passengers per year as a gateway
to the island of Panay. The government increased the
2015 budget for aviation by 46% to P13.3bn ($299m).
OUTLOOK: Though the Philippines is suffering an infrastructure deficit that cannot be remedied overnight,
positive steps taken by the current administration to
prioritise spending and get keystone projects moving
are all steps in the right direction. However, with slow
internal bureaucracy and mistrust of certain government agencies still apparent, the Philippines has realised
it must also rely on outside help for sector development.
A willingness to communicate with international banks
and development agencies has created a strong dialogue that investors can benefit from. Significant
improvement in connectivity and transport infrastructure is vital for inclusive growth for its citizens.
Augmenting road infrastructure and the coordination of different transport entities is a central priority.
Unfortunately, the city of Manila is currently in a catch22 whereby construction works on the essential Skyway project is temporarily increasing congestion to
unprecedented levels. However, these growing pains
are essential for progress as Metro Manila remains the
economic engine of the country. The amendment of
the BOT law and greater integration of international
investors and development agencies will hopefully
boost investment and improve management of such
projects, so that these pains will be lessened.
The state of the countrys ports, which is exacerbated by the condition of the roads, is a direct burden on
logistics costs. Thankfully, the existence of proactive port
operators such as ICTSI and ATI is helping to keep things
moving. After previously poor dialogue between private
and public sector players in the industry, the truck ban
has arguably forced them to work together on solutions. Overall, strong fundamentals indicate continued
growth for the sector as the government has given it
the green light. A focus on implementation of these
ambitious plans can sustainably increase connectivity.
By the end of 2014, the

Department of
Transportation and
Communications had fully
rehabilitated three airports
that had been damaged by
Typhoon Haiyan in 2006,
and the 2015 budget for
aviation was increased by
46% to $299m.
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TRANSPORT & INFRASTRUCTURE ANALYSIS
About 44 port rehabilitation projects are ongoing or planned
Island hopping
New port infrastructure and better domestic connections
The Philippine Ports
Authority has allocated
$2.7m for the expansion of
ports at Bohol, Iligan and
Butuan, with $1.37m set
aside for a new passenger
terminal building.
A total of $5.85m has been

devoted to the expansion
of the Caticlan Jetty port,
which will target the
ferrying of tourists to and
from Boracay Island and
Malay.
An archipelago state, the Philippines has over 7000

islands, with the 11 largest holding 94% of land area.
Accordingly, port infrastructure across the country
remains a crucial component to overall connectivity.
While ports have suffered from a general lack of investment, progress has been made in recent years through
the development of roll on/roll off (ro-ro) ferry services, which are aimed at providing an alternative to traditional long-distance, inter-island shipping services.
In 2003 the government of the Philippines issued a
policy to promote ro-ro as part of the states Strong
Republic Nautical Highway programme. The growth of
ro-ro services may have contributed to the decline in
both freight and passenger traffic on conventional
inter-island shipping services. It is estimated that the
use of ro-ro offers a saving of about 12 hours in travel time between Mindanao and Luzon, and a reduction
of about 30% in the cost of freight transport and 40%
in the cost of passenger transport.
BIGGER & BETTER: The developments planned by the
Philippine Ports Authority (PPA) include the P260m
($5.85m) Caticlan Jetty Port expansion project that
specifically targets the ferrying of tourists to and from
the world famous destination of Boracay Island in Malay,
Aklan. However, in 2011 the project was halted under
a temporary environment protection order, sought by
private organisation the Boracay Foundation (BFI), forcing the Aklan provincial government, Philippine Reclamation Authority, and the Environmental Management
Bureau at the Department of Environment and Natural Resources to suspend reclamation work despite the
fact that it was almost 80% complete.
The rationale behind the freeze was that the reclamation would lead to the further erosion of Boracays
coastline. However, after adjustments to the project to
include only 2.6 ha of mainland Malay and not Boracay Island, the project met with BFI approval, and the
Supreme Court was able to lift the decision in July 2014.
The move will allow for the construction of a new terminal building, a crucial upgrade as the Caticlan Jetty
Port is already far beyond its holding capacity. This has

caused inconveniences to tourists, who have to wait
for long periods to travel between mainland Malay
town and Boracay Island. Alongside the new terminal
building, other amenities will be constructed, such as
a parking area, a health centre and a wellness centre.
In addition to the much-needed Caticlan Jetty Port
expansion project, the state-run PPA has announced
plans to fast track the expansion of the major ports of
Bohol, Iligan and Butuan. The PPA earmarked P120m
($2.7m) in January 2014 for the expansion, P61.2m
($1.37m) of which is slated to be used on constructing of a passenger terminal building and expanding the
back-up area at the Port of Talibon in Bohol.
The agency is also undertaking a P34.2m ($769,500)
project to construct a transit shed at the Port of Iligan
in Lanao del Norte. Submission and opening of bids for
the two projects took place in January 2014, with companies at least 75% owned by Filipinos being allowed
to participate. The PPA earmarked P23.84m ($536,400)
for the paving of the existing back-up area in the Port
of Masao in Butuan City, Agusan del Norte. The submission and opening of bids for the Butuan City project was also set for the beginning of 2014 through open
competitive bidding under the revised implementing
rules and regulations of Republic Act 9184, otherwise
known as the Government Procurement Reform Act.
BOUNCING BACK: With major port projects nationwide being driven by domestic demand and ASEAN
integration planned to be completed by the end of
2015, the nation is recovering from the serious impact
of Typhoon Haiyan. In the city of Tacloban, approximately 580 km south-east of Manila, almost 95% of its
transport system was destroyed. However, the administration of President Benigno Aquino III has been
impressively proactive in getting things moving again.
With regard to ports specifically, the government has
spent as estimated P41.2m ($927,000) to complete
the rehabilitation of 14 ports, and 44 more port rehabilitation projects are either ongoing or in the pipeline.
162
TRANSPORT & INFRASTRUCTURE INTERVIEW
Cosette Canilao, Executive Director, PPP Centre of the Philippines
A passion for partnership

OBG talks to Cosette Canilao, Executive Director, Public-Private
Partnership (PPP) Centre of the Philippines
To what extent can the Project Development and
Monitoring Facility (PDMF) fast-track the bidding
process while ensuring the viability of projects?
CANILAO: The PDMF lies at the very heart of the PPP
programme in the Philippines, as it can augment the
capacity of implementing agencies to roll out PPP projects. Through the PDMF, the PPP Centre will be able to
hire reputable consultants and transaction advisers to
help the implementing agencies.
This will enable the fast-tracking of the bidding
process, allowing us to have a feasibility study on which
to base our estimates and our terms of reference before
the request for proposals is published. This is a critical
component of the PPP programme, which we want to
see institutionalised in the amendments to the buildoperate-transfer law. As a result of the PDMF, a firm
list of projects is being planned, as compared to when
the PPP programme was first launched.
of classrooms for the Department of Education. Of the

seven projects awarded so far, two were awarded for
the construction of classrooms, and another went
towards the modernisation of an orthopaedic centre.
What role can foreign participants play in implementing and delivering PPPs through the transfer
of international expertise and competence?
CANILAO: Their role is twofold: first, through the PDMF,
we hire reputable international consultants and transaction advisers. These are then able to partner with
local advisers and contribute to the mutual exchange
of technology and specialist knowledge to help all parties concerned. Second, for PPP projects themselves,
foreign participants can contribute to the operation
and maintenance of our infrastructure or utilities, while
they can also participate in construction activities or
the transfer of technology and innovation.
Which PPP projects can improve infrastructure in

anticipation of the impending launch of the ASEAN
Economic Community (AEC) in 2015?
How can local government units (LGUs) be encouraged to participate in PPP projects in a way that
could contribute to overall growth?
CANILAO: One of our principal missions is to make the

country competitive following the launch of the AEC
next year. After President Benigno Aquinos administration came into office, one of its primary agenda
goals was to improve infrastructure development so
as to achieve sustainable inclusive growth. As of now,
almost all projects that we have under way are road
projects that are forecast to reduce the freight costs
of goods, while improving competitiveness. Moreover,
new rail transit lines will also improve travel times, while
airport projects will also boost economic competitiveness in comparison to that of our neighbours.
Through the PPP programme and the governments
infrastructure procurement budget, we are hoping to
increase infrastructure expenditure to 5% of GDP by
2016. In addition to traditional and hard infrastructure
projects, we have undertaken social infrastructure
developments through PPPs, such as the construction
CANILAO: LGUs have already played a critical role in

facilitating inclusive growth, and one of the goals of
the PPP programme is to align the partnership scheme
with the LGUs. From the PPP Centre, we have conducted capacity development training, in addition to coming out with a manual to help LGUs with their work, in
particular for simpler projects that they can roll out
with the assistance of a PPP scheme.
We are currently also in the early stages of exploring a new strategy that could further improve the ability of LGUs to undertake PPPs, namely through an
internship programme under which LGUs would be
able to choose some of their projects. Indeed, the PPP
Centre works alongside them to develop projects, from
the initial feasibility study all the way through to bidding and implementation. Moreover, we are training
schools and other local institutions so they can provide local consultancy to LGUs for their PPP projects.
163
The city of Manila temporarily banned trucks during rush hour in 2014
Stop and go
The removal of limitations on truck traffic eases port congestion
In 2014 stifling inner-city congestion cost the Metro
Manila area more than P2.4bn ($54m) per day,
according to a report by the National Economic
Development Authority Board of the Philippines. The
congestion was a result of poor city planning, delays
caused by the construction of elevated toll roads via
the new Metro Manila Skyway project and the reliance
of cargo-laden trucks on the citys surrounding road
infrastructure. The Port of Manila received over
900,000 containers in the first quarter of 2014, while
exports and imports rose 8.3% and 5.4%, respectively, in the first half of the year, according to the Philippine Ports Authority (PPA).
The congestion, also a result of spiralling motor
vehicle ownership, which is expected to hit 2.5m in
2015 in Metro Manila, led Manila Mayor Joseph Estrada to enact a blanket rush hour ban on trucks in February 2014. The ban prohibited eight-wheeled trucks
and vehicles weighing more than 4500 kg from driving on Manilas roads between 5.00am and 10.00am
and 3.00pm and 9.00pm between Monday and Saturday. Despite being subsequently revised to 6.00am
to 10.00am and from 5.00pm to 10.00pm following
the appeals of truckers, the impact of the ban
remained considerable and was adopted by neighbouring local government units.
HOLD UP: The effects of the ban were felt immediately at the Manila International Container Terminal
(MICT) and Manila South Harbour port. Raoul Santos, assistant general manager of operations for the
PPA told OBG, Before the ban, the Port of Manila
was receiving an average of 5000 containers daily,
while also being able to exit 5000. However, during
the ban we were only able to exit 3000 containers,
which resulted in a significant build up within the
port area and impeded efficiency.
The 100-ha MICT facility at the Port of Manila,
which is operated by International Container Terminal Services (ICTSI), handles over half of the countrys international freight. It was forced to operate
at over 100% of its capacity during the period, with

newly arriving containers left lingering for 20 days
as opposed to the usual six. Christian Gonzalez, Asia
regional head for ICTSI, told OBG, Although there is
sometimes a lack of discipline among truck drivers,
which should be addressed through process improvements, a truck ban is not the solution. From an economic and social point of view, the ban affects 20,000
jobs because while truck owners charge over 60%
more for their services to recover costs and maintain profitability, the drivers still get paid per move.
The negative effects of the ban were also felt by
Philippines-based franchising companies, which
reportedly suffered over P3bn ($67.5m) in losses
between February and September 2014 due to disruptions in their supply chains. Armando Bartolome,
chairman of the Association of Filipino Franchisers,
told local press, The P3bn ($67.5m) in losses incurred
were due to the rising costs of goods and brokerage fees, among other charges. Suppliers have no
choice but to increase their charges.
The domestic franchise industry is dominated by
homegrown brands that employ around 135,000
people, while consumption accounts for 60% of GDP.
The ban was criticised by both private and public sector parties. In the month following implementation,
Citigroup estimated that the less congested city
roads would save only P30bn ($675m) per year, a minimal amount when compared to the losses it would
impose on the shipping and commerce industries and
the national economy. The European Chamber of
Commerce of the Philippines published a statement
on its website that noted, Despite the fact [that]
facilities are being developed to handle substantially more cargo, this truck ban is effectively reducing
the countrys growth potential and is damaging the
economy. The Bureau of Customs also saw its revenues dip within the first month of the ban.
SILVER LINING: However, in September 2014 the
truck ban was finally lifted under Executive Order
Inner-city traffic is
estimated to have cost the
Metro Manila area more
than $54m per day, with
congestion largely due to
poor city planning and
delays caused by ongoing
construction projects.
While the truck ban had a

positive impact for
commuters and city
residents, it had a much
more negative effect on
the economy, with local
franchises suffering losses
of $67.5m between
February and September
2014.
164
One of the positive effects of the truck ban has been an increased impetus to improve port efficiency
The operator of Batangas

Port reported a 254%
increase in container traffic
during the second quarter
of 2014 as a result of new
management and an
improved IT system.
Following an intervention
by the Cabinet Cluster on
Port Congestion, which
worked with the Port Users
Confederation, dialogue
between stakeholders and
the authorities was
improved, allowing them to
address the gridlock
around Manila South
Harbour.
No. 67, issued by the city government to ease the

backlog of containers and unworkable congestion
around the Port of Manila. Despite the ban benefitting the lives of commuters and city residents, its
removal was widely viewed as an essential action and
signified the transfer of responsibility for the truck
congestion issue from the city government to the
Metropolitan Manila Development Authority (MMDA)
and the Department of Transport and Communication (DoTC). Though the limitations of the ban were
clear to see, the situation created at the Port of
Manila catalysed the welcome use of the regions
alternative ports, such as at Batangas and Subic,
which were designated as alternative gateways to
the Port of Manila during periods of congestion or
national emergency under Executive Order No. 172
from President Benigno Aquino III.
NEGATIVE IMPACT: During the second quarter of
2014, Asian Terminals (ATI), the operator of Batangas Port, which lies 110 km south of the Port of
Manila, reported a 254% increase in container
throughput. Though the port infrastructure initially
struggled to accommodate the rise, new management and an improved IT system since November
2014 means that the port has become more established with shipping lines, while port utilisation has
normalised to a steady 60%. Subic, located 140 km
north-west of the Port of Manila, also saw a rise in
traffic. By August 2014, the inflow of containers had
surged to 8770 twenty-foot equivalent units (TEUs)
at the ports new container Terminal One, up from
2551 TEUs in August 2013.
Yet while progress has been made in exposing
both ports to more traffic, thus reducing the burden on the Port of Manila, many within the transport industry maintain that Batangas is too small and
Subic too far away. For example, Batangas has an
annual capacity of 300,000 containers a year, compared to the Port of Manilas 3.8m, while for manufacturers located in or near Metro Manila exporting
through Subic is likely not a viable alternative due

to the distance. While the process of addressing the
backlog caused by the truck ban will likely extend
into the first half of 2015, according to the DoTC,
the truck ban has served as a wake up call for all
actors and authorities to work together on the issue.
QUICK FIX: Amid the wait for construction on Berth
7 at MICT and traffic caused by the Skyway construction project, which will continue until at least
2016, there has been a collaborative effort among
port operators, importers, associations and government bodies to remedy the congestion issue. The
response of the central government was galvanised
by the intervention of the Cabinet Cluster on Port
Congestion, headed by Cabinet Secretary Jose Rene
Almendras, which coordinated with the Port Users
Confederation to improve dialogue between stakeholders and the authorities. For example, in order
to address the gridlock around Manila South Harbour, port operator ATI has been working on implementing a vehicle booking system with the PPA so
that delivery times can be more accurately planned.
In addition to its efforts to ease road congestion,
between 2013 and 2015 ATI invested approximately $50m annually in improving its port infrastructure. Such consistent investment indicates that the
problem of port congestion is largely due to road
infrastructure and the poor discipline of truckers, who
are not sufficiently incentivised. It is worth noting
that the number of active trucks in Manila has
remained at a steady 6000, with 1500 backup trucks,
for nearly a decade and represents a very small contingent of actual vehicles on the road. The root of
the problem is rather the general state of road infrastructure around ports in a region of almost 23m people. The population of the area is expected to reach
30m by 2025, according to Bloomberg.
Yet despite the high levels of surrounding congestion, the Port of Manila remains the port of choice
for trade flowing into the Philippines. Though the
truck ban has catalysed the use of alternative ports,
such as Batangas and Subic, if the citys secondary
ports are to successfully share the load traditionally carried by the Port of Manila, their capacity to
accept larger vessels and access economic zones will
need to be upgraded. Outside of this, the answer to
the congestion problem remains very much in the
hands of the MMDA and DoTC with the help of private sector collaboration. While the government has
increased direct spending and fast tracked relevant
public-private partnership infrastructure projects,
it needs to reassert its authority over national roads
within Metro Manila and prioritise the expansion of
useful 24-hour express lanes for trucks.
Glenn MacArtney, country manager of MCC Transport Philippines, told OBG, While ideally Manila
would see the construction of a mega-port south of
the city that could accommodate 10,000- to 12,000TEU vessels, the realities of having a port located within an urban area will remain a challenge for both
the government and for private sector participants.
William K Hotchkiss III , Director-General, CAAP
A new connectivity
OBG talks to William K Hotchkiss III, Director-General, Civil Aviation
Authority of the Philippines (CAAP)
What opportunities does the return to a Category
1 safety rating generate for the development of new
long-haul routes and tapping into new markets?
HOTCHKISS III: The expected benefit is increased connectivity between the Philippines and the US, enabling
Philippine airlines to fly to new destinations in North
America, either via new routes or by expanding existing ones. This will positively impact their profitability
with the potential influx of passengers and cargo, since
there is a sizeable Filipino community in the US. The
flow of trade and investments between the two countries can be expected to flourish given their history of
close, friendly diplomatic and commercial ties.
In connection with these developments, the Department of Transportation and Communication and CAAP
have engaged the US Federal Aviation Administration
through a Technical Services Agreement signed in 2013,
forming collaborative technical programmes to bolster
the CAAPs efforts towards compliance in aviation safety and to ensure the sustainability of the reforms it has
implemented. As for developing new routes, the CAAPs
main contribution is to ensure the airworthiness of
Philippine aircraft, by enforcing strict compliance with
the standards of the International Civil Aviation Organisation and by closely monitoring airlines implementation of good corporate governance principles.
To what extent has inadequate airport infrastructure in the Philippines affected domestic connectivity and the development of tourism?
HOTCHKISS III: The Philippines has 86 airports, five of
which have their own charters and operate independently except for air traffic and navigational services,
which the CAAP provides. The 81 airports managed by
the CAAP are in areas serving major cities and tourist
destinations, and have shown robust growth, in both
passenger and cargo traffic, domestic and foreign.
We are currently undergoing a rationalisation programme to determine the measures needed to expand
the capacity of our commercial airports and upgrade
them to international standards. With the Department

of Tourism (DoT), for instance, we have embarked on
a gateway convergence programme that identifies
which airports draw the most tourists with reference
to local destinations, as well as which areas have the
highest concentration of trade and investment activity. These airports were then earmarked for expansion
or even relocation through the governments public-private partnership programme, including the
Bacolod-Silay, Iloilo, Bohol (Panglao) and Puerto Princesa airports in the Central Visayan region and Laguindingan and Davao airports in Mindanao. The perceived
congestion that Ninoy Aquino Airport is experiencing
is to be expected, as its location in the centre of Metro
Manila makes it the preferred stop or transfer point for
local and foreign air travellers. The full operationalisation of the new CNS/ATM project by June 2016 should
enable us to better manage our air traffic system.
In what ways could an open skies policy for ASEAN

affect aviation in the Philippines vis--vis the current administrations pocket open skies policy?
HOTCHKISS III: An open skies policy can only benefit
Philippine civil aviation by making the sector stronger
through competition the driver of liberalisation. The
definition of open skies under the ASEAN Single Aviation Market (ASAM) is subscription to the full fifth
freedom air right, whereby an airline from one country can land in a second country, pick up passengers,
then fly on to a third country where the passengers deplane. This condition embodies, in part, the ASEAN goal
of a free flow of goods, services and manpower within a single production and marketing block. However,
while this air connectivity opens opportunities for aviation enterprises to grow, it also poses the challenge
of prudent management to keep their competitiveness. The Philippines can gain a lot of mileage from the
ASAM platforms rationalisation, standardisation, harmonisation and convergence in propelling the growth
of the countrys civil aviation sector in a sustainable way.
165
166
Ramon S Ang, President and COO, San Miguel Corporation
Long-term investments
OBG talks to Ramon S Ang, Vice-Chairman, President and COO, San
Miguel Corporation
What has been the private sectors reaction to the
pace at which the public-private partnership (PPP)
programme has been implemented?
To what extent might the domestic availability of a

skilled labour force and technical know-how affect
the success of the PPP scheme?
ANG: The implementation of the PPP programme has

been slower than most of us expected. I think the government was just being extra-cautious to make sure
that there will be no issues with the projects once they
are indeed green-lighted. For our part, weve also worked
hard to fast-track our own projects, which, though not
falling under the PPP umbrella, are still very much part
of our countrys development agenda. These include
the Tarlac-Pangasinan-La Union Expressway and Skyway Stages 3 and 4. There is already a lot of interest,
from local and foreign firms, to undertake PPP projects
in the Philippines. Perhaps what needs to be done is to
build our countrys image as a compelling investment
destination that offers a level playing field and consistency in terms of government support and regulation.
ANG: The Philippines has more than enough talented

engineers, technical workers and skilled workers capable of helping bring about major infrastructure projects. In fact, our workers constitute some of our biggest
exports. But this becomes a problem as many of our
best talents are probably working abroad. Hopefully, with
the PPP programme, and with the acceleration of infrastructure and development projects, there will be more
job opportunities at home for talented Filipino workers. When these projects spur more economic growth,
these opportunities will only increase.
What national development goals and economic

sectors are likely to benefit the most from publicprivate collaboration?
ANG: Definitely road, port and airport projects, in that

order. These will facilitate an increase in the flow of people, goods and services in and out of the country and
will directly benefit economic growth. To ensure inclusive growth, mass transportation systems such as railways and bus rapid transits must also be developed.
ANG: Infrastructure is a key sector that we need to develop if we are to accelerate the Philippines growth. We
are behind many of our Asian neighbours in terms of
infrastructure, and this is why our government is focused
on this area and also why companies like ours are bullish about pursuing such projects.
Power is also a perennial problem in the Philippines,
particularly in the countryside where many still do not
have power supply security. In order to meet our countrys growth targets, we need to meet first its power
requirements and have enough capacity for the future
growth. Again, this is why we have invested significantly in this sector. Currently, we are constructing two new
power plants that we hope will go a long way towards
providing adequate and consistent power supply in
Luzon as well as in the Mindanao and Visayas regions.
Such development of infrastructure and electricity will
benefit all economic sectors and spur further growth.
What PPP projects present the greatest value proposition to improve infrastructure systems and attract
long-term investment in anticipation of the ASEAN
Economic Community in 2015?
How can coordination among government departments and central and regional governments be
improved to boost capacity among stakeholders?
ANG: The National Economic Development Authoritys
Long-Term Strategic Development Framework Plan
contains the physical development directions for the
entire country until 2020. Every administration also
has a Medium Philippine Development Plan that provides development directions for six years. These should
be cascaded to the national implementing agencies and
to various local governments which are the direct beneficiaries of these plans. Key to the recognition of various government sectors of these strategic plans
is implementation of these specific projects into law.
167
Nearly 400,000 Filipino seafarers were working overseas in 2013
Seafaring nation
Filipino workers have become an essential part of the global
maritime industry
Over the last 50 years, the Philippines has grown to
become a leading provider of maritime professionals and is subsequently considered by many to be
the seafaring capital of the world. The seafarer population in traditional maritime countries declined in
the 1970s, shifting supply to countries like India,
China and the Philippines. At present there are over
10.5m Filipinos living and working abroad, and in
2013 they sent total remittances of around $23bn
back home to the Philippines. The maritime industry is a major contributor to this: nearly 400,000 Filipino seafarers were working overseas in 2013, contributing a total of more than $5.2bn in remittances.
Globally, there are around 80,000 vessels of over
500 deadweight tonnes (DWT). Approximately 1.4m
workers are required at any given time on those
80,000 ships, and Filipinos occupy a large proportion of those positions. With shipping carrying over
90% of world trade, it can be said that Filipinos play
an extremely significant role in this industry. Maximo Mejia, administrator for the Maritime Industry
Authority (MARINA), told OBG, Seafaring is the

Philippines biggest strength, currently supplying
roughly 30% of the worlds seafarers, which is miles
away from the second-largest source country.
Filipino workers have proven themselves to be
competent and can be found working at shipping
companies around the world.
STANDARDS: Broadly speaking, practices covering
the mobility, education and training of seafarers in
the international shipping industry are well developed. Safety standards are governed by the International Maritime Organisation (IMO), which is based
in London, with member states having to be included on a white list as evidence of their compliance
with the Standards of Training, Certification and
Watchkeeping (STCW) Convention.
Under the previous system, in the Philippines the
governance structure was vested in the Maritime
Training Council (MTC) with the Department of
Labour and Employment serving as the chair and
MARINA as secretariat. Sitting on the MTC were the
Commission on Higher Education (CHED), the Technical Education and Skills Development Authority
(TESDA), the Professional Regulation Committee
(PRC), the Philippines Overseas Employment Administration and the Philippine Coast Guard.
In 2006 the European Maritime Safety Agency
audited the Philippines and again in 2010, 2011 and
2012, finding a lack of compliance with the STCW
Convention by many maritime schools and training
centres. One reason it attributed to this was the lack
of accountability resulting from having multiple government agencies under a coordinating body. It also
found a lack of coherent policies, infrastructure,
political will and accountability to audit and close
non-compliant schools and training centres.
To help address this issue, in 2012 President Benigno Aquino IIIs administration issued Executive Order
No. 75, designating the Department of Transportation and Communications, through MARINA, as the
Remittances from maritime workers totalled $5.2bn in 2013

Safety standards in the

maritime industry are
governed by the IMO,
which is based in London,
with member states having
to be included on a white
list as evidence of their
compliance with the STCW
Convention.
168
The country is implementing several initiatives to improve training
Since it was named the

single maritime
administration, MARINA
has established a list of
compliant maritime
schools, as well improved
the curriculum to be
outcome based.
single central maritime administration responsible

for the oversight of compliance with the 1978 STCW
Convention. However, the order did not override the
mandates of CHED, TESDA and the PRC.
REPRESENATION: On May 2013 the industry elected representatives to Congress through the maritime party of the Philippines, known as Angkla, under
a law that stipulates 20% of all congressional seats
can be assigned to sector representatives. Angkla representative Jesulito Manalo was sworn into office in
July 2013 and within seven months the first bill to
come out of the 16th Congress was Republic Act (RA)
10635, which established MARINA as the single
administration responsible for the implementation
and enforcement of the STCW Convention as amended, and any international agreements or covenants
related thereto. The law also transferred all STCW
functions performed by the PRC to MARINA.
NUMBERS GAME: Within the 10m-strong Filipino
diaspora, about 1.1m are active seafarers who hold
a seamens book, or certificate, issued by MARINA.
Of this number nearly 400,000 are on board at any
one time, returning home after a maximum of 10
months onboard for a two-month holiday. This means
there are almost 400,000 full-time equivalent posi-
tions year-round, which accounts for over $5bn in

remittances, and in 2014 this figure rose to $5.6bn.
According to World Bank figures from 2013, per
capita income levels in the Philippines are less than
$3000 per annum, while the income for maritime
industry professionals is over $13,000.
HR IMBALANCE: The industry also faces a human
resource imbalance as it takes less than a year to
build a new ship versus 14 or 15 for a first-year college student in a maritime programme to become a
master or chief engineer. This results in a shortage
of qualified staff and creates wage inflation.
FOCUS ON CURRICULUM: CHED has the authority over maritime educational institutions under MARINA. Since it was named the countrys single maritime
administration, MARINA has established a list of compliant maritime schools, as well as improved the curriculum to be outcome based. The maritime school
structure requires a student to study for three years,
with one year of on board training as a cadet before
being able to graduate.
Communication between maritime and education
authorities is necessary to ensure schools are providing the appropriate technical training. This will
enable institutions offering maritime programmes
to gear their curricula towards the future of the
maritime industry, focusing on developing muchneeded skill sets in the areas of machining, electronics and engineering.
MARINA has also developed a ratings scheme
called Enhanced Support Level Programmes, which
is designed to take into consideration value added
for the training of active Filipino seafarers, as well
as compliance with STCW requirements for certification. The programme aims to enhance the competitiveness of Filipino seafarers in the global maritime industry as they perform support-level function
and responsibilities on deck and in engine rooms.
Given the shortage of seafarers, and especially
officers, around the globe, there is an opportunity
for Filipinos to continue to be the seafarer of choice,
returning home to jobs as professionals in emerging ship management and ancillary services for the
international shipping industry. With high-quality
maritime schools, the opportunity extends to becoming an international centre for maritime education.
169
Construction & Real Estate

Rapid growth taking place in climate of political stability
Government fosters greater private sector participation
Vacancy rates low as supply plays catch-up with growth
Lower rents attracting business process outsourcing
170
CONSTRUCTION OVERVIEW
Derelict areas are being turned into master-planned developments
Thriller in Manila
Projects in the capital are part of a host of schemes across the country
The sector has been
flourishing in a climate of
political stability and
upbeat business sentiment,
spurred by growth in
overseas workers
remittances, investments
into business process
outsourcing and
government spending on
infrastructure.
Public spending on
infrastructure as a
proportion of GDP has
consistently been below
3%, ranking among the
lowest in the region and
below the international
benchmark of 5%.
The construction and real estate sectors make up

around 20% of the Philippine economy, slightly ahead
of manufacturing, and as of the first quarter of 2014
accounted for 7% of national employment. Over the
past few years, construction in the Philippines has
been flourishing amid a climate of political stability
and upbeat business sentiment, spurred by growth
in overseas foreign worker remittances, inbound
investments into business process outsourcing, rising numbers of tourist arrivals, and government
spending on large- and small-scale infrastructure.
REBORN: The Philippine Constructors Association
(PCA) dubbed 2013 a year of new birth for the industry. In Manila, evidence of this pronouncement came
in the form of the number of cranes scattered across
various master-planned, mixed-use districts where
derelict neighbourhoods and abandoned US military bases once stood. Outside the capital, public
infrastructure projects, in the form of new highways,
toll roads, ports, and water and power facilities, are
a common sight. Rebuilding efforts, meanwhile, were
taking place across the islands and provinces recovering from the devastating damage wrought by Super
Typhoon Haiyan and the Bohol earthquake.
Yet there are signs that these unprecedented
growth levels are unlikely to be sustained. A slowdown in reconstruction efforts coupled with budgetary hold-ups is leading to delays in public infrastructure work. In addition, a deceleration in the pace of
private building activity is arising from the central
banks intervention on banks lending exposure to
real estate projects, issues over land availability and
price appreciation, and a generally more cautious
approach on the part of developers as office, retail
and residential supply catches up with demand.
GOVERNMENT SPENDING: According to BCI AsiaPhilippines, the construction sector saw 85% growth
in the 12 months leading up to May 2014 compared
to the same period a year prior, with much of
the lift coming off a resurgence in public spending.
Historically, the construction sector has not relied

heavily on the government for work, with industry
demand from the private sector bettering that from
the government at a ratio of 13:7, according to the
PCA. Statistics from the Cement Manufacturers Association of the Philippines (CeMap) reveal the gross
value of private sector construction in 2013 to have
totalled P435.7bn ($9.8bn), compared to P137.8bn
($3.1bn) worth of public sector work.
Public spending on infrastructure as a proportion
of GDP has consistently been less than 3%, ranking
among the lowest in the region and below the international benchmark of 5%. In the World Banks 2014
Logistics Performance Index, the Philippines, with a
score of 2.6 out of 5, placed 75th out of 160 countries surveyed, testament to the fact that its roads,
airports and other infrastructure are in need of major
upgrades and expansion. The government wants
public infrastructure spending to account for 5% of
GDP by 2016. To reach this level, an estimated P200bn
($4.5bn) of extra spend is needed each year, and by
2020 the government is aiming for $110bn worth
of public projects to be completed.
BUDGET DISBURSEMENT: Public infrastructure
spending increased by 32% in 2013 to reach P267bn
($6.01bn), according to PCA figures, with higher tax
collection and improved budget execution cited as
contributory factors. Budget execution in 2014 was,
however, less smooth, following intervention from
the Supreme Court over a fiscal stimulus package
that resulted in some planned spending items being
halted. In turn, the administration has faced criticism
for not spending according to programme, during a
period when funding especially needs to be mobilised
to ensure that reconstruction and rehabilitation
efforts go ahead in natural-disaster-affected areas.
Budgeted government expenditures from January
to September amounted to P1.73trn ($38.9bn), yet
actual outlays came in 16% below target at P1.46trn
($32.9bn), which was also 2.6% below what was
spent in the corresponding period in the year prior.

Construction projects contracted by 6.2% year-onyear (y-o-y). The spending shortfall partly accounts
for GDP growth in the third quarter of 2014 being
below expectations at 5.3%, compared to projected
growth of 6.5%. Second-quarter growth was 6.2%.
The inflection point came in July, when the Supreme
Court ruled that some components of President
Benigno Aquino IIIs fiscal stimulus package, conceived in 2011, were unconstitutional. The decision
resulted in some projects being left unfunded, and
parliament is reworking these items into a supplementary budget so that work can recommence. If
approved, the P23bn ($518m) extra budget will consist of P16.4bn ($369m) allocated to new urgent
projects, of which at least P9.5bn ($214m) will be
directed towards reconstruction efforts.
REBUILD: According to risk research firm Maplecroft, the Philippines is the most at-risk country in
the world to natural hazards, and 2013 saw it hit
extremely hard by acts of nature.
Super Typhoon Haiyan, which was labelled the
worst recorded storm to ever hit land, brought about
the loss of 7000 lives and caused the destruction of
some 10,000 homes. The island of Bohol, meanwhile,
was affected by an earthquake measuring 7.2 on the
Richter scale that occurred in October. Hazard
research firm Kinetic Analysis estimates that Haiyan
caused $12bn-15bn worth of damage. One of the
most affected areas was Tacloban City, the capital
of the Eastern Visayas region, where the citys main
airport, seaports, power lines, hospitals and mobile
network stations are all undergoing repair.
PUBLIC-PRIVATE PARTNERSHIPS: Goldman Sachs
has forecast that the Philippines will see its GDP per
capita increase by 50% by 2020, leading to rising
demand for water, energy, roads, airports and other transport developments. The government has
been lowering its fiscal deficit y-o-y, and to alleviate the infrastructure financing burden and to free
up funds for other essential spending priorities, such
as reconstruction efforts and subsidised social housing it has been fostering greater private participation in the ownership and maintenance of strategic infrastructure projects.
Launched in 2010, the public-private partnership
(PPP) scheme took a few years to gather momentum, but by the end of 2014 eight projects had been
awarded. The latest occurred in October 2014, when
the much-delayed P65bn ($1.46bn) contract for a
railway linking Manila to Cavite was awarded to a consortium composed of Metro Pacific Investments
Metro Pacific Light Rail, Ayalas AC Infrastructure
Holdings and Macquarie Infrastructure Holdings.
Other PPPs awarded so far under the Aquino
administration include the P17.5bn ($394m) Mactan-Cebu International Airport Expansion won by a
consortium of GMR and Megawide, the P15.52bn
($349m) Ninoy Aquino International Airport Expressway awarded to the San Miguel Corporation, and
the P34.5bn ($776m) Cavite Laguna Expressway won
171
The number of approved building permits has been on the rise
by an AC Infrastructure Holdings and Aboitiz Land

joint venture. In addition to transport projects, utilities are starting to be packaged for private concession. By mid-2015 a P24.4bn ($549m), 32-year contract to supply bulk water to 24 municipalities in the
province of Bulacan should be awarded, as should
a P183.7m ($4.13m) contract for the construction
of a dam north-east of Manila.
MEGA-PROJECT: In all, the PPP programme comprises 54 projects, of which 15 are expected to be bid
on by the time President Aquinos current term ends
in May 2016. The project that is receiving the most
attention due to its sheer size, level of participant
interest and anticipated socio-economic impact is
the P122.8bn ($2.76bn) Laguna Lakeshore Expressway Dyke (LLED). Expected to go out for tender in
2015, 24 companies have so far expressed interest,
according to the PPP Centre of the Philippines. Structured as a build-operate-transfer (BOT) deal lasting
37 years, financing will come solely from private capital, with support from the government limited to covering the right-of-way (ROW) costs.
LLED consists of two sections. The first covers
land reclamation and a 47-km flood-control dyke, atop
which a six-lane expressway will be built. The second, located to the west of the dyke, entails 700 ha
of forest and offshore area reclamation that will
become mixed-use land. On completion, in addition
to reducing the volume of traffic in southern Manila, the project is expected to shield 1m residents
To alleviate the financing

burden and free up funds
for other priorities, such as
reconstruction and
subsidised social housing,
the government is
fostering greater private
participation in strategic
infrastructure projects.
Construction spending & contribution to GDP, 2012-13* (P bn)

2012
2013
Growth rate (%)
Public
113.34
137.81
21.6
Private
403.85
435.66
7.6
Gross value
517.18
573.48
10.9
Contribution to GDP
339.92
377.74
10.9
6.9
7.1
Share of GDP (%)
SOURCE: Philippine Constructors Association
*At constant prices (2000)
172
From 2015 contractors will operate more freely within ASEAN
Despite ratings upgrades

from Fitch and Standard &
Poors, as well as
improvements in business
competitiveness rankings,
foreign participation in the
sector has been limited.
and 5000 factories situated in low-lying areas around

the Laguna Lake from annual flooding.
FOREIGN PARTICIPATION: Despite upgraded investment ratings from Fitch and Standard & Poors, as
well as improvements in business competitiveness
rankings from the likes of the World Economic Forum,
foreign participation in the construction sector has
been limited. This is partly due to regulatory restrictions on non-Filipino land ownership and stakes in
housing, retail and commercial developments, and
partly to do with foreign investors risk aversion over
transparency concerns and the sanctity of contracts.
A number of high-profile contract disputes in the
power and mining sectors have made international
headlines in recent years, while several transport
projects have faced bottlenecks arising from disagreements over ROW with local authorities.
The PPP Centre was established by the Aquino
administration to promote transparency and alleviate the legal and administrative uncertainty. In July
2012 President Aquino signed an executive order
stipulating that all government contracts involving
PPPs, BOT schemes and joint ventures with the private sector must contain alternative dispute resolution provisions. Corruption has for a long time
been a stigma associated with doing business in the

Philippines, but in recent years the climate has
improved dramatically, with the country climbing
from 129th to 85th out of 175 in Transparency Internationals most recent Corruption Perceptions Index.
The local construction sector, with high levels of
liquidity and sufficient access to credit, is for the most
part equipped financially to take on large projects.
Yet beyond capital, the added value of foreign participation is expertise and knowledge.
The winning Mactan-Cebu International Airport
consortium includes Indias GMR Infrastructure,
which, as the operator of Delhi and Hyderabads
main airports, brings airport management experience. Meanwhile, Malaysian infrastructure conglomerate MTD Group, which already has a track record
in the country, having sold its stake in the South
Luzon Expressway in 2012, has expressed interest
in bidding on some of the flagship PPP projects.
ASEAN: The establishment of the ASEAN Economic Community (AEC) in 2015 and the move towards
a single market presents Philippine construction
firms with both opportunities and challenges.
Licensed contractors domiciled in any ASEAN member country will be permitted to operate more freely
throughout the bloc, and considering the rapid
growth in Philippine construction and the attractive
outlook, it is likely that foreign contractors will actively pursue work on local projects.
There are 6000 registered contractors in the Philippines. While some are large conglomerates with the
resources, technology and track record of working
overseas to enable them to compete on a regional
and even global scale, many are small and mediumsized enterprises that could struggle to match their
more developed counterparts in places such as
Malaysia and Thailand. Professionals will also be able
to move more freely within the region, likely contributing further to the brain drain of top Filipino talent
in fields like engineering and project management.
BUILDING BOOM: In the first half of 2014 the Philippine Statistics Authority reported the number of
approved building permits to be up 11.2% y-o-y. This
continued a trend that has seen residential, commercial, retail and hotel stock being delivered at record
rates. Between 2012 and 2016, real estate services
firm Colliers predicts available office space for Manila to expand from 6m to 7.5m sq metres. A further
25,000 residential condominium units will be added
to the market by 2016, amounting to nearly half of
the 58,000 units constructed in the previous 40
years. The citys hotel stock, meanwhile, is anticipated to grow by 23% y-o-y, with an average of 3700
new rooms hitting the capital annually until 2017.
New mall construction, in contrast, is expected to
be concentrated outside the capital. Total nationwide shopping mall space at the end of 2013 was
measured by Jones Lang LaSalle at 13m sq metres.
By 2015 the property firm expects new supply of 1.4m
sq metres to hit the provinces, while Colliers projects new space opening in metropolitan Manila
which already accounts for half of the countrys
total stock to be 340,000 sq metres.
Despite inflationary pressures and an expected
run of rate hikes, long-term borrowing costs are likely to remain attractive, allowing firms to take on new
projects and carry out capital-intensive construction
work. According to a first-quarter 2015 report from
the PCA, y-o-y growth in borrowing from the construction sector was 44.2%, the highest of any industry. The Philippines banks are liquid and well capitalised, and those with proven track records are able
to borrow with relative ease.
MATERIALS: Although the heightened pace of construction activity is leading to a marked increase in
the importation of materials, so far materials prices
have been kept in check by a slowdown in regional
demand, especially from China. According to the
PCA, with the exceptions of cement, galvanised iron
sheet, tile works and plumbing works, price inflation
in the first quarter of 2014 for key inputs such as
concrete, galvanised steel and glass material were
below the overall headline inflation rate of 4%.
With the country a net importer of most categories of construction materials, capacity constraints
at the main ports make planning for and stockpiling
inventories essential. Cement, in particular, is running only a small surplus, prompting fears that unless
domestic output expands, a repeat of 2010 when
prices surged from P205 ($4.61) per bag to P270
($6.08) could occur. CeMap reports 2013 cement
sales of 19.45m tonnes, an increase of 6% on the
18.36m sold in 2012. Imports for 2013 were measured at 159,000 tonnes, a significant rise from the
39,000 tonnes arriving from abroad in 2012.
In view of the growing demand gap, local manufacturers are investing in new capacity. Lafarge Philippines has allocated P1.2bn ($27m) towards a new
mill in Rizal that should commence production in
2015, and has also announced that it will be reopening its plant in Cebu. Holcim Philippines, meanwhile,
has indicated that it is considering constructing a
$450m-550m brownfield plant in Bulacan, although
head office approval has been delayed due to a
restructuring of its regional operations.
Under the AEC, tariffs on construction-related
materials are expected to be dramatically reduced,
prompting producers to re-evaluate their regional

footprint and investment in new capacity.
GOING GREEN: As more international firms establish a presence, they are demanding environmentally friendly spaces to be housed in. The Philippine
Green Building Council (PHILGBC) was established
as a not-for-profit in 2007, and has introduced a
voluntary rating system, aligned to the USs LEED, for
independently grading and certifying new buildings
and refurbishments. In some more developed markets a desire to move into green certified buildings
is predicated mainly on soft factors, such as promoting corporate social responsibility, and garnering
employee appreciation and productivity. In the Philippines, however, there are commercial motivations to
consider related to utility savings generated from
implementing smart building features.
ELECTRICITY COSTS: Electricity rates in the Philippines are among the highest in the world, and the
most expensive in Asia. Electricity for general use in
Manila, for example, costs $0.23 per KWh, compared
to $0.07 in Hanoi and Ho Chi Minh City, $0.08 in
Bangkok and $0.11 in Kuala Lumpur. This is providing a strong impetus for developers to implement
energy-efficient solutions in a broad range of construction projects beyond just property. So far, the
government has not opted to recognise the
PHILGBCs grading system, or provide any incentives
to those garnering certification. If a governmentendorsed system comes to fruition, it will bolster
the pursuit of green accreditation even further.
OUTLOOK: Although growth rates for the sector are
unlikely to maintain the exceptional levels of the
past 24 months, the long-term prospects remain
solid and balanced. Positive trading conditions for
the residential, office, retail and hospitality segments
point to robust demand for private-sector-led building. Although falling below expectations, government spending still exceeds the levels seen under
previous administrations. Public spending on infrastructure is targeted to reach record levels as a percentage of GDP by 2016. Big-ticket and strategic PPP
projects, having been stalled for a few years, are
starting to be awarded, and on the ground work on
some has now commenced. Considering the positive economic story and growth projections for the
country, infrastructure projects are highly bankable
and financial institutions willing to provide funding.
173
The Philippine Green

Building Council has
introduced a voluntary
rating system for
independently grading and
certifying new buildings
and refurbishments.
PPP projects awarded as of December 2014

Project
Cost (P bn)
Agency
Daang Hari-SLEX Link Road Project
2.01
DPWH
PPP for School Infrastructure Project Phase I
16.28
DepEd
NAIA Expressway (Phase II)
15.52
DPWH
PPP for School Infrastructure Project Phase II
3.86
DepEd
Modernisation of the Philippine Orthopedic Centre
5.69
DoH
Automatic Fare Collection System
1.72
DoTC
Mactan-Cebu Int'l Airport Passenger Terminal Building
17.52
DoTC
LRT Line 1 Cavite Extension and O&M
64.9
DoTC
SOURCE: Public-Private Partnership Centre
174
CONSTRUCTION ANALYSIS
The housing shortage could reach 6.5m units by 2030 if not addressed
Back to basics
Increasing the supply of affordable housing is a top priority
Total residential licences
issued by the Housing and
Land Use Regulatory Board
were down by 4% in 2014,
with those for socialised
housing falling the most of
any grouping at 16%.
The Idle GovernmentOwned Lands Disposition

Act requires that any
government-owned land
that has not been used for
its originally licensed
purpose within a 10-year
period be given to the
National Housing Authority.
One of the most pressing issues in the Philippines

construction sector is a chronic housing shortage.
Figures from the Subdivision and Housing Developers Association (SHDA) put the current national
housing backlog at 4m. Based on a study by the University of Asia and the Pacific (UA&P), that could
rise to 6.5m by 2030 if the situation is not addressed.
At present, according to Habitat for Humanity Philippines, yearly new housing stock averages less than
200,000, while in excess of 300,000 units are needed each year to eliminate the deficit by 2030.
According to the SHDA, most of the shortfall
applies to socialised housing, categorised as units
selling for under P450,000 ($10,125). It appears that
private developers are not keeping pace with pentup demand for the lowest-priced properties, with
Housing and Land Use Regulatory Board figures
revealing that only 27% of the 1.88m housing units
that the industry produced from 2003 to 2012 were
classified as socialised housing. Real estate services provider Colliers, meanwhile, reported that total
residential licences issued by the Housing and Land
Use Regulatory Board fell by 4% over the course of
2014, with licences issued for socialised housing
down the most of any grouping, at 16%.
SEEKING ENCOURAGEMENT: The results of a UA&P
survey show that over 800,000 families in the Philippines would be unable to afford a house priced above
P365,000 ($8200). The SHDA has said that without
government intervention and financial support, its
members will be unable to meet the goals of its proposed Housing Road Map, which targets 1m houses to be built between 2014 and 2016, another 2m
by 2020 and a further 7m by 2030.
Accordingly, the association has called on the
Board of Investment to continue offering incentives
for socialised housing projects until the long-standing backlog is ultimately resolved. The Bureau of
Internal Revenue offers tax relief for socialised housing projects that, to qualify, must demonstrate that
the houses have specifically been developed for the

underprivileged or the homeless.
According to Habitat for Humanity, government
financial support towards socialised housing provides both economic and social uplift, with the charity citing studies indicating that for every P1m
($22,500) invested in housing, five jobs are created.
For every peso paid in housing tax, the government
collects P3.39 ($0.08) in indirect taxes.
For Jesus Atencio, the president and CEO of mass
housing developer 8990 Holdings, while property
firms are able to tap into corporate tax exemptions,
over and above direct subsidies, the industry needs
a level and consistent playing field. We need clear
long-term rules so that we can properly plan for
capacity and financial requirements, he told OBG.
PLOTTING DEVELOPMENT: The Urban Development
and Housing Programme, enacted in 1992, stipulates that condominium developments must allocate at least 5% of the total project cost for socialised
housing, while subdivision developments are required
to allot 20%. Those failing to meet the obligation face
a penalty of P10m ($225,000) for the first offence,
and have their business licence removed following
a second violation. The umbrella body, the Chamber
of Real Estate and Builders Association (CREBA),
argues, however, that the quota for subdivisions is
not realistic, advocating that it should be reduced
to a cap of 5% of the net saleable residential area
instead of 20% of the total project area or cost.
Another bill recently passed into law that should
help drive conversion of land into socialised housing is the Idle Government-Owned Lands Disposition
Act. The act requires that any government-owned
land that has not been used for its originally licensed
purpose within a 10-year period be provisioned to
the National Housing Authority (NHA). From there,
the NHA, along with the local government unit, will
build socialised housing on their own or in partnership with private developers. In December 2014 the
Department of Interior and Local Government

announced that it was providing a seed fund of
P335m ($7.53m) to six city governments in Manila
for socialised housing projects relocating informal
settler families living in high-risk areas.
LENDING MECHANISMS: CREBA contends that setting aside government-backed funds to guarantee
fixed interest rates for socialised housing mortgages
is essential to helping first-time buyers enter the
market. It has proposed that 25-year fixed rates of
4.5% be applied to properties that sell for between
P450,000 ($10,125) and P1.25m ($28,125), and that
6.5% be charged on those priced between P1.25m
($28,125) and P3.199m ($71,978).
Housing for Humanity suggests that the Philippines
should mimic a scheme that has proved successful
in a number of South American markets, especially
Ecuador, under which families that borrow money
for socialised housing put 10% of their income
towards the property, which the government matches with a 20% grant, and the remaining 70% is paid
for via a loan from a partner bank.
The next grouping up after socialised housing is
the low-income market, at P450,000 ($10,125)
to P600,000 ($13,500). This is followed by the economic sector P600,000 ($13,500) to P900,000
($20,250) and the mid segment, at up to P1.5m
($33,750). Atencio groups all of these categories
together as the affordable housing segment, and
deems it a lucrative market for developers to pursue so long as costs can be kept down to ensure
affordability. Our GNP has been steadily rising for
the past 10 years at 7%, generating enough of a
trickle-down effect to benefit most levels of the
socio-economic pyramid. As GNP trickles down to the
middle class, affordable housing becomes a beneficiary too, with prices for middle-class housing
increasing far less than for primary subdivisions or
condominiums, Atencio told OBG.
According to Colliers, the only segment to witness
an increase in residential licences issued by the Housing and Land Use Regulatory Board in 2014 was lowcost (+6.6%), with the firm attributing the rise to
more local developers venturing into affordable
housing to meet the huge supply backlog. While margins are tight and it is risky to maintain profitability,
developers are increasingly looking at the lowerincome market instead of the top-tier market, as it
offers far larger volumes and far greater growth
potential, Anthony L Fernandez, the president and
COO of construction firm First Balfour, told OBG.
MANAGING MARGINS: For a country that has suffered recurring natural disasters, enforcing minimum safety and design standards is critical, and
developers must adopt technology that enables reliable construction. Atencio also told OBG that affordable housing need not be high-risk, and that the
banking sector needs to serve the segment better.
175
Setting aside
government-backed funds
to guarantee fixed interest
rates for socialised housing
mortgages could help
first-time buyers.
176
The Green Building Code is set to be introduced in June 2015
Green light
The adoption of environmentally friendly practices is gaining momentum
Advocates of sustainable
building techniques have
argued that the absence of
mandatory green building
standards has limited such
construction to the high
end of the market.
The commercial case for

investing in green buildings
is especially strong in the
Philippines, where
electricity prices are
among the worlds highest.
Slowly but surely, the adoption of green building

practices in the Philippines in office, residential and
public sector construction projects is gathering
momentum. Adhering to corporate social responsibility commitments on climate change reduction,
multinationals have been the first movers in terms
of demand for more environmentally friendly premises. Local corporates and residents are following suit,
driven by soft factors such as promoting employee
wellbeing and productivity, in addition to cost saving motivations in the face of rapidly escalating energy prices and supply concerns.
Green architecture and construction is new in
the market, and it comes at much higher cost. However, the foreign locaters are demanding it, and it is
likely where the market is heading, Anthony L Fernandez, president and COO of First Balfour, told OBG.
Until now, advocates of more sustainable building techniques and features have argued that a lack
of both a government regulation and imposition of
mandatory green building standards has limited the
pursuit of green buildings to mainly the higher end
of the market. This is set to change if and when the
Green Building Code, which is targeted to be ready
by June 15, 2015, comes into effect.
SETTING CRITERIA: In 2007 the Philippines Green
Building Council (PHILGBC), a non-governmental
organisation, established a rating system named
BERDE which in Tagalog means green to aid
in the grading of new, existing and retrofitted buildings according to their green credentials in the areas
of design, construction and building management.
BERDE is similar to the Leadership for Energy and
Environmental Design (LEED) certification that originated in the US, is commonly adopted throughout
the world and is required by US-domiciled multinationals. However, according to the PHILGBC, the
grading system has been tweaked slightly to harmonise and align more closely with the standards
already in place among counterpart green building
councils in the region, and attempts to take into

account localised conditions such as tropical weather patterns and the availability and wider usage of
different building materials. The Department of Energy has officially endorsed BERDE as the nationally
recognised voluntary green building rating system.
Meanwhile, the Department of Public Works and
Highways in cooperation with the International
Finance Corporation (IFC) and the World Bank, and
in consultation with the PHILGBC has been busy
drafting a Green Building Code that could be mandatorily applied to all government projects and to new
constructions of a certain size.
DOING THE MATHS: The commercial case for investing in green buildings is especially prevalent in the
Philippines, where electricity prices are among the
highest in the world, and power rates are considered
the most expensive in Asia. Electricity for general use
in Manila costs $0.23 per KWh, compared to just
$0.07 in Hanoi and Ho Chi Minh City, $0.08 in Bangkok
and $0.11 in Kuala Lumpur.
In part, the higher rates stem from higher production costs due to a lack of exploited indigenous
hydrocarbons sources, while partly it has to do with
a conscious decision on the part of the government
not to subsidise end-user tariffs. Irrespective, electricity remains in scarce supply.
As commercial and residential buildings, according to the Department of Energy, were responsible
for 63% (38.9m MWh) of total consumption in 2013,
there is also a significant environmental impetus to
reduce their energy requirements, which have grown
by 45% since a decade earlier, when they accounted for 24.46 MWh of consumption.
RECOUPING COSTS: According to figures from real
estate services firm CBRE International, qualifying
for LEED certification, if done efficiently, adds an extra
2-3% of costs to a typical developments price tag.
Proponents of green certification argue that the
added expense can be offset over time by savings
on utility bills (mainly water and electricity) and revenue potentially generated from offloading waste for
recycling. The PHILGBC, meanwhile, has produced
studies which demonstrate that corporate tenants
and residents, out of an adherence to environmental responsibilities, are willing to pay a premium for
green-certified buildings. Higher productivity, garnered from fewer sick days and greater employee
satisfaction, can also be quantified. In all, the PHILGBC
states that investing in green building features usually entails a five-year payback period.
The PHILGBC expects the year-on-year growth in
new residential and office buildings to be around 6%,
and in an environment of land shortages and escalating land prices, the tendency is increasingly to
build vertically and with higher density, rather than
horizontally, in housing developments and office
parks. This is a trend that, if catered to more sustainably via deployment of rain catchment systems
and window solar panels, contributes to the preservation of open spaces amid rapid urbanisation.
REQUIREMENTS: The IFC has stated that, if implemented as planned, by 2030 the introduction of a
compulsory Green Building Code will reduce carbon
dioxide emissions by 1.9m tonnes, and result in annual energy savings of 3.9m KWh that would be equivalent monetarily to around P38bn ($855m). The
codes draft stipulates that it will initially be applied
to major building projects over a given size, requiring them to adhere to certain requirements before
a building permit is granted. Over time, depending
on the programmes success, the specifications will
be extended to smaller constructions.
VOLUNTARY ADOPTION: Regardless of the pace at
which the Green Building Code is applied, the voluntary adoption of greener practices should become
a self-fulfilling prophecy. As more and more green
buildings go up, and display a proof of concept in
terms of the cost savings, other developers will gain
the confidence to follow suit.
It seems likely that the office sector, driven predominantly by multinationals corporate social
responsibility commitments, will continue to account
for the greater proportion of green-certified properties. The residential market, meanwhile, will eventually catch up as younger couples and families, who
177
There is a lack of expertise in green building among local developers
tend to be more green-conscious, climb onto the

property ladder as first-time buyers.
IMPLEMENTATION CHALLENGES: Surplus to
demand drivers, the pace of adoption is also tempered by implementation challenges. There is a lack
of expertise in green project design and engineering among local developers, as well as a scarcity of
green building material supplies.
Both of these factors should eventually be overcome as green construction experience is accumulated and supply chains are ramped up. Meanwhile,
some are calling for financial incentives such as
tax breaks on imported green materials and lower
tax rates applied to green properties to provide
some intermediary relief and encouragement.
One area of concern for some regarding the feasibility of a mandatory nationwide government-driven programme is a shortage of qualified building
inspectors. There are also challenges related to coordinating with local government units on ensuring that
the standards are strictly followed, since many local
government units are understaffed in terms of the
number of city building officials needed to monitor
and supervise every construction phase of buildings within the local government units jurisdiction.
By 2030 the introduction of

a compulsory Green
Building Code could reduce
carbon dioxide emissions
by 1.9m tonnes, and result
in annual energy savings of
3.9m KWh.
REAL ESTATE OVERVIEW
179
Growth in the residential segment has been fuelled by various factors
Home comforts
Matching supply with demand is a challenge as rapid growth continues
Favourable demographics, a solid macroeconomic outlook and a confluence of demand drivers are inspiring
bullishness in all property segments in the Philippines.
Motivated by some of the regions most competitive
rental rates and an attractive workforce, business
process outsourcing (BPO) firms are taking office space
in sought-after commercial areas. Traditional office
take-up is also rising as the economy grows at one of
the fastest rates in Asia, and confidence is being bolstered by investment rating upgrades and plaudits from
institutions like the World Economic Forum for the
improved business climate and political stability.
These same factors, along with system liquidity leading to historically low interest rates, are fuelling the residential segment. Expatriate and high-income earners
are moving into luxury condominiums in and around
central business districts, while the BPO sector workforce which is expected to double in size by 2016
and the relatives of overseas Filipino workers (OFWs)
are stepping onto the housing ladder and taking up middle- and lower-income units.
Increased purchasing power in an environment of
growing consumer confidence is motivating domestic
and global retailers to expand, boosting demand for retail
space. In addition, the hotel property segment is benefitting from increasing numbers of international business visitors to the capital and leisure travellers to
resort-oriented islands, while rising manufacturing output, trade flows and demand for logistics are driving
occupancy levels in industrial lots.
COOL HEADS: Although the signs point to buoyant
times ahead, there are also challenges related to land
acquisition and foreign ownership restrictions to temper any over exuberance, as well as risk factors that
could be brought about by external shocks.
This raises the need for property developers to rein
in their exposure and slow the pace of projects in certain segments and locations that could face saturation,
and is prompting the industrys regulators to impose
capital adequacy requirements and other control mech-
anisms in an effort to pre-empt the property market

from potentially overheating.
Despite the unprecedented pace of new office stock
hitting the market, demand is expected to outpace
supply for some time. As the Philippines improves the
ease of doing business we will see sustained demand
for office space, Lars Wittig, country manager for the
Philippines at multinational office provider Regus, told
OBG. BPO and offshoring currently account for 80% of
office take-up, according to local real estate firm KMC
MAG. Having expanded by 15% in 2014 to reach $15.3bn,
the segment shows no sign of slowing. By 2016, the IT
and Business Process Association of the Philippines
(IBPAP) expects sector revenue to reach $25bn, while
research group Tholons predicts the country will close
in on $50bn worth of BPO earnings by 2020.
The Philippines has a number of attributes that have
contributed to its emergence as the top global provider
of contact centre work and the second-most-popular
destination after India for IT-BPO and global in-house
centres (see BPO chapter). Attractive lease rates form
a key component of the value proposition. According
to real estate management firm Jones Lang LaSalle, rents
in Manila are among the cheapest in Asia. At around
$20 per sq metre, rates in the capital match those in
Bangkok and Bangalore as the lowest of all major Asian
cities, and are well below what a locator would expect
to pay in markets such as Hong Kong, Beijing and Singapore, where rents exceed $85 per sq metre.
TAKING STOCK: According to IBPAP, by the end of
2013 70% of the Philippines BPO segment, as measured by employment, was located in Manila. The citys
most sought-after commercial districts, and in turn the
locations where most new high-grade office stock is
being delivered, are Makati City, which since the 1970s
has been the countrys financial centre, and has the
highest concentration of multinational and local corporations; Fort Bonificio (also known as Bonificio Global City), a rapidly growing greenfield redevelopment
spread over land formerly occupied by US army bases;
Increased purchasing
power in an environment of
consumer confidence is
motivating retailers to
expand, boosting demand
for retail space.
Manilas most sought-after

commercial districts, where
most new high-grade office
stock is being delivered, are
Makati City, Fort Bonificio
and Ortigas Centre.
180
Around 25,000 residential condos are set to be built in Manilas three main commercial districts in 2013-16
Under the Next Wave Cities

initiative, the government
is looking to offset rapid
urbanisation by creating
more business process
outsourcing hubs outside
metropolitan Manila.
and Ortigas Centre, a third financial and central business district that straddles the boundaries of Pasig,
Mandaluyong and Quezon City. Other master-planned
communities that have launched with similar aspirations to Bonificio Global City of becoming a site for
offices, residences, retail and entertainment include
Eastwood City Alabang and McKinley Hill.
According to second-quarter 2014 figures from CBRE,
the vacancy rate in Makati City stood at 1.4%, while the
average lease rate was the highest in the country at
P970 ($21.80) per sq metre. Fort Bonificio had average rates of P797 ($17.90) and its vacancy rate rose to
3.8%, up from 2.2% in the previous quarter. As most of
the districts stock comprises new buildings, rental rates
are considered to be stable compared to other more
fluctuating districts. Rates in Ortigas, at $12.87 per sq
metre, were the lowest of the three, and its vacancy
rate was the highest at 8.75%. In 2013 Manilas vacancy rate of 2.7% was measured by the World Property
Journal as among the lowest in Asia, with only Bangalore, New Delhi and a couple of areas in Beijing showing tighter occupancy rates.
Colliers anticipates the market to have absorbed
450,000 sq metres of new office space in 2014, with
Fort Bonificio and Ortigas the destinations for 55% of
new units delivered. By 2016 available office space in
Manila will have expanded by nearly a quarter on what
had existed in 2012, growing from just over 6m sq
metres to 7.5m. While CBRE estimates that 80-90% of
the fresh stock will be occupied by BPO operations, this
does not preclude other industries from searching for
new premises. As the economy expands, so does the
arrival of multinationals looking to establish country
headquarters, and the desire of local corporates to
relocate into upgraded facilities.
Under an initiative titled Next Wave Cities, the government is looking to offset rapid urbanisation by creating more BPO hubs outside of metropolitan Manila.
As offshoring, by its very nature, is an exercise in creating cost arbitrage, some clients are moving to areas
outside of the capital, attracted by the availability of

lower rents, among other factors. By 2016 the government is aiming to reduce Manilas domestic share of
the sector from 70% to 60%.
RESIDENTIAL SEGMENT: In a November 2014 survey
of 16 emerging markets, online real estate marketplace Lamudi found that agents and brokers in the
Philippines were among the most upbeat of those surveyed, with 92% indicating optimism regarding the markets future over the next 12 months.
The capitals infamous heavy traffic is motivating
those who can afford to do so to sacrifice hectarage
and gardens for premium condominium units in closer proximity to their place of work and other amenities. According to Colliers, an average of 9000 high-end
condominium units are set to hit the market over the
next three years, 95% of them in the Makati central business district, Fort Bonifacio and Ortigas Centre.
Demonstrating the rapid facelift the city is undergoing, the citys three main commercial districts will witness 25,000 residential condominium units being built
between 2013 and 2016, which amounts to nearly half
of the 58,000 units constructed over the entire 40-year
period prior. Delays in construction reduced the number of units expected for delivery in 2014 from 7746
to 5546, helping to keep occupancy rates high.
With an influx of projects anticipated to become
available for occupancy in 2015, some analysts are
anticipating vacancy rates to reach double digits, and
to remain at that level for the next few years. In turn,
the pace of new project launches should be tempered
as developers become more conservative under an
expectation of supply catching up with demand. Diminishing availability of land in the more popular areas
should also contribute to a slowdown in the pace of
premium residential construction activity.
MASS MARKET: The Philippines is experiencing a rush
of first-time buyers as mortgage rates have hovered
around record lows, and a growing middle class underpinned by the new wave of BPO employees is driving
demand for mid-market housing. Although many fresh
graduates entering the profession opt to initially live at
home, after a few years of saving they are able to move
into smaller condominium units classified by Colliers
as studio or one-bedroom, ranging from 21 sq metres
to 60 sq metres. Those with younger families transitioning up the property ladder tend to opt for subdivisions or townhouses in areas outside Manilas three main
CBDs. It is estimated that around 10% of all Filipinos
are employed abroad as OFWs. The central bank estimates that 2014 remittances expanded by a further
5% to reach a record $23bn for the year. A substantial
proportion of this money up to 60%, according to figures from the World Bank goes towards supporting
family members to purchase property.
AFFORDABLE HOUSING: Despite the frenetic pace of
construction and transactions, the country still suffers
from a chronic shortage of affordable housing. The
government estimates that the housing shortfall will
reach 5.8m in 2016. In metropolitan Manila alone, the
current backlog is estimated at just below 500,000
units. There is new building technology that facilitates

socialised housing, but it needs to prove it can last for
up to 30 years, which is the tenure of the housing loan,
especially in an environment that is susceptible to climatological events, Darlene Marie Berberabe, the president and CEO of the Pag-IBIG Fund, told OBG.
Private developers have been reluctant to enter into
affordable housing projects, as commercial returns on
lower margins are harder to come by without achieving significant scale. The government has therefore
introduced some value-added tax exemptions that
developers participating in socialised housing schemes
can take advantage of. Private developers are also mandated to ensure that 20% of their total project cost or
their total land area for urban schemes is allocated to
socialised housing. There are several ways to comply,
depending on the location of the project, or whether
the developer prefers to acquire existent socialised
housing assets instead of building additional units.
The industry is producing less than 200,000 units
of affordable housing per year, at a level that is covering only incremental demand but not addressing the
backlog. To be successful in this space you need to
come up with a model that works for delivering lowcost housing, Guillermo Choa, the chairman of property developer Pro-Friends, told OBG.
RETAIL ON THE RISE: Adjusted for inflation, National
Statistical Coordination Board figures show gross value added in retail trade to have expanded by 6.8% in
2013. With a young, rapidly growing and consumptiondriven market of nearly 100m, an expanding middle class
and positive consumer sentiment, the Philippines has
emerged as one of the regions more promising retail
destinations. Across the country, malls of various shapes
and sizes are under construction to accommodate the
waiting list for new storefront (see Retail chapter).
As of the end of 2013 Jones Lang LaSalle measured
total shopping mall space at 13m sq metres, of which
7m was located in metropolitan Manila, with the bulk
of the remaining space found in the secondary cities
of Cebu, Davao, Cavite and Pampanga.
Colliers expects a total of 340,000 sq metres of new
space to open up in metropolitan Manila by 2016, and
a total of 645,000 sq metres of space to come on-line
nationwide between 2015 and 2017.
For the first time, wealth is being distributed outside the capital. In the past the regions were stagnant.
Now there is an aspiration shift, and this is being seen
in the pace at which malls are opening in the provinces,
George Royeca, a business development associate at
IT firm IPGV Corporation, told OBG.
Although 2014 witnessed the largest delivery of
fresh retail stock since 2006, vacancy rates of around
5% did not drastically increase from the year prior due
to some project delays and pre-commitments from
local and foreign brands. Looking ahead, vacancy rates
are expected to deteriorate slightly in metropolitan
Manila, as a supply glut looks set to result in saturation
in some of the retail districts.
HOSPITALITY: Late 2014 figures from the Department
of Tourism (DoT) show the Philippines as having 80,162
181
Developers are likely to exercise caution as the demand gap narrows
hotel rooms available, while demand currently stands

at 121,875. The DoT anticipates a shortfall of some
32,023 rooms by 2016, and has been calling on developers to increase the number of beds in the market.
In metropolitan Manila alone, Colliers anticipates that
hotel stock will increase by 23% y-o-y to reach 21,532
rooms, with an average of 3700 new rooms hitting the
capital each year until 2017. Much of the new stock
will be situated in and around newly established entertainment and gaming districts.
The rapid growth in construction and real estate has
brought benefits for other industries too. Ongoing
construction activity increases the inventory of buildings, which increases the demand for paint, as these
structures need to be repainted, Willy Ong, the president of Pacific Paint (Boysen) Philippines, told OBG.
OUTLOOK: Demand for housing, office, retail and hotel
space is expected to keep pace with economic growth,
and as long as supply is playing catch-up vacancy rates
should remain low. Possible exceptions where project success rates might be more moderate as more supply comes on-stream include premium residential
units in prime business districts, while some areas of
metropolitan Manila risk becoming over-retailed.
Slower-than-hoped-for delivery of government infrastructure and difficulties in acquiring land and permits
could ease the pace of large-scale developments, while
developers are likely to exhibit greater deliberation
when pursuing projects as the demand gap narrows.
Some 340,000 sq metres of

new mall space is expected
to open up in metropolitan
Manila by 2016, and a total
of 645,000 sq metres is set
to come on-line nationwide
between 2015 and 2017.
Forecast new residential supply, 2013-17

Location
Makati CBD
Rockwell
End-2013
2014F
2015F
2016F
2017F
Total
17,656
454
4608
2017
1485
26,220
3718
441
346
4505
Fort Bonifacio
17,585
2222
5125
4895
2979
32,806
Ortigas
18,188
11,921
1711
2756
1227
573
Eastwood
6830
718
988
8536
Total
57,710
5546
12,489
9127
5383
90,255
SOURCE: Colliers
REAL ESTATE ANALYSIS
183
Land values recently reached their highest level in 17 years
Seeking alignment
The last period of rapid growth provides lessons this time around
As property markets in South-east Asia absorbed
major hits following the last time they experienced
rapid growth in the late 1990s, questions inevitably
arise over the degree to which the Philippines ongoing surge in property value and activity is being driven by solid fundamentals rather than opportunism.
Rising household incomes combined with low interest rates and reduced downpayment requirements are
creating a surge in the number of first-time home buyers. Yet some analysts have expressed concerns over
a supply mismatch, with new developments being
geared towards luxury residences over more affordable options, for which there is clear pent-up demand.
Drawn by rising prices compared to the returns offered
by other asset classes, the wealthier segments of the
population could be tempted into purchasing property as a pure capital appreciation play, resulting in
those buying to live being priced out of the market.
URBAN COSTS: Vacancies are starting to rise in smaller condominium units (studios and one-bedroom
apartments), which could point to developers having
overestimated the potential of young business process

outsourcing (BPO) workers. The growth of prices for
urban housing has outpaced incomes. As a result, the
trend among BPO workers is to lease rooms in the city
rather than buy, Guillermo Choa, the chairman of
property developer Pro-Friends, told OBG.
Another perceived area of non-alignment is locational. Most lower-income earners are priced out of
the market in city centres. Yet inadequate transport
infrastructure and a lack of employment opportunities outside the main cities compels them to live in
an urban setting, often informally, rather than buy
property in the satellite towns where the government
is looking to develop affordable housing.
To participate successfully in the low-cost housing market, one must adopt building technology that
enables fast construction. The governments affordable housing programme must be centred on the realities of the lower-middle-income market and how it
budgets to be successful, Jesus Atencio, the president
and CEO of 8990 Holdings, told OBG.
LAND PRICES: According to research from Colliers,
land values reached their highest in 17 years in the
third quarter of 2013, surpassing the peaks seen in
1997 when the bubble imploded and the Asian financial crisis took hold. Year-on-year rises in the soughtafter Makati central business district were up 12%,
compared to 4.5% value appreciations in 2011 and
2012. The average quarter-on-quarter appreciation
in the highly desired Fort Bonifacio area was 38.2%.
Rising land values in the more desired commercial
districts, where vacant space is becoming scarce, are
translating into appreciating capital values. Colliers predicts Grade A office space to yield capital appreciation of 6.8% in 2015, and Grade B to generate an 8.5%
return. Yet when discounting prices in real terms, land
prices are less than half what they were prior to the
global financial crisis. While the margin between
appreciation and inflation stays in check inflation for
2014 is forecast by the Asian Development Bank to
There have been some concerns over a supply mismatch

Rising incomes, low interest

rates and reduced
downpayment
requirements are
combining to create a
surge in the number of
first-time home buyers.
Rising land values in

commercial districts where
space is becoming scarce
are translating into
appreciating capital values.
Grade A office space is
expected to yield capital
appreciation of 6.8% in
2015, with Grade B set to
generate an 8.5% return.
184
REAL ESTATE ANALYSIS
The dominance of the four main property conglomerates is a challenge for nascent domestic players
Only Philippine citizens and

corporations, or
partnerships with at least a
60% Philippine share, are
permitted to own land.
Additionally, foreign
corporations leases are
capped at 50 years.
be 4% it is unlikely the market will be subject to any

significant speculator activity.
LOCAL DOMINANCE: Walk past a construction site
at any of the Philippines mall, office or residential projects, and it is likely that the sign will belong to one of
the countrys four listed property conglomerates:
Ayala Land, Mega World, SM Prime Holdings and Filinvest Land. With large market capitalisations and
strong corporate backing from parent and affiliated
companies, these firms are easily able to raise capital through equity or debt financing, presenting a
challenge for nascent domestic players to compete
for projects of the same scope and magnitude.
Only Philippine citizens and corporations or partnerships with a Philippine share of at least 60% are
permitted to own land. This, along with stipulations
that a foreign national or corporations lease agreement is capped at 50 years, may be restricting foreign investment in the sector. According to Jones Lang
LaSalle, of the $240bn of investments committed to
Asia-Pacific property over the past two years, the
Philippines received less than P1bn ($23m). In addition, the IMF feels that the sectors oligopolistic structure poses some political and financial risk. Most of
the entities are family-run, and have on occasion been
accused of murky financial dealings and having complex holding structures that preclude transparency.
Should debt servicing problems arise, the IMF has
warned that this could induce a domestic credit crunch.
INTERVENTION: Corporate governance issues aside,
the property boom of the past seven years appears
to be driven by solid demand fundamentals, with no
definitive signs warranting panic. There remains a
backlog for housing in the middle- and low-income
segments, as well as for most grades of office space.
Although there is potentially a slight oversupply of
premium condominiums, those who are not buying
to live can rely on a large and steady rental market
from expatriates moving to the country for work, and
there is little evidence of flipping taking place. Although
most analysts expect prices, uptake rates and the

number of groundbreakings for luxury residences to
slow, they will likely do so at a pace that corresponds
to market correction, rather than a collapse.
The government, nonetheless, is proactively imposing measures to stress-test and mitigate against over
exuberant lending and the impact of unforeseen external shocks. Wary of increased exposure to real estate
loans, the central bank has capped the amount of lending banks can offer the segment to 20% of their books,
while the capital adequacy ratios that financial service companies must adhere to have risen across the
board. In addition, in an effort to better monitor the
movement of real estate prices, the central bank is
introducing a residential property price index in 2015.
While direct lending to the property segment is being
kept in check, publicly listed developers can still turn
to the bourse as an alternative.
PROCEED WITH CAUTION: While fears of a bubble
appear to be unfounded, when considering the devastating affect on ASEAN economies of the last major
property-driven financial crisis it befits both the industry and the government to show restraint and to proceed with some caution. While the country maintains
political stability, and inflation and interest rates hover in a comfortable band, most market and demographic indicators show no reason for concern.
Nonetheless, exogenous and unforeseen events
elsewhere in the region have the potential to trigger
a contagion effect, as happened in 1997 when the
Thai baht collapsed and companies and banks across
the region eventually went into bankruptcy.
In addition, there is a risk that local panic could set
in if the amount of new builds in the luxury segment
leads to a supply glut, causing valuations to fall. This
is a particular danger if OFW remittances and investments into the BPO industry fail to keep pace with
growth projections. Accordingly, new regulatory measures to shield banks from vulnerability to speculator
behaviour are always welcome to help keep both
exuberant and reactionary behaviour firmly in check.
Rapid sector growth has been driven by solid demand fundamentals

REAL ESTATE INTERVIEW
185
Manuel Paolo A Villar, President and CEO, Vista Land
A reason for optimism

OBG talks to Manuel Paolo A Villar, President and CEO, Vista Land
What will be the balance between high-end developments and low-cost housing in the coming years?
What value proposition do regions outside of Metro

Manila offer for residential expansion projects?
VILLAR: Growth has been experienced in both low- and

high-end housing, each fuelled by different factors but
centred on the strong macro fundamentals of the
Philippine economy. Demographics have been a major
driver for increased demand for housing products, particularly as the population continues to grow and the
median age remains just over 23 years, while the residential market faces a shortage of quality housing
stock and a backlog of over 4m units. Given these conditions, the potential for residential developments is
immense, primarily middle-class housing but also highend products. The latters growth has less to do with
demographics and more to do with investment-driven
demand generated by confidence in the overall Philippine growth story and political stability.
Condominium demand has also risen in response to
the investment-driven market created by higher demand
for rentals in the metropolis, mostly catering to business process outsourcing agents and the emerging
middle class. There has also been a growing foreigner
demand component for condominiums, which is not
present in middle-class housing. Given that 40% of condominium units in a high-rise development can be sold
to foreigners, who otherwise are not allowed to own
land in the Philippines, this demand is expected to grow.
The scarcity and costly nature of land in Metro Manila hampers efforts to provide affordable housing to
low-income individuals. Decentralisation, through government promotion of provincial centres and areas, is
important to decongest the metropolis from residential developments but also commercial centres, as people prefer to reside near their workplaces. For these
efforts to be viable there must be supporting infrastructure and mass transit extending to the outlying
provinces, where affordable land and housing exists.
Another solution is to have dense housing in Metro
Manila, with the government providing land
and subsidies for very-high-density housing projects.
VILLAR: Rising purchasing power in the provinces, not

just in Metro Manila and first-tier provincial cities, has
fuelled the need for housing and incentives for real
estate developers to establish a presence in less wellknown regions. The Philippines has over 10m overseas
Filipino workers whose income is not correlated with
the economic development of their regions. As a result,
we have economically underdeveloped areas with strong
purchasing power due to the large number of families
with members who are employed overseas. Outside of
Metro Manila the majority of housing consists of affordable or low-cost products, with the exception of a few
higher-end vertical developments in first-tier provincial cities such as Davao or Cebu.
On the commercial front, prospects are also very
good in the provinces due to strong consumption
demand and purchasing power, which is rising quickly
from a smaller base. Due to a lack of quality commercial retail stock, the provinces offer massive growth
areas for the development of retail malls and modern
facilities. There are challenges in establishing large
commercial and residential centres in areas with inadequate infrastructure, however, which is why participation from the government is key. The government has
endeavoured to build airports, seaports and roads, all
of which will help the development of provincial areas.
What can be done to increase access to mortgages?

VILLAR: Existing tax incentives for affordable housing
are crucial in maintaining growth in this segment, particularly as the government is not heavily involved in
the large-scale building of housing units. The government participates actively in the housing market through
various housing agencies that provide low-interest
long-dated loans to its millions of members. The Philippines good macroeconomic fundamentals, including
a historically low interest rate environment, have also
helped make mortgage financing more readily available.
186
REAL ESTATE INTERVIEW
Jose E B Antonio, Chairman & CEO, Century Properties Group
Eyes on the middle class

OBG talks to Jose E B Antonio, Chairman and CEO, Century Properties Group
What segments offer the best value proposition
for real estate developers wishing to diversify their
portfolios both at home and abroad?
ANTONIO: Looking at demand drivers, the opportunities not just for real estate, but for the whole country
revolve around the expanding middle class. When you
look at the economic history of developed countries,
the reason for their continuous prosperity has been a
large middle class, which is able to curb the volatility
of economic activity through its basic consumption
needs. Real estate developers in the Philippines are
therefore looking to meet the needs of the middle class
in terms of housing and retail, as well as diversify offerings in various areas of key cities to help decentralise
growth. For instance, we have expanded a project in
Pampanga because the central Luzon area has the
third-largest concentration of overseas foreign workers. Affordable housing also holds exponential growth
potential given that home ownership penetration in the
Philippines is barely 60%, compared with more advanced
countries like Singapore, where it is 96%.
Regionally, the market in South-east Asia alone is
600m strong. As part of ASEAN integration, developers in neighbouring countries are exploring options to
cooperate as integration broadens the market and
investment possibilities. Many developers are already
positioned to expand their brands in the region through
partnerships with their counterparts, capitalising on the
strengths they can export and share. In this context,
our main contribution as a developer would be to elevate real estate practice to international standards and
launch competitive projects. High-net-worth clients in
the region already make up a significant portion of
sales, particularly in the luxury market.
How can developers capitalise on the growth in

tourism, and what role can the government play to
complement these opportunities?
ANTONIO: Tourism is an area the entire country should
actively work to develop. On this front, the Philippines
lags its neighbours, receiving only 4.3m foreign tourists

a year, while Vietnam, with a population of 60m, receives
just as many and Thailand, with a 62m population,
receives 25m (its Phuket province alone receives 15m).
Low tourist arrivals are attributed to lack of transport access points. However, this is being addressed as
various airports are being upgraded. Palawan, for
instance which is not typhoon-prone and has worldrenowned beaches and attractions is converting its
Puerto Princesa airport into an international gateway
to raise the number of flights per day from 25 to 40.
This will attract foreign tourists willing to bypass Manila and travel directly there from anywhere in Asia. The
Philippines also enjoys 44m domestic tourists, which
added to foreign ones create a large market that developers can tap into by positioning their projects in outof-town destinations and luxury developments.
Most importantly, tourism is an industry that touches the lowest levels of society, given how its multiplier
effects cascade into local employment generation and
revenues for related industries. Tourist interest in the
Philippines already exists within Asia, and the country
has the destinations and people to serve them. The key
issue is access: this is an area where government can
contribute as an enabler of business by building the
infrastructure necessary to allow the private sector to
be effective in accelerating the industrys growth.
In what ways can developer participation in building health care centres catalyse medical tourism?
ANTONIO: Research shows that 70% of ailments can
be treated in an outpatient setting, and not exclusively in hospitals. However, two issues need addressing for
outpatient medical centres to serve the numbers
received by Thai hospitals namely, 1m patients a year,
of which half are foreigners. The first is connectivity to
source markets to attract more patients. The second
is to create a new culture of protocol. Our medical practices have been largely dictated by the domestic market, which is less demanding when it comes to service.
187
BPO
The nations global market share has grown exponentially
Companies are moving to second- and third-wave cities
Efforts to expand into higher-value market segments
Population demographics helping boost competitiveness
188
BPO OVERVIEW
The sector has had compound annual growth of 10% over the decade
The multiplier effect

The sector creates jobs directly and indirectly, and is drawing wealth
and investment to the country
The BPO sector generated
export earnings of $13.3bn
in 2013, a 15% increase
over 2012 and a nearly
10-fold increase since
2004, when it was valued at
$1.4bn.
Since 2004, the Philippines

has tripled its global
market share of BPO
business, from 4% to 12.3%
in 2014. It is estimated that
this could rise to 19% by
2020.
The global BPO industry is forecast by consultancy

Tholons to be worth $250bn by 2020 and the Philippines is seeking to cement its position as a preferred
global service offshoring hub and expand on and diversify its share in this lucrative, yet highly competitive field.
Having grown at a compound annual growth rate of
around 10% over the past decade, the BPO sector has
become the countrys largest source of private employment and the second-largest contributor of foreign
exchange earnings after remittances. It has also fuelled
the growth of other sectors, as the salaries paid out
have augmented household consumption and anchored
the expansion of the property and retail sectors.
VALUED SEGMENT: In contrast to overseas foreign
workers, because BPO workers spend all of their earnings onshore, each new outsourcing job created is estimated to generate 2.5 additional jobs in retail, public
transportation and other support services, Gillian Joyce
Virata, a former executive director at the IT and Business Process Association of the Philippines (IBPAP),
told OBG. IBPAP estimates revenue from the sector
expanded by 15% over the course of 2014 to reach
$15.3bn. By 2016, sector revenue could reach $25bn
and match the economic contribution of remittances,
while industry employment, which in 2014 surpassed
the 1m mark for the first time, will expand an additional 30% to account for 1.3m jobs.
In recognition of its economic contribution and multiplier effect, the government and IBPAP are backing
a roadmap aimed at ensuring that foreign exchange
earnings and employment keep growing. In addition to
growing the size of the pie, industry stakeholders are
looking to rearrange the slices into more sustainable
BPO sub-segments by diversifying up the value chain
away from a dependence on contact centre and low
value transactional BPO services into the higher earning, more specialised and more complex non-voice BPO
and knowledge process outsourcing (KPO) segments.
KEY CONTRIBUTION: The Philippines has emerged as
the worlds largest market for voice-service BPO and
the second-most-popular destination after India for

ITBPO and global in-house centres (GICs).
This is the one industry where we are global leaders and we intend to keep it that way by responding to
industry requirements in terms of policy, infrastructure
and educational support, Monchito Ibrahim, the deputy
executive director at the Department of Science and
Technologys (DOST) - Information and Communication
Technology Office (ICTO), told OBG.
Central bank data reveals the sector to have generated export earnings of $13.3bn in 2013, a 15% increase
on the previous years performance and a near 10-fold
increase from a decade earlier in 2004 when it registered $1.4bn. Employment, likewise, has also multiplied
by double digits over the past decade, rising from
101,000 in 2004 to over 1m by 2014.
With IBPAP expecting the BPO sectors revenue for
2014 to be valued at $18.4bn, this would comprise
6.2% of GDP, trailing only remittances, with $22.5bn
worth of foreign receipts, but well ahead of third-placed
tourism with $4.8bn worth of foreign earnings. Since
2004, the Philippines has tripled its global market share
from 4% to 12.3%, a figure that Tholons expects could
rise to 19% by 2020. For its part, the country has set
out to earn $25bn by 2016, with the sector responsible for 1.3m jobs, 7.3% of GDP and a 13.5% global market share. Tholons said that if the country plays its cards
right, it would reach $48bn in revenue by 2020.
Additional accolades for the industry can be found
in IBPAP data. The sector was responsible for a 27% share
of total exports and it has proven itself to be one of
the more equitable employment vehicles, with women
accounting for 43-45% of those employed. Recognising the industrys unparalleled and rapidly expanding
contribution to employment generation, investments
and foreign exchange earnings, both the government
and industry have drawn up roadmaps aimed at retaining and securing the Philippines competitive position.
The former articulated its vision in the Philippine Development Plan (PDP) 2005-10 and its successor, PDP
BPO OVERVIEW
2011-16, while the later identified five priority areas within the Philippine ITBPO Road Map 2011-16
LOCATOR DRAW: As a prime driver of the trend towards
outsourcing offshore is a need for firms to seek cost
arbitrage opportunities in the face of global competition, a countrys wage structure and labour pool are
significant selection determinants. With a population
of 100m, half of whom are below the age of 25, and
widely spoken English, the Philippines holds a demographic trump card. In comparison, the median age in
Thailand is 36.2 and in Japan it is 46.1.
While less tangible to measure, the countrys labour
pool has garnered a reputation for displaying loyalty,
adaptability, empathy and delivering strong customer
service in an authentic and relatable way. For historical reasons, there is also a strong affinity for Western
culture, and as some of the heaviest social media consumers in the world, a significant exposure to Western
fashions and trends. The Philippines, relative to other
top offshoring destinations, is rated well in terms of political stability, and under the Benigno Aquino III administration the government is perceived as pro-business
and is implementing sound economic policies. This has
been evidenced in upward movements in the major
investment ratings indices (Standard & Poors, Moodys
and Fitch), and an improvement of 33 places on World
Banks ease of doing business rankings since 2010, the
largest leap of any of the countries surveyed.
SURMOUNTABLE CONCERNS: Compared to competing offshoring markets in Africa (South Africa) and
Europe (Poland), the country is at a time zone disadvantage when it comes to servicing European and North
American clients. This is not usually a deterring factor,
however, as the youthful workforce is quite willing and
able to work night shifts, and most BPO locales of size
and scope that cater to multiple destinations are
required to run 24/7, regardless.
While there are some apprehensions over intellectual property (IP), the legal regime and its enforcement
are considered sufficient for the BPO sectors needs
and judged to be continually improving. Because of
the strong trade relationship with US, the country is
taking IP very seriously, Donald Felbaum, the managing director of the IT consulting firm Optel, told OBG.
In April 2014 the US removed the Philippines from its
watch list of countries that do not properly protect IP
Largest BPO rms by revenues, 2013 (P bn)

Firm
Revenues
1. Accenture
32.43
2. Convergys Philippines Services Corp.
19.83
3. 24/7 Customer Philippines
13.06
4. JPMorgan Chase Global Service Centre
11.79
5. Telephilippines
8.72
6. Sutherland Global Services Philippines
8.08
7. Hewlett-Packard
7.08
8. Stream International Global Services Philippines
6.92
9. Teletech Offshore Investments
6.59
10. IBM Daksh Business Process Services Philippines
6.31
SOURCE: House Committee on Higher & Technical Education
189
Many BPO operations in the Philippines are catering to other time zones, so they operate around the clock
rights for the first time in 20 years. Following a strong

run in 2012-13, the Philippine peso has settled into a
comfortable exchange rate band to the US dollar. However, rising administered prices (fuel and electricity)
could place pressures on wages in the coming year.
The one area where there is perhaps the most concern and calls for intervention is the labour gap, as the
solid reputation garnered by its workforce is negated
if the volumes of employees needed by investors are
not met. China and India annually churn out 7.5m and
5.5m graduates, respectively, far exceeding the 550,000
of the Philippines. The Commission on Higher Education estimated that BPO jobs created in 2012 around
137,000 represented more than 25% of graduating
college students, an absorption rate that will make it
difficult to fill all available jobs. Compounding matters
is the challenging and stressful nature of the job and
shift hours, resulting in a churn rate estimated at 50%.
For the industry to grow at the targeted 15%, 150,000
new entrants are needed each year, not accounting for
attrition. This would entail 60% of all new graduates to
enter the field, which is not realistic. The government
realises this and is looking to introduce new certification schemes and encourage high school graduates to
work in the industry part time, Feldbaum said.
In addition to a shortfall in quantity, while Filipinos
demonstrate a number of enviable attributes that make
them ideally suited to contact centre work, other markets labour pools are deemed to possess traits that make
them better suited to the higher value, non-voice contracts that the Philippines hopes to capture.
TELECOMS & UTILITIES: As a rapidly rising Asian economy, demand for office space and rental rates have been
increasing at about 3% year-on-year, but Metro Manilas office districts still offer some of the most affordable leases in the region. According to the real estate
firm Colliers, the central business district of Makati City
has the highest lease rates in greater Manila, with an
average charge per sq foot per annum of $29 as of the
second quarter of 2014. Fort Bonifacio, the countrys
Approximately half of the

population is below the
age of 25 and with English
being widely spoken, the
Philippines has the right
demographics to provide
the highest-demand BPO
services.
Rental rates for office

spaces have been rising
approximately 3%
year-on-year, with the
highest rates reaching $29
per sq foot as of the
second quarter of 2014.
190
BPO OVERVIEW
Efforts are under way by the government to encourage growth outside of the main urban centres
Approximately 62% of the

sectors revenue from 2014
was expected to come from
voice-based BPO. The
country overtook India in
this segment in 2010.
second-most-desired location, charges $17.89, while

Ortigas, the third main business district offers rates at
$12.87. In India, the countrys biggest BPO competitor,
charges range from $31 to $118 depending on the city.
Although the pace of new supply hitting the market
might not keep up with rising demand, analysts are
expecting rates to remain competitive, especially for
those willing to locate outside of the more sought after
commercial locales (see analysis).
A unique trait associated with the Philippines BPO
sector is that many BPO tenants are co-located in office
towers in central business districts rather than in large
office parks outside of the main city centres. Following the real estate boom that preceded the Asian financial crisis, the country was left with empty buildings to
fill and the BPO sector stepped in said IBPAPs Virata.
An offshoot of labour being located in smaller plots is
better network connectivity. At a national level, Philippine broadband capacity, due to geographic challenges
associated with being an archipelago and unresolved
regulatory issues, is considered poor. However, in Metro
Manila and some other urban centres, last-mile connectivity is in place for commercial internet speeds.
One infrastructural shortcoming affecting the country and the sector is power costs and reliability, a concern for an industry that often relies on running 24/7
and can ill afford going offline. The government, under
an initiative titled next-wave cities is looking to create more IT hubs outside of metro Manila.
While relocating firms to second-tier cities will afford
firms more incentives and lower rents, and allow employers to bypass the fierce demand and high turnover for
talent in the capital, there is a strong impetus for the
local authorities to ensure that robust power and broadband infrastructure is available (see analysis).
RAISING ITS VOICE: IBPAP estimates that of the $18.4bn
in revenue expected for 2014, 62% is to be derived from
voice-based BPO. The Philippines is the undisputed
leader when it comes to the provision of call centre work,
overtaking India in 2010 and expanding its lead ever
since. While there are other competing offshore destinations where English, although not the first language, is commonly used in business, government, education and print media, the distinct linguistic advantage
enjoyed by the Philippines is accent neutrality and an
unmatched proficiency in terms of daily vocabulary,
grammar and idiom. This, in addition to the historic ties
to the West and a strong culture of customer service
generates confidence among firms in the US, the UK,
and Australia and New Zealand to contract out even
their most sensitive customer relations work.
Although English contact centre work is the mainstay in the Philippines and makes market sense, when
considering that the US alone accounts for 60% of
global voice outsourcing demand, having been colonised
by the Spanish and Japanese at various stages prior to
independence, there is further linguistic diversity in
the country to leverage. Realistically, however, winning
non-US-originating Spanish language work could prove
challenging as Central and South America have already
cornered the market. At the moment, the US accounts
for around 77% of all voice work, and to geographically diversify the country is looking to increase the contribution from Australia, New Zealand and also the UK,
which has traditionally relied on India.
ADDING VALUE: The DOST road map calls for the proportion of contact centre work to reduce to 40% over
time as higher value segments are promoted. Voice
work is becoming commoditised and there are replacement options for speaking to customers via machines.
Long term, the industry needs to move into KPO, Felbaum told OBG. Corporate services are the secondlargest BPO segment after voice, accounting for 20%
of the industrys headcount in 2013, according to IBPAP.
The segment is dominated by accounting and other
repetitive back-office work, but also includes some of
the more expert fields of outsourcing such as financial and market research, analytics and auditing that
are collectively known as KPO.
The KPO segment includes many GICs, which are not
technically outsourcers, but are counted as part of the
Many companies have moved specific KPO operations to the country

BPO OVERVIEW
BPO sector. GICs are estimated to provide a 10% contribution to IT BPM exports. According to IBPAP, there
are over 130 GICs in the Philippines, of which 65 constitute Fortune 1000 firms. The other non-voice categories in the Philippines BPO mix include IT services
and health care information management (HIM), each
of which was responsible for around 8% of the industrys headcount, followed by engineering (1%), animation (1%) and game development (0.4%).
People incorrectly think that we only handle transactional voice work, but this is far from the case. Voice
work, like other types of work, can be viewed as a pyramid of complexity with more complex work being done
by fewer, more specialised professionals. In the Philippines, we work in all levels of the pyramid in the voice
and non-voice sectors. A pyramid has a larger base. We
now need to widen the upper levels, said Virata.
COMMON KNOWLEDGE: Expanding into more knowledge-intensive BPO segments requires an upgrading
of the talent pool, as an addition to good communication skills, specialised qualifications in fields such as IT,
engineering, finance and design are needed. China and
India are said to have a larger and more technical skill
base, with a longer track record in the more complex
business processes. Filipinos are famous for their sense
of empathy, which bodes well for all service industries
like customer care and tourism, but they are for the time
being less math and science inclined, Cyril Rocke, the
CEO of cloud provider DataOne Asia, told OBG.
Compounding the challenge is that Filipino knowledge workers in fields like engineering and IT are heavily demanded throughout the Gulf as well as in nearby Singapore and Malaysia, leading to a brain drain
of the countrys technical talent. According to IBPAP,
only around 10% of applicants for call centre positions
qualify for hiring. As such, diversifying into more back
office functions provides an employment outlet for
those who may lack communication skills but compensate with a proficiency in more technical areas, such
as accounting, finance and design.
CAPTIVE MARKET: Multinationals are increasingly setting up GICs to handle in-house work, like finance and
accounting, and those with operations in the country
include Chevron, Shell, Maersk, Bechtel, Procter & Gamble, Henkel and Thomson Reuters. Some of the longerestablished BPO consultancies have expanded their
Philippines-based GICs to service third parties, particularly in financial services field, where JPMorgan Chase,
Deutsche Bank, Bank of America and AIG provide specialist outsourcing functions to firms in their vertical.
GETTING TECHNICAL: The Philippine Software Industry Association (PSIA) calculates that revenues from IT
and software development nearly doubled between
2008 and 2012, expanding from $600m to $1.16bn.
IBM, Dell, HP and Xerox are amongst the global tech
giants with operations in the country.
Along with the PSIA, two other tech related affiliate
associations under the IBPAP umbrella are the Game
Developers Association of the Philippines and the Animation Council of the Philippines. The global market
for the outsourcing of animation and gaming is esti-
191
There are over 130 GICs operating in the Philippines and 65 of them are Fortune 1000 companies
mated to be worth $1.5bn, and in 2012 animation and

gaming revenues for the Philippines came in at $132m
and $50m respectively. By 2016, IBPAP is aiming to
increase the countrys share in gaming and animation
to 10%. Important media and gaming content producers, including Walt Disney, Warner Brothers, HBO, Marvel Comics, Hanna-Barbera, Nintendo, Sega, Game Gear,
Game Boy and Sony Playstation have outsourced work
to Filipino animation professionals and studios.
IN GOOD HEALTH: HIM is easily the fastest-growing
KPO segment for the Philippines, with revenues having expanded some 66% over 2011, a further 80% over
the course of 2012, and finally 117% over 2013 to
reach $998m. IBPAP is anticipating the rapid expansion
will continue, targeting $2.4bn worth of revenues and
employment of 120,000 by 2016. Health care reforms
in the US are creating an impetus to reduce the systems administration costs by outsourcing tasks like
medical transcription, billing, coding and outpatient
care services. The Philippines, with a demonstrated
track record of serving a diverse range of US clients
BPO needs, as well as a strong familiarity with the US
health care system stemming from its history supplying nurses to the US, is in a strong position to pick up
the bulk of the the countrys offshored work.
OUTLOOK: As the size and scope of the global BPO
industry expands, so too does the competition amongst
countries looking to win their share of the lucrative pie.
The Philippines possesses a demographic edge and
some innate cultural traits that would be difficult for
others to emulate in overtaking it as the global leader
in voice-based BPO. While ongoing efforts to revamp
the education system and better match the industrys
technical requirements should bolster its prospects at
capturing additional share from top-placed India in the
ITBPO and GICs spaces. The country can also use its
assets in niche segments. A propensity for creative
positions is good for design and digital work in fashion, animation, gaming and architecture, and the country is expected to become a new leader in offshore HIM.
Large multinationals are

increasingly setting up
global centres to handle
their in-house
administration such as
finance and accounting,
with many of these then
expanding to provide
services to third parties.
192
BPO INTERVIEW
Maulik Parekh, President & CEO, SPi Global
The digital age

OBG talks to Maulik Parekh, President and CEO, SPi Global
How well positioned is the Philippines to become
a centre for outsourced health care processes?
PAREKH: The potential for health care outsourcing in
the Philippines is substantial, as the country produces
roughly 40,000 nurses annually. While traditionally many
of these professionals sought jobs abroad, the growing health care outsourcing industry has created another option for these experts to stay home and pursue
careers they desire. We are trying to expand to have
over 1000 Philippine-based health care professionals,
particularly supporting the US market.
The health care market has been growing by around
45% annually and the uptrend is expected to continue, as the industry seeks specialisation in higher-value
and margin processes, such as revenue cycle management, coding and compliance, particularly in tandem
with the USs Affordable Care Act and International
Classification of Diseases implementation.
There has also been significant growth in providing
customer service through social media measuring,
reporting and supporting clients in acquiring and retaining customers. Given that future generations will
doubtlessly utilise digital and social media platforms for
their consumer needs, companies must be prepared
to delve into that service arena, or fall behind. Firms
like ours must be prepared to help them do so.
How can the Philippines utilise outsourcing opportunities under the ASEAN Economic Community?
PAREKH: If the Philippines continues building on the
ecosystem it has created for this industry, the country
will be well poised as a destination of choice for the
regions outsourcing needs. It is remarkable how many
success factors have converged here: the large pool of
English speakers with accents that are easy for speakers from around the world to understand, pairs with
the customer-service-oriented culture. The country
also generates more college graduates than most in the
region. I believe it is time for the Philippines to look
beyond its traditional outsourcing markets the US,
Canada, Europe, Australia and New Zealand towards

neighbouring countries. Close to 30% of SPi Globals
revenue comes from ASEAN nations. This regional integration allows companies like ours to utilise each countrys strengths. For example, our strong operational
presence in Vietnam relies on its workforce for nonvoice knowledge process outsourcing, while our customer-service activities remain in the Philippines.
In what ways is the industry ensuring a sustained

pipeline of skilled workers to meet BPO demand?
PAREKH: The only way for the BPO industry to thrive
is to invest in future employees. It is a people-centric
industry, which will ultimately benefit if it places people and their well-being at the centre of its growth
strategy to ensure long-term sustainability. I believe a
key reason Philippine BPO has grown faster and more
consistently than any other BPO market is that all the
stakeholders are pulling their weight; the partnerships
I have witnessed among government agencies, the private sector and industry associations, such as the Information Technology and Business Processing Association of the Philippines and the Contact Centre
Association of the Philippines are best-in-class. Theres
a massive effort to train and prepare future personnel,
and also promote BPO as the industry of choice for college graduates one that offers a prosperous career.
To what extent do new content and digital platforms offer opportunities for outsourcing?
PAREKH: The content industry is undergoing an incredible transformation, with three key trends that have created new revenue streams. First, content has gone
from location-specific to omni-present we can consume content anywhere via mobile devices. Content has
become dynamic, enriched through multi-media and
links. Finally, online search is becoming smarter and
faster it is taking less and less time to reach the information you are looking for. These trends are changing
business and our clients seek new partners to compete.
BPO ANALYSIS
193
The Philippines is 25% more expensive than its main competitor, India
Going to the countryside

BPO firms are expanding into secondary and tertiary cities
As the Philippines is the second-largest BPO destination in the world, holding at least a 12% share of
the global market, it is no surprise that Manila, as
the countrys commercial epicentre, has become a
top destination-city for hosting offshore service
providers. A study by research group Tholons ranked
the top 100 outsourcing destinations by city, placing Manila in second for 2014, behind only Bangalore. Manila moved up one spot in the rankings from
the previous year, overtaking the city of Mumbai in
India, which has historically been the stronger BPO
services providing nation of the two.
Several other Philippine cities ranked well, too.
Cebu, which is home to 20 BPO firms and a BPO
workforce of around 200,000, made it to eighth place
in the global table. The cities of Davao (approximately 20,000 workers), Bacolod (around 20,000), Iloilo
(2000), Santa Rosa and Baguio also appeared on
the list, though all were ranked near the bottom end
and are deemed to not yet fully register reputationwise amongst international decision makers.
SPREADING THE WEALTH: Manila accounts for
around 70% of all outsourcing employment, a concentration that the government would like to see
reduced in order to contain the pace of urban migration and allow other parts of the country the opportunity to benefit economically from the BPO boom.
Under the Next Wave Cities initiative formulated in
Employees by service area (000)

Contact centres
630
Non-voice BPM
200
IT services
80
Health care information management services
80
Engineering services
14
Animation
Game development
TOTAL
SOURCE: IBPAP
1017
2010, 10 locations, four of which constitute suburban extensions of metro Manila, were identified as
viable alternatives based on criteria related to worker supply, telecom infrastructure, a conducive business environment and risk management.
In order to raise awareness among companies that
are potentially interested in the Next Wave Cities, the
Department of Science and Technology - Information and Communications Technology office (DOSTICTO) has been collaborating with the IT and Business Process Association of the Philippines (IBPAP),
running roadshows and coordinating other promotional activities. So far, their efforts are bearing fruit.
Manilas share of Philippine BPO dropped from 83%
in 2006 to 70% by the end of 2013. By 2016, the government is targeting a 60:40 split between Manila
and the rest of the country, while aiming to put three
more cities on Tholons top-100 list.
However, the Philippines is not the only player.
China is seen as an emerging rival to the Indian-Filipino dominance of the sector, with three cities
ranked in the top 20 of Tholons list, while Malaysia,
a fellow ASEAN member, is raising its BPO profile.
CATCHING THE WAVE: Prospective investors relocating to the provinces are able to tap into locationspecific incentives as well as concessions offered by
IT parks accredited by the Philippine Economic Zone
Authority. Yet the primary motivating force tends to
come down to market realities. All things being
equal, incentives can come into play. But incentives
cannot sway a decision if the infrastructure and talent is not in place, Monchito Ibrahim, the deputy
executive director at DOST-ICTO, told OBG.
According to IPBAP, offshoring to the Philippines
is roughly a 25% more expensive proposition than
locating in India, where 80% of ITBPO growth is being
experienced in tier-two and -three cities. While the
Philippines overall value proposition can be swung
via offering superior quality and other desired attributes, as offshoring is by its very nature an exercise
The Philippines is the

second-largest BPO
destination in the world,
with about a 12% share of
the global market as of
2014.
Manilas share of Philippine

BPO dropped from 83% in
2006 to 70% by the end of
2013. By 2016, the
government is targeting a
60:40 split between Manila
and the rest of the country.
194
BPO ANALYSIS
Telecoms provision has expanded as BPO firms move to rural areas
As of mid-2014 it was
expected that Manila
would face a shortage of
some 80,000 sq metres of
office space, driving up the
cost of premium offices by
about 7%.
in creating cost arbitrage, diversifying the sector to

more affordable locations outside of metro Manila
provides alternatives to the more cost-conscious
clientele. At a human resources level, there are cost
savings and benefits associated with setting up in a
less saturated location. Talent acquisition and retention costs can be reduced, while attrition rates are
more manageable as there is less competition for
labour and lower turnover, as workers save money
by not having to move away from their homes.
Local real estate services firm and Savills affiliate
KMC MAG Group, in an article published June 2014,
anticipated Manila would face a shortage of 80,000
sq metres of office space by 2015, resulting in rental
cost for premium office space increasing by 7%. Cebu
is also projected to have its commercial property
sector approach saturation in coming years, pointing to the need for BPO firms to consider other locations. For Cyril Rocke, the CEO of cloud provider
DataOne Asia, beyond more favourable salary and
rental outlays, other advantages that come with

diversifying operations outside of the capital include
avoiding metro Manilas infrastructure congestion
and expatriate management enjoying more amenable
surroundings. Many emerging cities, such as Cebu
and Iloilo, offer more for employees in terms of quality of life and work environment.
INCLUSIVE GROWTH: The provinces supplied Manila with a significant portion of its labour force needed for the rapid growth the citys BPO sector over
the past decade. As such, the Next Wave Cities initiative is considered a win-win for all stakeholders
as it alleviates the socio-economic pressures associated with urban migration while promoting rural
development. Employers benefit from a more captive workforce and are able to pay lower salaries, as
they do not have to compensate for higher costs of
city living, and higher disposable income levels in tertiary cities fuel growth in consumer sectors.
The beauty of the BPO industry as a vehicle for
rural development is that a unit can be set up as a
greenfield project virtually anywhere. All you need
is a committed local government unit that is willing
to put up the infrastructure. Other industries, like
tourism and agriculture, are limited in terms of location, Dondi Mapa, the National Technology Officer
at Microsoft Philippines, told OBG.
The Philippines is a natural landing point for submarine cables connecting South-east Asia and Japan,
and these undersea links and routes provide a level of redundancy and security to the BPO industry,
which is entirely dependent upon stable international connectivity. Although last-mile telephony
connections outside of Manila, Cebu and major
tourist areas are currently limited, if and when locators show a commitment to set up in emerging BPO
centres, the expectation is that the telecom providers
will soon begin to follow suit. The private telecoms
companies tend to focus their enterprise efforts on
serving BPO firms, as they need good infrastructure and are willing to pay for it, said IBPAPs Virada.
195
Telecoms & IT
Network operators expect higher demand for data
Improved connectivity making space for mobile money
New technologies to extend internet coverage
Public and private sector investing in infrastructure
Business incubators set to boost start-up culture
196
TELECOMS OVERVIEW
Network operators are preparing for more mobile data demand
Keeping up with expansion

Demand and opportunities grow for local providers
Just two companies control
the fixed line and mobile
telecommunications
market; however,
competition between
these two providers is
intense.
By total number of SIMs,

the mobile penetration
rate stood at 104.5% in
2013, but industry players
estimate that the per-user
penetration rate is closer
to 80%.
Lagging behind the regions faster evolving markets

when it comes to the provision and adoption rate of
mobile broadband, data usage and mobile services in
the Philippines are expected to grow as smartphones
become more pervasive and the two leading operators
continue to raise capital expenditure to upgrade existing networks and deploy 4G sites.
MARKET LAYOUT: Although considered a duopoly,
with the two leading operators Philippine Long Distance Telephone (PLDT) and Globe Telecom controlling the majority of fixed line and mobile subscriptions,
competition between the two is high. Each firm looks
to capture shares from the other through aggressive
promotions and new value-added technologies as profit margins on traditional voice calls and texting taper
off. Beyond this though, the sectors regulator, the
National Telecommunications Commission (NTC), finds
itself legislatively limited from ruling on issues such as
interconnection rates, internet peering and mobile
number portability. This inhibits its ability to intervene
on matters that could promote competition or make a
more compelling case for new entrants to feel confident enough to assertively roll out services and take
on the entrenched incumbents.
If and when network capital expenditure and deregulation increases access and drives down telephony
costs, the Philippiness demographic fundamentals
offer exciting prospects for advanced telecommunications being adopted. There are 100m Filipinos with an
average age of 26. Young people are quick adopters,
so long as the price point is right, Donald Felbaum, managing director at ICT consulting firm Optel, told OBG.
BYPASSING FIXED LINE SERVICE: As has transpired
in many developing markets and throughout much of
Asia, fixed line infrastructure, which until 1995 was
exclusively the responsibility of the then state-owned
monopoly PLDT, was relatively non-existent by the time
mobile network technology was introduced. As such,
much of the market leapfrogged directly into mobile
communications, resulting in fixed line penetration
remaining minimal. Mobile telephony services really

took off in the 1990s when submarine cables landed
at the same time as the PLDT monopoly was broken up
and the sector evolved into hyper competition, Gillian
Joyce Virata, former senior executive director at the
Information Technology and Business Process Association of the Philippines, told OBG.
When new licences were first issued, based on an
expectation that fixed line growth would be stagnant,
especially for the residential segment, new carriers
opted to focus their attention on the mobile space, allowing PLDT to continue its dominance over the fixed line
market. For the first half of 2014, the firm reported to
have 2.2m fixed line subscribers, indicating a penetration rate of around 2.5%. While subscriber numbers are
waning, PLDT claimed a 6% increase in fixed line earnings over the period due to strong performance from
its retail and corporate base.
MOBILE CONSOLIDIATION: Mobile penetration for
2013, according to the International Telecommunications Union (ITU), stood at 104.5%, an increase of some
10% from the year prior. While it is difficult to ascertain official figures, unique penetration, when discounting the common practice of multiple SIM card ownership, industry players estimate this to be around 80%.
Following a period of consolidation that began around
2008, when average revenue per user (ARPU) took a
hit from the detrimental impact of the global financial
crisis on the local economy, the mobile sector has
evolved into a two-horse race, with PLDT holding 63.4%
of the market and Globe Telecom responsible for the
remaining 36.6%, as of the first quarter of 2014.
PLDT-owned Smart Communications kicked off a
series of industry consolidations when it acquired Pilitel in 2009. Digitel, a successful company that had
launched its mobile phone service under the brand
Sun Cellular in 2003, was subsequently acquired in
2011 by Smart at a price of P74.1bn ($1.67bn). In September 2013 rival Globe Telecom received approval
from a regional trial court to acquire debt-ridden Bayan
TELECOMS OVERVIEW
Telecommunications. Bayan has a strong enterprise

business and a solid broadband subscriber base. Their
nation-wide fibre network provides us with a strong back
up, Jomari Fajardo, investor relations director at Globe
Telecom, told OBG. Both Globe Telecoms consolidation
of Bayan and the PLDTs absorption of Sun Cellular
have been slowed by appeals and contestations over
if and how the frequency allocations inherited in the
deals should be publicly re-auctioned (see IT overview).
TEXTING PREVALENCE: Labelled by some as the texting capital of the world, Filipinos are among the worlds
most prolific senders of text messages, with estimates
that nearly 2bn SMS messages are sent every day,
accounting for around 10% of global text traffic. The
propensity for high texting rates stems from the fact
that voice calls are prohibitively expensive for many lower income citizens. In recognition of the reliance on SMS
for the poorest segments of society, in early 2014 the
NTC ruled that the interconnection fee per text message between the two main operators be dropped from
P0.35 ($0.0079) to P0.15 ($0.0034). We would like to
do the same for voice, but by law we are not empowered to do so as the interconnection rates are negotiated by the two operators. The only way we can intervene is if one party asks us to mediate, and so far this
has not happened, Edgardo Cabarios, director at the
Regulation Branch of the NTC, explained to OBG.
At present, subscribers calling between networks
incur an interconnection cost of P4 ($0.09), whereas
in most countries this cost is between $0.03) and $0.05.
I believe we have the second highest interconnection
rates in the world after Brazil, and a voice call to the
US from the Philippines can often end up being cheaper than a local call as a result, Cabarios said.
POST-PAID CONVERSION: Most active consumers
hold dual SIM cards that they switch between in order
to avoid hefty interconnection charges, as well as take
advantage of on network promotional deals. Some
97% of SMART subscribers are pre-paid, with the same
holding true for 95% of Globe Telecoms subscribers.
Enticing more customers to convert to postpaid plans
is one way for operators to ensure that their SIM card
becomes the primary one.
Although our prepaid subscribers dwarf our postpaid subscribers in sheer numbers, revenue wise, postpaid monthly ARPU is around P1200 ($27) versus around
P150 ($3.37) for prepaid, Fajardo told OBG. The postpaid segment, growing at around 18%, is one of our
main growth drivers. The aim is to convert the higher
spending prepaid users into postpaid subscribers. While
Key ICT indicators, 2014

Individuals using the internet (%)
37
Fixed telephone subscriptions per 100 inhabitants
3.2
Mobile subscriptions per 100 inhaitants
104.5
Fixed (wired) broadband subscriptions per 100 inhabitants
2.6
Wireless broadband subscriptions per 100 inhabitants
27.2
Households with a computer (%)
18.7
Households with internet access (%)
22.9
SOURCE: ITU
197
part of their motivation to switch is to take advantage

of a subsidised handset, the main appeal is the convenience of not having to frequently recharge a SIM
and being able to customise the services one needs.
GOING MOBILE: According to the ITU, 2.6% of Filipino
households in 2013 had installed broadband, while 27
out of every 100 Filipinos had access to mobile broadband. This translated into the country ranking 110th
(out of 190) globally for fixed broadband penetration
and 79th for mobile broadband penetration. Collective
internet penetration of 37% placed the country 106th
in global rankings. While personal broadband access is
considered to lag the regional average, it is trending
upwards at a fast pace, with global consultancy PwC
predicting 3G subscriptions to grow at a compound
annual rate of 12.7% over the period 2012 to 2016.
Three to four years ago, 70% of internet access by Filipinos occurred at cyber cafes, George Royeca, a business development associate at technology conglomerate IPVG Corporation told OBG. As mobile broadband
expands and gaming switches from PCs to mobile
devices, we are converting the internet cafes we own
into mobile phone retail outlets.
The demand for mobile data services is expected to
be robust in the future, driven concurrently by the proliferation of more affordable smartphones hitting the
market and the finalisation of operators rollout of 3G
networks, and eventual moves towards the full-scale
commercial deployment of 4G networks beyond Metro
Manilas central business district and some key tourist
destinations. Our legacy network needed to be modernised, as it was geared towards SMS and not data.
We are betting big on future data demand, and as we
want to make sure our network is future proof, we are
advancing right into 4G compatibility even though the
countrys 3G networks are not yet fully saturated with
traffic, Fajardo told OBG.
HOME GROWN SMARTPHONES: The Philippines offers
one of the worlds more exciting markets when it comes
to smartphone adoption. While ownership penetration of 15%, as measured in a 2014 study by mobile
market research firm On Device Research, was the lowest in South-east Asia, penetration is expected to
leapfrog to 50% by 2015. Data from research firm IDC
Asia/Pacific shows that for the third quarter of 2013,
smartphone shipments to the Philippines expanded
75% year-on-year, compared to flat growth for Malaysia,
4% in Thailand, 1% in Vietnam, 12% in Indonesia and
14% in Singapore. Price points for entry-level smartphones are dropping dramatically and we have reached
the inflection point and will witness a huge upgrade
cycle over the next five years, Royeca said.
Somewhat unique to the Philippines is that the
upswing in low-cost smartphone purchases is not limited to cheap Chinese imports, as three homegrown
brands Cherry Mobile, MyPhone and Starmobile are
capturing a substantial chunk of the market traditionally dominated by Nokia (at 28% market share) and
Samsung (24%). In an early 2014 survey conducted by
rewards platform Jana, 85% of respondents indicated
a willingness to purchase a local smartphone brand. The
Filipinos are described as

the worlds most prolific
texters, with the country
sending some 2bn SMS
messages per day, making
up some 10% of global
traffic.
Mobile network operators

are beginning to shift their
investment focus to
providing more data
capacity and related
services.
TELECOMS OVERVIEW
Jana report places Cherry Mobile as the third most popular smartphone brand (17% market share) while
MyPhone is fifth, with a 4% share. The positioning of
local brands, which offer Android-based devices at a
price point as low as $50, is not all bad news for the
established high-end foreign smartphone makers, as
the market as a whole is growing and early adopters
are expected to upgrade devices over time as their
usage requirements transition from more basic applications to video-streaming and mobile gaming.
NEED FOR SPEED: In anticipation of mobile data being
demanded at faster speeds, both Globe Telecom and
PLDT (through Smart), in addition to expanding their
3G network coverage, are devoting substantial capital
to installing 4G-enabled sites situated across the country. As screens and offerings on phones get better, this
will spawn a whole new way of consuming content on
mobile devices, and we are preparing our network to
cope with this growth, Ernest Cu, president and CEO
of Globe Telecom, told OBG.
A 2014 report by global market research firm Nielsen
on Filipino internet habits reveals that 33% of users are
online for more than two hours per day, 95% visit social
networking sites and 44% play online games. Filipinos
love videos and music, and we are a very social media
engaged country. Operators moving to 4G and longterm evolution (LTE) makes sense and will present a big
future market for mobile advertising and e-commerce,
Royeca said. Out of 34m Facebook accounts in the
country, only 20% were estimated to be accessed
through mobile devices in 2013, indicating high potential to divert traffic from fixed to mobile broadband.
MONETISING NEW TECHNOLOGIES: The rapid uptake
of smartphone applications and the countrys social
media savvy population is resulting in a high propensity for data users to take advantage of IP-based messenger apps like WhatsApp and Viber for their communication needs as a means of reducing expenses for
traditional voice calls and texts. Operators, accordingly, are grappling with this new reality and are strategising over how over-the-top (OTT) applications can be
leveraged to create, rather than erode, revenue streams.
We have opted to bundle OTT apps like Spotify as
part of our data promo offers to encourages more use
of the network. The alternative is to try and develop
competing apps ourselves, but we prefer to partner with
best in breed, as their developers have spent years perfecting their product, Fajardo said.
In a race to incentivise their subscribers to become
more accustomed and adept at accessing the internet
on mobile devices, promotional access to popular OTT
applications and social networking sites has resulted
in a case of one-upmanship that some observers have
dubbed the free internet war. At various points in 2014,
Globe Telecom has offered its subscribers free uncapped
Facebook access, while Smart has countered with promotional periods offering 30 MB worth of free daily surfing and unlimited access to select sites like Wikipedia.
In the past, most internet browsing was done at
internet cafes where you paid by time surfed. So we
have to educate consumers that if they do very basic
199
browsing on their phones, it is a manageable expense.

But if they want to stream and download, it will naturally end up costing more, Fajardo said.
A WAY TO PAY: Considering that only 10-15% of the
population has access to formal financial services,
whereas cell phone penetration exceeds 100%, the
telecoms sector has emerged as a viable alternative distribution channel for banking the unbanked. Both network operators are looking to extend offerings to include
mobile banking and electronic payment solutions.
Some 95% of the countrys subscribers are prepaid and
accustomed to loading credit as a way of life and entering pins and codes. So its a natural transition for phone
credit to become a payment method, Royeca said.
Globe Telecom is working with its parent company
Ayala Corporations banking subsidiary, the Bank of the
Philippine Islands (BPI), to attach bank accounts to its
SIM cards and cross-sell microloans and insurance. As
part of a consortium with BPI and Smart, it has been
awarded a contract to handle the new smart card ticketing system for Metro Manilas light rail and bus transit systems. The consortium aspires to create an ecosystem similar to what Hong Kong has achieved with its
highly regarded Octopus Card, where the top-up metrocards can be used to transact at retail outlets and a
host of other merchants.
A significant challenge facing Filipino small and medium-sized enterprises is an inability to afford the hardware and establish the necessary arrangement with a
bank to accept credit card payments a barrier that
mobile money could help overcome. Another segment
standing to benefit from mobile money is the countrys
over 2m overseas foreign workers, who through mobile
money can send remittances electronically by phone
to family members who might not have a bank account.
DUO DOMINANCE: While competition between PLDT
and Globe Telecom is intense, many argue there is still
room for additional market players. Supporters of this
position highlight the fact that the Philippines is Southeast Asias second-largest population, with just under
100m people, and therefore should be able to sufficiently support multiple operators. The Philippines lacks
Telecoms operators see

opportunity in leveraging
mobile networks to provide
financial services to the
large share of the
population that remains
outside of the formal
financial sector.
Avg. connection speed for the Asia-Pacic region, 2014 Q2

Global rank
Country/region
2014 Q2 avg. speed (Mbps) Q-o-q change (%)
Y-o-y change (%)
South Korea
24.6
84
Hong Kong
15.7
18
45
Japan
14.9
1.7
23
21
Singapore
10.4
24
59
26
Taiwan
9.5
6.7
73
41
Australia
7.1
18
46
43
New Zealand
6.8
21
47
47
Thailand
6.3
22
42
69
Malaysia
4.3
21
37
73
China
3.7
18
32
90
Vietnam
2.9
42
73
101
Indonesia
2.5
5.1
44
103
Philippines
2.5
19
58
115
India
15
46
SOURCE: Akami
200
TELECOMS OVERVIEW
Local smartphone brands hold significant market share, with market surveys showing high demand
The Philippines two

dominant operators made
significant investments
over the course of 2014 to
expand capacity and
ensure that their networks
use the latest technologies.
clear-cut laws prohibiting anti-competitive behaviours,

and the sector regulator, by its own admission, lacks
the legislative powers to intervene on certain matters
without parliament passing it into law. In addition to
an inability to rule on voice interconnection rates, other regulatory measures in place in other markets to bolster competition that have been debated but so far have
not been instituted in the Philippines. These include
measures for tower sharing, mobile number portability and internet peering (see IT analysis).
POTENTIAL CHALLENGERS: The NTC has not been
averse to issuing new licences or permitting acquisitions by new entrants, and although the sector has
shaped into a duopoly, things could structurally be set
to change. Brewing giant San Miguel Corporation (SMC)
following the extension of a 3G licence and LTE-compatible spectrum to its subsidiary, BellTel, in 2012
announced that it would launch its mobile brand in 2014.
However, so far the conglomerate has yet to commence
with commercial operations. Some are asking us to
impose a use it or lose it principle on [SMCs] licence
Cabarios told OBG. However, as there are already two
very entrenched players, we have to allow SMC proper time to assess the market conditions before committing huge sums, and it would not be right to force
their hand into moving any faster than they see fit.
SMC, with aggressive management, a recognised
brand name and established distribution channels could
present itself as a formidable challenger. However,
rolling out a national network is a costly and challenging affair. Analysts estimate that SMC would need to
invest around $2bn a year on infrastructure to catch
up with the incumbents, and would likely face struggles in securing viable base station sites and accessing the required environmental approvals from government agencies, as well as right of way permission
from local communities. With market at saturation, the
only way for a new entrant to gain customers is to steal
market share. Considering all the risks and cost involved,
it is an unenviable proposition, Felbaum explained.
Joining SMC as a potential market disruptor is media

conglomerate ABS-CBN Corporation, which in May
2013 signed a network-sharing agreement with Globe
Telecom to create a new cellular telephony brand, ABSCBN Mobile. The firm has announced plans to launch
a mobile SIM that will extend a number of services to
subscribers in addition to traditional media content. The
SIM will provide voice, SMS and various other online
services. Aside from the obvious advantage of avoiding spending on building its own network, the agreement gives ABS-CBN the capability to not only offer traditional telecom services, but also, more importantly,
allows them to further leverage their library of proprietary and exclusive content to be re-purposed for viewing on a mobile phone screen. By being able to extend
their reach to a different screen, this also gives their
advertising clients more options, Fajardo told OBG.
NETWORK UPGRADES: As the debate over the degree
to which the market stands to benefit from a major
shake-up rolls on, both PLDT and Globe Telecom are
undergoing substantive network modernisation programmes to enhance their offering. Its not always
about the number of competing players, but the level
of competition between the players, Royeca said. Their
ARPUs are relatively small compared to their regional
peers, so it is hard to accuse them of profiteering. Nor
can one accuse either player of not investing in infrastructure. PLDT has certainly matured from exhibiting
monopolistic to market developmental traits.
PLDT, for its part, was expected to have committed
P32bn ($720m) over the course of 2014 towards ensuring its 3G network reached 100% coverage by year-end,
and its LTE network was being extended to cover all
major cities and reach around 50% of the population.
Its national fibre network footprint, meanwhile, was
being expanded from 78,000 km to 90,000 km.
Globe Telecom, in late 2011, launched a $790m programme to modernise its services, including the roll out
of 4G LTE. The modernisation, which involved the
upgrading of 100% of its cell sites, was completed in
2013. In 2014 capital investment in excess of $200m
was earmarked to further expand the data network and
build additional capacity, which is becoming more
important given high-end customers growing mobile
data needs. According to Fajardo, total capital expenditure for 2014 was to reach $650m, and expected
allocation for 2015 is between $700m and $750m.
OUTLOOK: Although ARPU growth has tapered as voice
and data revenues decline, the two operators are looking to combat this trend by selling more data, for which
demand is set to increase as smartphones become
more accessible and customer sophistication and
requirements rise. Overall, the Philippines young population and expanding economy makes it an attractive
market for telecoms firms to play. Despite the two
incumbent operators enjoying an entrenched market
position that makes them difficult to challenge, the
propensity for Filipinos to consume online content and
engage in social media presents opportunities for a
range of technology firms involved in delivering media
content, gaming, e-commerce and digital advertising.
202
IT OVERVIEW
Call centres have emerged as an important contributor to GDP
Extending connectivity
Building infrastructure with an eye for future growth
Encouraging demographics
and a well established BPO
industry suggest there are
strong opportunities for
growth and ways to expand
upon current operations in
the IT sector.
As an archipelago, the
Philippines faces a number
of geographical hurdles to
providing strong and fast
broadband connectivity,
which relies upon
submarine cables.
With a large, young and social media savvy population approaching 100m, a fast growing economy that
is forecast to become the worlds 16th largest by
2050, and a relatively affordable labour pool with
strong English proficiency, the Philippines boasts many
exploitable assets that could establish the country as
a regional IT powerhouse. One of the biggest opportunities is in the business process outsourcing (BPO)
space for which the country has gained global prominence and learning how to better leverage this
attribute to transition from lower-value call centre and
transaction offshoring to more IT-centric components
of the value chain. For the sake of diversification and
local capacity building, a more robust domestic market where both the government and private sector
invest in and exploit IT further is also needed.
A significant inhibitor is that Filipino consumers
and corporates are currently deemed to be paying
more for their telephony needs than elsewhere in the
region, while internet speeds are considerably slower. However, price and quality is improving as undersea cables continue to land and the providers invest
in network modernisation. Those in more remote
parts, meanwhile, stand to benefit from government
and NGO efforts aimed at exploiting unused TV white
space spectrum and other technologies to provide
connections in harder to access places. With ASEAN
integration expected in 2015, the poaching of top
Philippine talent will increase, as will the need for the
countrys IT ecosystem to match its regional peers to
ensure that its firms remain competitive.
CURRENT RANKINGS: In the International Telecommunication Unions (ITU) ICT Development Index for
2013, the Philippines placed 103rd globally. This was
a one-spot drop from the previous years survey in
which it placed 102nd. Despite the drop, the countrys score improved slightly from 3.91 to 4.02.
For comparative purposes, Denmark was the top rated country at 8.86, while the Central African Republic bottomed the table with a score of 0.96. Out of the
29 Asian Pacific countries evaluated, the Philippines

was at 17th, between Vietnam and Indonesia.
SLOW BROADBAND: In the State of the Internet
report released by cloud computing provider Akamai
in the second quarter of 2014, the Philippines, was
ranked 103rd globally for internet speed, with an average speed of 2.5 Mbps, and 13th on the table of Asia
Pacific countries. While the average recorded speed
for the period showed an improvement of 59% yearon-year, the proportional gain matched the regional
averages improvement, resulting in the country
remaining second from last amongst Asia Pacific countries, trailing only Indonesia and tied with India.
Similar to Indonesia, the Philippines is at a major
geographic disadvantage when it comes to broadband provision. As compared to smaller, single land
mass countries like Hong Kong and Singapore, its citizens reside throughout a long archipelago comprising over 1700 islands. Achieving national broadband
delivery requires connecting islands via costly submarine cables, which results in higher average prices to
offset the costlier investment outlays. If internet
service was only offered in Metro Manila, price and
quality would be comparable to elsewhere, Edgardo
Cabarios, director of the Regulation Branch at the government sector regulator, the National Telecommunication Commission (NTC), told OBG.
PEER PRESSURE: Geography, however, is not the
sole culprit behind the countrys relatively slow speeds.
The Philippines two largest telecoms firms, the Philippine Long Distance Telephone Company (PLDT) and
Globe Telecom, do not practice IP peering. Peering is
a concept referring to two networks exchanging traffic with each other freely by providing access to their
caches. Peering typically results in faster connections
and better quality overall for end-users, as local traffic does not have to be diverted to an exchange point
outside of the country. Most service providers believe
that this is a regulatory and competitive issue, Cyril
Rocke, CEO of cloud provider DataOne Asia, told OBG.
IT OVERVIEW
and long-term evolution (LTE) technology is that it is

a far more cost effective solution, and requires less
base stations and towers. In addition, ultra high-frequency signals can more easily penetrate through
dense foliage and difficult terrains, making it more
amenable to non-urban landscapes. As long as empty white space spectrum is going unused and can help
decongest other networks, there is a strong commercial impetus to exploit it, Mapa said. Rural customers
tend to have lower broadband requirements and do
not want to pay high rates for 3G and 4G that they
wont properly benefit from.
For the time being, the trial, which was initially set
up for disaster relief efforts, is focusing on public over
commercial broadband delivery. Free public access
points for citizens have been set up in underserved
communities, and capacity is being provided to local
government units health and education departments.
Once the trial is concluded and digital migration frees
up even more white space, we will consider going
commercial with the technology, Ibrahim said.
DIGITAL DIVIDEND: The NTC has stated that the
switch to digital terrestrial television will occur over
the next three to five years and implemented based
on Japans integrated service digital broadcastingterrestrial standards. Once the migration is completed, because digital television uses up spectrum far
more efficiently than analogue transmissions, the
technology switch should free up excess digital dividend spectrum that could then be re-allocated to
telecoms operators. The roadmap and rules for digital migration should be released by the end of 2014.
Migration is being phased and will start in populated
centres. The speed of completion all depends on the
speed in which the price of set-top boxes can be lowered. There are an estimated 20m households with
televisions, and as the government we do not have
the funds to subsidise digital receiver boxes for all of
them, Cabarios told OBG.
AVAILABLE SPECTRUM: According to Ibrahim, the
current plan is for the newly available digital dividend
spectrum to be used by the government for e-health,
e-government and disaster risk mitigation. There are,
One innovative approach to

bringing internet to more
remote parts of the
country aims to leverage
unused TV white space to
improve connectivity in
non-urban areas.
Individuals using the internet, 2000-13 (%)

40
32
24
16
SOURCE: ITU
Since Philippine law continues to regard the internet as a value-added service and not a necessity,
as was legislated with text messaging, the NTC does
not currently have the authority to intervene and
make peering mandatory. The decision to do so, therefore, is left up to the service providers commercial
discretion. We hope to be able to make a distinct ruling on peering in the near future, as addressing the
issue of slow internet speeds and high bandwidth
prices is now our top priority, Cabarios said. Traffic
is unnecessarily leaving and returning to the country,
which leads to excess bandwidth being used.
Compulsory peering is a cause being championed
by influential politician Senator Paolo Benigno Bam
Aquino IV, who has been particularly vocal in his disapproval of slow and costly internet and the detrimental impact this is having on the ease of doing business in the country. Over the course of senate hearings
in May 2014, Aquino stated that the average Filipino
consumer spends about P1000 ($22) a month on
internet service that receives speeds of up to only 2
Mbps. Whereas for the same cost outlay, consumers
in Thailand and Singapore receive 12 Mbps and 15
Mbps service, respectively.
CREATIVE SOLUTIONS: According to Cabarios, while
IP peering would certainly assist matters, there is no
one silver bullet when it comes to resolving the countrys internet woes. Peering would only address about
20% of the problem. Estimates are that as a country
we need to invest around P800bn ($18bn) on broadband infrastructure, and the private sector is only
investing P60bn-70bn ($1.4-1.6bn) a year, Cabarios
said. Unable to throw vast public expenditure at the
problem, interim solutions that the NTC is exploring
to free up bandwidth include encouraging particularly popular content to locate in the Philippines as a
means of reducing international traffic, as well as
moving government agencies onto a single network
to free up bandwidth for use by consumers.
WHITE SPACE: In lieu of the challenges and costs
associated with delivering last mile connectivity to
remote areas, Microsoft, in partnership with the
Department of Science and Technologys Information and Communication Technology Office (ICTO),
has been engaged in a trial to assess the viability and
commercial potential of unused TV white space.
Microsoft has been undergoing similar commercial trials in a number of African and Asian markets, and
according to Dondi Mapa, National Technology Officer at Microsoft Philippines, once the Philippines trial expands to other regions of the country beyond the
earthquake stricken island of Bohol, it will lay claim
to the largest deployment of white space of any country in the world. We will be sharing our results with
other developing countries looking to emulate our
approach, Monchito Ibrahim, deputy executive director at the ICTO, told OBG. We are pioneers for the
region and a lot is riding on the programmes success.
Although using TV white space makes some sacrifices in terms of speed, the pros associated with the
technology over deploying point-to-point fibre or 3G
203
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
204
IT OVERVIEW
There is an increasing focus on graduating more students with advanced IT skills to support sector growth
Construction of more
undersea cables to provide
broadband connectivity has
helped the country boost
internet speeds in recent
years, as well as reduce the
vulnerability of the
network.
With SMEs making up over

99% of all registered
businesses in the
Philippines, reaching out
and catering to the IT
needs of such
establishments provides a
significant opportunity.
however, additional sources that could become available to private telecoms firms.
Following PLDTs purchase of Digitel in 2011 and
Globe Telecoms takeover of Bayan Telecommunications in 2013, contestations have risen over what to
do with the acquired firms vacated spectrum. In PLDTs
case, the take-over approval was conditional on Digitels spectrum being re-auctioned by the NTC to outside parties. However, this has been delayed due to
an inability on the part of the NTC and PLDT to reach
an agreement over financial compensation. While
Globe Telecoms acquisition of Bayan did not include
a similar provision, the firm has so far not been able
to take ownership of Bayans spectrum measuring
around 50MHz following a restraining order filed
by PLDT to the NTC. With 2015 shaping up as an election year, it is unlikely both legal matters will draw to
a conclusion any time soon, and there is no clarity on
the bidding rules to be applied if and when any of the
spectrum is eventually put up for public auction.
UNDER THE SEA: When considering that demand
for ultra-high speed bandwidth is largely limited to
major urban centres where capacity rollout of LTE is
already taking place, bottlenecks in issuing further
spectrum are not considered a major impediment.
The Philippines internet speeds, while still lagging
others in the region, has been showing a steady path
of improvement in recent years, assisted by a slew of
undersea cable landings. In 2006 an undersea earthquake offshore of Taiwan severely disrupted internet
services for many countries in the region, demonstrating the vulnerability from an over-dependence
on only a few links. We now have eight undersea
cables serving the country, providing sufficient redundancy and alternate back up routes if needed, Donald Felbaum, managing director at ICT consulting firm
Optel, told OBG. Adding to the mix, PLDT is in the
midst of constructing a new 25,000 km line connecting Asia, the Middle East, East Africa and Europe, while
Globe Telecom has joined an international consortium
that is constructing a $250m, 15,000-km system connecting South-east Asia directly with the US.
CLIENT MIX: Possessing robust and diverse cable
links is essential to the countrys ambitions of retaining its position as a top global offshoring destination.
BPO firms are major enterprise clients and have a lot
of connectivity requirements. Other big spenders are
financial service providers and retail chains, Jomari
Fajardo, investor relations director at Globe Telecom,
told OBG. In 2013 the BPO sector generated $9bn in
exports and made up 5% of GDP, according to the Information Technology and Business Process Association
of the Philippines (IBPAP). Gillian Joyce Virata, former
executive director at IBPAP, points out that a unique
trait of the Philippines BPO industry is that office
space is concentrated in compact commercial districts with firms co-locating in high-rise towers. This
helps ensure that companies are well served by network connectivity. The private telecoms firms tend to
focus their enterprise efforts on serving BPOs as they
demand good infrastructure and are willing to pay for
it. The government, under an initiative titled Next
Wave Cities, is looking to create more ICT hubs outside of Metro Manila. While IT-BPO firms are being
enticed by incentives, lower operating costs and available talent, insufficient access to the required telecoms infrastructure would likely prove a deal breaker for any firm considering relocation.
SME ADOPTION: As is the case in many developing
economies, there is a large chasm between the degree
to which blue chip corporates and small and medium-sized enterprises (SME) invest in and exploit ICT
within their operations. IT spending and the application of IT to improve productivity by Filipino companies is still lagging behind counterparts in Malaysia
and Indonesia, but rapidly catching up Rocke said.
According the Department of Trade and Industry (DTI),
SMEs account for as much as 99.7% of all registered
business establishments, pointing to a large untapped
opportunity should adoption rates increase. With
the ASEAN Economic Community (AEC) coming on
stream, Filipino SMEs will be forced to compete with
their regional counterparts and this will place pressure on them to become more efficient and cost
effective Mapa said. There is a lot of competition
for SME accounts, and SMEs can increasingly take
advantage of attractive packages.
INTO THE CLOUD: The advent of cloud-based technology allows SMEs to pay for server use on-demand,
rather than as a fixed expense. According to the Cloud
Readiness Index from the Asia Cloud Computing Association (ACCA), which measures 14 countries in the
region on their preparedness for cloud computing, the
Philippines improved from being bottom of the ranking in 2011 to 10th place in 2014. Three years ago
there was a reluctance to move into the cloud over
security concerns. Now, more companies realise that
it is safe and reliable, as firms like Google and Amazon offer it. Due to data sovereignty issues, local cloud
providers are picking up new business from organisations like law and accounting firms, Rocke explained.
IT OVERVIEW
According to ACCA data, since 2011 the number of

Filipino companies migrating to the cloud has more
than doubled, while ICT spending for 2014 is expected to come in 11% higher than in 2013. In addition
to efficiency gains, an added motivation for Filipino
firms to move their data hosting off premise is the
cost and instability of power supply in the Philippines,
with brownouts a fairly common occurrence during
peak electricity demand periods (see Energy chapter).
GOVERNMENT SPEND: For a number of IT software
and solutions providers, selling to the government
has proven a complex and cumbersome proposition
in the past. Government procurement laws have traditionally been designed for spending on hard infrastructure. There has been a lack expertise in drawing
up requests for proposals for IT systems, Virata said.
Part of the reluctance on the part of IT providers
to take on government work has been a perception
of inconsistent and disjointed bidding and selection
requirements between agencies and departments. In
response, in January 2013 the ICTO, in collaboration
with the Department of Budget and Management
(DBM), launched the Medium-Term Information and
Communications Technology Harmonisation Initiative
(MITHI). Under MITHI, any government agency looking to allocate budget towards IT must receive prior
ICTO approval. In addition to harmonising standards,
an added benefit of centralised procurement is the
ability to benefit from bulk purchases, says Ibrahim.
E-GOV: In the UNs E-Government Development Index,
the Philippines was ranked 95th out of the 193 countries surveyed. With a weighted score of 0.4768, the
country fared well when measuring human capital
(0.7051), was rated about average on online service
(0.4803), and evaluated poorly on telecoms infrastructure (0.2451). That said, the dedicated e-government (e-gov) strategy aimed at enhanced government transparency and the ICTOs Philippines Digital
Strategy 2011-16 aim to boost the efficient delivery
of online social services as a key strategic thrust. Other priority areas include: e-business, which involves
applying ICT to improve the competitiveness of strategic industries, creating a start-up ecosystem for technology companies and promoting e-commerce; esociety, which strives for digital inclusiveness and
looks to empower citizens and communities to more
fully benefit from ICT; and digital security.
As part of the e-gov initiative, the gov.ph domain
is set to become the hosting portal for all government
agency websites. Moving forward, all government
agencies will adopt the .gov address for email protocols, and all agency data and project management systems will be moved and consolidated into a single
data centre and information system. As our online
services and data handling requirements increase,
our preference is to outsource where possible. There
will be many opportunities for the private sector to
bid on work, Ibrahim said.
IT TALENT: As the economy grows, and with it so too
does the demand for IT services and systems, the
education system will need to increasingly produce
205
Cloud computing has the potential to significantly reduce IT costs for small and medium-sized businesses
qualified and industry-ready graduate talent. As part

of recent reforms to the education system, an extra
two years of secondary education has been added.
The extra years of schooling will definitely help
improve things. All IT companies are asking from
schools is to produce good critical and systematic
thinkers, and from there the companies can train
them up on coding language and computer systems.
It is hard for any education system to keep pace with
industry IT requirements, Virata said.
A perennial challenge facing the Philippines labour
pool is that top-tier talent is lured to places like the
Middle East and Singapore where they can fetch higher salaries. Once the AEC comes on stream in 2015,
this problem could be exacerbated further as restrictions on labour movement between member countries is liberalised. The AEC will worsen the brain drain
as there are already many Filipino IT professionals
working in Malaysia and Singapore. The only way to
lessen the impact of the brain drain is to graduate more
talent to begin with, Ibrahim told OBG.
OUTLOOK: If harnessed effectively, the Philippines
possesses a number of ingredients that position it to
emerge as a globally competitive tech hub. While large
corporates and BPO companies are still the mainstay
when it comes to ICT spenders, efforts are under way
to integrate and transform government agencies to
more effectively deploy IT in delivering public services. The competitive pressures from ASEAN integration
and the greater affordability and customisability
offered by the cloud is providing the impetus to SMEs
to adopt ICT platform and solutions. The Philippines
telecoms infrastructure, especially broadband provision, remains a significant impediment to the countrys ambitions of emerging as a global destination
for more value-added BPO services. Although improvements in internet cost and speed are seen in some
main business centres, industry and the government
must continue to collaborate on more creative and
cost-effective solutions to deliver broadband access.
To streamline the process

of providing IT services and
solutions to government
agencies, all state bodies
looking to allocate funding
to IT must receive approval
from the ICTO.
206
IT ANALYSIS
Favourable demographics are helping to boost technology creation
Assistance to start-ups
Public and private efforts to support local technological innovation
Despite lower overall
connectivity rates, internet
users in the Philippines are
highly active, with the
country ranked as having
the 10th-highest number
of Twitter followers in the
world.
Major telecoms firms that

are part of larger
conglomerates are
supporting local startups
via incubators that provide
access to a wider network
of businesses.
The Philippines tech start-up scene is on the cusp of

taking a major leap forward, as the support infrastructure and ecosystem to finance and bring ideas to market takes shape. To date, the most successful ideas to
hit the market have been adaptations of Western-conceived innovations, such as local versions of taxicab
ordering services. But slowly and surely, creative solutions to uniquely Filipino and developing market challenges are being germinated.
The next phase of evolution, which is being bolstered
by the establishment of several incubation centres and
accelerators, is for the Philippines to mature into a
place where innovative ideas are not only developed,
but also successfully exported across the globe. If you
want an app or technology to go global, you also have
to spend money on marketing it globally, Cyril Rocke,
CEO of cloud provider DataOne Asia, told OBG.
ELEMENTS IN PLACE: Despite only 37% of Filipinos having access to the internet, more than 90% of all active
internet users (over 30m) are on Facebook and the
country has the 10th-largest number of Twitter followers of anywhere in the world (9.5m), demonstrating a
significant domestic market for social media and mobile
applications. With an average age of 26, the country
also possesses a favourable demographic dividend
when it comes to technology creation, as much of the
globes emerging and disrupting technology firms tend
to be started by younger founders.
The Philippines also has a large and active diaspora
community, with over 3m Filipinos in the US alone. As
the countrys economy expands and exciting business
prospects emerge, many expatriates, a number of whom
have achieved success in Silicon Valley and other tech
hubs, are either returning home or creating VC funds
to lend their support and take advantage of their country of origins creative potential.
LENDING SUPPORT: One such example is Paul Monozca, a Filipino national who made his fortune in Singapore in the 1990s by developing a bill payment system
used by automated teller machines. In March 2014
Monozca, through his self-named foundation, launched

what is expected to become Asias largest incubation
facility for supporting tech-related small and mediumsized enterprises. The facility is expected to house over
200 firms, offering them support services such as
branding, marketing, packaging and distribution, in
addition to funding and office space,
Another foreign-linked institution joining the fray is
the Founder Institute, a Silicon Valley-based entrepreneur training and startup launch program that opened
a Manila chapter in 2014.
INCUBATING SUCCESS: The local incubator space is
dominated by the countrys two largest telecoms firms,
Globe Telecom and the Philippine Long Distance Telecom Company (PLDT). Kickstart Ventures, a wholly
owned subsidiary of Globe Telecom, has to date invested in 17 startups. While PLDT subsidiary Smart Communications is behind the IdeaSpace incubator that has
so far committed $12,000 to each of the first batch of
10 civic-minded ventures being incubated. Because
both telecoms firms are aligned to diversified conglomerates, this provides the start-ups with instant market
access as they can help breed ideas that can be used
by one of their affiliated banks, hospitals or utilities,
George Royeca, business development associate at
technology conglomerate IPVG Corporation told OBG.
The government is also doing its part, with the Department of Science and Technology and the Philippine
Economic Zone Authority joining forces to provide legal,
marketing and technological assistance to startups
that demonstrate potential in the field of open technologies. The University of the Philippines, the largest
public university in the country, has an in-house incubation programme with 12 startups currently under its
portfolio. In the future, we aim to set up a dedicated
advisory council that will harmonise all private and public incubation firms to ensure that efforts are synched,
Monchito Ibrahim, deputy executive director at the
Department of Science and Technologys Information and Communication Technology Office, told OBG.
IT INTERVIEW
207
Mariels Almeda Winhoffer, Vice-President for Global Business

Partners Asia-Pacific, IBM
Analytics kingdom
OBG talks to Mariels Almeda Winhoffer, Vice-President for Global
Business Partners Asia-Pacific, IBM
How does ANALITIKA consortium plan to turn the
Philippines into a regional analytics centre?
WINHOFFER: The vision started as an IBM requirement, as we had identified analytics as a key growth
area to invest in. At that time the global analytics market was worth $176bn. Today, including services, software and hardware components, it is estimated at
$232bn, with the services component growing at 15%.
Business process outsourcing (BPO) is a $300bn market, but it is growing at only 5%. To lead and drive analytics, we needed resources and skills. Although the
Philippines was primarily a destination for BPO, application management or IT services, it also exhibited the
right context for analytics in the form of graduates
being groomed to move into the growing IT industry,
the prevalence of BPO, the existing services base, and
the understanding of processes and data.
In the shift to cognitive computing, one entity cannot do it alone. It needs a collaborative approach, an
ecosystem to enable the country to shift to this new
market that will deliver higher value services. ANALITIKA consortium emerged as a multi-sectoral alliance
aimed at transforming the Philippines into a global centre for analytics by defining future jobs and developing new skills. The aim is to execute on the roadmap
we are building and institutionalise it as an industry.
Can the responsibility for human capital development be addressed by cooperation with academia?
WINHOFFER: Everyone anticipates big data and analytics will be the next big thing, and is trying to understand what the new roles will be, as businesses will
need to compete. ANALITIKA consortium comprises
leaders of each industry working on three streams. The
first is job role creation, as so far the roles are largely
undefined though two are emerging in analytics: data
scientists and chief data officers, who will work with
and monetise data, creating new business models.
Second is skills development, having obtained the
support of the Commission on Higher Education and
brought experts to enable universities to provide training on how to use the tool and build competency based
on the as-yet undefined vision of an analytics professional. From July 2013, 12 universities offered business
analytics as part of their curriculum. Grades 11 and 12
also offer the opportunity to integrate analytics into
the curricula. What is continually underlined is that our
graduates are insufficiently qualified. Internships with
companies integrating analytics would also embed
them into these trends, making them more productive.
The third stream has to do with awareness as a way
of positioning the Philippines as an analytics centre. Education and awareness are important given our population of 103m with differing levels of education. We
must reach the least educated so they also benefit.
Can analytics address public- and private-sector

needs in the Philippines? What industries are best
positioned to benefit from its application?
WINHOFFER: Analytics will change how we do things.
Data will be part of how we live our lives, determining
things like what form of transport to take and what retail
outlets to patronise. Analytics is being used in specific projects, with the Department of Science and Technology (DOST) establishing an Intelligence Operations
Centre for Emergency Management and supporting
project NOAH with the vision of creating a centralised
source of analytics to perform simulations and predictive analytics to prepare for any potential disaster. We
are providing technology and analytics space in partnership with the World Wide Fund for Nature to increase
corn yields by 20% through the use of data.
We are working with DOST and the University of the
Philippines in genomics. We also aim to promote how
to use analytics to decipher which government programmes are having an impact on targeted results in
areas like poverty alleviation. In addition, for small enterprises and new entrepreneurs, analytics can facilitate
the leveraging of technology, tools and methodology
to revitalise business models they want to promote.
208
IT INTERVIEW
Maria Rosario Santos-Concio, President & CEO, ABS-CBN

Corporation
A unique experience
OBG talks to Maria Rosario Santos-Concio, President and CEO,
ABS-CBN Corporation
How is the Philippines positioned as a location for
the development of media and entertainment content for the ASEAN region?
SANTOS-CONCIO: We have been successfully exporting content to the region for several years, with shows
having aired in Malaysia, Vietnam, Cambodia, Thailand,
Indonesia and China, and this has garnered various
awards at various festivals in the region. Beyond Asia,
content is being exported to Africa, particularly North
Africa and the Middle East. ASEAN integration creates
significant opportunities for the export of talent or
finished content products, whether through straight
syndication and licensing or co-productions. Given the
dearth of offerings in both the multichannel and
straight-to-TV environments, there are opportunities
across the whole spectrum of content, not only for television, but also for feature films, music, concerts, etc.
There have been talks about the possibility of an
open skies policy in ASEAN, namely the ability of foreign broadcasters to beam directly into a country. However, beyond regulatory and technical hurdles there
are local sensitivities and censorship issues as well that
would be a major consideration for the export of content. There are also issues related to intellectual rights.
Advertising issues could arise as a local advertiser may
not have cleared the rights to use the material in another country or the product may not be applicable there.
How does the adoption of social media and digital

communication affect the industrys development?
SANTOS-CONCIO: The media industry has experienced
a very unique push on the digital front, with several initiatives being developed to capitalise on social media
and the digital space via online and over-the-top consumption; investment in analytics; and social media listening and crowd sourcing of content. The Philippines
is the worlds eighth-largest Facebook user and the
third in Asia, which is very valuable as social media platforms generate traffic and links to company websites,
and give us an opportunity to engage often with our
audience and also act as a source of user generated

content. Consequently, the industry is moving beyond
traditional platforms for delivery of content. The ongoing fragmentation poses both challenges as well as
unique opportunities for media organisations to not only
to create or reverse content, but also to tell stories in
new ways. As a result, there is experimentation with
unique content for mobile streaming sites and the definition of content has expanded from video content into
applications and other new forms. As a media firm covering publishing, music, television, cable, radio, mobile,
online, live events and film, we are experimenting with
new ways of telling stories across platforms, using the
media itself as part of the story while staying true to
our focus on content and storytelling
Given the migration towards digital, the media industry needs to be more familiar with the digital space, leading firms to expand their digital media divisions and
attract digital natives to join the industry in fast-moving content generation areas. The challenge ahead will
be to balance good storytelling with new ways of telling
stories, especially as audiences evolve and as clients
experiment with new media.
What opportunities does new mobile phone technology and ongoing convergence offer for media
content generation and delivery?
SANTOS-CONCIO: Our investment in a mobile operator is designed to allow us to remain in step with our
audience while still being differentiated by our core skills
as a content firm. Convergence will be about content
and what the platform can offer as far as content is
concerned. Technology should not be a distracting factor, but a means to an end, ultimately the final edge will
be based on content and user experience, while technology will remain invisible. Convergence offers the
opportunity to deliver unique content via mobile devices,
whether as media or as apps, and derive income. The
multi-screen experience is what will continue to provide value (and unique experiences) for each platform.
209
Agriculture
The government expands crop insurance programmes
Fruit and vegetables drive the agricultural export market
Attempts to increase yields and modernise production
Fisheries exports recording significant expansion
210
AGRICULTURE OVERVIEW
Agriculture, forestry and fisheries contributed 10.4% of GDP in 2013
On the right track

A number of segments are registering production increases, although
inclement weather remains a challenge
The palay, poultry and
livestock industries were
the key drivers of growth in
2013, and the segments
continued to perform well
in the first half of 2014.
To boost domestic supplies

and reduce a reliance on
imports, the Department of
Agriculture rolled out the
Food Self-Sufficiency
Programme in 2012. This
includes rice, white corn
and banana, as well as root
crops such as cassava and
sweet potato.
Still the countrys largest single employer, the Philippines agriculture sector continues to play a pivotal role
in the economy, even as the government looks to develop other modern industries to lead the way in the
future. Directly employing more than one-quarter of
all workers in non-services industries, more than 11m
Filipinos relied on agriculture for their livelihood in
2013, according to the Philippines Statistics Authority (PSA). Whatever the sectors importance to the population at large, the efficiency of production in the
Philippines still lags that of many regional competitors
due to the diffuse nature of its archipelagic geography; small average plot sizes that limit economies of
scale; a comparative lack of flat, arable farmland; and
susceptibility to unfavourable weather events like
typhoons. Agriculture, forestry and fisheries contributed
10.4% of GDP in 2013, with the sector posting modest
growth of 1.1%, down from 2.8% in 2012.
Despite these limitations, recent public and private
efforts to boost output and efficiency have led to promising improvements across several segments, including a drive for self-sufficiency in the staple crops of rice
and corn, an expansion of the sugar industry (including new downstream applications in biofuels and biomass power generation), and continued investment
and growth in export-oriented cash crops.
SNAPSHOT: The growth of the palay (unhusked rice),
poultry and livestock industries were the primary drivers in 2013. The segments continued to perform well
in the first half of 2014 as the agriculture sector overall grew by another 1.81% and grossed P776.5bn
($17.5bn) at current prices through June, according to
PSA data. In late 2013 typhoons did considerable damage, but they relented in the first six months of 2014,
allowing the crop segment to recover. The segment
expanded by 3.68%, contributing 52.72% of total agricultural production. The largest gainers within the segment were palay and corn, which increased output by
4.78% and 4.7%, respectively. Production increases were
also recorded for sugarcane, pineapple, mango, banana
and tobacco as the crop segments gross production

value rose 18.31% to P443.9bn ($10bn).
Led by higher output from hog and dairy farms the
livestock sector increased by 0.94% to contribute 15.39%
of total agriculture output with gross earnings registering P118.9bn ($2.7bn) through the first six months
of 2014. Poultry production similarly increased by 0.73%,
good for 14.44% of agriculture production with a gross
value of P91.7bn ($2.1bn). By contrast, the fisheries segment contracted by 1.9% over the same time period,
with the industry grossing P122bn ($2.7bn) and
accounting for 17.45% of agriculture output.
SELF-SUFFICIENCY: Part of rice-producing Asia, which
accounts for some 90% of the worlds rice production
and stretches from Pakistan in the west to Japan in the
east, the Philippines ranks among the top-10 rice producers in the world. Nevertheless, it still produces less
than half the annual average of the dominant regional mainland producers of Thailand, Vietnam, Myanmar,
Cambodia and Lao, and it still relies on imports to supplement domestic supplies in order to meet demand.
Rice provides 45% of the caloric intake of Filipinos and
accounts for 20% of the typical households budget,
according to the Department of Agriculture (DoA). As
a result, the country continues to import 4m-5m kg of
rice each year, generating a total import bill that has
reached as high as $2.88bn in 2008.
To boost domestic supplies and reduce reliance on
imports, which led to rice shortages and food inflation
in 2008, the DoA rolled out its Food Self-Sufficiency
Programme (FSSP) in 2012. In addition to the primary
staple of rice, other foods are included in the plan such
as white corn and banana as well as root crops like cassava and sweet potato. To reduce its reliance on potentially volatile imports (only five primary exporters
account for around 80% of global rice exports) while
also bolstering domestic employment and capacity, the
FSSP takes a multipronged approach, targeting all stages
of the value chain. This begins with local procurement
of stocks by boosting output through front-loading
investment in infrastructure such as irrigation, wells,

small farm reservoirs, farm-to-market roads, as well as
increasing research efforts and expanding dissemination of flood- and drought-tolerant crop strains and
improved farming systems, including ways to reduce
input costs through organic farming. Other crossagency efforts will target areas such as production
credit, loan guarantees, crop insurance and encouraging the expansion of farm mechanisation and postharvest facilities. Demand-side challenges are also being
addressed through consumer education programmes
to reduce wastage and diversify local diets to include
more of other staples such as white corn and cassava.
YIELDING RESULTS: Early indications are showing
promising signs of production increases across the staples segment as rice and corn farms continue to register slow but steady growth. Irrigation projects are
boosting output in new areas, allowing farmers to add
an additional harvest cycle every two years, while the
introduction of new hybrid rice strains that are more
resistant to flooding, salinity, drought and pests is also
expected to double yields from around 4 tonnes per
ha to at least 8 tonnes per ha. Although the more efficient (and more expensive) hybrid seeds produce substantially more rice, their use has so far been limited
to only around 10% of total rice crops planted.
Palay production has increased in each of the past
four years, rising from 15.78m tonnes in 2010 to a high
of 18.44m tonnes in 2013, according to PSA data. Corn
output has increased over the same time period from
6.38m tonnes to 7.38m tonnes. This trend continued
into the first half of 2014, when an increase in cultivation areas and yield improvements in Ilocos Region,
Cagayan Valley, Central Luzon and SOCCSKSARGEN
helped to drive up palay production to 8.38m tonnes,
an increase of 4.78% year-on-year. Other contributing
factors to this growth were the availability of irrigation
water during planting time and favourable pricing that
encouraged farmers to intensify growing of palay (particularly in Central Luzon and Ilocos Region).
Corn production also recorded a nearly identical 4.7%
increase in production to 3.48m tonnes in the first half
of 2014. Better prices and early cropping as a recovery measure from the damage caused by Typhoon Pablo
contributed to the substantial increases in production
in Cagayan Valley, Central Luzon, Ilocos Region, Davao
211
Staples continue to register slow but continuous growth
Region and Caraga, along with other factors such as a

greater availability of seeds and financial assistance, as
well as adequate soil moisture, lower incidence of corn
borer pests, increased application of fertiliser and usage
of seeds of high-yielding varieties.
In spite of these gains, the administration of President Benigno Aquino III announced in March 2014 that
rice imports would likely continue until at least 2017.
The explanation given for abandoning the target deadline of 2014 was that typhoons had depleted the
reserves held by the National Food Authority (NFA),
which were tapped for emergency food aid for the victims, leaving buffer stocks generally used to stabilise
prices at below-average levels. Since 2010, national rice
stockpiles have been in decline, with NFA supplies dwindling to just 452,810 tonnes in September 2014 after
registering 1.38m tonnes in 2011. Rice stockpiles have
also been halved from a two-decade high of 3.03m
tonnes in September 2010 to 1.49m tonnes in 2014.
Other entities, including the International Rice
Research Institute (IRRI), located in the province of
Laguna, some 100 km south of Manila, have voiced scepticism that the Philippines or other island nations can
feasibly attain complete self-sufficiency in the long run.
In a study released in 2014, IRRI researchers noted that
Palay production has risen

from 15.78m tonnes in
2010 to 18.44m tonnes in
2013, while corn output
has increased from 6.38m
tonnes to 7.38m tonnes
over the same time period.
212
The government has been expanding its crop insurance schemes
In order to mitigate some

of the weather-related
losses the government has
expanded its heavily
subsidised crop insurance
programmes. As of October
2014, the penetration rate
for crop insurance stood at
8.51% for rice, 2.31% for
corn and less than 1% for
other segments.
the current and historical rice exporting countries of

Thailand, Vietnam, Myanmar and Cambodia all benefit
from large, contiguous landmasses that contain large
floodplains more suitable to rice cultivation and higher land per capita ratios compared to the water-bound
nations of the Indonesia, the Philippines, Japan, Sri Lanka and Malaysia, which have all been importers of rice
for much of the past century. With less arable land and
more varied landscapes better suited to the cultivation
of other crops, such as palm oil, bananas, corn and
coconuts (not to mention fisheries), each of these
countries has imported rice to supplement domestic
production. From 1996 to 2003 the Philippines relied
on imports for 12% of its consumption, followed by Sri
Lanka with 8%, Japan (6%) and Indonesia (5%).
HEDGING ITS BETS: In spite of efforts to make the sector more competitive internationally and provide ample
supplies of staple foods for the population, inclement
weather continues to wreak havoc on the industry,
causing billions of dollars in damage to infrastructure
and equipment and wiping out entire crops. In order
to mitigate some of these losses, the government has
been expanding its heavily subsidised crop insurance
programmes. The Philippines is one of the most vulnerable countries in the world in terms of negative
effects of climate change. Even medium and large commercial farms are now buying insurance from us across
a growing number of sectors, Norman Cajucom, acting senior vice-president of the Philippine Crop Insurance Corporation (PCIC), told OBG. Forestry plantations,
livestock such as pig and poultry farms, palm oil plantations and banana plantations are all asking for special coverage, including typhoon and flood insurance.
Demand is also growing right now because of the
increase of government premium subsidies and provision of subsidies to additional agricultural insurance
lines, such as high-value commercial crops, livestock,
fisheries/aquaculture and non-crop agricultural assets,
rather than just rice or corn crops as originally offered.
After seeing its budget for premium subsidies balloon from P183m ($4.1m) in 2011 to P1.18bn ($26.6m)
in 2013 (excluding the addition of a special allocation
to support subsistence farmers in 2013), the PCIC
received the same amount in 2014. The majority of these
funds have been used to subsidise crop insurance for
some of the countrys poorest farmers, who would otherwise be unable to afford the safety net. The additional funding is being used in many cases to subsidise
100% of the insurance cost, rather than the 55% the
PCIC was able to provide previously to a much smaller
pool of recipients. The programme is a component of
the Agrarian Reform Plan, which targets beneficiaries
growing rice, corn, select cash crops, livestock and fisheries, as well as non-crop assets. As of October 2014,
the penetration rate for crop insurance stood at 8.51%
for rice, 2.31% for corn and less than 1% for other segments, according to the PCIC. Efforts to boost funding
further are being made via a number of different
avenues, including a bill to allocate a one-time P10bn
($225m) payment to the PCIC that is under review in
the Senate, as well as a separate initiative to further
increase the PCICs annual budget.
TYPHOONS: One of the strongest typhoons to hit the
country in 2013 was Typhoon Haiyan, which caused significant property damage. Fortunately, much of the
harvesting had already taken place by that point in the
season, resulting in relatively minimal crop damage
claims, although non-crop asset insurance (NCI) claims,
including for fishing fleets, were significant. Due to
these losses the PCIC board of directors approved a
100% subsidy for those in affected areas, supported
acreage continue to push up production. Cane production has increased in each of the last three cropping seasons from 23.88m tonnes in 2011/12 to 24.86m
tonnes the following season to 25.09m tonnes for
2013/14 (through August 2014), according to data
from the Sugar Regulatory Authority (SRA). The amount
of raw sugar derived from the cane has also increased
in recent years due largely to greater milling efficiency and improved cane quality as a curtailing of government subsidies for sugar farmers has led to a decline
in active sugar cane area from 424,132 ha in 2012/13
to 423,036 the following year. Gains in the first half of
2014 were attributed to the efficient use of fertilisers
in two major sugarcane-producing provinces, Negros
Oriental and Negros Occidental, along with the expansion of harvested area in Capiz, Cebu, Kalinga and Sultan Kudarat. Consumption of Philippine sugar is focused
almost exclusively on the domestic market (apart from
a trade quota deal with the US) as production costs
remain higher than other regional competitors, while
downstream applications for sugar, including its use in
energy, provide ample latent demand.
More important than the overall increase in output,
however, is the increased efficiency displayed over the
past three harvest seasons, during which sugar output
has risen from 5.31 to 5.82 tonnes per ha (reflecting
an increase in yield), while the number of 50-kg bags
of sugar per tonne of cane has also increased from 1.88
to 1.96 (reflecting an increase in mill efficiency and cane
quality). These encouraging trends bode well for the
sectors long-term outlook as the sugar industry looks
to make itself more competitive with its international
rivals. According the SRAs industry road map for 201116, the sector is looking to increase sugarcane area from
400,000 ha to 470,000 ha (423,036 ha as of August
2014); boost farm productivity from 55 tonnes of cane
per ha to 75 (it was 59.31 tonnes per ha as of August
2014); and boost sugar yield from 1.80 50-kg bag per
tonne of cane to 2.1 (it was 1.96 as of August 2014).
The road map outlines several strategies to achieve
these targets, many of which are being implemented.
On the supply side output is being improved by increasing acreage and boosting yields though a number of
The Sugar Regulatory

Authority plans to increase
cultivated acreage and
enhance yields though
techniques such as
increasing mill capacity;
improving research,
development and extension
services; bolstering
infrastructure; and
consolidating small farms
into larger block farms.
Agricultural exports, 2000-13 ($ bn)

10
by a P100m ($2.3m) technical and financial assistance

mandate from the presidents office in October 2014,
roughly half of which (P50m, $1.1m) went to NCI. We
expect a substantial increase in leverage for the fisheries sector because of the Registry System for Basic
Sectors in Agricultures (RSBSA) focus on poor farmers, including fishermen. The Bureau of Fisheries and
Aquatic Resources has identified 150,000 fishermen
qualified for the RSBSA, said Cajucom. We expect
more coverage before the end of 2014 and into next
year. Many of the fisheries allocations include NCI policies that are used to insure capital expenditures and
property, such as fishing vessels and gear.
TRADE: The country remains a net importer of agricultural products. Imports totalled $7.93bn in 2013
compared to $6.4bn in exports, according to PSA statistics. However, positive trends have been emerging
over the past five years that point to a significant narrowing of this gap, in spite of the weather-related damage that has negatively affected production. While
imports decreased from $8.17bn in 2012 and have
averaged $7.48bn since 2009, exports have more than
doubled over the same four-year period, growing from
$3.14bn to $6.4bn. Although the importation of many
commodities is slowly increasing in step with growing
domestic consumption, demand for Philippine-cultivated products continues to outpace imports.
Much of this increased trade is due to the ASEAN Economic Community, which is gradually reducing trade tariffs as member countries move closer to full compliance in 2015. Full ASEAN integration will be good for
our exports, but will also bring more competition on
the domestic market, Larry Lacson, vice-president of
AgriNurture, told OBG. "Given production costs and
competition for rice and corn, it will be difficult for
these industries, but this is also an opportunity for
more established industries like banana and pineapple,
as I think we are ahead here in terms of technology and
acreage within ASEAN.
While the Philippines has a competitive edge in some
commodities due to its favourable climate and harvesting techniques, products that require larger amounts
of flat, arable land, which is scarcer in the Philippines
than in its mainland ASEAN competitors, put the country at a decided disadvantage. The Philippines is not
yet competitive enough in agriculture compared to
Thailand, Vietnam and Indonesia, which produce rice
and all the other crops in a much cheaper way, Takashi
Sumi, CEO of Atlas Fertiliser Corporation, told OBG.
ASEAN integration thus brings concerns about the
ability of the domestic market to subsist in the face of
cheaper agricultural imports. Higher transport and
energy costs, lack of mechanisation, and small farm size
all contribute to higher costs of production for many
commodities, making it difficult for local producers to
not only compete in global markets, but also to defend
their home turf against larger quantities of less-expensive imports, such as sugar, cooking oil or rice.
SUGAR: The sugar industry continues to climb back
towards its all-time peak output achieved in the 2010/11
bumper crop year as incremental increases in yields and
213
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
214
The block farm scheme

seeks to consolidate
contiguous small farms into
larger, aggregated farms of
30-50 ha to take advantage
of economies of scale. As
of 2013, 22 block farms
were operational compared
to just six the previous year,
with a total of 39 planned
in the first two phases.
techniques, including expanding mill capacity closer to

100% (compared to around 60% in 2011); improving
research, development and extension services; bolstering infrastructure such as irrigation and farm-to-mill
roads; mechanising farms; and consolidating small farms
into larger, more efficient block farms. The business
model for agriculture in the Philippines needs to be centred on organising the farmers into associations or
cooperatives to then teach them to enhance their products and build added value through processing, Cynthia Villar, Chair of the Senate Committee on Agriculture and Food, told OBG. This can only effectively occur
if there are economies of scale.
Carried out in cooperation with the DoA and the
Department of Agrarian Reform (DAR), the block farm
scheme seeks to consolidate numerous contiguous
small farms into a larger, aggregated farm of 30-50 ha
in order to take advantage of plantation-scale production (economies of scale) while also providing education of best practices and financial assistance. The project took a step forward in 2013, when 22 block farms
were operational compared to just six the previous
year, with a total of 39 planned in the first two phases
of development, according to the DAR. Early reports
from the SRA indicate favourable results in 2013, with
a number of participating farms experiencing increased
yields, including Lucban (yields up 1.27 tonnes per ha),
Kamahari (5.72 tonnes per ha), Damba (4.42 tonnes per
ha) and Prenza (5 tonnes per ha).
BLOCK FARM SCHEME: By increasing efficiency and
taking advantage of greater economies of scale, it is
hoped that Philippine sugar can be more competitive
on the international market. Imports are still P200P300 ($4.50-6.75) per bag cheaper than domestically
produced sugar, with a further reduction of tariffs to
just 5% expected for 2015. In spite of the initial success of consolidation and the increased output measured in the initial year of implementation, the jury is
still out on the actual effectiveness of the programme.
Only after a period of at least three years will the sample size be large enough to conclude if the block farm
scheme is successful. Demand-side solutions include
diversifying the customer base through usage in more
Production of palay & corn, 2005-13 (m tonnes)

Palay
Corn
20
16
12
2005
2006
2007
2008
2009
2010
2011
2012
2013
downstream applications, such as processed and prepackaged foods and beverages, as well as biomassfuelled power plants and the use of sugarcane and
molasses as feedstock for bioethanol use. A major factor which influenced investor interest was the passage
of the renewable energy policy in 2008 and the policy
issued by the DOE which mandated the optimisation
of locally produced bioethanol starting in 2011, Rosemarie Gumera, the manager of the SRAs Planning and
Policy Department, told OBG.
These compulsory blending requirements have moved
incrementally upwards since their inception, starting
from a minimum 1% biodiesel blend (B1) and 5%
bioethanol (E5) blend by volume in all diesel and petrol
fuels, respectively, being distributed and sold in the
country. Biodiesel blending was originally scheduled to
by upped to 5% (B5) by 2015, although the move is likely to be delayed pending a study on the potential price
impacts of the move, while the 10% ethanol (E10)
requirements have been fully implemented since 2012.
In order to ensure this biofuel supply benefits domestic farmers, the government has also stipulated that
oil distributors are barred from purchasing foreign biofuel unless the domestic market cannot produce an adequate supply to meet the mandate. These directives,
combined with the gradual lowering of trade tariffs as
mandated by ASEAN framework, have also resulted in
the conversion of existing potable ethanol factories from
producing distilled sugar-based spirits to bioethanol as
the price of imported alcohol began undercutting the
local market. With a captive domestic market guaranteeing off-take and the price of sugar declining, companies are making significant progress in terms of
boosting capacity. Four distilleries were operational in
2013 with a total combined capacity of 117m litres per
annum, according to SRA data.
Annual output for the year tallied around 72m litres,
up from 32m litres the previous year, putting capacity
utilisation at 61.5%. Another two distilleries began operating in 2014, boosting national capacity to 193m litres.
Capacity will be further bolstered in 2015 when five
more plants are projected to come on-line.
OUTLOOK: Although agricultures contribution to the
Philippines will likely be greater socially in terms of
employment and feeding the domestic market than economically in terms of its GDP and export contributions,
a number of segments are showing considerable promise for future development. One area that is expected
to remain a concern is the prevalence of inclement
and often devastating weather, which has an obvious
negative impact on the sector as a whole, as well as on
countless individual farmers. Determining the most
effective means of countering the effects of weather
will be a key concern going forward. Initiatives to boost
yields of staples such as rice and corn should reduce
the countrys food import bills in the future, even if the
stated goal of full rice self-sufficiency is not achieved.
The flourishing fisheries and fruits and vegetables segment is likely to continue to be profitable as well, as
international demand still significantly outpaces the
supply of Philippines-cultivated produce and seafood.
AGRICULTURE INTERVIEW
Francis N Pangilinan, Secretary, Office of the Presidential Assistant

for Food Security and Agricultural Modernisation
Shifting focus
OBG talks to Francis N Pangilinan, Secretary, Office of the Presidential
Assistant for Food Security and Agricultural Modernisation
To what extent can agricultural development reverse
rural unemployment and reorient focus toward
farmer-centred development?
PANGILINAN: As the Philippines is a largely agricultural economy, agricultural development plays a significant role in curbing rural unemployment. One-third of
the Philippine population is directly employed by the
agricultural sector; however, if one counts allied services, such as milling, post-harvest or transport, nearly
half of the countrys labour force would be directly or
indirectly employed in the agricultural sector. Similarly, if one counts the contribution of agricultural allied
services, whether manufacturing processes, industrial activities or services, in addition to agricultural production, estimates suggest that agriculture-related
activity accounts for up to 40% of GDP.
Considering that agriculture is the backbone of our
economy, in order to pursue modernisation in a sustainable way, we must invest in agriculture. Unfortunately, agriculture in the Philippines has been neglected
over the past three decades. Though the country led
the region in terms of agricultural development in the
late 1960s, the underlying structural reforms needed
to make its development sustainable were not established. As a result of this, at one point the average
farmer was 57 years old and only had a fourth-grade
education. Both indicators demonstrate the level of neglect and reasons for poverty evident in the country. Even
today, in terms of exports, the Philippines is a net
importer of agricultural products to the tune of $2bn,
whereas Thailand is net exporter at $18bn and Vietnam exports approximately $4bn.
Agricultural development can serve as a vehicle to
reorient focus toward farmer-centred development.
Such a development strategy needs to be incomebased to enable farmers to access markets, packaging,
value-added processes and post-harvest facilities. The
government and the private sector need to shift their
focus from yields to farmers incomes. The strategy of
regional agricultural powerhouse nations like Thailand,
Vietnam, China and Malaysia is to use an income-based

indicator to measure agricultural development.
The Philippines is still in the early stages of benchmarking incomes as a fundamental growth development strategy. While annual farmer incomes are around
P23,000 ($518), coconut farmers often earn as little
as P50 ($1.13) per day, making farming unsustainable
as a viable economic activity. One would need to put
the farmer first in order to achieve better yields and
create a robust agricultural economy.
What strategies can be employed to increase agricultural and economic output for farmers?
PANGILINAN: Per the theory of economies of scale,
cost advantages can be achieved as the size of an
enterprise increases. As such, creating agricultural clusters and building farming communities means not only
increasing outputs, but also reducing the cost of operations. The average size of a Philippine farm is around
1.5 ha, which is not viable for achieving economies of
scale and therefore clustering should be encouraged.
Overall, the best way to make farming more attractive, both for the farmers themselves and for private
sector investors, is to make it viable. This requires a
transformation of the countrys agricultural landscape
from subsistence farming into self-sustaining farming
enterprises. A wide range of agricultural interventions
are needed, such as approaching small farmers and
creating clusters; fostering viable farming enterprises;
providing government support; encouraging stronger
private sector partnerships; and mobilising resources
around farming communities.
On coconut farms, for example, greater use of intercropping can boost income and productivity. Fertilisation is also key, as it can increase the yield of a coconut
tree by 25-50% in the first year and 50-100% in the second. Replanting is another effective intervention, as
around 30% of the countrys trees are old. Lastly, there
needs to be a greater focus on enterprise development by engaging farmers in value-added processes.
215
216
AGRICULTURE INTERVIEW
John P Perrine, Chairman, Unifrutti Group Philippines
Going bananas
OBG talks to John P Perrine, Chairman, Unifrutti Group Philippines
How will the Bangsamoro Basic Law (BBL) help
unlock Mindanaos agribusiness potential?
PERRINE: Political unrest in Mindanao has had a huge
impact on the nations perspective of the BBL, the
Moro Islamic Liberation Front (MILF), the Moro National Liberation Front (MNLF) and the countrys Muslim
minority. Whereas Manila has experienced continuous
economic growth, this has not been felt in rural areas,
particularly the Bangsamoro region. Luzon has many
regions, but when one talks about Mindanao the second-largest island in the country it is usually referred
to as a block. Only those who recognise the different
identities and socioeconomic realities within the regions
can work successfully in these areas.
Over 60% of Bangsamoros inhabitants live below
the poverty line, creating an environment with limited
means and many victims of decades-long neglect an
environment where extremism and insurgency can and
have originated. As administration after administration
has not delivered on promises to address abject poverty in Mindanao and its incidence worsens with population growth, communities have come to accept and
allow extremism, which fuels repercussions not only in
Mindanao, but also in the countrys capital.
Since the establishment of the La Frutera banana
plantation in Maguindanao in 1996, two expansions in
Lanao del Sur have been successfully completed both
completely within Bangsamoro. From the onset 60% of
the workers at La Frutera were former MNLF and MILF
fighters. The realisation was that the region could not
sustain peace without development. However, the question of how to replicate this business model remained.
The primary strategy is to look for an investment
area under the control of a single clan to avoid disputes.
The reality is that Bangsamoro has feudal conditions
that cannot be changed overnight. Second, investors
must find a clan with enlightened leadership, which can
be observed through the types of social services delivered. Lastly, investors should look at areas under MILF
control, as it acts as the only functioning police force
in Bangsamoro. Once an investor enters an undeveloped area, it will cause major positive changes in the
community, as an important catalyst for sustainable economic development and thus, a key to lasting peace.
To what extent can the expansion of banana production encourage sustainable development?
PERRINE: Banana plantations once flourished in Mindanao because it was historically free of typhoons. In
2011 Typhoon Sendong affected Mindanao, and
Typhoon Pablo also devastated the area in 2012. As a
result, the banana industry cluster is working to adjust
to climate change, which has put Mindanao in the
typhoon belt. All the banana plantations operating in
Mindanao have acknowledged that the clock is ticking
and a typhoon could wipe out the area. The change in
agricultural conditions has brought flooding-originated Panama disease, which as yet has no cure and effectively wipes out plantations. Typhoons have facilitated
the spread of Panama disease and reduced the coverage of banana plantations from 80,000 ha to 65,000
ha as of 2014. The only remaining expansion area is
Maguindanao, in the middle of Bangsamoro.
A major competitor for Philippine banana exports is
Ecuador. The Philippines is a competitive source for
Cavendish bananas for the Asia region, but other markets the Philippines serves, such as the UAE, Iran and
Saudi Arabia, can be reached by Ecuador. In Asia the
Philippines has a natural competitive advantage, especially for serving Japan, which needs twice weekly deliveries on small vessels to ensure freshness.
To ensure agriculture expansion in Mindanao, the
cultural context must be appreciated. Women serve as
stabilising influences in the community, creating family businesses that generate high revenues. By partnering with small enterprises and womens businesses,
investors enable the entire community to grow. For
banana plantations, investment is $30,000 per ha, as
high-value plantation crops need greater investment,
and this has a multiplier effects in these communities.
AGRICULTURE ANALYSIS
217
Free-on-board seafood shipments reached $1.16bn in 2013
Seafood scene
Exports of fresh and processed fish products are expanding, with
aquaculture recording strong increases in output
One of the greatest benefits derived from the Philippines widely dispersed archipelagic landmass of more
than 7000 islands spread across 2.2m sq km of the Pacific Ocean is the abundance of sea life teeming beneath
the surface of territorial waters. Given the seafaring
nature, heavy reliance on seafood as a local dietary staple and maritime tradition of many Filipino people, the
commercialisation of the fisheries present off the Philippines 36,289 km of coastline seems all but preordained.
In all, the fisheries sector produced P244.55bn ($5.5bn)
worth of seafood in 2013, up from P232.61bn ($5.2bn)
the previous year and roughly double the output of
P112bn ($2.5bn) a decade ago, according to Philippine
Statistics Authority (PSA) data. Exports of both fresh
and processed products expanded dramatically from
2012 to 2013 on the strength of increased shipments
of seaweed and fresh or preserved fish to the US, Japan
and South Korea. Free-on-board seafood shipments
hit $1.16bn in 2013, up from $810.8m in 2012 and
nearly triple the $427.4m exported in 2003.
While many of the more easily accessible fishing
grounds containing more profitable commercial catches have declined in yield and quality over the past few
decades due to heavy fishing, the country still boasts
numerous productive fisheries. Fishing is broken down
into three modes of production for statistical and
administrative purposes: commercial fisheries, municipal fisheries and aquaculture.
AQUACULTURE: Aquaculture is the most productive of
the three segments and is enjoying strong growth from
production in ponds, pens, cages or on substrates such
as stakes, ropes, lines, nets, shells or other surfaces.
Aquaculture represents a significant potential for the
sector, with fish cage farming expected to grow dramatically in the coming 10 years, especially targeting
high-value fish like milkfish, Phillip L Ong, the president
of Santeh Feeds Corporation, told OBG.
Aquaculture production has increased from under
1m tonnes in 1998 to 2.37m tonnes in 2013, valued at
an all-time high of P93.73bn ($2.1bn) according to
PSA. The most valuable aquaculture species are milkfish, with more than P20bn ($450m) produced from
brackish water fish ponds alone, along with a significant and rapidly growing contribution from marine and
brackish water cages, at P9.7bn ($218.3m), and smaller contributions from freshwater cages and fish pens
and marine and brackish water fish pens. In 2013 fish
farmers yielded more than 400,000 tonnes of milkfish,
which is widely consumed domestically. Other significant contributors include tiger prawns raised in brackish water fish ponds, at P19.72bn ($443.7m) in 2013,
tilapia from freshwater ponds and cages (P10.38bn,
$233.6m) and seaweed (P9.9bn, $222.8m).
COMMERCIAL: Commercial fisheries, which mostly
focus on large pelagic species like tuna, billfish, marlin
and sailfish, were the largest contributor to the sector
in the 1970s, but have since declined in relative value,
with the industry producing P69.92bn ($1.6bn) worth
of fish in 2013, ranking it third behind the municipal
and aquaculture segments. Tuna was the largest and
most profitable segment in the 1980s as the country
became the leading producer of the fish in South-east
Asia, due in large part to the introduction of fish aggregating devices. However, the effectiveness and efficiency of the devices eventually led to declining domestic
tuna schools, prompting local vessels to expand their
operations into international waters. In spite of the
changes in species of tuna targeted, overall catches continue to climb mainly due to increased production of
skipjack tuna, which rose from 83,385 tonnes in 2002
to a peak of 201,262 in 2009 before tailing off to
171,261in 2013. Local production continues to fall,
with frigate tuna and eastern little tuna tailing off from
100,958 and 26,811 tonnes in 2002 to 73,647 and
22,179 tonnes by 2013. Other, less plentiful species,
such as bigeye and yellowfin, have also declined of late.
MUNICIPAL: Municipal fisheries in which the fishing
is carried out in inland and coastal areas with or without the use of a fishing boat totalled 1.26m tonnes
in 2013 and were worth a total of P80.9bn ($1.8bn).
Several of the more easily

accessible fishing grounds
containing more profitable
commercial catches have
declined in yield and quality
over the past few decades.
However, aquaculture
continues to grow strongly.
218
AGRICULTURE ANALYSIS
Most fruit and vegetable exports go to China and the Middle East
Fruitful business
Production volumes and exports of fruit and vegetables continue to rise
Fruit and vegetables have

become the leading
agricultural export,
expanding from $571.74m
in 1994 and $783.42m in
2004 to $1.97bn in 2013.
Easily the most profitable segment of the Philippines

agriculture industry, fruit and vegetable farms continue to drive agricultural exports as well as supply produce for the domestic market. In 2013 the segment
led all agricultural export commodities with 4.42bn kg
of fruit and vegetables shipped worth a combined total
of $1.97bn, according to Philippine Statistics Agency
(PSA) data. This is the continuation of a longer-term
trend that has seen fruit and vegetable exports expand
from $571.74m in 1994 and $783.42m in 2004. The
majority of these shipments are destined for the growing regional markets of China, the Middle East and, to
a lesser extent, Russia to satisfy their demand for fresh
produce (although recent trade restrictions on transactions with Russian companies have limited sales to
this market beginning in 2014).
SMALL SCALE: While price inflation and moderate
increases in yields have had some effect on this substantial jump in value, the volume of production has
also risen over the past two decades, even though the
majority of fruit and vegetable farmers operate on a
limited scale. Although the size of farms varies depending on the crop and the location, in general most produce farming is done on small-scale subsistence farms
of 2 ha or less. That being said, in some areas, particularly in Mindanao, companies have been able to consolidate larger tracts of land through leasing of large
contiguous areas up to 500 ha from established local
cooperatives and form joint ventures that employ leasers
to work the land. With most small landowners thus limited in the amount of money they can invest in new
technology and crop strains, any boost in production
will have to come primarily from a greater number of
trees, rather than increased yields from existing acreage.
The majority of fresh fruits and vegetables grown in
the Philippines are consumed domestically, although
a few cash crops are exported in large volumes. The
most profitable of these cash crops are Cavendish
bananas, 95% of which are exported, while varieties such
as Lucatan and Saba are generally consumed locally.
Philippine farms produced a total of 8.65m tonnes

of bananas valued at P117.15bn ($2.6bn) in 2013, down
from a peak of 9.23m tonnes worth P108.13bn ($2.4bn)
the previous year, according to PSA data. Concerted
efforts over the past two decades to expand banana
production have led to the commodity becoming the
countrys most valuable crop as well as its most profitable agricultural export. Banana tree cultivation has
more than doubled since 1990, increasing from 137.1m
trees in 1990 to more than 280m trees in 2013. The
majority of these are of the Cavendish variety, which
accounts for more than 115.83m trees in 2013, along
with lesser numbers of Saba (79.24m) and Lucatan
(32.23m). As a result, Cavendish banana output has
soared from 1.81m tonnes in 2002 to 4.23m tonnes in
2013. In spite of the growth in production, demand for
Cavendish bananas among existing importers is substantially greater than what local farms can supply.
IN HIGH DEMAND: We can only serve around 30% of
the companys banana requirement for the export market each year, so even if we were able to expand production by 10% every year, this would still be taken up
by the export market, Larry Lacson, the vice-president of AgriNurture, told OBG. At the same time, banana
prices have been at a high level from January to July
2014, so this is a lost opportunity for us. With high
demand, even small banana farmers are seeing substantial increases in profits. As a result, the commodity has become among the most decentralised in the
county, with small-scale farmers negotiating increasingly favourable prices with mid-range traders dealing
directly with farmers in what is a sellers market.
Pineapples are the second major export fruit with
around 70% of output shipped out each year, while
25% of annual mango production is also exported. The
pineapple market is particularly appealing for small
farmers given the generally higher return on investment
for the fruit as the trees require less maintenance, are
less prone to disease, and more hardy when it comes
dealing with natural disasters and inclement weather.
219
Health
The universal health care system continues to expand
Registering patients more efficiently is a key priority
Price caps on pharmaceuticals raise uptake of generics
Public spending on health boosts private providers
220
HEALTH OVERVIEW
The health system combines public coverage with private delivery
Onwards and upwards

Universal health care programme continues to drive sector growth
Universal health care
coverage is available to
82% of the population in
the Philippines. However,
many patients are still
unaware of their covered
status.
With the government committing unprecedented levels of funding to increasing the coverage of its national public health insurance programme, positive effects
are being felt throughout the domestic health sector. The Philippine experiment of combining public
health care spending with private sector delivery continues to evolve. As health care remains central to the
public interest, there is a heavy onus on improving
access and efficiency in accordance with the goal of
providing universal health care coverage for all Filipinos
by 2016. In addition to the realisation of hard infrastructure projects under public-private partnerships
(PPPs), options for the provision of health services and
business process outsourcing (BPO) more generally
under such a model are gradually coming to the fore.
MULTI-LEVEL: While the progression of the domestic health care sector has failed to reach its potential
in recent years due to poor infrastructure, insufficient human resources and under-investment, the
current government is prioritising the fulfilment of its
public health care promises.
Universal health care coverage now extends to
about 82% of the population, and the governments
aim to ensure universal health care to the entire population is taking shape. Though currently in a period
of adjustment as the private sector digests and adapts
to the demands of its increasingly redefined role, the
positives for the overall sector appear to far outweigh
the negatives. However, with this evolution comes an
increased responsibility of the government to regulate and maintain standards. This extends not just to
quality of care and service delivery but also to the ongoing development of the PPP model, which remains
prone to the inefficient bureaucracy and tardy implementation that can dampen investor appetite.
CURRENT CHALLENGES: In light of steps to increase
universal health care coverage, more is now required
from the state in terms of effective management of
health care distribution. However, this is an area where
the country has been liable to face difficulty, due to
the incumbent complexities of harmonising standards

across a decentralised system. The systems three tiers
include municipal, provincial and regional providers,
while the Department of Health (DoH) has continued
to transfer authority to local government units (LGUs).
These units are responsible for the majority of primary
care provision and management of provincial and district hospitals. According to World Health Organisation (WHO) data, the Philippines has 1.15 physicians
per 1000 people, with the majority in urban areas, leaving LGUs short staffed. Longstanding DoH initiatives
such as the Doctor to Barrios Programme that came
into existence in the 1990s are in need of review, as
doctors remain without sufficient incentive to work
in rural areas for long periods of time. Still, rural expansion efforts have had some success. Dr Edgardo Cortez,
president and CEO of St Lukes Medical Centre, told
OBG, Hospitals in metro Manila have seen a decline
in the number of patients coming from outside the
city, as health care facilities in the provinces are improving and servicing more of the needs of patients.
Another challenge associated with the increasingly broad spectrum universal system is the issue of
raising awareness among the general population in
order to ensure they seek treatment. At present, there
is a discrepancy between the 82% of people covered
by the government scheme and those who are aware
of that fact and have subsequently registered. For
example at Philippines General Hospital in Manila,
only 30-40% of patients at the hospital were registered upon arrival. While the addition of an on-site
registration service has enabled patients to register
on arrival, the service is unlikely to be available outside of urban areas. Accordingly, the government must
work to ensure that the general population is aware
of the coverage being made available to them.
Performance monitoring and record keeping have
also remained underdeveloped, making it hard for all
tiers of government to keep track of incumbent health
care delivery targets. Many hospitals lack basic IT
HEALTH OVERVIEW
The Department of Healths budget was up 57.9% in 2014 to $1.9bn
incremental revenues and a lower smoking rate.

Changes have also been made to the management
of the Priority Development Assistance Fund (PDAF),
widely referred to as the pork barrel, a controversial scheme that has long faced public opposition.
The total PDAF fund stood at P25.2bn ($567m) at
the beginning of 2014 after the House of Representatives agreed to break it up between six departments
and agencies. The DoH was allocated 15% of the total,
equal to P3.78bn ($85m).
For 2015, the DoH budget was raised to P102.18bn
($2.3bn), making it the sixth-largest ministerial budget recipient. The UN Millennium Development Goals
(MDGs) are viewed by many as an essential driver for
improving health fundamentals within the Philippines.
Health care related goals for the 2015 deadline include
eradicating extreme hunger and poverty, reducing
child mortality, improving maternal health and combating HIV/AIDS malaria and other diseases.
PUBLIC INSURANCE: Established under the National Health Insurance Act (NHIA) of 1995, PhilHealth was
originally given the mandate of providing the entire
Life expectancy at birth

was 69 years as of 2012,
and infant mortality was 25
per 1000 births, with about
72% of births attended by
skilled medical staff.
Gov't health spending per capita, 2010-12 ($)

120
96
72
SOURCE: World Bank
infrastructure, which would allow for better management. Hospitals are often forced to rely on an offline
system whereby data from their respective practice
is transferred to a central database via memory stick.
HEALTH INDICATORS: The recently increased spending and the extension of the universal health care
scheme will take time to have effect, so health care
indicators in the Philippines still show a deficit in the
quality and distribution of care across the board.
According to the latest World Bank data from 2012,
life expectancy at birth is 69 years old, compared to
75 in Malaysia and 71 in Indonesia. Infant mortality
at birth is 25 per 1000 live births as of 2012, with 72%
of births being attended by skilled medical staff. Health
care spending per capita was $119 in 2012 compared
to $215 in Thailand and $108 in Indonesia, however
this has undoubtedly gone up since then.
PROGRESS: After a decade-long debate between
government and the Catholic Church, the Reproductive Health Bill was passed in December 2012, gaining Supreme Court approval in 2014. While those in
urban areas have access to contraception and health
care services, those in rural areas do not. The UN Population Fund estimated of the 3.4m pregnancies annually in the Philippines, more than half are unintended and one-third are aborted. To counter this, the
new law requires government health centres to hand
out free condoms and birth control pills, as well as
mandating that sex education be taught in schools.
It also requires that public health workers receive
family planning training and post-abortion medical
care has been also legalised. It is believed that the law
will greatly reduce the levels of child mortality, some
of the highest in the region, while also reducing the
strain on the universal health care system.
As for improving primary care, the Health Facility
Enhancement Programme has continued to make
gains. The Philippines has over 3000 rural health care
units, servicing between two and four barangays (villages) each. Each unit has a doctor, a nurse, a midwife and potentially other additional health care staff.
These units represent the backbone of primary health
care in the Philippines, managed by LGUs and put
under considerable strain by the large populations
located in rural areas. The installation of birthing facilities at these clinics is now being prioritised in accordance with aforementioned MDGs. Though 57.79% had
such facilities in 2010, it is estimated that this level
has now reached over 70%.
The reallocation and boosting of the government
health care budget has been key to the constantly
developing coverage of Philippine Health Insurance
Corporation (PhilHealth). The implementation of initiatives such as the 2012 Sin Tax Law has been a success, helping to increase the Department of Health
budget by 57.9%, from P50bn ($1.1bn) in 2013 to
P83.7bn ($1.9bn) in 2014 under the 2014 General
Appropriations Act. From January to November 2013,
the Bureau of Internal Revenue collected P91.6bn
($2.1bn) from excise taxes on tobacco and alcohol
products, resulting in P41.1bn ($924.8m) worth of
221
48
24
2010
2011
2012
222
Premium rates in the public

health system have
remained steady since
2013: for those earning
$157.50 or less per month,
the premium of $4.73 is
divided between employer
and employee. For those
with a monthly salary range
between $157.50 and
$1125, the employer and
employee contribute 1.5%.
HEALTH OVERVIEW
Philippine population with health insurance by 2010.

However, by that year, only about 54% of the population (i.e., the formal sector) had been enrolled in the
programme, a discrepancy the current administration
has been working hard to remedy ever since.
Though mandatory for all formal sector employees,
including contractors, sub-contractors and Filipinos
working abroad, coverage is currently being extended to cover the entire population including informal
sector works. Amendments to the original NHIA include
the 2010 Expanded Senior Citizens Act, which now
covers all Filipinos over 60, with PhilHealth covering
all costs unless the person is gainfully employed. However, the headline amendment took place in 2013
under the comprehensive amending of the NHIA to
provide mandatory health care for all Filipinos. In
2014, the government focused on extending coverage to the 14.7m poorest families in the Philippines,
according to a list prepared by the Department of
Social Welfare and Development, entitling them to PhilHealth benefits even if they have not paid premiums.
This extended coverage to 82% of the population.
CLAIMS PROCESSING: While record keeping tracking the proportion of the population which has actually registered remains hazy in light of inadequate IT
infrastructure, access for patients has been assured
in urban areas through the use of on-site registration
facilities. The facilities allow patients to register with
PhilHealth via their hospital on the day of treatment,
after which hospitals are reimbursed. The maximum

claim time target was 30 days, a figure PhilHealth was
keeping up with as of December 2014.
As for the premium rates, these have remained
largely unchanged since January 2013. For employees with a monthly salary of P7000 ($157.50) or less,
the premium of P210 ($4.73) is divided between
employer and employee. For employees with a salary
range between P7000 ($157.50) and P50,000 ($1125),
both the employer and employee contribute 1.5%
each. The premium will be P1500 ($33.75) with an
equal contribution of P750 ($16.88) from both employers and employees for all those earning more than
P50,000 ($1125). Therefore, the annual premium for
the employee in the lowest income bracket is P2520
($56.70), up from P1200 ($27) earlier.
In line with improved enforcement of the health care
scheme, PhilHealth instituted a No Balance Billing policy in 2011 under which enrolled members are exempted from paying anything. This scheme applies even
when a members medical bills at a PhilHealth-accredited hospital are higher than the specified PhilHealth
case rates for the medical condition. In 2014, this
scheme was extended to cover kasambahays (household helpers), based on provisions made within the
2013 NHIA. Employees in the private and public sectors were also awarded improved benefits under the
Employees Compensation Programme (ECP) following the signing into law of Executive Order No. 167.
HEALTH OVERVIEW
Under the order, funeral benefits for private and public sector employees were doubled from P10,000
($225) to P20,000 ($450) in addition to a 10% increase
for Employees Compensation (EC) covering those
with permanent partial, permanent total disability
and/or survivorship pension.
PRIVATE HEALTH CARE: During the years of lacklustre investment under previous administrations, private
health care provision in the Philippines grew in order
to supply the demands of a growing population.
According to the latest WHO data from 2012, the
country has approximately 1800 hospitals, of which
60% are private, and which cover a range of services
in the areas of medicine, paediatrics, primary and tertiary clinical laboratory, and radiology. The number of
primary health care centres around the country is
2252 and there are 721 public hospitals under the
management of LGUs. There are 70 DoH hospitals,
which treat patients suffering specific illnesses requiring a range of services. As for actual hospital usage,
in 2013 the percentage of persons treated in a public hospital or clinic was 55%, compared with 44%
handled in a private facility, according to the National Demographic and Health Survey. About 2% of Filipinos are covered by private insurance or membership in health maintenance organisations (HMOs).
The effect of the increased coverage under PhilHealth and consequent demands for increased private sector health care delivery is forecast to have a
positive effect on the sector. The government paid out
P47.2bn ($1.1bn) for claims in 2012 and over P62bn
($1.4bn) in 2013. The primary revenue sources for private hospitals are user fees and health-cost reimbursement from PhilHealth, and the scales are expected to tip in favour of the latter as the country
approaches universal coverage.
Private hospitals in the Philippines are generally
smaller than public hospitals and have sought to invest
in specialist treatment segments such as eye care,
cosmetic surgery, orthopaedics and cancer treatment
to ensure profit making. However, the increased
coverage of PhilHealth will likely result in the construction of larger private hospitals that provide general
and primary care. As for the pharma industry, following the imposition of the Maximum Drug Retail Price
Key health indicators, 2013

Age dependency ratio, old (% of working pop.)
6.3
Diabetes prevalence (% of pop. 20-79)
6.9
Immunisation, DPT (% of children 12-23 months)
94
Immunisation, measles (% of children 12-23 months)
90
Immunisation, polio (% of 1-year-old children)
88
Lifetime risk of maternal death (%)
0.4
Maternal mortality ratio (per 100,000 live births)
120
Mortality rate, infant (per 1000 live births)
24
Mortality rate, under 5 (per 1000)
30
No. of maternal deaths
3000
No. of under 5 deaths
70,987
Population, total (m)
98.39
SOURCE: World Bank
223
Some 55% of patients were treated in public hospitals in 2013, while 44% visited private facilities
(MDRP) in May 2008, which called for a 50% price

reduction on 21 molecules, generic drugs have become
more widely available and better implemented into
the treatment plans of both private and public hospitals. Retail battles between pharmacies such as
Watsons and Rose have begun as they have started
to open dedicated generic drug retail stores as the
variants have become more publicly accepted, despite
the enduring strength of the big brands.
REGULATIONS: The headline regulatory change for
2014, other than the signing into law of the 2010
Expanded Senior Citizens Act, was the launch of the
new Case Type Z benefit package that increases coverage and treatment for catastrophic diseases. Accordingly, PhilHealth will pay for the whole treatment
course for patients who are affected by the following diseases: early stage breast and prostate cancer
with low to intermediate risk (both have a package
rate of P100,000, $2250); childhood acute leukaemia
of standard risk, with a P210,000 ($4725) package;
and low-risk end-stage renal transplants, with a
P600,000 ($13,500) benefit package. A tracking system is under development to monitor and ensure provision of all medical services to PhilHealth members.
MEDICAL TOURISM CHALLENGES: According to the
National Economic and Development Authority, medical tourism in the Philippines is set to lift revenue to
$3bn annually by 2015. It is also estimated that arrivals
of medical tourists will approach 200,000 in 2015, up
from 100,000 in 2008. The growth of the sector is
largely thanks to the high quality of health care services offered by Philippine hospitals, which are keeping up with competitive neighbours like Thailand and
Malaysia while also out-pricing them. Several facilities have achieved accreditation from Joint Commission International (St. Lukes Medical Centre, Medical
City and Chong Hua Hospital), and others have from
Accreditation Canada International (the Philippine
Heart center, Manila Doctors Hospital, and Asian Eye
Hospital). Speciality care in the Philippines includes
As of the latest available

data from 2012, the
country had approximately
1800 hospitals, of which
60% were privately
operated facilities.
Medical tourism is growing,

and the number of visitors
is expected to reach
200,000 in 2015, up from
100,000 in 2008. The
segment could raise sector
revenue by $3bn in 2015.
224
HEALTH OVERVIEW
The Philippines has suffered a brain drain in the medical sector and is incentivising residencies at home
In anticipation of higher
usage of medical services
and facilities resulting from
full implementation of
universal health care
coverage, private firms are
adding to their total bed
capacity.
cosmetic surgery, wellness treatments and dentistry.

The sector has been held back by the national infrastructure deficit, which leaves it unable to fully compete with its neighbours. Connectivity has long been
an obstacle, with many airlines not flying directly to
the Philippines due to safety concerns and the high
price of refuelling costs at national airports. While the
2014 inclusion of Philippines Airlines into category one
in the US and Europe should help, the quality of the
airports is behind that of the nations competitors.
The Philippines is currently opting out of joining the
ASEAN Open Skies programme, as the government
does not feel the country is ready to participate just
yet, and although improvements at Ninoy Aquino
International Airport terminals are making progress,
alongside the development of alternative airports
further away from Manila like Clarks International
Airport it will take time for these project to be complete and better integration between health care and
travel is needed across the country.
ACQUISITIONS: With the government honouring its
commitments to PhilHealth, which is increasingly
becoming a dominant sector driver, investment in
health is prompting a rise in acquisitions as large business groups acquire hospitals. The Metro Pacific Investments Corporation (MPIC) is currently the largest
health care group in the country, with eight hospitals
and a total capacity of 2137 beds. The firm is targeting a bed capacity of 3000 by purchasing new facilities at a pace of one or two hospitals per year. The
group acquired 51% of the 200-bed Central Luzon Doctors Hospital Educational Institution with an investment of P187m ($4.2m) in 2013, and allotted P4bn
($90m) to its health care arm for capital spending in
2014. The group hopes to launch five to 10 mallbased clinics in the next three to five years and is also
targeting the tele-health segment for expansion.
Just behind MPIC is the countrys biggest real estate
developer, Ayala Land (AL), has also begun to build a
portfolio in health care. In 2013 it signed a deal to
acquire Whiteknight Holdings, which owns 33% of

Mercado General Hospital (MGH). At the start of 2014,
AL and MGH started a joint venture named QualiMed,
which aims to implement 1000 new hospital beds
across 10 new hospitals and 10 satellite clinics over
a 10-year period. It is forecast that capital spending
for the project could reach P5bn ($112.5m), as a 100to 150-bed hospital will require approximately P500m
($11.3m) of investment, while satellite clinics require
P20m-30m ($450,000-675,000).
TALENT: Despite a growing economy and increasing
urbanisation, the Philippines continues to lose many
health workers to international opportunities, as doctors, nurses and specialists look abroad for higher
earning potential and better jobs. For example, in the
UK the Philippines is the source of the third-highest
number of National Health Service staff, at 12,744.
The brain-drain has subsequently compromised
domestic ability to fulfil human resource demands in
the sector. In an attempt to discourage students from
going abroad, the University of the Philippines (UP)
implemented a return service agreement (RSA) in
2010. The RSA requires UP medical students to perform three years of medical work in the Philippines
in the areas of research, further study or practice. If
the student does not comply, he or she is held liable
to pay back P1.8m ($40,500), which is the approximate cost of five years tuition at the UP medical campus. With new medical students graduating in 2015,
it will be the first year of testing for the RSA programme. The RSA is an experiment that other educational institutions may well adopt in the future.
As for the ASEAN Economic Community and the
mobility of Filipino health professionals, countries
such as Singapore and Malaysia are anticipating the
possible influx of inexpensive labour as the region
becomes more integrated in 2015. However, on a positive note, the Philippines may also see foreign talent
coming to the country, which would be serve to bolster the human resource deficit.
Dr Joven Cruz, chief of plastic surgery at Asian Hospital and Medical Centre, told OBG, We have started
seeing medical students from neighbouring countries, such as Indonesia, coming to complete residencies in the Philippines, where they can also obtain a
higher level of English and improve their skills.
OUTLOOK: In 2014 observers were assessing the
commitment of the current administration to PhilHealth, but extended coverage and accessible funding for public and private care providers are grounds
for optimism. The government continues its efforts
to further integrate the private sector while it extends
universal health care coverage before 2016 and health
care providers are poised to receive investment from
domestic and international entities. Thus, 2015 is
expected to be a year of consolidation, as inefficiencies in PhilHealth and past shortcomings in the investment environment are addressed with new funding.
The battle to improve the quality of primary care in
rural areas remains pressing and efforts to keep health
care staff close to home will start having an effect.
226
HEALTH ANALYSIS
Per capita health care spend was $119 in 2013, up from $30 in 2003
Cutting spending
Pharmaceuticals comprise a significant portion of per capita health
expenses, but the government is working to reduce costs
The nations
pharmaceuticals industry
was valued at $4.3bn in
2013, but could reach
approximately $8bn by
2020.
Legislation passed in 2009

called for a 50% price
reduction on 21 molecules
and set the stage for a
systematisation of drug
pricing in the country.
The pharmaceutical industry in the Philippines has been

seeing stable growth for the past decade, and it looks
set to continue. Though the market stood at $4.3bn in
2013, several recent and incoming changes could
enable to sector to reach approximately $8bn by 2020.
The increase is linked to the governments intervention
in price control and a growing acceptance of generic
drug variants. The spending power of the population
has also been on the rise, with per capita health care
expenditure hitting $119 per person, according the
World Bank, up from less than $30 in 2003.
The traditional preference of doctors and patients
for high-quality, branded drugs, rather than less expensive, generic drugs that can vary in quality, means that
products from the big pharmaceutical firms have
achieved dominance. In the Philippines, foreign drug
firms are the primary players and account for approximately 75% of the pharmaceutical market. Sanofi, GlaxoSmithKline (GSK) and Novartis are some of the biggest
foreign drug firms in the Philippines.
Unlike other foreign pharmaceutical firms in the
country, GSK manufactures a large proportion of its
drugs in the Philippines in preparation for the domestic market or other South-east Asian countries, and other foreign producers have begun to follow suit. Novartis established its South-east Asian headquarters in the
Philippines in 2009 to allow it to conduct clinical trials
more conveniently for vaccines and other products. On
a regional level, the Philippines remains the third-largest
pharma market among ASEAN members, just after
Indonesia and Thailand. Large domestic pharmaceutical firms include Natrapharm, United Laboratories, Pascual Laboratories and GV International.
Following a period of stable growth, during which foreign companies became accustomed to high margins
and a steady demand for costly branded drugs, increased
government intervention in the pharmaceutical market under the universal health care initiative and a
growing acceptance of generic drugs have prompted
a sector shake-up. Although adding another layer of
complexity for all players, optimistic growth forecasts

indicate the vast potential for the private sector.
COST CUTTING: In 2009, a World Health Organisation
study showed that the poorest households in the Philippines spent 59% of their medical care costs on drugs.
The previous government, which was already taking
steps to increase accessibility and widen access, created the Universally Accessible Cheaper and Quality
Medicines Act, which included the Maximum Drug
Retail Price (MDRP) scheme that was implemented in
August 2009. The MDRP called for a 50% price reduction on 21 molecules and set the scene for a high level of systematisation to drug pricing in the country.
The immediate call for reductions directly affected
drugs like GlaxoSmithKlines Augmentin and Pfizers
Norvasc, and in anticipation of further cuts, many foreign drug companies voluntarily cut their prices. With
multinational corporations forced to slash the price of
their drugs by as much as 60%, many experienced a
period of negative growth in the following years. However, the MDRP also contributed to the generics market quickly became the fastest-growing segment in the
industry, building on the growth already established by
cheap drugs imported from Pakistan and India. Firms
like Taiwans Orient Europharma and Getz Pharma from
Pakistan augmented their local subsidiaries alongside
the generic arm of Novartis, Sandoz.
DEMANDING GENERICS: In line with the government
decision to amend the National Health Insurance Act,
making it mandatory for all Filipinos to be covered
through PhilHealth, the national insurance body, reform
has also affected the pharmaceutical industry with a
heightened overall demand for drugs. Generic drugs
in particular received a considerable boost from PhilHealth, as patients and hospitals have become focused
on maximising the value of the government allocation
of funds for each particular treatment. While doctors
previously shied away from prescribing generic drugs
in favour of branded drugs, new laws have made it
mandatory to offer generic drugs in public hospitals.
HEALTH ANALYSIS
At Philippines General Hospital, a tertiary state-owned

hospital that sees some 600,000 patients a year, patients
are offered three options: the innovator drug, the branded variant and the generic variant. While a preference
for the branded drugs remains, the cost savings of the
generic variants and improving quality means that the
sector will likely see a shift towards their usage.
In addition, a benefit extension in 2014 under Philippine Health Insurance Corporation (PhilHealth) to cover catastrophic diseases has increased demand for new
drugs, both branded and genetic. Early stage breast and
prostate cancer with low to intermediate risk, childhood
acute leukaemia with standard risk, and low risk endstage renal transplantation are now all covered by packages including designations of cash for drugs. Transparency has improved with drug reference pricing now
available for public viewing on the Department of Health
website, a result of better coordination between PhilHealth and the National Centre for Pharmaceutical
Access and Management. The development means
that there are now fewer discrepancies when hospitals are purchasing drugs and selling them to patients.
The improvements in this area mean that doctors and
patients have more autonomy over the tailoring of
treatment, with patients paying the excess if they
choose more costly treatment options.
QUALITY CONTROL: Though the historical preference
for branded drugs was often based on fiscal remuneration and brand-loyalty, the preference was also based
on guaranteed quality. Generic counterparts often could

not live up to the same standards, which is why they
were priced accordingly. However, generic drugs have
come to be viewed as equally effective which can explain
their increased role within the governments universal
health care programme. Accordingly, the Philippines
Food and Drug Administration (FDA) is taking quality
control and monitoring more seriously, obligating drug
manufacturers to meet strict standards and implementing the Mexico City Principles for Voluntary Codes
of Business Ethics for the Biopharmaceutical Sector.
LOOKING FORWARD: For 2015, the welcome evolution of PhilHealth continues to be the main growth
story, with the entirety of the pharmaceutical industry
directly plugged in. Growth is trickling down to the
pharmaceutical retail and distribution sectors, with
health care firms like Watsons Personal Care Stores
planning to increase their share in the local retail drug
sector with an expansion programme. Mercury Drug is
the leader in the sector, with more than 50% of the market, Watsons is second with 6% and other firms are all
fighting to supply the population with generic drugs.
Competition within the sector has been steadily
increasing as pharmaceutical manufacturers attempt
to grab market share by adopting new strategies to
ensure they are not left behind in the field of generic
drugs. Small foreign players and domestic firms that
can adapt quickly will be able to capitalise on higher
demand for drugs as the health sector makes progress.
227
The Philippines retail

pharmaceuticals market is
becoming an increasingly
competitive, as generic
drugs change the retail
sales landscape.
228
HEALTH INTERVIEW
Alexander A Padilla, President and CEO, PhilHealth
On the mend
OBG talks to Alexander A Padilla, President and CEO, Philippine Health
Insurance Corporation (PhilHealth)
How can PhilHealth boost utilisation of the universal coverage programme among the unserved and
underserved segments of the population?
PADILLA: In 2014 alone, the national government allotted P35.3bn ($794.3m) in premium contributions for
14.7m families, or roughly 46m individuals. Allocation
will increase to P37.2bn ($837m) in 2015, as coverage
is expanded to Barangay officials and as part of the
peace initiative to the Moro Islamic Liberation Front
and other qualifying political groups. To put utilisation
in context, for every 100 members, around eight normally get sick, and covering their needs requires the
resources of all contributors. As such, we do not aspire
for 50% utilisation, as it would mean an epidemic.
For the poor, utilisation has increased from 7% to
roughly 12%, accelerated by an information campaign.
Traditionally, many of the poor have not known they
are members of PhilHealth, though this trend is being
reversed by efforts to coordinate with other government agencies to increase awareness. The goal is to
help members learn about PhilHealth and demand their
rights. Aside from the no balance policy, which helps
the poor avoid out-of-pocket expenses after entering
a hospital, we have point-of-care enrolment, whereby
anyone who is not part of the listed poor under the
Department of Social Welfare and Development or listed as formal sector can enter a hospital and enrol
immediately with PhilHealth.
We have also come up with a new case rate system.
Currently, we have a fixed amount for each treated
medical case, ranging from P10,000 ($225) for dengue,
to P8000 ($180) for normal childbirth and P19,000
($427.5) for caesareans. In the past, we did not know
the cost of public versus private hospitals or secondary versus tertiary ones. The new system now allows
hospitals that are efficient and able to discharge patients
in a timely manner to benefit from our case rate. The
case rate not only protects members and increases
hospital accountability, but also promotes a change in
behaviour. For example, hospitals often complain that
reimbursements for caesareans are low which is true.

However, with caesareans accounting for 56% of births
and rising, mothers are in danger. As long as rates do
not fall to acceptable levels, case rates will not increase.
What measures are being institutionalised to ensure

health coverage and social protection for vulnerable groups and minimise out-of-pocket expenses?
PADILLA: In 2015 we will have a more systematic outpatient benefit package called Tsekap, whereby the
poor and members of sponsored groups will be assigned
to particular health facilities near them, which could
be rural units or clinics, not just hospitals. Beneficiaries will be offered a range of services and diagnostics,
including medication for the three most-common diseases hypertension, diabetes and high cholesterol.
Whereas members used to have to go to a hospital
to receive treatment, this allows them to enrol in a rural
facility. Doctors and nurses have an obligation to administer Tsekap, while PhilHealth is strengthening its monitoring mechanisms to verify that services were received.
Preventive care will also be a focus, helping to lessen
the costs of curative or hospital treatment. Depending its success, it could be extended to all Filipinos.
We currently allow services to be provided by private
institutions if the geographical area does not have a
facility or if it is an island community, which is common
in the Philippines. We are open to government institutions not only to Department of Health hospitals, of
which there are around 80 in the country, but also local
government unit (LGU) hospitals and facilities, which
number around 800. However, as LGU resources cannot fully cover their constituents because of other priorities in the community, PhilHealth represents the
best additional resource for buying necessary equipment and paying local professionals, which can account
for up to 40% of reimbursement fees. In addition, our
Z catastrophic benefit package helps protect patients
from high medical costs by capping private hospital outof-pocket expenses to match payments from PhilHealth.
HEALTH ANALYSIS
229
Total government spending on health care equaled 5% of GDP in 2014
Maximising potential
The health care sector is set to grow through a number of public-private
partnerships
Though health care sector spending is on the rise in
the Philippines, years of underinvestment have resulted in a deficit in both available facilities and services. Although improvements are being made in 2014
the Philippine government spending on health care
reached the 5% of GDP recommended by the WHO
to reach the levels of care planned for the universal
health care system by 2016, integrating of the private
sector is necessary. Health care provision is an important issue in the Philippines, but there has traditionally been trepidation about involving the private sector in what is viewed as a state responsibility. Such
caution, which was often due to a lack of understanding regarding the distinction between public-private
partnerships (PPPs) and privatisation, is one reason
for the lack of investment in the sector. However, attitudes have begun to change as PPPs materialised in
areas like transport infrastructure.
PPP BUILDUP: This momentum is now being built
upon by the International Specialist Centre of Excellence on PPPs, which is focused on PPP implementation in several sectors. The centre was established by
the Ministry of Health in Manila in 2012, under the
auspices of the UN Economic Commission for Europes
International PPP Centre of Excellence, which is also
assisting with the drafting process. Several PPPs have
been proposed for the health sector that satisfy the
demands of the universal health care system, and the
centre is also in the process of completing a guide on
best practices for PPPs in health.
The administration of the President Benigno Aquino
III and the Department of Health (DoH) have designated a particular focus on the modernisation and
upgrading of hospitals, cancer centres, orthopaedics,
dialysis as well as primary health care clinics. Providing an adequate number of hospital beds has been
an enduring challenge in the Philippines, currently at
1.15 per 1000 people, according to World Bank data,
while its lowest value reached 0.5 in 2002. However,
as the role of the private sector continues to expand
alongside the evolution of Philippine Health Insurance Corporation (PhilHealth) and accommodating
government legislation, initiatives to incorporate soft
infrastructure projects in addition to the hard
infrastructure projects under way are also being
considered. A combination of both under a well implemented and monitored PPP mechanism would allow
the Philippines to keep pace with its neighbours.
CURRENT PROJECTS: The headline PPP within the
health care sector thus far has been the P5.7bn
($128.3m) modernisation project for the Philippine
Orthopaedic Centre, which began in mid-2013. The
Megaworld-World Citi consortium, a joint venture
between Megawide Construction and World Citi, was
the sole bidder of the project that involves the construction of a 700-bed-capacity, super-specialty, tertiary orthopaedic hospital that will be located within
the National Kidney and Transplant Institute Compound in Quezon City. It will replace the 68-year-old
Philippine Orthopaedic Hospital that is currently located in Quezon City. Only 300 out of the 700 beds of
the hospital are usable because of its current poor
condition. Megawides partner, World Citi, operates
the 276-bed World Citi Medical Centre.
In terms of financing, Megawide Construction
entered into a P2.9bn ($65.3m) omnibus loan and
security agreement with Land Bank of the Philippines,
Land Bank of the Philippines-Trust Banking Group
and Development Bank of the Philippines in October
2014. The consortium can finance up to 70% of the
project cost through borrowings and the remaining
30% through equity. Under the build-operate-transfer arrangement with the DoH, the consortium will
design, build, finance, operate and maintain the facility for 25 years. At the end of the 25-year concession
period, the hospital will be returned to the DoH. During the 25-year programme, there will still be free
services for the poor even as the modernised hospital makes its money from other patients to achieve a
return on their investment. So far, Megawide has won
Estimates of the number of

hospital beds in the
Philippines vary and were
as low as 0.5 per 1000
people in 2002, but are
currently around 1.15 for
every 1000 people.
230
HEALTH ANALYSIS
Modernisation efforts have resulted in improvements at 20 Philippine hospitals at a cost of about $20bn
In order to provide a
greater range of services
and increase reliability for
rural residents,
telemedicine is being used
to extend treatment to
previously under-served
populations.
four out of the eight awarded PPP projects of the

Aquino administration, including the P17.5bn
($393.8m) Mactan-Cebu International Airport project.
Apart from the Philippine Orthopedic Centre, additional health projects that have been awarded include
the modernisation of the following facilities: Bicol
Medical Centre, Cagayan Valley Medical Centre and
Cotabato Regional Medical Centre; as well as the construction of a vaccine production facility at the
Research Institute for Tropical Medicine and the development of three regional cancer centres.
With the modernisation of Philippines hospitals
being a flagship programme of the Aquino administration, in January 2015 the DoH confirmed its intentions to modernise at least 20 hospitals at a cost of
approximately $20bn over the course of the next
decade. Furthermore, the provision of additional hospital services is also being entertained, such as the
construction of adjacent car parks via PPP.
PROJECTS: Apart from the focus on hospitals, the
potential for PPPs elsewhere sector has also begun
to be recognised. In 2014 former health secretary Dr
Enrique Ona said, All of our DoH hospitals are candidates for PPPs, but we have a lot of options for how
to do this. For example, we can subject the PPP to major
equipment, such as computed tomography scans,
magnetic resonance imaging and even our oncology
centres. With regard to softer PPP projects, Dr Juan
Naagas, medical director of the Asian Eye Centre in
Manila, told OBG, While previously there has been
quite a one-sided view towards the benefits of hard
infrastructure projects, the government is now exploring new ways to fill gaps in service delivery via the private sector. Health care providers are accustomed to
enlisting the help of private sector players in fulfilling equipment needs, an area that could be developed
further in light of government plans for comprehensive hospital modernisation over the next decade.
Many more opportunities for health PPPs are also
resulting from the evolution of universal health care
coverage and the increasing acceptance of generic

drugs, demand for improved warehousing and distribution capacity for drugs being one poignant example. With a limited number of government distribution centres failing to accommodate demand, a method
known as telemedicine is currently being rolled out
which allows for treatment to be delivered to remote
areas of the archipelago where access is limited.
In November 2014, the DoH in Region 4B, or
Mimaropa, launched the first interactive telemedicine system in the country at the newly inaugurated
Dr Damian J Reyes Provincial Hospital in Boac,
Marinduque. The system provides medical consultation and diagnostics through video calls. The telemedicine project is a PPP programme of DoH-Mimaropa.
The DoH-Mimaropa provided P10m ($225,000) for the
installation of satellite equipment to support the programme and three hospitals will be linked by the
telemedicine system: Santa Cruz District Hospital,
Torijos Municipal Hospital and the Dr Damian J Reyes
Provincial Hospital, which will be the hub.
Finally, disaster management and emergency services, such as the provision of vaccinations, are another area where PPPs are being considered by the government. Following Typhoon Haiyan in November
2013, the private sector became involved in contributing to the rehabilitation efforts, many of them
coordinated under Manilas cross-sector business
associations such as the Philippine Disaster Recovery Foundation, League of Corporate Foundations and
various foreign chambers of commerce, among others. This infrastructure has been vital to connect the
Philippine government and international organisations with private sector companies, both local and
international. One example under way via the Specialist Centre for Health PPPs is entitled Last Building
Standing. Citizens in regions hit by natural disasters
citizens can be rescued by teams of doctors housed
in a solar-powered multitasked building, operating as
both a hospital and command centre.
PPPS: Aside from promising hard infrastructure projects, which look to significantly aid the development
of Filipino hospitals and health facilities, it is arguably
the provision of medical services through a PPP model that looks most promising. While the current longterm structure of PPPs is undoubtedly more suited to
hard infrastructure projects, a better model for the
linking of health services has yet to be fully developed.
Promising work is being undertaken by the International Specialist Centre of Excellence on PPPs, and
domestic experts have suggested that the government
should further examine the concept of public-private
investment partnerships (PPIPs). PPIPs are of a medium term at least 10 years and deliver integrated
services, among others. However, since a proper framework for PPIPs must first be developed, adequate
monitoring and competition would allow them to
thrive in the hands of local government units. Overall, it would appear that the government and DoH are
making constructive efforts to involve the private sector, which is increasingly committed to PPP efforts.
231
Education
The sector begins to transition to a K-12 system
Reforms increase the availability of educational services
ASEAN integration attracts international students
Expanding rural access remains a key priority
232
EDUCATION OVERVIEW
The academic year lasts for 200 days between June and March
Change for good

The government works to implement its K-12 programme while raising
general standards
As of 2016 the Philippines
will extend the timeframe
for mandatory basic
education to 13 years, from
the 10-year mandate that
has been in effect since
1945.
Having been the only country in South-east Asia providing just 10 years of basic education to its population, the Philippines is working to join its neighbours
and implement a K-12 system in 2016. Though the
administration of President Benigno Aquino III is providing the Department of Education (DepEd) with
more funding to aid the realisation of this task, the
challenge of doing so over in a short transition period is unquestionable. The growing role of the private
sector in providing educational services is crucial,
with greater opportunities on the horizon and the
government taking slow but steady steps to define
them. Continuing reform is set to further integrate
and incentivise private sector participation, as is happening in sectors like infrastructure and health care.
Elsewhere, the challenges of access and quality
remain, which the government continues to address
through a host of pragmatic initiatives. However, the
implementation of such programmes across the
Philippines challenging archipelagic landscape, populated by over 100m people, is no small feat. The
development of human capital and production of
job-ready graduates is crucial to the growth of the
Philippines, which had one of the highest unemployment rates of all ASEAN nations in 2013, at 7.3%.
The rate steadily decreased to 6.7% by the end of
2014, due in part to the workforces fundamentals,
such as fluency in English and the evolving number
of vocational degrees offered to graduates. Since
coming to power in 2010, the current administration
has laid down a concrete education agenda via the
Philippine Development Plan (PDP) 2011-16. This
plan was updated for 2014-16 with DepEd prioritising access to basic complete quality basic education,
engagement with the private sector in broadening
opportunities for basic education and preparing graduates for further education and employment.
LEGAL BASIS: The former education system, which
has been in place since 1945, is also enforced by
stipulations in the Philippines Constitution of 1987
that all children attend basic public education, divided into six years of elementary school and four years
of secondary education. However, the country has
since fallen behind many of its regional competitors,
largely due to the scale of the implementation effort.
At the beginning of the millennium, the original constitution was updated via the Governance of Basic
Education Act of 2001, which reinforced the constitutional right to free basic education for the schoolage population and young adults. Under the Aquino
administration, this was bolstered through the Kindergarten Act in 2012 and the Enhanced Basic Education Act of 2013, which demonstrated political will
to reform the education sector and propel the country towards achieving its high growth potential.
In the Philippines, the academic year begins in June
and lasts approximately 200 days. Holidays are taken for the summer between March and May, while
students are also granted two weeks at Christmas
among other public holidays. While there has been
talk of harmonising the national calendar at both
the high school and college levels to one that is more
in sync with other ASEAN nations, the majority of
Philippine education institutions are waiting for clearer definition from the ASEAN secretariat.
SECTOR OVERSIGHT: DepEd is responsible for ensuring the provision of basic education to primary and
secondary school students while also managing the
Alternative Learning System for out-of-school youths
and adults. DepEd oversees kindergarten care and
education alongside the Department of Social Welfare and Development (DSWD).
Tertiary degree programmes conducted by state and
private institutions are supervised by the Commission
on Higher Education (CHED), while the Technical Education and Skills Development Authority (TESDA) is
responsible for the formulation and supervision of
manpower and skilled workers. TESDA sets appropriate skills benchmarks and aptitude tests alongside
various government policies and programmes. It also
EDUCATION OVERVIEW
for a maximum of three children. This has prompted

an improvement in school attendance of 12- to 14year-old students in CCT barangays (small villages),
5% higher than in non-CCT barangays.
Providing education access to students in an archipelago of over 7000 islands raises the issue of capacity. While nearly 50% of the population lives in urban
areas where access to schools is much improved, the
schools within them are often congested. In Metro
Manila, 82% of the 764 schools in the metropolis are
operating with a two-shift policy for teaching, opening schools at 6AM and closing them at 6PM in order
to accommodate the number of students.
The average teacher to student ratio is one teacher
for every 36 elementary students and one to every
35 secondary students. A UNESCO report stated that
classes in the Philippines had 43.9 students on average nearly three times what is regarded as the ideal class size. It is estimated the Philippines continues
to have a backlog of over 60,000 classrooms, despite
the government having built more than 66,000 since
2010. Furthermore, Typhoon Haiyan in 2013 damaged
3100 schools, with 20,000 classrooms needing to be
either rebuilt or repaired. An estimated 1.4m children
were affected by the disaster.
Such shortages have become increasingly evident
since the 2013 entrance of the K-12 system and Universal Kindergarten Law, which makes kindergarten
compulsory. This has inevitably also put strain on
teacher provision, which the Aquino administration
has been countering through the hiring of a total of
102,623 teachers since 2010. However, despite such
efforts, a study by the Philippine Business for Education (PBEd) indicated that 29% and 34% of students
in the Teacher Education Institutions surveyed passed
the Licensure Examination for Teachers for elementary and secondary education, respectively, from
October 2009 to September 2013. The results reveal
an on-going struggle to locate teachers with adequate
skills for the teacher places that need filling.
KEYSTONE REFORM: The most significant educational reform since the last century, on May 15 2013
President Aquino signed into law the Enhanced Basic
The Philippines was lacking

some 60,000 classrooms as
of early 2015, and many
urban schools were
operating two shifts to
accommodate students.
Kindergarten enrolment, 2008-13 (m)

2.5
2.0
SOURCE: Department of Education
oversees policy and resource guidelines for Technicalvocational and education and training institutions in both the private and public sectors.
BUDGETING: With provision of good basic education
the central priority of the incumbent government, the
DepEd accordingly received a P321.05bn ($7.22bn)
budget for 2015, making it the largest recipient of
all ministries. However, despite substantial allocations of P293.4bn ($6.6bn) in 2013 and P336.9bn
($7.6bn) in 2014, its funding remains behind the UN
Educational, Scientific and Cultural Organisations
(UNESCO) recommended spending rate of 4-6% of
GDP, advised by the Education for All (EFA) movement.
Some P42.27bn ($951.1m) of the total was allotted for state universities and colleges (SUCs) in 2015,
a roughly 11% increase over 2014, to provide for faculty upgrading, operating funds and capital outlays.
This budget includes an estimated P3.5bn ($78.8m)
for SUC scholarships and P2.2bn ($49.5m) for scholarships administered by the CHED. Some P316m
($7.1m) was set aside as a research fund to improve
the quality of higher education.
In addition to its EFA commitments, the Philippines
is also pursuing eight time-specific targets under the
Millennium Declaration, which it signed on September 2000. The declaration aims to cut poverty in half
by 2015, to 22.65% of the population living below
poverty incidence and 12.15% below subsistence
incidence. With the adoption of the declaration, the
Philippines also affirmed its commitment to the Millennium Development Goals (MDGs) aimed at reducing poverty, hunger, disease, illiteracy, discrimination
against women and environmental degradation.
BASIC EDUCATION: Even without the under-investment in education that occurred under previous
administrations, the challenge of providing basic education to the over 21m children enrolled in the Philippine public school system is considerable. With a
population of 98.39m and a growth rate of 1.7%,
according to 2013 World Bank data, the weight placed
on education is increasing and enrolment rates have
risen, in part thanks to the Basic Education Reform
Agenda 2006-12. Enrolment numbers of elementary
education for students aged between six and 11
increased from 13m in 2005 to 14.4m in 2013.
Similarly, secondary school enrolment of students
aged 12 to 15 also increased from 6.3m in 2005 to
7.1m in 2013. Kindergarten enrolment was at 2.2m
in 2013, up from 1.1m in 2008. However, with 20.7%
of the population living in poverty, according to the
latest data from the National Statistical Coordination
Board, the government estimates that approximately 5.59m children between the ages of five and 17
years old were working and therefore not in full-time
education. The government has been countering this
through programmes such as the Conditional Cash
Transfer (CCT) programme, locally known as Pantawid Pamilyang Pilipino Programme (4Ps) to provide the
poorest households a P500 ($11.25) subsidy per
month for health care and nutrition expenses and a
P300 ($6.75) education subsidy per month per child
233
1.5
1.0
0.5
0.0
2008/09
2009/10
2010/11
2011/12
2012/13
234
EDUCATION OVERVIEW
The K-12 system began enrolling students in the 2012/13 school year
New programmes are

extending basic education
to minority populations,
including Muslims and
indigenous peoples, as well
as learners with disabilities.
Education Act in order to take the Philippines into

the 21st century. The principal feature of the law
was the K-12 programme which provides that every
student receive kindergarten and 12 years of basic
education six years of elementary, four of junior
high school and two years of senior high school (SHS).
The compulsory attendance of kindergarten had
only been implemented shortly beforehand in the
Universal Kindergarten Law. The implementation of
the K-12 system began in the 2012/13 academic
year, which means that the first full cohort of students to go through the whole K-12 system will graduate from high school in 2024. Previously, under the
10-year system, Filipino students would graduate
with a university degree two years younger than their
peers in other countries. Such a situation was not necessarily an advantageous one, as students were often
less educated than regional peers and lacking adequate skills and maturity to enter the workforce.
K-12 QUESTION: While the rationale behind the creation and implementation of the K-12 system is laudable, debate has taken place in recent years over the
planning and capacity constraints. In mid-2014, lawmakers even threatened to repeal or postpone the
K-12 in anticipation of major upheaval caused when
no freshmen college students appeared in 2016 due

to the additional two years of high school being provided. However, the government has since committed unprecedented amounts of funding to K-12 while
also hinting at increased support packages for private sector institutions in order to improve capacity
and mitigate upheaval. The DepEd has also entered
into agreements with business organisations, chambers of commerce and industry players in order to
ensure that K-12 graduates will be considered for
employment. A system of competency requirements
is being implemented in order to match the skills of
the workforce to those required by employers alongside an increased focus on College Readiness Standards. Entrepreneurship skills are also being fostered,
through a revised curriculum amended in order to
better fit the new programme.
As for ensuring education for isolated or minority
groups, disparity is being addressed through the
Enhanced Basic Education Act of 2013, which mandates an education that is learner oriented and
responsive to the needs, cognitive and cultural capacity, the circumstances and diversity of learners.
The DepEd has called for improved inclusiveness
of basic education through the implementation of
programmes adapted for Muslim students and indigenous peoples, in addition to learners with disabilities
and those facing unique or difficult circumstances
(i.e., geographic isolation, chronic illness, displacement
due to armed conflict, urban resettlement due to
natural disasters, child abuse and child labour).
Prior to this, the DepEd had already established
Indigenous People Education, Madrasah Education
and Special Education. The National Statistics
Agencys 2010 Census of Population and Housing
showed that of the 71.5m individuals aged 10 years
old and above, 97.5 % or 69.8m were literate or
could read and write. However, in the Autonomous
Region in Muslim Mindanao, for example, the literacy rate was the lowest at 82.5 %.
HEALTHY START: In recognition of the importance
of the cognitive development occurring between
infancy and six years of age, compulsory kindergarten
under the Universal Kindergarten Law focuses on a
standards based programme set over one year. It
focuses on basic numeracy and literacy skills set to
EDUCATION OVERVIEW
The monitoring of schools eventually led to accreditation standards
educators pursuing quality through standards and

implementation monitoring, completed on a voluntary basis. Three such accrediting bodies were founded: the Philippine Accrediting Association of Schools,
Colleges and Universities; the Philippine Association
of Colleges and Universities Commission on Accreditation; and the Association of Christian Schools, Colleges and Universities Accrediting Agency.
ACCREDITING PROCESS: Despite the fact that many
more schools have been established since 1951,
enrolment in associations has remained around the
13% mark. The need for accrediting bodies remains
prescient. Dr Michael M Alba, president of The Far
Eastern University, told OBG, Accreditations, whether
homegrown or international, are important because
quality education cannot be claimed by any school
or training institution if it has not undergone a validation by independent bodies.
A proliferation of small and stand-alone PHEIs,
often operating without fully qualified professionals,
means that standards have been progressively
watered down. Furthermore, the financial barriers to
Despite growth in the

number of schools, the
enrolment of educational
institutions in accrediting
associations has remained
around 13% of the total
since 1951.
Secondary schools, 2008-13

Public
Private
8000
6400
SOURCE: Department of Education
gradually prepare students for entrance into the next

stage of elementary school education under the new
13-year programme. The DSWD is responsible for
human development concerns such as the provision
of social services provided in day care centres. This
includes the nationwide Supplementary Feeding Programme, in addition to regular meals provided to
those enrolled in day care, as part of DSWDs contribution to the National Early Childhood Care and
Development (ECCD) programme.
Despite previous presidential decrees and laws,
such as the Total Development and Protection of
Children Act in 1990, which stipulated that every
barangay should have its own day care centre, the
successful implementation of these and similar programmes has been limited. However, progress has
been made in some areas. For example, the total
number of barangays served by these programmes
increased from 51,797 in 2011 to 53,436 in 2013.
With regard to service delivery, the 2013 Early
Years Act specified which programmes would deliver the necessary services for children between infancy and four years by ensuring that adequate health
and nutrition programmes were accessible to young
children and their parents. The act also institutionalised the ECCD system, ensuring the collaboration
of various agencies at the national and local levels
with families and communities, non-governmental
organisations, professional and academic groups,
and other service providers. Guidance for the care
of children between infancy and four years is under
the ECCD Council, while the DepEd handles students
from five years until the end of secondary school.
HIGHER EDUCATION: Higher education in the Philippines is a well-established and diversified segment,
having been formalised under the colonial rule of the
Spanish and the Americans before Philippine independence. Currently, higher education institutions
(HEIs) are divided into SUCs, local universities and colleges (LUCs), CHED-supervised institutions (CSIs) and
private higher education institutions (PHEIs). SUCs
are chartered public institutions established by law
and administered by the government, while LUCs are
overseen and funded by city, provincial and local governments. CSIs are public, post-secondary institutions established and administered by the national
government. PHEIs, which account for 80% of total
higher education, are generally for-profit organisations established under the Corporation Code and
administered independently but governed by guidelines and policies set out by the CHED.
The CHED oversees all higher education institutions
and provides validation of school performance and
competencies, set out most recently in the 7722
Republic Act and CHED Memorandum 46 of 2012,
which calls for outcomes-based education. CHED
surveys institutions horizontally, depending on their
status as an SUC, LUC, CSI or PHEI, and vertically via
a points system that takes note of services offered.
Accreditation is completely independent of the state
and began in 1951 as an initiative of private school
235
4800
3200
1600
0
2008/09
2009/10
2010/11
2011/12
2012/13
236
EDUCATION OVERVIEW
It is expected that the number of students pursuing a university education will grow by 700,000 by 2020
The average entry age for

university students will
reach 18 years beginning
from the 2018/19
academic year, following
the graduation of the first
class of students to
complete the K-12
programme.
accessing a university education are also being continually lowered with the growth in popularity of
online open courses, which are significantly less costprohibitive for Filipino students than even the bestvalue public universities.
As a result, those PHEIs at the very top and other
aspiring HEIs have begun to increasingly focus on
fulfilling international accreditation standards such
as ABET to set themselves apart. While an ASEAN University Network, an association for accrediting regional schools, is on the horizon, at present it appears that
inclusion in the group will be restricted to the best
institutions in Asia, making it likely that only three
Philippine HEIs are eligible at the moment.
Despite students previously entering HEIs at the
age of 16, typically being able to graduate with bachelors degree at 20 and a further masters degree at
22, the K-12 system means that students entering HEIs
will be 18 years old starting from 2018/19. While for
SUCs the acclimatisation period and the loss of a
whole cohort of students between 2016 and 2018
is likely to be less of a problem as their budgets are
assured by the state, for PHEIs the period will be significantly more difficult and uncertain.
The president of the Technological Institute of the
Philippines, Elizabeth Lahoz, told OBG, Private higher learning institutions are completely reliant on revenue from tuition fees and hardly get any government
support. In order to remain competitive, schools must
invest resources to accommodate demand for popular programmes such as nursing. However, these
schools may also become victims as demand for such
programmes inevitably rises and falls and so they
have to be very strategic in order to survive.
PRIVATE CHALLENGES: The primary challenge facing all HEIs, whether in the private or public sector,
is providing space for the growing number of students.
The Philippines is forecast to have one of the worlds
highest growth rates in university and higher education participation. The British Council estimated that
700,000 additional Filipino students will pursue tertiary education by 2020, a 26% increase over the
2010 benchmark of 2.77m. According to the CHED,
the most popular HEI bachelors programmes for
2014 include agriculture, engineering, science and
maths, information technology (IT), teacher education and health sciences. Demand for courses for
tourism-related studies and business have also been
on the rise in recent years. With the rise in popularity of outcome-based education encouraged by the
government and required by ABET accredited programmes, colleges are increasingly following the German model which mixes work experience integration
into bachelors courses. One example is the Marine
Engineering Course offered at the Technical Institute of the Philippines, which includes three years of
class time and one year at sea before a final year back
in class to consolidate learning before graduation.
The government has also rolled out its own Government Internship programme under the DSWD as
part of the Kabataan 2000 programme, which provides opportunity for youths to get hands-on experience working in various government agencies.
FUNDING: With the majority of HEIs being for-profit institutions, with little or no support provided by
the government, many have turned to income generating projects (IGPs) to boost funding. In 2011, the
government made a push for both SUCs and PHEIs
to start aiming for financial independence through
IGPs, as part of the Aquino administrations larger
Roadmap to Higher Education Reform (RPHER). The
end goal of having the top-22 SUCs source 50% of
their budgetary requirements from internal income
seems uncertain, with relatively little funding coming from IGPs to date. For example, in 2013 the University of the Philippines (UP) accrued just P115m
($2.59m), and the Philippine Normal University garnered P54m ($1.22m). While it seems increasingly likely that the government will work to extend more
equitable funding through a voucher scheme, seeking to mitigate a dearth of students resulting from
The government wants to help state schools become self-sufficient

EDUCATION OVERVIEW
the transition to the K-12 system, until this happens

PHEIs in particular will likely continue to need IPGs.
EDUCATION MEETS EXPERIENCE: As neighbouring
governments of Thailand, Malaysia and Indonesia
commit greater support to higher education institutions, the Philippine government is also following
suit. Plans were announced in September 2014 to
build eight globally competitive universities within the
next three years as the country seeks to increase its
educational standing internationally. However, the
government has indicated its understanding that one
of the most pressing domestic issues within higher
education, aside from quality and access, is the need
to ensure experiences that prepare students for jobs.
Accordingly, in June 2014 the Ladderised Education Interface Act was passed, which allows vocational education and training (VET) students and
graduates to transfer VET credits to degree programmes at universities. In the same month they also
revealed plans for the expansion of distance-learning services within the country through the Open
Distance Learning Act and measures to harmonise
grant and scholarship programmes via the Unified Student Financial Assistance System for Higher Technical Education Act. These reforms are designed to
improve competitiveness and quality of education.
It remains to be seen what impact they may have on
outbound mobility, particularly in relation to broader shifts in demographics and economics that are in
play in the Philippine market this decade. For 2015,
P2bn ($45m) was allocated for the Training for Work
Scholarship programme under TESDA. This allocation is 42% more than that in 2014.
In an effort to build industry links, the National
Academe-Industry Council was established with the
assistance of the PBEd. The council continues to make
progress in human resource planning and the promotion of growing industries. Data from recruitment
website Jobstreet revealed that the highest-paying
industries for graduates in 2013 were travel and
tourism, telecommunication and IT hardware. The
academy has consistently championed travel and
tourism related industries since its inception, regarding this as the sector with the fastest-growing number of opportunities for graduates. The Philippines
welcomed 4.7m foreign visitors in 2013, up 9.56%
from 4.3m arrivals in 2012.
BACK & FORTH: In terms of boosting its appeal as a
regional study destination, the country is also seeking to capitalise on the number of students coming
to study English in the Philippines. With its expanding education system and relative affordability, the
country continues to emerge as an important education centre in South-east Asia and attracts increasing numbers of students from across the region.
The Philippine Bureau of Immigration reported that
student visa approvals increased by 14% in 2012,
reaching a total of 47,478 student visas and permits,
compared to 41,443 in 2011. However, within this
number the majority of visas were issued for special
study permits (SSPs) issued to those on courses such
237
Language training specifically in English is attracting a growing number of international students
as language training. In 2012 over 31,000 SSPs were

issued compared with 16,478 student visas which are
typically handed out to those studying full bachelors
or masters programmes at universities or colleges.
In addition to the Philippines accepting an increasing number of students, the number of Filipino students studying abroad has also risen sharply in recent
years, fuelled by a rapidly growing economy, above
average levels of youth unemployment, incumbent
trends for outbound migration and a burgeoning
field of education agents. While in 2001 there were
just over 5500 tertiary-level Filipino students enrolled
abroad, by 2012 this had increased to 11,210. The
majority of this growth occurred in the 2006-12 period, with the most popular destinations including the
US, which accounted for 27% of outbound enrolment in 2012, Australia with 21% and the UK with 12%.
OUTLOOK: As senior high schools gear up to accommodate the first cohort of year 11 and 12 students
in 2016, the K-12 system is a significant step for the
Philippines in the modernisation of its education system regardless of the inevitable settling-in period. In
the great scheme of things, it is only two years, but
there will definitely be a phase of acclimatisation as
new students and staff adjust to the specialised and
vocation-orientated curriculum set out for senior
high school, Alfredo Pascual, president of the University of the Philippines, told OBG.
While the higher budget allocation for K-12 is
encouraging, the government must ensure adequate
monitoring of spending to avoid waste or misappropriation. The Philippines must also continue on the
constructive path it has been taking in recent years
spurred on by the MDGs to boost access to quality basic education and reduce the number of children working rather than learning. With the dialogue
between the private sector and educational institutions increasing and accompanied by reforms squarely aimed at better preparing students for employment,
the sector continues to move in the right direction.
In 2001 there were about

5500 tertiary-level Filipino
students enrolled abroad;
however, this had risen to
11,210 by 2012. The most
popular destinations were
the US, which accounted
for 27% of outbound
enrolment in 2012,
Australia with 21% and the
UK with 12%
238
EDUCATION INTERVIEW
Armin Luistro, Secretary, Department of Education
Core skills
OBG talks to Armin Luistro, Secretary, Department of Education (DepEd)
How can the education system nurture English proficiency while embracing cultural sensitivities and
promoting learning in the mother tongue?
LUISTRO: The DepEd is currently implementing mother-tongue based multilingual education (MTB-MLE) as
part of our K-12 reform. This is not a purely pedagogical strategy for language but a learner-centred
approach. By using the language students are comfortable with, the MTB-MLE in the enhanced curriculum helps them develop the language skills they need
to learn the fundamentals of various subjects from
kindergarten to third grade, and to move seamlessly from
home to school. Children clearly learn best when we
use the language they understand, especially in elementary education. Additionally, prior to the launch of MTBMLE, studies had shown that language skills mastered
with the mother tongue can enable students to learn
a second and subsequent languages faster.
What can be done to address the backlog of infrastructure, basic materials and financing that are
needed for the K-12 programme?
LUISTRO: Over the last three and a half years the DepEd
has been addressing gaps in basic inputs namely,
classrooms, teachers, textbooks, seats, and water and
sanitation facilities. We have fully accounted for backlogs of these in all 47,000 schools from 2010, and will
continue to build more infrastructure, hire more teachers and buy more learning materials and tools for the
K-12 programme. Senior high school (SHS) will be introduced nationwide starting with grade 11 in 2016 followed by grade 12 in 2017. We expect 1.4m students
per cohort to enter grade 11, more than 1m of them
from public junior high schools. The department will
fulfil these requirements both by building capacity at
public high schools and by tapping available capacities
at private schools and other state-funded institutions.
Starting in 2016, an SHS voucher programme will provide financial subsidies to public junior high graduates
wishing to attend private SHS or schools managed by
public institutions. The programme will also expand

the financial assistance programme, which benefits
over half of the nations private junior high students.
What measures would enable basic education to

produce graduates that meet locale-based needs?
LUISTRO: The Enhanced Basic Curriculum is designed
to prepare graduates for both higher education and the
world of work. The goal is mastery of both core competencies and specific tracks prior to tertiary education or employment. The SHS curriculum will include
four tracks of specialisation that address individual
interests as well as community needs and opportunities: academic, technical-vocational-livelihood, sports,
and arts and design. The tracks are designed to prepare students for specific industries in their localities
for example, the Coffee Academy, the SHS in the city
of Lipa, supports the provinces coffee industry and provides industry-relevant education and training. Academic subjects are equally rigorous, to equip students
with adequate preparation should they choose to proceed to higher education after finishing grade 12.
How can ICT adoption complement learning-teaching capabilities and enhance access to education?
LUISTRO: Providing ICT tools to public schools nationwide has been one of the departments priorities, to
complement the new curriculum and revolutionise education using the limitless possibilities of technology. We
have incorporated interactive learning tools to build fundamental ICT skills, and tried to democratise information by posting the entire curriculum and other learning materials online for use by teachers, students and
other interested stakeholders. ICT is also used as a tool
to broaden access to basic education, especially for nonmainstream learners who find it hard to attend school
on the traditional calendar or schedule. Programmes
like the Open High School and Alternative Learning
System employ suitable on- and off-line technologies
to reach marginalised learners and develop their skills.
EDUCATION ANALYSIS
239
Special programmes have helped extend support to 76,0000 youth
Helping hand
The private sector plays an important role in education provision
The role of the private sector in education has always
been apparent in the Philippines, particularly due to
the dominance of private tertiary institutions that
were established before state institutions arrived to
provide more affordable options. As a result of this
history, past and present governments have been able
to consistently work together with private sector entities, both domestic and foreign, to the benefit of the
sector. It is important to note that this extends far
beyond educational institutions, but as a more general participation of a variety of players from different industries. Such participation has been aided by
encouraging and enabling legislation set out by the
Department of Education (DepEd), such as the Adopta-School Act and the Republic Act 8525 of 1988,
which provided a way for the private sector to participate in nation-building via the education of Filipinos.
EDUCATIONAL ADOPTION: For 2014, the DepEd
recently confirmed that it has received more than
P5.5bn ($124m) in donations from the private sector
towards the Adopt-a-School programme. The programme links the DepEd with players and organisations that are able to assist in the provision of basic
education resources, such as classrooms, teaching
materials and equipment. Currently, more than 130
private companies are participating by supporting
specific DepEd initiatives and programmes such as
nationwide feeding programmes, teacher training and
integration of integration technology.
Aside from the existing Adopt-a-School programme,
the DepEd has also been championing and inviting private sector support of the Abot Alam programme.
This programme focuses specifically on location-outof-school youth (OSY) between the ages of 15 and
30, with the aim of successfully finding them educational, entrepreneurship and employment opportunities. Since the beginning of the programme, the
DepEd has mapped over 1.2m OSY. Of this number,
76,000 have been enrolled in the Alternative Learning System programme, Alternative Delivery Mode,
completed skills training or have been employed. The

challenge is pressing across all youth age groups, with
recent government figures revealing that 5.59m children between the ages of five and 17 years old were
working and not in full-time education in 2014.
FACING TYPHOON HAIYAN: Though the private
sector support of the domestic education sector has
been longstanding, Typhoon Haiyan also illustrated the
willingness of companies and businesses from all over
the country to aid recovery. In early 2015 DepEds
Typhoon Haiyan interventions were in the fourth and
final phase of its Framework for Recovery and Rehabilitation. In keeping with the governments effort to
recover, DepEd continues to deliver basic education
to five typhoon-affected regions: IV-B, VI, VII, VIII and
Caraga. This includes the rehabilitation of more than
17,000 damaged classrooms, construction of new
classrooms and distribution of school furniture. As of
November 2014, more than half of the targeted classrooms had been completed or were in the process of
being reconstructed. Classroom construction in
typhoon-affected areas is expected to be complete
by June 2015. DepEd has said that private firms will
fund the reconstruction and repair of at least 3467
classrooms, about 20% of the total needed.
One multinational company that has been leading
the way in terms of both its response to Typhoon
Haiyan and participation in beneficial social programmes is Coca-Cola. Through its non-profit CocaCola foundation, set up in 1987, it has assisted many
hundreds of thousands of Filipinos with programmes
for education, clean water, economic opportunity,
youth empowerment and disaster relief projects.
One particularly successful example has been its
Agos Project, which installed clean water systems in
60 communities and has been serving over 47,000 Filipinos since the programmes launch in 2011. The
ongoing efforts of the company were recognised in
December 2014, when it received an Award for Corporate Excellence from the US Department of State.
Over the course of 2014

the Philippine private
sector provided some
$124m worth of donations
to support basic
educational resources.
EDUCATION ANALYSIS
241
The secondary school population will grow by about 3m in 2016
Aiming high
The government is implementing widespread reforms to turn out
better students
Aimed at modernising an outdated system and providing students with an education that better equips
them to participate in an increasingly competitive
world, the K-12 programme is receiving full support
from the government. Part of President Benigno
Aquino IIIs 10 Point Education Agenda, the K-12 programme turns the existing 10-year system into a 13year one, including mandatory kindergarten and two
years of senior high school education.
One of the main areas of change and improvement,
therefore, is the curriculum. At senior high school
(SHS), students are expected to take two years of
specialised courses bases upon aptitude, interest and
the capacity of their school, allowing them to follow
a certain vocational direction if desired. SHS offers
subjects included within the core curriculum, often
referred to as general studies programmes, and more
specialised, tracked curriculum options.
The core curriculum includes languages, literature,
communication, mathematics, philosophy, natural sciences and social sciences. However, students may
also select from three tracks, academic, technicalvocational-livelihood and sport-art combined. The
academic track is broken into three different paths,
namely, business, accountancy and management;
humanities, education and social sciences; and science, technology, engineering and mathematics.
K-12 TRAINING: In addition to new curricula, which
allows students to hone in on their area of expertise
or interest, the K-12 system also allows for students
to begin to gain practical and technical competencies
after year 10, or their final year of junior high school.
Following this, students are allowed to study for Certificates of Competency, National Certificate (NC) Level I in year 11 and NC Level II if completing a technical-vocational-livelihood track in 2012. All certificates
improve the employability of students in sectors like
agriculture, electronics and trade, also demonstrating the willingness of students to apply themselves.
It is envisaged the complementary qualifications will
help to smooth the road for graduate jobseekers.

Though sustained economic growth has resulted in
improved job creation, with over a million jobs created between October 2013 and October 2014 according to the World Bank, the current administration is
striving to keep up the momentum. Running alongside the curriculum for all students going through
the K-12 programme is a greater emphasis and integration of information technology studies.
IMPLEMENTATION: Accompanying the extensive level of reform is increased demand for SHS teachers with
appropriate skills, such as those with an aptitude for
teaching general core curriculum subjects, as private higher education institutions (PHEIs) scramble
to ready themselves for 2016. It has been estimated
that the addition of SHS education within the K-12
programme will require places for almost 3m secondary school students and 68,000 additional teachers
for 2016. The timeline is a pressing one for a number
of PHEIs, such as the Technological Institute of the
Philippines, which has filed an application to offer
grades 11 and 12 in order to help cope with K-12
implementation. PHEIs generally do not receive any
meaningful assistance from the government, despite
the challenges of accommodating the vast student
body. However, regardless of this, it is essential for many
that they comply in order to fill the complete void of
freshmen", or first-year students in 2016, because
otherwise many will likely be forced to close.
In order to mitigate this strain on SHS and the students which seek to attend them, in September 2013
the Department of Education (DepEd) announced
the adoption of an education voucher scheme to provide financial assistance to poorer students who enrol
in licensed private SHS. The voucher scheme will partially or fully compensate students who have attended a public junior high school (JHS) for at least four
years for the cost of private school tuition at SHS.
The voucher scheme is viewed as the most viable
option because of the autonomy it gives students and
The transition of the

Philippine education
system to a K-12 model
involves adding a two-year
senior high school level, in
addition to making
kindergarten attendance
mandatory.
242
EDUCATION ANALYSIS
Some universities are changing their calendars to start classes in July or August, like others in the region
PHEIs numbered 1699 at

the end of 2014, up from
the 948 that were
operating in 1996, with
some 3.56m students
enrolled in higher
education.
parents to select a school. Though the voucher scheme

will initially be rolled out on a small scale, it is calculated that the potential number of recipients could
reach 1.3m 2017. The inherent simplicity of a voucher scheme for large-scale funding and quick school
access makes it administratively attractive to DepEd.
Furthermore, the proposed voucher scheme would also
include a pro-poor targeting mechanism, aimed at
providing assistance for those students whose household income falls at or below the median national
household income level of around P150,000 ($3375).
The voucher scheme is viewed as superior to previous forms of Government Assistance to Students and
Teachers in Private Education programme, which have
relied upon an Education Service Contracting Scheme
(ESCS). The ESCS is one of the worlds largest education-focused public-private partnerships, used in the
Philippines since 1986 and allowing the government
to provide educational access for public students via
places at private high schools.
Through the scheme, an annual per pupil subsidy
is doled out to certified private JHS to accept public
school students who cannot be accommodated in
public high schools that are over-congested. However, the existing ESC has been criticised for being
inequitable for poor students, inefficient due to level of monitoring required while also requiring families to fork out top up fees. Positively though, the
scheme has succeeded in further involving the private sector into the provision of Education For All and
widening the mindset of the central government.
CALENDAR COMMOTION: In line with modernisation of the domestic curriculum under K-12, the updating of the calendar for schooling at both high school
and higher education institutions has also come under
debate in 2014. The trend has already been set in
motion by the University of the Philippines and the
University of Santo Tomas, which are set to move the
start of their academic calendar year 2014-15 from
June to August and July, respectively. The Ateneo de
Manila University, meanwhile, will start its school year

in August of academic year 2015/16. The rationale
behind the move is internationalisation via improved
harmony with other top PHEIs in Asia.
However, the Commission on Higher Education
(CHED) countered the move by the select group of
PHEIs by stating that the best way for institutions in
Philippines to internationalise would be to intensify
quality assurance, capacity-building and institutional development programmes. Upcoming ASEAN integration is also causing concern within the sector, with
increased pressure on CHED to assess the skills of
their own students against regional neighbours.
Rather than dictate the decisions of schools to
adapt to the calendar, the CHED is allowing schools
across the education spectrum to make the calendar
decision on their own. Under Republic Act No 7797,
which sets the school calendar to a maximum of 220
class days, it is proclaimed that the school year should
start on the first Monday of June, but not later than
the last day of August. CHED continues to recommend a June opening, but for those wishing to change,
they must seek CHEDs approval in writing no later than
15 days before the recommended opening of classes. In practice, it appears that only those top universities aiming for inclusion within ASEAN University
Network are eyeing the shift in their calendars.
TUITION: Finally, another product of incumbent reform
has been a change in the tuition system. In July 2014
the UP implemented the Socialised Tuition System
(STS), which serves to replace the Socialised Tuition
and Financial Assistance Programme. The STS is set to
simplify the basis for tuition brackets, adjust income
bracket cut-offs for inflation, increase monthly stipends
for low-income students and streamline the entire
process. Indeed, the 14-page application from under
the previous system has been cut back to two pages.
In terms of tuition, the STS adjusted the income brackets upwards by 30% to account for inflation since
2006, when the original cut-offs were established,
effectively reducing tuition for those affected. For
example, a student with an annual household income
of P1.3m ($29,250) now falls into bracket B, not A.
However, the CHED announced in May 2014 that
353 of the estimated 1683 PHEIs had asked to increase
their tuition fees for the 2014/15 academic year.
Unlike state and local tertiary education providers,
which fall under the remit of the government, private
post-secondary institutions are set up through a corporation code, and while accredited independently,
remain governed by CHED, which oversees all legislation, guidelines and policy decisions.
Approximately 3.56m students are enrolled in postsecondary institutions throughout the Philippines,
with PHEIs constituting the overwhelming majority of
the total number of tertiary education providers. The
number of PHEIs operating at end-2014 was 1699, or
88% of the total, up from 948 in 1996. In 2014 CHED
allowed 354 private post-secondary institutions to
raise their fees, resulting in an average increase
per unit of P37.45 ($0.84), or 8.5%, for each student.
243
Mining
New revenue-sharing proposal before Congress
Moratorium on exploration permits lifted in 2013
Tax burden could increase for mining companies
Investment lagging due to lack of regulatory clarity
Transparency initiative gaining traction in the sector
244
MINING OVERVIEW
Output and revenue have been largely steady in recent years
Waiting game
Murky regulatory environment continues to impede expansion
The Philippines boasts some
of the largest precious
metals reserves in the
world, valued at around
$840bn at 2010 prices
equivalent to 14 times the
countrys external debt as
of January 2014.
Virtually all metallic mining

has been accounted for by
large-scale mines since
2011, when a change in tax
collection practices
essentially eliminated
small-scale gold mining
operations from the formal
sector.
Progress on commoditising the Philippines vast mineral potential is proceeding at a painstaking pace, with
a few successful mine openings in 2014 driving modest growth in the sector. Although overall output and
revenue are being sustained by existing operations,
new investment continues to lag, as mining companies
wait out the finalisation of new mining regulations,
which have dragged on since 2011. In 2014 the mining sector contributed just 0.9% to national GDP in real
terms, with the contribution of mining and quarrying
increasing only marginally in recent years, from P72.05bn
($1.62bn) in 2012 (equivalent to 1% of GDP) to P72.9bn
($1.64bn) in 2013 and P75.48bn ($1.7bn) in 2014,
according to the Philippine Statistics Authority National Statistical Coordination Board (PSA-NSCB).
HOLDING STEADY: The dearth of new mining projects
coming on-line in the Philippines in recent years has
resulted in inelastic production since 2010, with any
minor variations in the nominal value of output in the
mining sector primarily due to fluctuations in global commodity prices rather than substantial changes in production levels. According to the Mines & Geoscience
Bureau (MGB), the gross production value of mining in
the country amounted to P157.1bn ($3.53bn) in 2013,
compared to P144.6bn ($3.25bn) in 2012, P163.2bn
($3.67bn) in 2011 when commodity prices briefly
rebounded and P145.3bn ($3.27bn) in 2010.
Virtually all metallic mining has been accounted for
by large-scale mines since 2011, due to a change in
tax collection practices that essentially eliminated smallscale gold mining operations from the formal sector
(see analysis). According to the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, the gross production value from such operations came to just P1.2bn
($27m) in 2012 and P300m ($6.75m) in 2013 a significant decline from the P42.9bn ($965.25m) and
P34.1bn ($767.25m) in 2010 and 2011, respectively.
By contrast, data from the MGB saw large-scale
metallic mining steadily increase its gross production
value over the period, from P69.1bn ($1.55bn) in 2010
to P88bn ($1.98bn), P97.8bn ($2.2bn) and P99bn

($2.23bn) in the following years. The growth in the value of the sector in past years is thanks to higher output from existing mines, as only a handful of new mines
have come on-line of late due to legislative delays that
have slowed sector investment to a trickle.
However, there was some good news in early 2014,
with the start of two new commercial-scale gold-copper projects and the resumption of another helping to
boost precious metals output, in addition to a slight yearon-year (y-o-y) increase in production, from P7.62bn
($171.45m) in the first quarter of 2013 to P8.63bn
($194.18m) in 2014. Substantial growth in copper and
nickel production helped push base metal output in the
first quarter of 2014 to P13.35bn ($300.38m), up from
P11.15bn ($250.88m) one year earlier.
PRECIOUS METALS: The Philippines boasts some of
the vastest precious metals reserves in the world, valued at around $840bn in 2010 prices, according to a
study by the World Bank equivalent to 14 times the
countrys external debt as of January 2014, according
to the BSP. Its unique geographic location along the confluence of the Eurasian and Philippine tectonic plates
has resulted in a wealth of geologic formations, with
the country widely believed to have the third-largest
gold reserves in the world, the fourth-largest copper
reserves and the fifth-largest nickel reserves. This
includes 14.5bn tonnes of metallic minerals, including
gold, copper, iron, chromite, nickel, cobalt and platinum, along with 67.66bn tonnes of non-metallic minerals such as sand and gravel, limestone, marble, clay
and other quarry materials, according to the Department of Environmental and Natural Resources.
Precious metals production surged 13% in the first
three months of 2014 to P8.63bn ($194.18m), according to data from the MGB, thanks largely to higher output from three of the countrys gold mines, which
boosted production by volume by nearly one-third,
from around 3434 kg in the first quarter of 2013 to
4509 kg by the first quarter of 2014. Conversely, silver
MINING OVERVIEW
production fell by more than half over the same period, from 8629 kg to around 4226 kg.
The bulk of increasing gold production is due to two
new operations the high-grade gold-copper Didipio
Mine and copper-gold Padcal mine which ramped up
operations at the end of 2013. Operated by Australias
OceanaGold, the Didipio mine located about 270 km
north of Manila on the island of Luzon commenced
commercial operations in April 2013 and increased
annual output to 106,256 oz of gold and 25,010 tonnes
of copper by end-2014, according to statements by the
company. In the first four years of the 16-year project
open-pit mining will be taking place, with underground
operations scheduled to ramp up starting in years 5-7.
Nominal annual production is slated to reach 100,000
oz of gold and 14,000 tonnes copper from total reserves
of 1.59m oz of gold and 210,000 tonnes of copper.
The closure of the Padcal mine by its owner, Philex
Mining, from April 2012 to March 2013 limited production at the site in Benguet to 99,802 oz of gold in 2013,
up from 71,297 oz in 2012, but 29% less than the
140,113 oz recorded in 2011. Increased throughput of
higher-ore grades boosted copper output by 46% from
10.14m kg in 2012 to 14.77m kg in 2013, but was down
14% from the 17.25m kg seen in 2011. According to
data from the MGB, the mine produced 28,995 oz of
gold in the first quarter 2014, a 247% rise over the 8360
oz mined the previous year. Copper production likewise
improved, increasing by more than three-fold from
4393 tonnes to 18,052 tonnes of concentrate.
The 2012 closure came as a result of heavy rains
brought on by two typhoons that caused one of the
tailing storage pits to overflow, discharging some 20m
tonnes of silt into the Balog Creek and Agno River and
resulting in fines of P188.6m ($4.24m). According to
company estimates, the total reserves of the Padcal mine
covered by mineral agreements are spread out over an
area of 13,492 ha and amount to around 65.8m tonnes
of copper and gold grades of 0.20% and 0.40 grams
per tonnes, resulting in recoverable resources of 108.7m
kg of copper and 627,000 oz of gold.
ESTABLISHED PRODUCERS: Strong production from
the well-established Toledo copper mine in Cebu also
helped to bolster output, with the facility turning out
41.6m kg of copper concentrate in 2013, a 2% y-o-y
increase from the 40.9m kg produced in 2012, according to company reports. As a subsidiary of the Australian
Atlas Mining through its domestic operator Carmen
Copper Corporation, Toledo is one of the countrys
largest copper mines, with estimated mineral resources
of 1.43m tonnes at 0.29% copper grade and 4.1m
tonnes of copper metal at 0.15% cut-off grade.
A handful of other operations also posted positive
y-o-y gains in the first quarter of 2014, including the
Co-O Gold Project, operated by Mindanao Mineral Processing and Refining, which increased production 19%
from 494 kg to 588 kg. The output from the Benguet
Corporations Acupan Contract Mining Project also
more than doubled y-o-y, from 92 kg to 188 kg. These
rises combined to more than offset declines in other
areas, such as from the shuttering of Greenstone
245
The Philippines has the third-largest gold reserves in the world
Resources Corporations Siana gold project and the

Rapu-Rapu polymetallic project, which had been producing around 182 kg and 201 kg, respectively, as
recently as the first quarter of 2013.
The closure of Siana and Rapu-Rapu also significantly affected the countrys overall silver production, as
the two projects had been contributing some 460 kg
and 2709 kg, respectively, to the segments total output of 9629 kg as of the first quarter of 2013. The only
significant silver mines to boost output over the period were Padcal, where production rose by a factor of
more than three, to 753 kg, and the Carmen mining area
of Toledo, which doubled output to 441 kg.
NICKEL FOR YOUR THOUGHTS: The countrys existing nickel mines continue to ship out vast quantities of
raw ore, primarily to China, where it is processed into
nickel pig iron used in Chinese stainless steel plants. In
2013 the Philippines was tied with Indonesia as the
largest nickel producer in the world, though the latter
banned exports of the metal in 2014 in an effort to
promote local industry. This was a boon for other nickel producers like the Philippines, as nickel commodity
prices rose dramatically from less than $14,000 per
tonne on the London Metals Exchange at end-2013 to
peak at over $21,000 per tonne in May 2014 before
receding. The Philippines and Indonesia each produced
approximately 440,000 tonnes of nickel in 2013, according to data from the US Geological Survey. The Philippines had increased production from 424,000 tonnes
in 2012, with reserves estimated at 1.1m tonnes.
HOLDING PATTERN: Despite the Philippines veritable
stockpile of mineral wealth, the country has yet to take
In 2013 the Philippines was

tied with Indonesia as the
largest nickel producer in
the world, producing some
440,000 tonnes each. The
Philippines reserves are
estimated at 1.1m tonnes.
Mining gross production value, 2010-14* (P bn)

2010
2011
2012
2013
2014*
Large-scale metallic mining
69.1
88
97.8
99
21.94
Small-scale gold mining
42.9
34.1
1.2
0.3
0.04
Non-metallic mining
33.3
41.1
45.6
57.8
SOURCE: MGB
*Preliminary data through March 2014
246
MINING OVERVIEW
The country is working to adopt global transparency standards
The no-go zone map

released in mid-2013
reduced the total land area
previously open to
extractive activities by 50%,
due to criteria like the
presence of tourism sites,
agricultural land, marine
sanctuaries and others.
full advantage of its natural resources as a result of

uncertainty over mining regulations. At the heart of the
matter is Executive Order 79 (EO 79), which was first
issued in 2011 with the intention of clarifying inconsistencies in existing mining regulations primarily
governed by the Philippine Mining Act of 1995.
However, four years on, EO 79 has yet to make a substantial impact on the sector, as its accompanying
implementation legislation has remained incomplete.
This is largely due to different interests struggling to
reach an agreement on a host of issues, including environmental regulations, transparency, the role of local
government units (LGUs), the structure of exploratory
and production leases, and taxation (see analysis).
POLITICAL WILL: One point of contention is the need
for stronger political will by the national government
over the involvement of LGUs in large-scale mining
projects. While LGUs have the authority to issue smallscale mining permits, they can also block federally
approved, large-scale mining projects by enacting their
own conflicting legislation, such as a ban on open-pit
mining. While the EO 79 was designed in part to address
the inconsistency between the national mining law and
LGU ordinances, in practice this has not happened.
It is likely that a move by the national government
to limit the involvement of LGUs in large-scale mining
will meet with strong resistance from LGUs that hold
sway over operations planned in their territories and
are often backed by influential interests, including the
No. of operating metallic mines, 2010-14*

2010
2011
2012
2013
2014*
Copper & gold
Copper, gold & silver
Copper, gold, silver & zinc
Gold & silver
Nickel
15
18
21
24
27
Iron
SOURCE: MGB
*Preliminary data through March 2014
Catholic church and environmental groups. Several

projects remain on hold as a result of local ordinances
notably, the Tampakan Copper-Gold project. Developed by Glencore Xtrata and Indofil, the mine is valued
at around $5.9bn, making it the single largest foreign
direct investment in the country to date. However, Tampakan remains in limbo due to an open-pit mine ban
enacted by an LGU in South Cotabato back in 2010.
MAPPING EXERCISE: Heavy geographical restrictions
are also being codified into federal regulation in the
form of a no-go zone map, delineating areas where
mining operations are forbidden owing to social or
environmental restrictions. Released in mid-2013 by the
Mining Industry Coordinating Councils technical working group, the zone map reduced the total land area
previously open to extractive activities by some 50%.
As a result, around 4.5m ha of land with high mineral
content was ruled off limits due to criteria like the presence of tourism sites, agricultural land (including nonproducing land), marine sanctuaries and island ecosystems. However, after mining advocates protested that
the new map effectively nullified the majority of previously approved permits for exploration, the government agreed to revisit it and was still in the process of
redrawing the boundaries as of early 2015.
After years of debate, compromise and hand wringing over the implementation of EO79, the order could
still be rescinded. Unlike laws passed by Congress, executive orders can be easily revoked. With a presidential
election on the horizon, there is a distinct possibility
that EO79 could be modified or scrapped altogether.
TRANSPARENCY: One of the subjects covered by EO79
that has been gaining traction in recent years is the
domestic implementation of standards from the Extractive Industries Transparency Initiative (EITI), designed
to open up the books of both mining companies and
the government to public scrutiny. As of February 2015,
some 32 countries had been deemed compliant with
EITI standards, while another 48 countries were in the
process of implementing its framework.
EITI certification is intended to alleviate public distrust of the government and mining companies, which
often struggle with negative perceptions arising from
past incidences of pollution from mines and oil fields.
It will also open up the governments books to allow
the collection and distribution of revenues derived
from extractive industries to be traced. The transparency afforded by the process will facilitate more consistent benchmarking, fostering a more accurate and
objective picture of the sectors actual operations, in
addition to taxes paid and government revenue streams.
The Philippines officially became an EITI candidate
country in May 2013, and has since been working with
stakeholders to compile its official validation report,
which will be submitted to the EITI for review. The local
response to this voluntary initiative has been largely positive, with 40 mining companies having signed a disclosure waiver as of late 2014.
I would like to see mandatory compliance so that
reluctant companies would be forced to comply," Teresa Habitan, assistant secretary in the Department of
MINING OVERVIEW
Finance and PH-EITI focal person, told OBG. This would

also speed up data collection by setting up a centralised
data centre. The bottom line is that if they have nothing to hide, then why withhold information? And it is
not just their information that is collected, but also
counterpart information from the government.
MOVING FORWARD: With the Didipio mine up and running and operations resumed at Padcal, only a limited
number of mines now remain in stages of development that would allow them to commence operations
in the coming years. At least three new mining projects
with combined investments of P1.46bn ($32.85m) are
expected to be up and running in early 2015 with several others also awaiting final authorisation of pending permits to begin mining as well.
Among these is the Vitali iron ore mining project, located in Zamboanga City in Mindanao, which will primarily produce iron along with smaller amounts of gold,
silver and other associated mineral deposits over a projected mine life of 10 years. Hard Rock Mineral Trading
secured a declaration of mining project feasibility
(DMPF) in March 2014 to begin commercial operations through its mineral production sharing agreement (MPSA), which covers an area of 2077 ha.
The other projects on the horizon are two new nickel operations: Libjo nickel laterite project, developed
by the East Coast Mineral Resources Company on Dinagat Island, and the Agata nickel laterite project, from
the Minimax Mineral Exploration Corporation, located
in Agusan del Norte. The Agata North nickel mine is estimated to have proven and probable ore (limonite and
saprolite) reserves of 6.79m tonnes, with measured
and indicated resources of 33.94m at a grade of 1.1%
nickel, and inferred resources of around 2m tonnes
with a nickel grade of 1.04%. A partial DMPF for nickel
production on 600 ha was approved in April 2014 by
the government, with exploration also approved in the
remaining portion of the 7679-ha MPSA contract area.
Commercial operations to mine chromite and nickel
have also been approved for the 697-ha MPSA covering Dinagat Island which expires in November 2022.
In addition to these, the Runruno mine is also under
development and could begin commercial operations
as early as 2015 provided it is able to clear up a few
outstanding social and environmental permits. The
gold-molybdenum project boasts a defined resource
of 1.42m oz of gold and 11.6m kg of molybdenum
according to operator FCF Minerals Corporation, with
780,000 oz of proven and probable gold reserves.
The long awaited King-king Copper-Gold Project,
being developed by the Philippines-based Nationwide
Development Corporation (Nadecor) and Toronto-listed St Augustine Gold and Copper, was also on the verge
of opening as of early 2015, pending the approval of
its Environmental Compliance Certificate. If given the
go-ahead, the mine would likely become the most productive in the country, producing around 110,000130,000 tonnes of copper as well as 529,000 oz of
gold per year, according to company estimates.
Located near Davao City in Mindanao, the project
boasts measured and indicated mineral resources of
249
Three new mining projects with combined investments of $32.85m are expected to begin operating in 2015
962.3m tonnes at 0.25% total copper, 0.06% soluble copper and 0.33 grams per tonne of gold, resulting in
2.45bn kg of contained copper and 10.3m oz of contained gold, according to data from St Augustine.
Other significant projects in varying stages of development include the Far Southeast copper-gold project from Lepanto Consolidated Mining Company and
Gold Fields, which is expecting approval for its Financial or Technical Assistance Agreement in 2015, and
Philexs Silangan gold and copper project, forecast to
begin production in 2018.
EXPLORATION: Despite the challenges of obtaining
exploration permits (EPs), mining firms continue to
show considerable interest in the sector. After the
moratorium on EPs was lifted in 2013, the MGB had
received some 130 applications for exploration as of
October 2014, sought after as a placeholder to secure
land in the hopes that the legislative morass will be
resolved prior to the permits expiration. Depending on
how accommodating the government is in approving
EP applications, exploration activity could begin to pick
up again after the number of active EPs fell from 53 in
early 2013 to 36 by July 2014, according the MGB.
OUTLOOK: The Philippines vast and largely untapped
mining potential will continue to draw strong interest
from both foreign and domestic actors despite decreasing investment in the short term. Although a few projects are moving forward, the vast majority of large-scale
developments will remain on hold until the government issues the relevant sector regulations, which
could feasibly drag on through the 2016 elections.
Once these issues are resolved, there are many large,
high-grade reserves in the country," Artemio Disini,
chairman of the Chamber of Mines of the Philippines,
told OBG. "There are large deposits of gold, copper and
nickel in Eastern Mindanao. If internationals decide the
risk is too great in the Philippines, large local conglomerates are already showing interest in filling the void.
The question is when the regulatory framework will
catch up with demand. Timing, as they say, is everything.
The moratorium on
exploration permits was
lifted in 2013, leading to a
flurry of applications. As of
October 2014, the Mines
and Geoscience Bureau had
received more than 130
applications for exploration
activity.
Although a few projects are

moving forward, most
large-scale developments
will remain on hold until the
government issues the
relevant sector regulations.
250
MINING ANALYSIS
The government collected $483.3m in mining sector taxes in 2013
Dollars and sense

Conflicting opinions on the sectors tax burden complicating reforms
The federal government
has announced plans to
collect up to $1bn from the
mining sector per year
through a new
revenue-sharing regime
that would take in 55% of
adjusted net mining
revenues or 10% of gross
revenue whichever is
higher.
The effective tax rates for

mining outfits are
significantly higher than
the 2% cited by the
government, due to
numerous other taxes,
levies and fees imposed
through a complex
regulatory structure.
When making investment decisions, mining companies take a wide array of variables into account, including everything from regulatory policies and political
stability, to resource size and accessibility. As geologic factors such as the grade or depth of resources are
relatively constant, governments have a more limited toolbox when it comes to attracting mining operations to their territory. One of the most influential
of these policy tools is a countrys taxation structure,
which is often the deciding factor for whether a mining company chooses to move forward with a given
project or pursue other prospects in countries with
a more profitable tax structure.
In the case of the Philippines, this crucial policy
direction remains in flux along with many of the other regulatory issues related to the sector (see
overview). Mining taxation has become something of
a hot-button issue in recent years, with politicians,
agencies, companies and industry bodies weighing in
publicly with their opinions on the industrys future.
PLANNED REFORM: The federal government has
announced plans to collect up to $1bn per year from
the sector by imposing a new revenue-sharing system that would take in a 55% of the adjusted net mining revenues or 10% of gross revenue whichever is
higher. Approved by the Mining Industry Coordinating Council (MICC) in June 2014 but not formally
approved by Congress as of February 2015, the new
scheme would replace all existing national and local
taxes, with the exception of the real property, valueadded, capital gains, stock transaction, documentary
stamp, and donors tax, as well as the Securities and
Exchange Commission, environmental, administrative
and judicial fees. It would also entitle the government
to collect a supplementary tax on windfall profits.
TWO SIDES OF THE COIN: The government has justified the tax boost, contending that the mining sector has not been pulling its weight in terms of tax collection, citing the current gross tax rate of 2%, levied
as a resource rent for companies extracting minerals
belonging to the state, as a benchmark. Although the

Philippine Mining Act of 1995 does levy a 2% gross
tax on mineral companies, the effective tax rates for
mining outfits are significantly higher due to numerous other taxes, levies and fees imposed through a
complex regulatory structure. Some of the most significant of these include a corporate income tax of
30%; a 12% value-added tax; a 5% royalty tax on minerals in state reservations; and 1-1.5% in royalties paid
to indigenous peoples on top of the 2% excise tax.
In 2013 the government collected a total of
P21.95bn ($493.9m) in taxes, fees and royalties from
the mining sector, according to data from the Mining
and Geosciences Bureau (MGB). This was similar to
the P19.44bn ($437.4m) paid in 2012 and P22.23bn
($500.2m) in 2011. The majority of this revenue stream
is derived from taxes collected by national government agencies, which accounts for some P16.51bn
($371.5m), or 75%, of the 2013 total.
Other contributions come from the excise tax collected by the Bureau of Internal Revenue (BIR), equivalent to P2.49bn ($56m) in 2013; fees, charges and
royalties imposed by the Department of Environmental and Natural Resources and the MGB, for a combined P1.52bn ($34.2m); and taxes, fees and charges
levied by local government units, at P1.42bn ($32m).
Given these figures, the tax rate on the P157.1bn
($3.53bn) in gross mining sector revenue was roughly 14% in 2013 well above the 2% figure cited by
proponents of a tougher tax scheme.
DATED DATA: Furthermore, much of the data used
as an illustration of comparably low taxation levels in
the industry come from 2010 or earlier, which has the
potential to create a misleading picture of sector contributions, as revenue from small-scale mining (SSM)
operations which generally pay no tax are aggregated into national production data. This inflates the
ratio of revenue to taxes and results in a figure that
indicates a lower average tax burden than in reality.
In 2010, for example, SSM gold operations produced
MINING ANALYSIS
P42.9bn ($965.3m) in revenues, while paying virtually no taxes. This yielded an overall tax rate on gross
production of 9.2%. However, after removing SSM
output from the total, revenues came to P95.9bn
($2.2bn), with a tax rate of 13.4%, according to a study
by the Chamber of Mines of the Philippines (COMP).
This anomaly was largely alleviated after 2011, with
reported SSM revenue plummeting from P34.1bn
($767.3m) in 2011 equivalent to nearly one-fifth of
total mineral revenue to P1.2bn ($27m) in 2012
and P33m ($742,500) in 2013. The dramatic downturn in SSM output was the result of a previous unrelated tax reform initiative implemented in 2012 in
which the BIR tasked the Philippine central bank,
Bangko Sentral ng Pilipinas (BSP), with enforcing a 2%
excise tax on its gold purchases. The change in regulations saw the vast majority of SSM operators, which
had previously sold their gold to the BSP under taxfree, no-name transactions, shift to the informal economy overnight, with roughly one-third of annual
domestic gold production vanishing from the books.
AETR ARGUMENT: Another commonly used method
of comparing extractive resource tax regimes is the
average effective tax rate (AETR), which has also been
used by the MGB and others, projecting prohibitively high tax rates under the current form of the MICC
proposal. For example, when the AETR model was
applied to a mining operation with a theoretical 20year life span and commodity prices set at $6.82 per
kg of copper and $1292 per oz of gold, the state
would yield an AETR of 79.3% for an internal rate of
return (IRR) of 13.2%, according to the COMP study.
This AETR would compare unfavourably to those in other mining intensive countries, such as Australia (58.8%),
Canada (58.3%), Peru (54.7%), South Africa (52.6%),
Chile (40.8%) and Papua New Guinea (34.5%).
WEIGHING IN: As stakeholders debate the sectors
real tax burden and how it should be most fairly distributed going forward, third-party research is also
being conducted on the possible effects of the MICC
proposal, accompanied by recommendations for an
equitable solution for all parties.
A study published by the Asian Institute of Management in January 2013 concluded that under the existing regulations, mining companies operating in the
Philippines have a negligible difference in average tax
payments, expressed as a share of total company revenue, compared with mining firms operating in other countries. The report also noted that average tax
payments in the Philippines were significantly higher than the industry-wide average cited by the government in the MICC proposal.
According to the study, the two Philippines-based
mining outfits sampled paid taxes at an average of
rate of 19.4% of revenue, compared to a 15.7% taxation rate for their counterparts operating in other
countries. The foreign companies sampled in the survey included established industry players like Barrick
Gold, ENRC, Rio Tinto, Vale Indonesia and Norilsk Nickel, in addition to two domestic operators, Philex Mining and Nickel Asia. The average level of taxation in
251
The average level of taxation in the sector is higher than in Latin America, Africa and the OECD
the sector in the Philippines also measured higher than

in other regions or country groupings, such as Latin
America (17.4%), Africa (11.3%) and the OECD (13.7%).
A report issued by the Fiscal Affairs Department of
the IMF in June 2012 was similarly critical of the proposed reforms to the mining sector, stating that, The
current FTAA [Financial or Technical Assistance Agreement] regime is not competitive internationally. It
further added that, the low contribution of the mining sector to government revenues is not due to the
Philippine fiscal regime for mining being generous to
contractors by international standards.
These opinions were supported by the Frasier Institutes most recent annual survey of global mining
companies, compiled in 2013, which revealed that
more than half of those polled view the mining tax
scheme as an impediment to investment. According
to the survey, some 28% of respondents indicated
that the Philippines mining sectors taxation regime
including personal, corporate, payroll, capital and
other taxes, as well as the overall complexity of tax
compliance was a mild deterrent to investment.
Another 17% stated that taxation was a strong deterrent, with 7% concluding that they would not pursue
investments as a result of this.
IMPACT OF UNCERTAINTY: Given the variation in
estimates of how much mining companies actually pay
in taxes, and the potentially flawed models used to
estimate effective tax rates in the future, mining companies have good reason to be apprehensive about
the potential fallout from the changes proposed by
the MICC. If the government fails to take into account
more inclusive and broadly accepted benchmarks
such as the AETR and IRR in its sector-level taxation projections, the country runs a real risk of making the industry even more uncompetitive relative to
other mineral-rich territories with more favourable taxation schemes. While the tax structure is not solely
to blame for lagging investment, it remains a significant contributor, and should be treated as such.
According to a study by the

Chamber of Mines of the
Philippines, the average
effective tax rate under the
MICCs reform proposal
would be nearly 80%, much
higher than in other
mining-intensive countries.
In a 2013 mining survey,

28% of respondents cited
the Philippines taxation
regime as a mild deterrent
to investment, while 17%
saw it as a strong deterrent
and 7% would not pursue
investment as a result of it.
252
MINING INTERVIEW
Gerard H Brimo, President & CEO, Nickel Asia Corporation
Voluntary action
OBG talks to Gerard H Brimo, President and CEO, Nickel Asia Corporation
How can mining officials ensure the development
of the communities surrounding mining sites?
BRIMO: Mining firms are already mandated to spend
1.5% of their annual operating costs for the development of their immediate local communities. Moreover,
excise taxes and royalties on mining operations are
shared with local government units, providing more
funds that can fuel development if spent wisely. Generally, host communities are supportive of the industry in properly organised mining areas, as they benefit
from the development that the sector generates.
That said, the country can do a lot more in the sphere
of social development in remote, mountainous areas,
which is exactly where the mining industry tends to be
based. The Philippines is rich in natural minerals and
yet mining accounts for only 1% of GDP. The country
could use its mineral resources to decrease poverty, but
this would necessitate greater government support. The
case of Palawan, which has been declared a no-go mining zone, illustrates this. There are few tourist areas in
southern Palawan, nor is there much in the way of agriculture, in areas where the soil is lateritic, meaning it
is full of iron, reducing the availability of nutrients and
impeding agricultural development. As a result, lateritic areas call for different forms of development. Prior
to the beginning of operations at our Rio Tuba mine,
the area was not developed. Infrastructure did not exist
and people had limited means to earn a livelihood.
However, looking at it now, mining has generated significant opportunities in that part of Palawan.
To what extent can the Philippines candidacy for

the Extractive Industries Transparency Initiative
(EITI) enhance environmental safeguards?
BRIMO: Large-scale metallic mining companies have
been advocating participation in the EITI for years. Currently, mining companies that represent in aggregate
over 95% of the revenues for the entire industry have
signed waivers in order to allow the Bureau of Internal
Revenue to disclose their tax payments on a voluntary
basis. As a result, the Philippines hopes to reach country accreditation within a year.
The EITI holds great potential to improve transparency in both the extractive sector and the government.
Extractive companies publish details about their tax payments, and any discrepancies with government receipts
undergo a reconciliation process. Companies also publish details of their social expenditures and royalties to
indigenous peoples, while there is a write-up on applicable laws and regulations regarding extractives. In
addition to the EITI, there have also been other significant initiatives to strengthen environmental protection. The monitoring by the Mines and Geosciences
Bureau has involved multipartite teams overseeing the
performance of each mining company on a quarterly
basis. However, such efforts need to be followed in
small-scale mining. Unfortunately, the negative image
of small-scale mining, which for the most part involves
illegal, unsupervised operations, has affected the image
of large-scale mining, as both are lumped together.
What kind of opportunities exist for the development of downstream and value-added industries?
BRIMO: Opportunities remain limited because the mining industry is currently small, while the countrys power supply is among the most expensive in our region.
There are only a handful of copper and gold mines in
operation today, and they are not large by international standards. There are more nickel mines producing
nickel ore for exports, which Indonesia last year banned
to encourage processing. If the Philippines did the
same, it would be difficult to compete with Indonesia,
which has higher-grade nickel mines in contrast to our
mostly low- and medium-grade operations, and has
abundant coal with higher calorific content than ours
to power their plants. If there are opportunities for significant value-added activities, the private sector would
naturally gravitate towards those. We have also proven
that through our participation in two nickel processing plants in the country, even without a ban in place.
253
Legal Framework
New legislation allows full entry of foreign banks
Domestic banks able to open Islamic windows
Legal procedures for mergers and acquisitions
Rules on data privacy and anti-money laundering
254
LEGAL FRAMEWORK
New legislation allows for the full entry of qualified foreign banks
By the law
Important legal and regulatory developments
As ASEAN starts its economic integration in 2015, there
have been certain important developments in the legal
and regulatory framework of the Philippines. As elucidated below, the changes of recent years have significant implications in the area of banking and finance,
mergers and acquisitions, and data privacy.
LIBERALISED ENTRY OF FOREIGN BANKS: Perhaps
the most significant legal development in the banking
sector is the passage of Republic Act No. 10641, which
allows full entry of qualified foreign banks into the
Philippines. Prior to this law, a foreign bank could enter
the Philippine banking system by (1) acquiring up to
60% of the voting stock of an existing domestic bank,
(2) forming a new banking subsidiary whose voting
stock was to be owned up to 60% by the foreign bank,
or (3) establishing a Philippine branch with full banking authority. Eventually, these last two modes of entry
were closed. Under the new statute, all three modes
have been made available anew, with modifications.
Presently, a foreign bank can be authorised by the central bank, Bangko Sentral ng Pilipinas (BSP), to (i) acquire
up to 100% of the voting stock of an existing bank, (ii)
form a 100%-owned banking subsidiary, or (iii) establish a Philippine branch with full banking authority.
Before, to be considered by the BSP, a foreign bank had
to be among the top 150 foreign banks in the world or
among the top five banks in its country of origin. Now,
it is sufficient that the foreign bank be widely owned
or publicly listed, if not owned or controlled by the government of its country of origin.
Prior to the passage of the new law, a domestic bank
whose capital stock was owned more than 40% by a
foreign bank, as well as a local branch of a foreign bank,
could not bid at the foreclosure sale of land mortgaged
to it, and was merely entitled to receive the net proceeds from such sale. This was in view of the provision
in the constitution of the Philippines restricting the
ownership of land to Philippine nationals, such as
through a company at least 60% owned by Philippine
citizens. At present, a foreign bank, acting through its
local subsidiary or branch, can bid and purchase the

mortgaged land at foreclosure (without the title thereto being transferred to it), but with an obligation to transfer its rights to a qualified Philippine national within five
years from the land purchase. During this five-year period, the foreign banks subsidiary or branch will have actual possession of the purchased land.
To enhance the competitiveness of the local banking system, the BSP has raised the minimum capitalisation of banks. For instance, a universal bank with
more than 100 branches is now required to have a
threshold capital of P20bn ($450m), up from P4.95bn
($111.4m), while a commercial bank with the same
number of branches must be initially capitalised at
P15bn ($337.5m), compared to P2.4bn ($54m) before.
The BSP is also reinforcing prudential measures to
minimise systemic risk, as exemplified by its adoption
of a stress test for the real estate exposures of local
banks. With growing international reserves, the BSP is
confident of the bright prospects of the countrys banking system in the years to come.
ISLAMIC BANKING & FINANCE: One can also observe
positive developments in Islamic banking and finance.
The Philippines was one of the earliest countries in the
region to recognise Islamic finance. More than 40 years
ago, a legislative franchise was granted to Al Amanah
Bank, the countrys first bank formed to cater to the
banking requirements of the Muslim population in the
southern Philippines. The said bank was eventually reorganised in 1990 as the Al-Amanah Islamic Investment
Bank of the Philippines. Since that time, however, the
government has taken no significant steps to encourage Islamic banking and finance in the country. With
the signing by the government of a framework agreement on the Bangsamoro in order to end the armed
conflict in southern Philippines, and with the expected passage of the enabling law to implement that
agreement, a new impetus for the promotion of Islamic banking and finance in the country has arisen. It is
anticipated that the BSP will authorise the establish-
LEGAL FRAMEWORK
ment of Islamic banks in the country, or at least allow

conventional banks to open Islamic windows.
Ideally, the Congress of the Philippines ought to enact
a specific legal framework for Islamic banking and
finance. Even without such a framework, however, the
BSP can, at this stage, already allow local banks to open
Islamic windows, based on the BSPs mandate in the
General Banking Law to classify and license Islamic
banks as defined in Republic Act No. 6848, otherwise
known as the Charter of Al-Amanah Islamic Investment
Bank of the Philippines. Here, one will note the reference to Islamic banks in the plural and not singular, with
the existing Al-Amanah Islamic Investment Bank mentioned only as a model entity. Based on this deliberate
language, there is a mandate for the BSP to allow more
than one Islamic bank in the country. At this juncture,
the BSP can initially authorise conventional banks to
open Islamic windows. Eventually, the BSP can push the
frontier further, by licensing stand-alone Islamic banks
(now merely Islamic windows), based on its aforesaid
mandate, coupled with its authority under the same
General Banking Law to make other classifications of
banks as it may deem appropriate.
In fact, existing laws applicable to conventional banking and finance are not a hindrance to Islamic banking
and finance. Article 1306 of the Civil Code of the Philippines allows contracting parties to establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
This freedom in contract-making would certainly allow
the adoption of terms and conditions suitable to Islamic banking and finance, with the approval of the BSP
and other pertinent regulators.
In this area, the private sector is leading the way to
spur Islamic investments in the country. The Philippine
Stock Exchange (PSE) came up with a list of companies that pass the standards of the Accounting and
Auditing Organisation for Islamic Financial Institutions.
The PSE seeks to diversify its investor base by launching this sub-index of sharia-compliant stocks.
MERGER CONTROL: Pending the enactment of an
anti-trust or anti-monopoly law by Congress, the Department of Justice acting through its Office for Competition (OFC) entered an agreement with the Securities and Exchange Commission (SEC) for monitoring
mergers of corporations, acquisitions, consolidations,
and other anti-competitive conduct in the market or
concerned industries. Under the agreement, the SEC
will provide the OFC with copies of all documents relating to proposed mergers or consolidations. The OFC will
assess whether the resulting amalgamation will create
a monopoly or be in restraint of trade. The SEC will consider this assessment in its decision to approve or disapprove the proposed transaction.
Apart from this, the insurance commissioner can disapprove the acquisition of control of a local insurer if
the effect of the acquisition may be substantially to
lessen competition in any line of commerce in insurance or to tend to create a monopoly therein. Control
is presumed if an acquirer will directly own or hold at
255
Laws are in place to control acquisitions that might substantially lessen competition or form a monopoly
least 40% of a local insurers voting stock. In the banking sector, the BSPs approval is required for acquisition of more than 20% of a local banks voting stock.
With the initial implementation in 2015 of ASEAN economic integration and the eventual launching of qualified ASEAN banks, the BSP will continue to encourage
mergers and consolidations between and among local
banks to make them more competitive with their much
bigger counterparts in the region.
DATA PRIVACY: The Data Privacy Act was passed to
protect the fundamental human right of privacy of
communication while ensuring free flow of information to promote innovation and growth. Protected
here is personal information, defined as any information recorded in material form or not, from which
the identity of an individual is apparent or can be reasonably and directly ascertained by the entity holding
the information, or when put together with other information would directly and certainly identify an individual. However, this act does not interdict the reporting
of information by local banks and other financial institutions to the BSP under the Credit Information System Act and the Anti-Money Laundering Act of 2001.
The Data Privacy Act does not amend the various bank
secrecy laws. However, the Anti-Money Laundering Act
of 2001 empowers the Anti-Money Laundering Council to examine deposits or investments with banks and
other financial institutions, when there is a probable
cause that these deposits or investments are involved
in money laundering. Here, the said council is generally required to obtain a court order for that purpose. In
contrast, under the Terrorism Financing Prevention Act
of 2012, the said council, either upon its own initiative
or at the request of the Anti-Terrorism Council, can
inquire into or examine deposits or investments with
banks and financial institutions, without a court order.
OBG would like to thank SyCip Salazar Hernandez &
Gatmaitan for its contribution to
256
LEGAL FRAMEWORK INTERVIEW
Rafael A Morales, Managing Partner, SyCip Salazar Hernandez &

Gatmaitan
Legal protections
OBG talks to Rafael A Morales, Managing Partner, SyCip Salazar
Hernandez & Gatmaitan
How can the authorities help level the playing field?
MORALES: The Philippines legislature has yet to pass
a competition or anti-trust law, despite the fact that
the 1987 Constitution mandates the regulation or prohibition of monopolies and combinations in restraint
of trade. In the meantime, the Department of Justice
(DoJ) has been designated as the ad hoc competition
authority. The DoJ recently made an agreement with
the Securities and Exchange Commission (SEC), whereby the SEC will notify the DoJ of applications for mergers or consolidations of companies. This will allow the
DoJs Office of Competition to assess their impact on
competition, as well as help to level the playing field.
What is being done to expedite enforcement of

contracts and investor protection in the country?
MORALES: The Civil Code of the Philippines expressly
states that contractual obligations have the force of
law and must be performed in good faith, and this is a
fundamental tenet of contract law. Enforcement by
judicial action, including suits for performance of contracts, is being expedited by the Supreme Court through
the streamlining of court proceedings such as by
presenting testimony via affidavits and monitoring lower courts timeframes for handing down decisions.
With regard to investor protection, the Philippines
generally extends the same protection to foreign
investors as residents. Like local investors, property
owned by foreign investors cannot be expropriated
unless it is for public use and justly compensated. Foreign investors have the right to repatriate earnings and
the liquidation proceeds from their investments. Additionally, the Philippines has treaties with several countries, providing protection to foreign investments.
What laws are currently helping to encourage micro,

small and medium-sized enterprises (MSMEs)?
MORALES: We have a law called the Magna Carta for
MSMEs, which implements the government policy of
promoting and supporting the growth and development
of the countrys MSMEs. This recognises the vital role

they play in generating employment and economic
growth in the Philippines. The Magna Carta is being
administered by a government agency known as the
MSME Development Council.
From a legal standpoint, how is ASEAN integration

affecting labour laws and regional trade?
MORALES: ASEAN integration in 2015 is more of a
guideline than a deadline. ASEAN countries have huge
disparities in their levels of income, competitiveness
and education, to name a few indicators, and this makes
integration difficult, as less developed members are asking for certain leeway and flexibility in target compliance. Certainly, this poses a challenge for labour law
harmonisation in ASEAN.
Regional trade facilitation is also a work in progress.
Looking at the situation of the Philippines, in order to
realise the trade benefits from the opening of markets
on account of ASEAN integration, the country must
improve its port and transportation infrastructure and
reform the Bureau of Customs to rid the agency of corruption. There is also an urgent need to streamline
doing-business procedures by eliminating red tape.
How can the public-private partnership (PPP) framework help accelerate infrastructure development?
MORALES: The problem is the slow implementation
of the PPP programme. So far only a few projects have
been awarded to successful bidders of these, only
five are expected to be completed before the end of
the presidency of Benigno Aquino III.
If the World Banks advice were to be followed, the
Philippines should be spending around 5% of its GDP
on infrastructure development to catch up with its
regional counterparts; however, it would appear that
only about 2.2% of GDP has been devoted to this purpose since 2009. Clearly, the government needs to
redouble its efforts to solicit private-sector assistance to address the Philippines infrastructure backlog.
257
Tax
Financial reporting aligned with international standards
Separate tax regimes offered in special economic zones
Regulations governing transfer pricing issued in 2013
Bookkeeping requirements laid out in detail
TAX OVERVIEW
259
The general rate of corporate income tax is 30%
In detail
A look at the key elements of the tax regime
Taxes in the Philippines are imposed at both the national and local levels. At the national level, taxes are
imposed and collected pursuant to the National Internal Revenue Code, the Tariff and Customs Code, and
several special laws. There are four main types of national internal revenue taxes: income, indirect (value-added
and percentage taxes), excise and documentary stamp
taxes, all of which are administered by the Bureau of
Internal Revenue. At the local level, governments also
have some autonomy to impose taxes on business and
ownership of real property.
There is a territorial system of taxation for foreign
corporations and individuals, as well as non-resident
citizens. Only Philippine-sourced income is subject to
Philippine taxes for the latter group. Corporations incorporated under Philippine laws and resident citizens are
subject to income tax on their worldwide income.
CORPORATE INCOME TAX: The general rate is 30% on
net taxable income. There is a minimum corporate
income tax (MCIT) equivalent to 2% of gross income,
which applies beginning on the fourth year of commercial operation.
Allowable expenses in computing the gross income
subject to MCIT for certain business activities have
been enumerated. The excess MCIT paid over the regular income tax is allowed as a tax credit against the
regular corporate income tax payable in the succeeding three years. The 30% rate applies to non-resident
foreign corporations. The tax is, however, calculated on
gross income instead of net income. Exemptions apply
pursuant to tax treaty provisions.
Certain types of income and corporations are subject to special tax rates and are as follows:
International carriers doing business in the Philippines
are required to pay 2.5% of gross billings from carriage originating from the Philippines. Lower rates
are available under tax treaties. Exemption applies
on condition of reciprocity;
Expanded foreign currency deposit units of banks are
required to pay 10% on onshore interest income;
Offshore banks pay 10% on onshore interest

income;
Regional operating headquarters of multinational
companies are required to pay 10% of taxable income;
Regional or area headquarters of multinational companies are exempt. These entities are not allowed to
generate income from Philippine sources nor solicit or market goods and services on behalf of their
parent company or affiliates. They are authorised to
act as supervisory, communications and coordinating centres for their subsidiaries and branches;
Contractors and subcontractors engaged in petroleum exploration are required to pay 8% of gross
income in lieu of all other taxes;
Non-resident foreign owners, lessors, or distributors
of motion pictures pay 25% on gross income;
Non-resident owners of vessels pay 4.5% of gross
rental, lease or charter fees from citizens; and
Non-resident foreign lessors of aircraft, machinery
and other equipment pay 7.5% on rentals, charter fees
and other fees from Philippine sources. These taxes
are withheld by the payer.
TAX BASE: Taxable income is computed in accordance
with the accounting method employed by the company. Where there are differences in financial and tax
reporting on the recognition of income and expenses,
the differences are recognised as reconciling items on
the income tax return.
DEDUCTIBLE EXPENSES: In general, all expenses
incurred in connection with the conduct of business
are allowed to be claimed as deductions when calculating net income subject to tax. The tax code lists the
following major classifications of allowable deductions:
Ordinary and necessary expenses;
Interest;
Taxes;
Losses;
Bad debts;
Depreciation;
Depletion of oil and gas wells and mines;
260
TAX OVERVIEW
Charitable and other contributions;

Research and development; and
Contributions to employee pension trust.
Deductibility of certain expenses is subject to some limitations. The interest expense allowed shall be reduced
by an amount equivalent to 33% of the companys
interest income that is subject to final tax. Interest paid
by corporations to a majority individual owner or shareholder is non-deductible. Likewise, interest expenses
are not allowed as a tax expense if paid to a personal
holding company that is more than 50% owned by a
majority shareholder of the corporation.
Entertainment and recreation expenses are subject
to a limit of 0.5% and 1% of net revenue for taxpayers
engaged in selling goods and services, respectively.
Income tax paid in a foreign country by a domestic
corporation on foreign-sourced income may be claimed
as a deductible expense. Alternatively, the company
may opt to claim the foreign tax as a tax credit against
Philippine income tax proportionate to the Philippine
income tax due on such income.
Property losses sustained in relation to the business
and not indemnified by insurance or other means are
deductible from gross income. The net operating loss
incurred in any taxable year can be carried forward for
the three succeeding taxable years. Capital losses can
be offset only against capital gains. Losses from wash
sales of stock or securities are not deductible.
Research and development expenses may be claimed
as a deduction during the year they are incurred. The
taxpayer has an option to amortise the expense over
a period of not less than 60 months, beginning with
the month when the benefits were realised.
Contributions to a qualified employee pension trust
are deductible to the extent of the excess of the contribution needed to cover the pension liability accruing during the taxable year. The amount shall be apportioned equally over a period of 10 years. The plan should
be pre-qualified by the tax authorities.
REQUIREMENT FOR DEDUCTIBILITY: Expenses must
be substantiated with sufficient evidence, such as official receipts and invoices. Expenses may be disallowed
as a deduction if the prescribed withholding tax on payments made for such expenses is not withheld and
paid to the tax authorities.
OPTIONAL STANDARD DEDUCTION: Corporations
may claim an optional standard deduction (OSD) at
40% of gross income in lieu of the itemised deductible
expenses. The option to claim the OSD may be changed
every year but the choice, once made in the first quarter, is irrevocable for the taxable year.
TAX YEAR: A corporation may choose a calendar or
fiscal year for its taxable year, depending on which
schedule more accurately reflects its taxable income.
Prior approval from the Commissioner of Internal Revenue is required to change the accounting period.
GROUPS OF COMPANIES: For tax purposes, each
company is an independent entity, and as such it must
file its own tax return and pay its own taxes. The filing of consolidated tax returns or the relieving
of losses within a group of companies is not allowed.
Related companies must interact on an arms-length

basis. The commissioner is authorised to allocate revenues and expenses between related companies to
prevent tax evasion or to correctly reflect each entitys income. In 2013, the Philippines issued transfer
pricing regulations, which specify the methodologies
to be used in determining the arms-length price and
the documentation required to show compliance with
the arms-length standard in related party transactions.
The documentation shall be submitted to the tax authorities upon notification.
CORPORATE TAX RETURNS & PAYMENT: Domestic
and resident foreign corporations must file their quarterly income tax returns within 60 days of the end of
each taxable quarter. They must also file a final adjusted return on or before the 15th of the fourth month
following the end of the tax year April 15 for taxpayers on the calendar year. The quarterly and annual
returns cover the regular income tax and the MCIT, as
well as income subject to special tax regimes.
Non-resident foreign corporations are not required
to file income tax returns. Taxes due on their Philippinesourced income are withheld at the source by the Philippine-based company making the payment.
Excess income taxes paid during the year may be
applied for refund or the amount may be carried over
to the succeeding quarter. The latter option shall be
irrevocable for that taxable year and no application for
cash refund shall be allowed. Tax credit certificates
(TCCs) may only be used to pay for certain direct internal revenue tax liabilities of the holder, and are prohibited from being transferred or assigned to any person.
In 2012, the government implemented a monetisation programme that allows all value-added tax (VAT)
TCCs to be converted to cash. The VAT TCC monetisation programme runs for a period of five years from
2012 to 2016.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET):
The IAET is essentially a penalty that is levied against
closely held corporations for the unreasonable accumulation of earnings resulting in the non-distribution
of dividends to shareholders and, consequently, to
deferred payment of dividends tax.
The IAET is imposed at 10% of the improperly accumulated taxable income in excess of the amount necessary to cover the reasonable needs of the business,
which, under existing regulations, is limited to 100% of
the paid-up capital of the corporation inclusive of accumulations taken from other years. Paid-up capital refers
to the par value, excluding any premium paid.
Banks, insurance companies, publicly held corporations, and companies registered with and enjoying preferential tax treatment in special economic and freeport
zones are not covered by the IAET. The IAET is due one
year and 15 days following the close of the taxable year
and is covered by a separate tax return.
DIVIDENDS & PROFIT REMITTANCES: Dividends from
a domestic corporation are tax-exempt in the hands
of other domestic corporations. The tax is 10% if these
are paid to citizens and residents, and 25% if paid to
non-resident foreign nationals. Dividends received by
TAX OVERVIEW
domestic corporations from foreign corporations form

part of the income subject to regular corporate tax. Dividends received by non-resident foreign corporations
from domestic corporations are taxed at 30% or the
treaty rate. A lower rate of 15% applies if the recipients
home country does not impose a tax on foreign-sourced
dividends or when there are tax-sparing provisions.
A 15% tax rate also applies on the remittance of profits of Philippine branches to their foreign parent firms.
The tax is based on total profits that are applied to remittance without any deduction for the tax component.
The tax is generally not waived even if the profits for
remittance are reinvested in the Philippines. Branches
registered in the special economic zones are exempt
from this tax. Preferential rates of branch profits remittance tax are also available under treaties.
INTEREST & ROYALTIES: Royalties payable to nonresident foreign corporations are subject to the 30%
final withholding tax. A lower rate of 25% is imposed
on non-resident foreign nationals.
Interest on foreign loans paid to non-resident foreign corporations is taxed at 20%. Preferential rates are
available under tax treaties.
OTHER PASSIVE INCOME: Scheduled rates apply on
most passive income, including the following:
Interest from bank deposits and yields from deposit
substitutes and similar arrangements, royalties, prizes
and other winnings from Philippine sources 20%;
Interest from foreign currency deposits in a local
bank 7.5% (non-residents are exempt);
Interest income from long-term deposits individuals are exempt;
Gains from the sale of shares listed and traded through
the local exchange exempt from income tax but
subject to a transaction tax at 0.5% of selling price;
Capital gains from the sale of land and buildings classified as capital assets 6% of the gross selling price
or market value, whichever is higher; and
Capital gains from the sale of shares in a domestic
corporation, not traded through the local stock
exchange 5% on the first P100,000 ($2250) of net
gain and 10% on the excess. This tax is imposed on
the cumulative net gain from the sale of shares during the taxable year. Gains from the surrender of
shares upon dissolution of the issuing company are
taxed at the regular corporate/individual tax rates.
OTHER CAPITAL ASSETS: Gains from the sale or disposition of capital assets other than land or buildings
and shares in domestic corporations are taxed as business income. For individuals, only 50% of the gain is taxed
if the asset is held for more than 12 months. Capital
losses are deductible only to the extent of gains made.
PERSONAL INCOME TAX: Foreign nationals and nonresidents are subject to income tax only on income
from Philippine sources; only residents are subject to
taxation on worldwide income.
Graduated rates from 5% to 32% apply to citizens,
resident aliens and non-resident aliens staying in the
country for more than 180 days in a year. If engaged
in business or the practice of a profession, the net taxable income is calculated in the same manner as that
261
Taxes in the Philippines are imposed at the national and local levels
for corporations. The 40% OSD for individuals is, however, based on gross revenues.
Non-resident foreign nationals not doing business
in the Philippines are taxed at a rate of 25% on their
Philippine-sourced income, including wages, rents,
gains, interest, dividends and royalties.
Foreign nationals employed by offshore banking
units, regional or area headquarters and operating
headquarters of multinational companies, and petroleum service contractors and subcontractors enjoy a
preferential rate of 15%.
INDIVIDUAL TAX RETURNS & PAYMENT: For individuals, the tax year is the calendar year and the income
tax is due on or before April 15 of the following year.
The tax liabilities of spouses are calculated separately,
although spouses are required to file their tax returns
jointly.
Individuals filing income tax returns are required to
disclose in their annual income tax returns the amounts
and sources of other income that is exempt from tax
or already subject to final taxes.
For employees receiving only compensation, employers are relied upon to ensure that the correct tax for
the year is fully withheld. Employees qualifying under
the substituted filing scheme are exempt from filing
annual income tax returns.
Employees receiving only the statutory minimum
wage are exempt from the payment of income tax if
they do not earn other taxable income, whether from
the conduct of business or from other employment.
Employers are not required to withhold tax from them.
Non-resident aliens not engaged in business are not
required to file an annual income tax return.
WITHHOLDING TAXES: Most income is subject to
withholding of taxes.
If classified as a top-20,000 corporation or a top-5000
individual engaged in business, the payor is required
to withhold on all payments for the purchase of goods
(1%) and services (2%). Withholding taxes on income
subject to the regular corporate rate are creditable
262
TAX OVERVIEW
A corporation may choose either a calendar or fiscal year for its taxable year
against the calculated liability. Most passive income is

subject to final withholding taxes. For corporate taxpayers, this is disclosed as income that is no longer subject to regular income tax.
Income payments to non-resident foreign corporations are likewise withheld at the source as final taxes.
Hence, non-resident foreign corporations are not
required to file annual income tax returns.
INDIRECT TAXES: A 12% VAT is imposed on the gross
selling price on the sale, barter or exchange of goods
and properties, as well as on the gross receipts from
the sale of services within the Philippines, including the
lease of properties.
The 12% VAT paid on the companys purchases relative to its business subject to VAT is credited against
the 12% VAT due on gross sales or receipts. The net
amount is the VAT payable by the company.
Exports are subject to 0% VAT and entitle the exporter
to claim a refund for VAT that has been paid on its purchases of goods, properties and services relating to the
product. Exempt status is granted to certain transactions and entities. In such cases, VAT paid on the inputs
is not allowed to be claimed as creditable input VAT.
Instead, the VAT paid forms part of the deductible costs
of the business in question.
A VAT taxpayer files monthly declarations and quarterly returns that serve as the final adjusted return for
the period. The VAT on services performed in the Philippines by non-resident foreign corporations, as well as
the VAT on royalties and rentals payable to such nonresident foreign corporations, is withheld by the paying local company. Imports are subject to VAT unless
specifically exempted. VAT is paid whether or not the
importer conducts business. Percentage taxes on gross
receipts apply to most services and transactions not
subject to VAT, such as:
Carriers of passenger on land 3%;
International carriers on carriage of cargoes 3%;
Franchisees of gas and water utilities 2%;
Banks and non-bank financial firms 1%, 5% or 7%;
Life insurance companies and agents of foreign insurance firms 5% of the premiums; and
Sale of shares through initial public offerings onehalf of 1% of the selling price.
EXCISE TAXES: In addition to VAT, excise taxes are also
imposed on the following: alcohol, tobacco, petroleum
products, automobiles, mineral products, and nonessential goods such as jewellery and precious stones,
perfumes, yachts and other sport vessels.
DOCUMENTARY STAMP TAX: A documentary stamp
tax (DST) is required for certain documents, transactions or instruments specified in the tax code when the
obligation or right arises from Philippine sources or when
the property is situated in the Philippines. These include:
Bills of exchange 0.15%;
Bills of lading 1%;
Sale of real property 1.5% of the fair market value;
Original issuance of shares 0.5% of par value;
Sale of shares (except those listed and traded in the
local stock exchange) 0.38% of par value;
Debt instruments 0.5%; and
Lease agreements 0.1% of the total lease over the
lease period.
TAX AUDIT: The period allowed for tax authorities to
audit companies and assess deficiency taxes is three
years from the date of filing of the final return. If fraud
is alleged, this period may extend to 10 years from the
date of discovery of the possible fraud.
The deficiency tax may be collected within five years
from the date when the assessment becomes final.
Assessments may be contested in courts.
RECOVERY OF TAXES: In the case of taxes that have
been excessively or erroneously paid, a taxpayer may
apply for refund or the issuance of TCCs within two years
from the date of payment. For purposes of the creditable taxes withheld, the option to carry forward the
excess credits generated shall be irrevocable once chosen. A VAT-registered taxpayer may apply for refund of
any excess VAT when the taxpayer shifts to a non-VAT
activity or ceases to be in business or when such input
taxes arise from zero-rated sales.
BOOKKEEPING REQUIREMENTS: All business entities
subject to internal revenue taxes are required to maintain books of account. These consist of a journal, a
ledger and subsidiary records required for the business.
Entities subject to VAT are also required to keep subsidiary sales and purchase journals.
Books of accounts and other accounting records
may be kept in either English or Spanish. The books and
records must be preserved for a period of at least 10
years. Companies with gross quarterly sales or receipts
exceeding P150,000 ($3375) shall have their books
audited and examined yearly by independent certified
public accountants who should be accredited as tax
agents by the tax bureau.
For public companies, as well as banks and insurance companies, the independent certified public
accountants should further be accredited by regulatory agencies, such as the Securities and Exchange
Commission (SEC), the Bangko Sentral ng Pilipinas
(the central bank), or the Insurance Commission.
TAX OVERVIEW
Financial statements are required to be filed together with annual income tax returns. In addition to maintaining books of accounts, the Corporation Code requires
businesses to keep the following items: records of all
the business transactions, minutes of meetings of shareholders and directors, and a stock and transfer book.
Sales should be evidenced by official receipts and
invoices based on the prescribed format.
The books may be in manual or digital form. These
are required to be registered with the tax authorities
prior to their use. Large taxpayers, however, are mandated to adopt a digitised accounting system.
FINANCIAL REPORTING FRAMEWORK: The amended Securities Regulation Code (SRC) Rule 68 (the Rule)
issued by the Philippine SEC prescribed a financial
reporting framework or set of accounting principles,
standards, interpretations and pronouncements that
must be adopted in the preparation and submission of
the annual financial statements of a particular group
of entities. The following paragraphs outline the financial reporting framework prescribed by SRC Rule 68 for
each group of entities covered by the Rule:
Large and/or publicly accountable entities are those
with assets exceeding P350m ($7.9m) or liabilities of
more than P250m ($5.6m). Other entities covered by
the Rule include those required to file financial statements under Part II of SRC Rule 68 (for example, an
issuer that has sold a class of securities pursuant to
registration under Section 12 of the SRC, an issuer
with a class of securities listed for trading on an
exchange, and an issuer with assets of at least P50m
[$1.1m] and 200 or more shareholders each holding
at least 100 shares of a class of equity securities); entities in the process of issuing securities to the public
market; or entities that are holders of secondary licences
issued by regulatory agencies. Entities qualifying for any
of the criteria provided above shall use Philippine Financial Reporting Standards (PFRS) as their reporting
framework. However, another set of reporting rules
may be permitted by the SEC for certain regulated entities such as banks and insurance companies. The PFRS
are adopted by the Financial Reporting Standard Council (FRSC) from the International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB).
Small and medium-sized entities (SMEs) are defined
as entities with total assets between P3m ($67,500) and
P350m ($7.9m), or total liabilities between P3m
($67,500) and P250m ($5.6m). If the entity is a parent
company, such amounts will be based on consolidated figures. Other entities classed as SMEs are those not
required to file financial statements under Part II of SRC
Rule 68; entities not in the process of issuing securities to the public market; and entities that are not holders of secondary licences. Entities that qualify based
on all above criteria shall use the PFRS for SMEs as their
financial reporting framework.
PFRS for SMEs are adopted by the FRSC from the IFRS
for SMEs issued by the IASB. Except for those allowed
under the Rule, the SEC requires mandatory adoption
of PFRS for SMEs for entities that qualify as SMEs.
263
At the smallest end of the scale, micro entities are

considered to be those with total assets and liabilities
below P3m ($67,500); entities not required to file financial statements under Part II of SRC Rule 68; entities
not in the process of offering securities to the public;
and entities that do not hold secondary licences.
Micro entities may choose to use either the income
tax basis or PFRS for SMEs, provided that the financial
statements shall at least consist of the statement of
managements responsibility, auditors report, statement
of financial position, statement of income and notes
to financial statements, all of which cover the two-year
comparative periods, if applicable.
RELIEF FROM DOUBLE TAXATION: Relief from double taxation is available for Philippine-sourced income
received by non-resident foreign nationals under the
tax treaties in effect with the following 39 countries:
Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil,
Canada, China, the Czech Republic, Denmark, Finland,
France, Germany, Hungary, India, Indonesia, Israel, Italy,
Japan, Korea, Kuwait, Malaysia, the Netherlands, New
Zealand, Nigeria, Norway, Pakistan, Poland, Romania,
the Russian Federation, Singapore, Spain, Sweden,
Switzerland, Thailand, the UAE, the UK, the US and Vietnam. The new treaties with Kuwait and Nigeria took
effect on income derived in 2014.
To avail themselves of the relief from double taxation pursuant to tax treaties, foreign nationals must file
a tax treaty relief application before the occurrence of
the first taxable event.
TAXES ON IMPORTS: Customs duties are generally
imposed on articles imported into the Philippines at various rates. Certain imports may be exempt or conditionally exempt subject to certain situations. There are
also some imports that are prohibited.
The basis for the calculation of the duties is the
transaction value, which is subject to adjustments for
certain costs. The VAT and excise taxes for imports are
also collected by the Bureau of Customs.
LOCAL TAXES: Local governments impose various taxes on businesses. The local government code provides
for the maximum tax rates that local governments may
impose on business activities in their jurisdiction.
Property tax is imposed at 1-2%, but the base differs
depending on the actual use. For commercial and industrial properties, the tax base is 50% of the propertys
market value. The base is lower, at 40%, for agricultural properties, and 20% for residential properties.
SPECIAL TAX REGIMES: Entities registered in the countrys special economic zones are subject to a separate
tax regime. These entities enjoy an income tax holiday
of up to eight years, and thereafter, a preferential gross
income tax rate of 5% is imposed. This is in lieu of national and local taxes, including the regular income tax, MCIT
and the IAET, VAT and percentage taxes, excise taxes
and DST. The purchase of enterprises in economic zones
is automatically zero-rated for VAT. Certain authorised
imports are also free from both duties and taxes.
OBG would like to thank Punongbayan & Araullo for its
contribution to THE REPORT The Philippines 2015
264
TAX INTERVIEW
Marivic C Espao, Chairperson and CEO, Punongbayan & Araullo
Across the border

OBG talks to Marivic C Espao, Chairperson and CEO, Punongbayan & Araullo
How would you rate the fiscal burden for corporation in the Philippines? What changes to the fiscal
code would help private sector companies?
ESPAO: The fiscal burden for corporations varies
depending on their business activities and registration.
For instance, the Philippines very generous incentives
for firms engaged in preferred areas of investment
make the country a viable option, because of the relatively low fiscal burden being imposed upon them.
Export-oriented companies can register with any of the
special economic zones throughout the country and
access the preferential tax regime, enjoy an income tax
holiday for four to six years and, thereafter, be subject
to a 5% tax on gross income in lieu of all taxes including value-added tax (VAT), import duties, local business
taxes and real property tax. Qualified activities include
manufacturing for the export market, business process
outsourcing and other IT services for foreign clients.
The income tax holiday, as well as the VAT and import
duty exemptions, are also available to firms registering
with the Board of Investments and engaging in activities listed in the annual Investment Priorities Plan. A
special tax regime is also offered to multinational firms
setting up their regional headquarters in the country.
The current income tax rate for companies subject
to the regular tax regime is relatively high. Nonetheless, reforms are under way to reduce taxes for both
corporate and individual taxpayers. Lower tax rates and
exemptions are also available under double taxation
agreements with 39 treaty countries.
The tax bureau is aggressively shifting to online for
tax registration, filing and payment, and other reporting and compliance requirements. This should significantly ease taxpayers compliance. Upcoming reforms
should be directed toward more liberal net loss carry
forward and carry back provisions. A simplification of
the withholding tax system to a single or dual rate
would definitely be a welcome development, and the
crediting of improperly accumulated taxes against
future dividends tax payable will also be a positive move.
How can the Philippine tax regime stimulate sunrise industries and economic diversification?
ESPAO: The success of the Philippine Economic Zone
Authority in encouraging investments in export-oriented activities is a concrete example of how desired
businesses can be promoted and protected. Sunrise
industries and other desired activities should be identified and incentives tax and non-tax should be provided. It is important to maintain focused and sustained
effort on ensuring that industry is receiving support
and incentives that drive desired activities.
In the implementation of incentives, compliance
requirements could be streamlined to ensure revenue
generation and encourage business. Transparency and
consistency should also be maintained during implementation. Research and development (R&D) is crucial to innovation and growth; its taxation, therefore,
should be structured so as to encourage risk-taking.
Without an incentive to take risk, R&D will be limited
to activities with guaranteed commercial gains.
What tax regime could enhance tax planning and

prepare the country for international trade risks?
ESPAO: Tax rules on cross border transactions should
be clarified and reformed to address the emerging
structures and transactions resulting from enhanced
cross border trade and developments in technology. Tax
treatment of internet transactions should be established
to avoid being subject to unwarranted changes in interpretation. Conditions on the application of provisions
of international tax treaties and other agreements
should be harmonised with those being imposed by
treaty partners. For investor firms, it is important that
tax rules are transparent and stable. It is time for the
Philippines to focus on ensuring the allocation of profits to the Philippine operations of multinational groups.
Transfer pricing guidelines have been issued for both
taxpayers and tax authorities, and for firms that need
certainty on the tax treatment of their cross border
transactions, advanced pricing rules will soon be issued.
265
The Guide
Development as an ecotourism destination is ongoing
Listings for a range of local hotels and resorts
Important telephone numbers to keep on hand
Useful information for business and leisure travellers
266
THE GUIDE SIGHTS & SOUNDS
The focus of the sector has shifted in recent years to ecotourism
An enchanted land
Theres something to suit all tastes in this Asian archipelago
As the Philippines attracts tourists in ever greater numbers, the focus of the sector has shifted away from the
mass market to promoting the country as an ecotourism
destination. Crucial to this strategy has been an focus
on sustainable development, emphasising projects with
a minimal impact on the environment, as well as efforts
to avoid the displacement of indigenous people.
This strategy has centred on the MIMAROPA region,
the acronym encompassing its members Mindoro,
Marinduque, Romblon and Palawan, and home to some
of the countrys most renowned natural wonders. Most
notably, Busuanga and Puerto Galera have been consolidating their reputations as the archipelagos premier ecotourism destinations. They are located in the
neighbouring island provinces of Palawan and Oriental Mindoro, respectively, in the MIMAROPA region.
WILDLIFE SANCTUARY: Situated in the western third
of Busuanga Island, which is the largest island in the
Calamian Islands and hosts the Philippines other leading diving destination, Coron, Busuanga lies around
halfway between the islands of Mindoro and Palawan,
and is bordered by the South China Sea (known locally as the West Philippine Sea) to the west and the Sulu
Sea to its south-east. The combination of impressive
natural landscapes and underwater shipwrecks has
made Busuanga into a popular destination. The recent
renovation of its local airport, which receives direct
daily flights from Manila, has allowed the municipality
to handle increasing numbers of tourists who are keen
to take advantage of the islands diving opportunities.
Busuanga Island is home to the Tagbanwa people,
one of the countrys oldest ethnic groups. In 1998, the
Tagbanwa were awarded a certificate of ancestral
domain title, including more than 22,000 ha of land and
sea in Coron. This award gave them the right to manage the areas marine and land resources. Furthermore,
a presidential decree in 1967 declared Palawan a marine
and wildlife sanctuary, establishing the Palawan Council for Sustainable Development. There has been a concerted effort by authorities to avoid the growth of
mass tourism resorts of the kind that have developed

elsewhere in the region. Alongside these efforts, an ecotourism industry has emerged, catering to environmentally aware tourists and diving enthusiasts alike.
Similarly, Oriental Mindoro is bordered by the Verde
Island Passage, which separates the island province
from Batangas and is known for its marine biodiversity, hosting more than half the Philippines documented fish species as well as many globally threatened
species. The Verde Passage occupies more than 1.14m
ha and remains an important area for shipping, tourism,
fishing and other economic activities. Designated by
UNESCO as a biosphere, the passage is at the apex of
the Coral Triangle, traversing the Philippines, Indonesia and Malaysia. It thus has the distinction of being a
global centre for marine biodiversity. Puerto Galera is
the north-western-most municipality of Oriental Mindoro and lies 140 km south-west of Manila. Over the
past decade, Puerto Galera has shed its reputation for
booming nightlife, becoming better known for its marine
conservation efforts, as well as its beaches and coves.
UNDERWATER HAVEN: Busuangas most distinctive
attraction consists of the Japanese shipwrecks sunk by
US Helldivers during the Second World War. These lie
in the seabed of Coron Bay and its surrounding shores.
Sunk in the 1940s, these shipwrecks remain at depths
between 10 and 40 metres below the turquoise-blue
waters and are surrounded by coral reefs, creating a
unique diving experience. Aside from shipwrecks, Coron
has plenty of other dive sites, including underwater caves
and marine sanctuaries that are teeming with diverse
marine life for those preferring nature diving. A threehour boat ride towards the western side of Busuanga,
the internationally renowned Apo Reef Natural Park covers an area of more than 20 dive sites populated by large
fish species and composed of a reef plateau, sure to
impress divers and snorkellers alike.
With an area of 34 sq km of coral reef where various
species of fish and marine mammals have thrived, the
Apo Reef is the Philippines largest contiguous coral reef,
THE GUIDE SIGHTS & SOUNDS
and the second-largest one in the world. Its shallow

lagoon, with a depth ranging from two to 10 metres,
is surrounded by a mangrove forest, which serves as a
sanctuary for local flora and fauna.
DIVING AND BEYOND: Puerto Galera includes diving
spots found around the areas either side of Escarceo
Point, a reef dive of pristine coral slopes and abundant
marine life. Diving in Puerto Galera is generally done
with the assistance of an experienced local guide or a
local dive centre. The area has become a principal technical diving destination in Asia, and Technical Diving
International has several centres in the area. More than
30 dive sites exist all within a 10-minute banca (traditional boat) ride from Sabang Beach. All sites exhibit
considerable underwater biodiversity, with over 180
species of nudibranchs in the area. The surrounding
waters house a variety of wrecks that have sunk over
the years, including the wreck of an engine of a Japanese patrol boat dating back to the Second World War.
However, the areas appeal is not limited to its underwater biodiversity. In and around Coron, for example,
visitors can hop on a guided mangrove kayak tour, trek
into the jungle or engage in island camping. Above-surface diversions are further magnified by the existence
of thousands of small undiscovered islets that populate neighbouring Coron Harbour and Coron Bay.
Opportunities also exist to explore shallow aquamarine waters surrounded by towering limestone formations. The neighbouring island town, chosen as the site
for the Philippines leper colony by the US occupation
government in 1904, is now among the regions most
unconventional attractions. Culion has a rich history,
with buildings ranging from La Immaculada Church,
formerly a fort built by the Spaniards to defend themselves from the invading Moros, to Fort Culion. This
was constructed in 1740 and then later rebuilt into a
church by the Jesuits in 1930 using coral rock. The
Calauit Game Preserve and Wildlife Sanctuary, off the
north-western coast of Busuanga, is home to African
animal species that coexist with Palawan's indigenous
species. The island works to promote greater awareness among tourists of local wildlife, which ranges from
giraffes and zebras to animals indigenous to Palawan
like the Calamian deer, mouse deer and bearcat.
SNORKELLING SPOTS: Puerto Galeras coastal environment is also popular for its numerous pocket beaches and snorkelling spots. Among the municipalitys
most famous beaches are White Beach and Sabang
Beach, both of which are traditionally known for their
active nightlife scenes. Conversely, Puerto Galera town
is a calmer destination best suited for bonfires, volleyball or beach hopping, and leisure trips. The area also
serves as the location for a nine-hole golf course resting above White Beach, as well as a home for the
Mangyan tribes which are scattered over the mountain sides. Of the eight tribes on Mindoro, the Iraya are
the largest. High-profile events like the annual Malasimbo Music and Arts Festival, which started in 2011 and
is now a five-day affair held on the last weekend of February at the foothills of Mount Malasimbo, have further boosted the areas visibility by promoting the arts.
The waters surrounding Puerto Galera house a variety of wrecks that have sunk over the years
INCLUSIVE APPROACH: The area has become increasingly engaged in bringing public and private sector
players to join forces as they undertake environmentally friendly projects, including luxury developments.
An example of these initiatives is Huma Island Resort
and Spa, a Maldives-inspired luxury destination located in a remote area renowned for its wildlife and biodiversity, including mangroves and tropical gardens.
According to Jurgen Geier, Humas assistant vice-president for hospitality, We are endorsing and following
responsible tourism as a pathway towards sustainable
tourism by taking responsibility for the local communities and culture as well as wildlife conservation and
the environment. The resorts name derives from the
Great Galleon Huma and the legend of Captain Ibrahim,
and it is located one hour away by plane from Manila,
or a 30-minute speedboat ride away from Busuanga.
As they initiate new projects, developers must also
ensure direct support to local communities of indigeneous people. As Geiger stresses, Local communities
benefit from sustainable tourism through economic
development, job creation and infrastructure development, which can raise the standard of living in destination communities. Equally important is developing
tourism infrastructure without disturbing ecology and
with a positive impact on the environment.
The potential of Puerto Galera has also attracted
interest from investors interested in luxury developments. For instance, Infinity Resorts & Spa, which opened
in 2013, sits on a 2-ha property three hours away by
car from Metro Manila. It is surrounded by the mountains of Malasimbo, Talipanan and Alunbayan of Oriental Mindoro on one side and the waters of the Verde
Passage. Guests can access luxury amenities as well as
enjoy opportunities for outdoor activities.
THE LONG TERM: Alongside the development of
tourism infrastructure, wildlife preservation and the
inclusion of local indigeneous communities are therefore urgent priorities as the region seeks to ensure its
long-term sustainability as an ecotourism destination.
267
268
THE GUIDE HOTELS
Huma Island Resort & Spa
Sleep tight
HUMA ISLAND RESORT & SPA
Eastwood Richmonde Hotel
Huma Island
Busuanga
Palawan
T: 63 (2) 553 0119
F: 63 (2) 553 0121
www.humaisland.com
reservation@humaisland.com
Rooms: 64 water villas, 15 beach villas, 1 family suite,
2 presidential suites.
Business & Conference Facilities: Meeting room with
audio-visual equipment.
Health & Leisure Facilities: Fitness centre, kids club,
library, dive centre, infinity pool, kids pool, Kapuruan
Spa featuring 7 treatment rooms and an authentic Arabic hammam, archery, volleyball. A Jacuzzi and bath tub
are provided in each villa.
Guest Services: 24-hour villa host service, laundry and
dry cleaning, babysitting, airport transfer, 24-hour room
service, Wi-Fi in villas and public areas.
Wining & Dining: 7 dining outlets, including 4 specialty restaurants.
Makati Shangri-La
EASTWOOD RICHMONDE HOTEL

17 Orchard Road
Eastwood City
Bagumbayan, Quezon City 1110
T: 63 (2) 570 7777
F: 63 (2) 352 7286
www.richmondehotels.com.ph
erhreservations@richmondehotel.com.ph
The Luxe Residences
Rooms: 138 rooms, including 30 superior queen rooms,

18 superior king rooms, 36 deluxe twin rooms, 12
deluxe queen rooms, 2 deluxe king rooms, 38 one-bedroom suites, 2 two-bedroom suites.
Business & Conference Facilities: Grand Ballroom
(capacity for 300) divisible into 4 sections, 2 function
rooms, business centre including 2 meeting rooms.
Health & Leisure Facilities: Fitness centre, sauna, outdoor swimming pool, clinic, beauty salon.
Guest Services: Concierge, room service, laundry service, safety deposit, basement parking.
Wining & Dining: Eastwood Caf (all-day dining restaurant), the Gallery (bar), the Lounge (lobby lounge).
MAKATI SHANGRI-LA
Ayala Avenue, at the corner of Makati Avenue
Makati City, Metro Manila
T: 63 (2) 813 8888
F: 63 (2) 813 5065
slm@shangri-la.com
www.shangri-la.com
Rooms: 696 rooms and suites.
Business & Conference Facilities: Four levels of function space, including Rizal Ballroom (with capacity of
2100) and the Isabela Ballroom (with capacity of 540).
Health & Leisure Facilities: 24-hour health club, exercise room with fitness classes, outdoor swimming pool,
steam room, massage service, sauna, spa, tennis courts.
Wining & Dining: Shang Palace (Cantonese), Inagiku
(Japanese), Circles Event Caf (all day international dining), Lobby Lounge, Pool Bar (snacks), Sinfully Circles
and Sinfully by Makati Shangri-La (pastries).
THE LUXE RESIDENCES

28th Street Corner 4th Avenue
Bomifacio Global City
Taguig City 1634
T: 63 (2) 836 8888
F: 63 (2) 828 6666
www.theluxe.com.ph
kris@theluxe.com.ph
Rooms: 24 one-bedroom units, 23 two-bedroom units,
35 two-bedroom deluxe units, 24 three-bedroom units,
16 three-bedroom deluxe units.
Business & Conference Facilities: Function room.
THE GUIDE HOTELS
Health & Leisure Facilities: 25-metre indoor competition swimming pool, gym, sauna.
Guest Services: 24-hour reception, concierge and security, apartment cleaning service.
Wining & Dining: Hanaichi (Japanese restaurant) and
Riozen (Japanese restaurant).
BERJAYA HOTEL
7835 Makati Avenue
Corner of Eduque Street
Makati City 1209
T: 63 (2) 750 7500
F: 63 (2) 890 3878
www.berjayahotel.com
manila.inquiry@berjayahotel.com
Rooms: 117 deluxe units, 38 premier units, 12 grand
deluxe units, 4 studio units, 3 junior suite units, 5 twobedroom deluxe units, 36 executive deluxe units, 4
executive studio units and 4 executive suite units.
Business & Conference Facilities: Business centre, 6
meeting rooms with audio-visual equipment.
Health & Leisure Facilities: 1 indoor pool, Jacuzzi, gym.
Guest Services: 24-hour reception and room service,
concierge, laundry and dry cleaning, airport transfer.
Wining & Dining: El Prado Restaurant, El Paseo Bar, Las
Ramblas and Veranda.
MANILA HOTEL
1 Rizal Park 0913
Manila 1099
T: 63 (2) 527 0011
F: 63 (2) 527 0722
www.manila-hotel.com.ph
resvn@manila-hotel.com.ph
Rooms: 500 guest rooms.
Business & Conference Facilities: Conference rooms and
ballrooms catering to a range of needs, business centre with a wide range of administrative services.
Health & Leisure Facilities: Fully equipped health centre, newly renovated pool and garden area with a pool
bar and a recently opened spa.
Guest Services: 24-hour reception, concierge and security, laundry and dry cleaning, airport transfers.
Wining & Dining: Cafe Ilang Ilang (casual international dining), Champagne Room (French and Italian),
Mabuhay Palace (Chinese cuisine), Cowrie Grill (steak
and seafood), Ginza (Japanese cuisine), Lobby Lounge
(bar and cocktails), Tap Room (bar snacks and drinks).
MARRIOTT HOTEL MANILA

10 Newport Boulevard
Newport City Complex
Pasay City Manila 1309
T: 63 (2) 988 9999
F: 63 (2) 836 9998
www.manilamarriott.com
marriotthotelmanila@marriott.com
Rooms: 323 deluxe rooms and 19 executive suites.
269
Business & Conference Facilities: Business centre,

including 6 meeting rooms with audio-visual equipment, 1 service office, 10 modern function rooms.
Health & Leisure Facilities: Outdoor borderless sky
pool, QuanSpa health club.
Guest Services: 24-hour room service and three-level car park with valet service, handicapped rooms, beauty salon, car hire, concierge, laundry and dry cleaning,
florist, foreign currency exchange, limousine service,
shoeshine service, Wi-Fi internet access.
Wining & Dining: Marriott Caf (featuring open-theatre kitchen), Cru Steakhouse, Java+ (gourmet coffee,
freshly baked pastries).
Berjaya Hotel
COCOON BOUTIQUE HOTEL

61 Scout Tobias Corner
Scout Rallos Streets, Bgy. Laging Handa
Quezon City 1103
T: 63 (2) 9212706/07/08
F: 63 (2) 4137281
www.thecocoonhotel.com
info@thecocoonhotel.com
Rooms: 31 deluxe rooms, 4 studios, 1 two-bedroom junior master suite, 3 one-bedroom suites that can be
converted to two-bedroom master suites.
Business & Conference Facilities: 2 function halls, with
capacity of up to 70 and 100, respectively. Both halls
are divided by soundproof wall dividers that can open
up to a Grand Ballroom, with capacity of up to 200.
Boardroom available on request for smaller functions.
Health & Leisure Facilities: Swimming pool, Spa at
Cocoon with a range of treatments, exercise room,
Nouvelle Clinic, featuring medical services such as dermatology, cosmetic surgery and dentistry.
Guest Services: Wi-Fi internet access, 24-hour room
service and concierge, laundry and dry cleaning,
shoeshine, car hire, airport transfer, the Mulberry Shop
(flowers and gifts), Peps Silvestre Salon.
Wining & Dining: The Deck Breakfast Venue, Deck Bar,
Abuelas Coffeeshop, Paire Cocktails and Pastries, Black
Kitchen, My SerendipiTEA (Taiwanese bubble tea).
Manila Hotel
Marriott Hotel Manila
INFINITY RESORT & SPA

Talipanan
Puerto Galera
Oriental Mindoro 5203
T: 63 (9) 177 926 353
www.infinityresort.com.ph
reservations@infinityresort.com.ph
Rooms: 6 deluxe rooms, 6 executive rooms, 7 premier
suites, 1 family room.
Business & Conference Facilities: Business centre.
Health & Leisure Facilities: Game room featuring Xbox,
billiards, and board games, spa, Jacuzzi, infinity pool, gym.
Guest Services: Complimentary guest transfer service
to nearby attractions, laundry service, room service.
Wining & Dining: The Brae (restaurant with indoor and
outdoor seating), Estuary pool bar. A private dining setup by the beach can also be arranged upon request.
Cocoon Boutique Hotel
Infinity Resort & Spa
270
THE GUIDE LISTINGS
Shops tend to open six days a week between 9.00am

and 11.00am and close between 6.00pm and 9.00pm.
Offices in both the private and public sectors typically open from Monday to Friday from 8.00am to 5.00pm,
although some corporate offices stay open later.
GOVERNMENT
OFFICES
Department of Agrarian
Reform
63 (2) 928 7031
63 (2) 928 7039
Department of Agriculture
63 (2) 928 8762/65
Department of Budget and
Management
63 (2) 490 1000
Department of Education
63 (2) 632 1361/71
Department of Energy
63 (2) 479 2900
Department of
Environment and Natural
Resources
63 (2) 929 6626/29
Department of Finance
63 (2) 523 9911/14
Department of
Foreign Affairs
63 (2) 834 4000
Department of Health
63 (2) 651 7800
Department of Interior and
Local Government
63 (2) 925 0330
Department of Justice
63 (2) 523 8481/98
Department of Labour and
Employment
63 (2) 527 3000
Department of National
Defense
63 (2) 982 5600
Department of Public
Works and Highways
63 (2) 304 3000
Department of Science and

Technology
63 (2) 837 2071
63 (2) 837 2082
Department of Social
Welfare and Development
63 (2) 931 8101
63 (2) 931 8107
Department of Tourism
63 (2) 523 8411
Department of Trade and
Industry
63 (2) 895 4424
Department of
Transportation
63 (2) 790 8300
National Economic and
Development Authority
63 (2) 631 0945/56
National Competitiveness
Council
63 (2) 751 3404
Office of the President
63 (2) 784 4286
Office of the Presidential
Spokesperson
63 (2) 733 3605
Office of the Vice-President
63 (2) 832 6991/99
BUSINESS
ORGANISATIONS
Bangko Sentral ng Pilipinas
Investor Relations Office
63 (2) 708 7487
Makati Business Club
63 (2) 751 1137/38
Philippine Chamber of
Commerce & Industry
63 (2) 846 8196
Management Association
of the Philippines
63 (2) 751 1149
Financial Executives of the
Philippines (FINEX)
63 (2) 811 4052
CHAMBERS OF
COMMERCE
British Chamber of
Commerce
63 (2) 858 2255
European Chamber of
Commerce
63 (2) 845 1324
Korean Chamber of
Commerce
63 (2) 885 7342
American Chamber of
Commerce
63 (2) 818 7911
63 (2) 818 7913
Canadian Chamber of
Commerce
63 (2) 843 6457
Spanish Chamber of
Commerce
63 (2) 886 7643
Australia-New Zealand
Chamber of Commerce &
Industry
63 (2) 755 8840/41
French Chamber of
Commerce
63 (2) 813 9005
Japanese Chamber of
Commerce
63 (2) 892 3233
Board of Investments
63 (2) 897 6682
Manila is notorious for endless traffic jams, and during peak hours travel around the city can be extremely difficult. If anything, the situation has worsened in
recent years as large-scale infrastructure projects have
begun construction in the middle of the metropolis.
Cebu Chamber of
Commerce & Industry
63 (32) 232 1421/24
Federation of FilipinoChinese Chambers of
Commerce & Industry
63 (2) 241 9201/05
Mindanao Business Council
63 (82) 224 2581
Philippine Economic Zone
Authority
63 (2) 551 3436
FOREIGN
MISSIONS
Australia
63 (2) 757 8100
Canada
63 (2) 857 9000
China
63 (2) 844 3148
France
63 (2) 857 6900
Germany
63 (2) 702 3000
India
63 (2) 843 0101
63 (2) 843 0102
Italy
63 (2) 892 4531
Japan
63 (2) 551 5710
Malaysia
63 (2) 864 0761/68
New Zealand
63 (2) 891 5358
Singapore
63 (2) 856 9922
South Korea
63 (2) 856 9210
Taiwan
63 (2) 887 6688
United Kingdom
63 (2) 858 2200
United States
63 (2) 301 2000
BANKING
Banco de Oro
63 (2) 840 7000
Land Bank of the
Philippines
63 (2) 633 7585
Bank of the Philippine
Islands
63 (2) 891 0000
Asian Development Bank
63 (2) 632 4444
Metro Bank
63 (2) 870 0700
Philippine National Bank
63 (2) 891 6040
LEGAL &
ACCOUNTANCY
Punongbayan & Araullo
63 (2) 886 5511
SyCip Salazar Hernandez &
Gatmaitan
63 (2) 982 3500
CAR HIRE
Avis
63 (2) 462 2881
Autohub
63 (2) 860-8844
Europcar
63 (2) 664 0782
Filcar
63 (2) 817 8346
THE GUIDE
271
Facts for visitors

Useful information for new arrivals
VISAS: Most nationalities can easily obtain a tourist visa
upon arrival in the country that is good for a 30-day
stay, and obtaining an extension of up to six months is
relatively easy and requires presenting the proper paperwork and roughly $68 to the Bureau of Immigration.
For any traveller entering the country, an outbound ticket is required at the airport. Those who wish to obtain
a visa overseas may do so for $35, but the length of
stay is usually two months.
BUSINESS HOURS: Shops tend to open six days a week
between 9.00am and 11.00am and close between
6.00pm and 9.00pm. Offices in both the private and public sectors are typically open from Monday to Friday from
8.00am to 5.00pm, although some corporate offices
stay open later. Banking hours run Monday through Friday from 9.00am to 3.00pm, while embassies are generally open from 9.00am to around 1.00pm.
CURRENCY: The Philippine peso (P) is the countrys currency and is divided into 100 centavos. Notes come in
denominations of 20, 50, 100, 200, 500 and 1000. The
Philippines remains a cash-centric economy, with credit cards generally only accepted at major hotels, shops,
restaurants and resorts. It is best to carry small bills when
possible, as it can be difficult to find change. The current rate of exchange is about P1:$0.023.
LANGUAGE: Filipino (Tagalog) and English are the two
official languages. The former is spoken and understood
by most Filipinos, although countless dialects exist
throughout the various regions and islands. English is
also commonly used in formal and informal settings,
especially in urban business environments. English has
also been fused with Tagalog to form the hybrid Taglish
and is used in everyday informal conversation.
TIPPING: Tipping culture in the Philippines varies according to context. While many locals proudly proclaim that
they never tip, the practice is growing in popularity and
small gratuities may be expected. Service charges of
at least 10% can be expected in upscale restaurants
and bars. For taxi drivers using a meter, it is common
to simply round up to the nearest multiple of 20 pesos.
HEALTH: The same precautions that are taken in most

tropical climates should also be followed before travelling to the Philippines. For example, vaccinations for
yellow fever, typhoid fever and hepatitis are all recommended. Malaria is sometimes reported, but dengue
fever is of greater concern. Outside of major urban
centres, medical facilities do not meet international
standards, and the tap water is not potable.
TRANSPORT: Manila is notorious for its endless traffic jams, and during peak hours travel around the city
can be extremely difficult. The situation has worsened
in recent years as large-scale infrastructure projects have
begun construction in the middle of the metropolis.
Although there are two metro lines and one rail line
serving commuters, with additional expansions planned,
their reach is currently geographically limited. Public
transportation within Manila is dominated by the colourful passenger jeepneys. Taxis are plentiful and affordable, but it is best to insist that drivers use a meter.
DRESS: Businessmen and government officials often
wear the native barong tagalog, a lightweight embroidered shirt generally made from indigenous fruit fibres.
Western-style suits are also widely worn.
ELECTRICITY: The Philippines uses the 220-volt AC
system with two flat-pin plugs so most visitors, except
those from North America, will require adaptors.
SOCIETY & ETIQUETTE: Philippine business customs
are similar to those prevailing in the West. Handshakes
are standard for both men and women, in formal and
informal occasions, while the exchange of business
cards is informal. However, if meeting with a high-ranking government official or an established businessman, it is best to present and receive the business card
with both hands as a sign of respect, so that the card
is readable to the recipient. One should be cognisant
of academic, professional and honorary titles as they
are often used in conjunction with a persons surname.
The most significant difference in conducting business
is that text messaging is a completely acceptable form
of carrying out formal communication in the Philippines.

The Report: The Philippines 2015

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CONTENTS THE PHILIPPINES 2015

TRADE & INVESTMENT

deposits and lending increase

12 Got to be real: Favourable demographics and

improving governance make the Philippines a

see exports and investment increase

Bangko Sentral ng Pilipinas

performance, with new trading options to come

corporate bond issuance

Capital & Investment Corporation, and Co-chair,

growth rates may be sustainable

Makati Business Club, and President and CEO,

Aboitiz Power: Power generation

despite the effects of natural disasters

natural disaster insurance broadens

Life Financial Company

CONTENTS THE PHILIPPINES 2015

Chairman: Michael Benson-Colpi

134 More fun under the sun: The government steps

Director of Field Operations: Elizabeth

up its commitment to bring in more visitors

Managing Director, Asia: Laura Herrero

Field Operations Executive: Meltem

accommodation will be key to future growth

Project Coordinator: Diorel Ollodo

protection of natural attractions will be a priority

Philippine Amusement & Gaming Corporation,

Reversing the trend

flat, a shift to new sources is needed to reduce

INDUSTRY & RETAIL

the sector with a special focus on segments with

TRANSPORT & INFRASTRUCTURE

better domestic connections

PPP Centre of the Philippines

traffic eases port congestion

Director-General, Civil Aviation Authority

President & COO, San Miguel Corporation

CONSTRUCTION & REAL ESTATE

of a host of schemes across the country

friendly practices is gaining momentum

CEO, Vista Land

Century Properties Group

is drawing wealth and investment to the country

expanding into secondary and tertiary cities

opportunities grow for local providers

with an eye to future growth

to support local technological innovation

Vice-President for Global Business Partners

CONTENTS THE PHILIPPINES 2015

production increases despite inclement weather

of the Presidential Assistant for Food Security

programme continues to drive sector growth

health expenses, the state works to reduce costs

Philippine Health Insurance Corporation

through a number of public-private partnerships

implement its K-12 programme while raising

continues to impede expansion

Keeping up with expansion

SyCip Salazar Hernandez & Gatmaitan

tastes in this Asian archipelago

On the right track

THE REPORT The Philippines 2015

The Philippines in figures

International trade, 2005-14* ($ bn)