Part 3: Big Winner Sectors, Panel Discussion 1

Forum Program Reference

Alcuaz: We have about 30 minutes for this discussion and about 10 minutes for questions. If anyone has a question at any point , please stand up, wave your hand, and I will throw you into the discussion. Let me introduce members of the panel. Of course, you know the Secretary of Tourism Ramon Jimenez. Aileen Clemente, head of Rajah Tours, is from the Philippine Travel Agencies Association. Dr. Rolly Dy, representing agribusiness sector, is with the University of Asia and the Pacific. Bobby Batungbacal is with Dow Chemical and also with the Chemical Industries Association. He represents the manufacturing. John Ridsdel is with TVI, which operates a mine in Zamboanga del Norte.

I will ask everyone one or two questions, and I will ask the same question to everyone. [First Question] Could you point out in your sector what’s been the biggest accomplishment or the biggest challenge in the last one or two years.

May we begin with the mining sector. John?

Ridsdel: The mining sector, is the one that, I think Secretary De Ocampo indicated last year had a growth rate of minus 7% and reflecting on John Forbes’ review of the Arangkada scorecard track record, mining is not advancing to the same degree. So as Roger Dimmell [Canadian Chamber of Commerce First Vice President] said, the challenge is, how do we make mining—I prefer to use the term mineral development—go forward.

I’d like to quote a recent speech by Finance Secretary Purisima. In a speech to kick off the country’s initiative to join the Extractive Industries Transparency Initiative, Secretary Purisima said and I quote, “If we are able to resolve the issues we are dealing with in mining, this industry can actually provide an extra gear or two to the Philippine economy.” In fact, said Secretary Purisima, “I believe mining can easily provide 1 or 2 percentage points growth of GDP if we are able to do it properly.” In short, mining can be a major contributor to the economy, social development, revenue, and recognizing the Philippines for investment grade. Looking back on 2012, I think industry would say that the number one accomplishment was that the Administration decided what the issues are. Secretary Purisima said we can resolve the issues. It took some time, but in fact, they have identified what those issues are. Executive Order 79 is a framework going forward to resolve the issues.

The Administration has, if you will pardon the expression, passed through the valley of doubt and emerged on the other side on the plateau of commitment. There are clearly a number of good elements in EO. The Executive Order recognizes existing contracts, it established a cabinet level committee moving forward, it commits to the Extractive Industry Transparency Initiative, it promises to do something about the scourge of illegal mining, and it asserts the primacy of national law over LGU ordinances.

The bad news is that it is taking a long time to get to this point. Meanwhile the moratorium on mining continues, and industry is on hold and even going backwards, minus 7% was the number Secretary De Ocampo had in his remarks. Except for companies with existing contracts which are recognized, the industry is staying away in droves. There are no new agreements, companies are not exploring, and we have to remember that in the extractive industries, it takes a long time to wind things back up. So while we decided what the main issues are to resolve, the problem is we actually didn’t resolve any of them.

The biggest issue to resolve, starting to look forward, is the fiscal regime or government share where government thinks it is not getting enough. And now because it is a financial issue, we have to wait until there is a new Congress, and so industry will be going backwards, and be in a moratorium even longer. For the record, the public sector share as we refer to it, not just the Finance Department’s tax receipts, but the public sector share is actually much bigger than what the government appears to think. That’s because not only does the industry pay excise tax and income tax which the Department of Finance sees, but it also pays something like 20 other taxes to various government department, agencies, and LGUs. And a 1-2% gross royalty to the indigenous people. And 1.5% of operating costs to social development and management plans for schools, hospitals, and sustainable development. And we have to build roads, bridges, and provide electricity and security for the surrounding regions so government does not have to. And even though mining is relatively a more capital-intensive than labor-intensive industry, we contribute a very significant multiplier for economic activity and employment both locally and nationally. Finally, industry is increasingly conscious of the importance of targeting long-term social and environmental sustainability.

Alcuaz: Let me ask Bobby who represents the manufacturing sector what he thinks is the biggest accomplishment or the biggest challenge facing the industry.

Batungbacal: Thank you. I’d like to mention [two]. First I think would be awareness. I think our awareness on the strategic importance of manufacturing has been pretty recent. If you think about when Arangakada was written in 2010, it was there, and it was recognized to be an important industry. But policy makers and the private sector didn’t have a high priority for it. We came from one end of the spectrum where people were asking “Meron pa bang manufacturing?” to the middle of the spectrum today were people are saying, “We didn’t realize that manufacturing was such a big part of the economy.” So I think this is a very important accomplishment this year because it raises the prioritization that both private and public sectors will put on this important sector. In the last 12 months, it became a very a hot and interesting topic. The Federation of Philippine Industries had their second manufacturing conference. Now, you have labor groups, investor groups, and everybody else coming up with their manufacturing forum with the intention of growing and reviving the manufacturing sector.

The second most important accomplishment this year was the creation of the roadmaps. Secretary Domingo and other speakers talked a lot about those. It’s important to point out that the creation of these roadmaps was quite inclusive. Before we would make roadmaps for the biggest groups like the SEIPIs and the BPAPs. It’s comprehensive now. You’ll even see roadmaps for laminated bamboo materials. It includes so many industry associations. BoI is working with PIDS on this one, and they are putting all of them together into a manufacturing roadmap for the Philippines. Having this unified roadmap enables the government to see this coordinating effort and enables industry associations to work with each other. That’s where you get synergy.

Alcuaz: Rolly Dy represents the agribusiness sector.

Dy: Many people do not realize that close to 40% of employment is the direct effect of agribusiness. If you add the multiplier effect, part of the output of agriculture is processed by manufacturing, and we buy from manufacturing. We are talking about easily 60% of the employment as affected by agriculture. The major long-term problems are low productivity, lack of diversification, and inefficient value chain. There are three important observations I have in 2012, which are very important for the future. It takes time to change policy in this country. You have the executive branch, and you have also the legislative branch.

First, there is now refocusing on food security from mere rice self-sufficiency to food staples sufficiency—white corn, cassava, coconut, and camote, which have large multipliers, and are more distributive, more inclusive, and less water-intensive. Water would be a crisis in the 21st century.

Second, there’s greater emphasis on other crops to address rural development. The major problem though is not only do we lack private investments, but there is surplus capacity in some sectors of the economy, such as coconut oil milling and rubber processing, because there is low raw material base due to lack of investments in the non-rice sector.

Third, there’s now better understanding on the part of government in convergence and value chain coordination—DA, DAR, DTI, DENR, etcetera. This is exemplified by more private sector participation, for example, in the rubber roadmap. UA&P did a benchmarking of the rubber industry and coffee industry in Southeast Asia.

Alcuaz: Aileen Clemente represents the tourism. You can either say what are the big issues right now, or better yet, you can ask Secretary Jimenez a question. I think we’d all prefer that. You ask him a question.

Clemente: I wouldn’t want to ask more questions to the Secretary because the Department of Tourism under his leadership has been very cooperative and usually in consultation with the private sector. The reason why tourism is ahead right now is because the private sector has worked to institutionalize development certain aspects of the industry to propel it to grow via the 2009 Tourism Act. The tourism industry is made up of mostly women—feisty women at that—so it has made it into law and part of that is the National Tourism Development Plan. That is moving us forward. In the Philippine Development Plan, there are five major guideposts. One is the rapid, inclusive, and sustained economic growth, and part of the Act is including other government agencies to be a part of the planning process. It’s institutionalizing the new mind set, which is present for tourism growth and the policies that are required for further growth. As the Secretary mentioned, we have an archipelagic landscape, and it is a must to push for our aviation to be treated as a conduit to trade and provide economies of scale. That is a big thing we need to do. It has passed through both the House and Senate and is meant to be signed into law. We hope that happens very soon.

Another is incentives. We are growing, but we need to grow faster, because the pipe can burst any time since the supply is not present. We need more investments at the onset.

The last is mind set, an active consciousness of what we need to have, and that there’s a trickle down on the high-level discussion so that there are no barriers to entry.

Alcuaz: I have a question to Secretary Jimenez. You are talking about how the target is 10 million arrivals by 2016. Last year we had 4 million, and you are saying it will be 5.5 this year. Our main airports were already at capacity last year. Where are you going to squeeze the 1.5 million additional arrivals this year in to those airports, since we don’t have any new airports yet?

Secretary Jimenez: This is precisely the paradigm shift taking place all over the system. Today, we throw around words like “convergence” as if we were doing it before. The fact of the matter is, we are only doing it in earnest now. When I talk about convergence with DPWH, we also have to talk about convergence between DOT and DOTC, or even entities like POEA. Let me give you an example. It is only in a convergence meeting that people realized that 95% of all OFW workers pass through Manila. That accounts for about 30% of traffic that goes through NAIAs 1, 2, and 3. Why? We process all our workers in Manila. Even if I am from Cebu, I cannot fly home directly to Cebu because my papers are processed in Manila. In the next two years, the convergence team will look at dispersing OFW arrivals throughout our airports. That’s where you are going to get some space, and this is just an example of the paradigm shifts that actually happened when people sat across a table and started comparing notes. It is a more transparent and insightful approach to our problems.

Alcuaz: You mentioned we are going to have 11 international airports by 2016. Is that 11 additional or we are going to have 11 in total?

Secretary Jimenez: Eleven airports capable of receiving international flights, yes. Very few people know that Iloilo’s runway will actually take an Airbus 330. It’s ready now, but we need the air agreements to bring them in. When you talk about releasing demand, you have to create the connectivity and agreements that will do that. We have more facilities than people think.

Alcuaz: Are there any questions from the audience? Do stand up, please. There’s a question here already. Mr. Ordoñez?

Ernie Ordoñez: Magandang umaga po sa inyong lahat. I am head of the Cement Manufacturers, which increased 17% at best in 15 years, but I’m also head of Alyansa Agrikultura, which lost jobs; 20% of our small holders lost their jobs. So, we see here growth but not inclusive growth. My question is this: Incidentally my most important job today is that I am recently appointed Chair of the Anti-smuggling Committee of the National Competitiveness Council concentrating on agriculture, but which will hit industry. My question, which deserves only a yes or a no with a small explanation, is addressed to both industry and agriculture, which are dying from smuggling. I have calculated smuggling every single year for the last 12 years and I found out that smuggling is worst now in the last two years, as compared to before, so on page 116 of Arangkada, you say it has started, but it is worst now. I think today will be a milestone. I have computed for every year that whenever Customs is left alone, smuggling skyrockets. When smuggling is looked upon—that is, BOC is looked upon with a committee or an inter-agency entity with some private sector—smuggling goes down. Question to Mr. Batungbacal for industry, and Mr. Rolly Dy for agriculture: Do you or do you not favor the resurrection of a committee that is proven to work, which will look at Customs activities, because right now, only Finance looks at it and they only hardly do so.Do you agree that we should have an oversight group spurred by Arangakda that will look at Customs in a systematic way and make recommendations.

Batungbacal: If you look at our assessment in Arangkada, smuggling is the only one where we did worse compared to all other metrics. I can’t agree more with Dr. Ordoñez. It needs coordinated effort beyond the DOF, and coordinated effort certainly includes private sector as well.

Dy: Data on the magnitude of smuggling is accessible to the public. We did research for 2011 and found that 500,000 tons of palm oil left Malaysia—this is Pemuli—but only 27,000 tons reached the Philippines for that classification. Three hundred fifty thousand (350,00) tons arrived in the Philippines in a different VAT-free classification. The same year, 84,000 tons of onions and garlic left China, but less than 25,000 tons arrived in the Philippines. You can see that as well for permit products. Definitely, I will agree with ka-Ernie here of Alyansa Agrikultura that there has to be some serious oversight on the informal trade of agricultural products.

Alcuaz: For a layman like myself, the reason why smuggling “works” is because their goods are cheaper than ours. They are cheaper to produce there than here. In 2016 we are supposed to have an ASEAN “free trade area” [sic], some people told me that the agriculture sector would not be able to compete with the goods that would be coming in with very low duties or no duties in 2016. Will the agriculture sector suffer a lot? How bad will it suffer in 2016? How prepared is it for the AEC?

Dy: It’s in 2015. As with any country, you cannot specialize in everything. We trade on the basis of competitive advantage. The benchmarking study of the sugar industry between Thailand and Philippines shows that we are down 35% in terms of cost competitiveness, 15% in terms of farm yield, and around 15% in terms of mill efficiency. But we cannot operate on the basis of those averages. The modern farmers in Negros and Bukidnon can survive this and be competitive. The main problem is good farmers cannot buy land or lease land to expand, unlike in Australia and New Zealand. That is difficult here. We have comparative advantage in tree crops, but we have not invested in tree crops, such as coconut oil, palm, coffee, cacao, etcetera. We import almost 80% of our coffee; we import 80% of our palm oil. There is a market out there hungry for more rubber or coconut, but we have not invested. This is something the private sector is looking at, to have a major thrust in developing tree crops in the country, as experienced in many Southeast Asian countries. The key here is looking at the value chain competitiveness of these products. This is not a walk in the park, because we have neglected this for a long time. The political sector talks about rice self-sufficiency, which is perhaps not an easy thing to do. They talk about exporting rice, which is going to mean big losses. I am happy that the [Agriculture] Secretary is talking about exporting fancy rice varieties where we are more competitive. There are opportunities for us to expand markets. If we address logistics, value chain, and R&D investment, we can compete like any other Southeast Asian country using modern science in addressing agricultural productivity.

Alcuaz: Let me ask John one more question before we go. How can the mining industry prosper in the next couple of years if the Congress doesn’t fix the taxes, which is the condition for new mining permits?

Ridsdel: Can it or how can it?

Alcuaz: Either way.

Ridsdel: It can’t. Everybody is very sympathetic with the government. Secretary Purisima said it is a finite resource. It is a depleting resource, and we need to be clear on what the costs and benefits are. The problem is we have frozen the industry while we are thinking about these imponderables. There’s a moratorium on new permits. All that’s happening in the industry is those companies with existing mines, projects, and exploration permits are working forward. Nobody else is. Government has been quite steadfast in saying that until we revise the fiscal terms, nobody will go forward. That is a policy decision they’ve made. Industry is working very hard to work with government. The International Monetary Fund has made an analysis and proposals. The moment Congress gets back after election to get the fiscal regime revised, the industry can start gearing up again.

***

Part 3: Big Winner Sectors, Panel Discussion 1 Transcript

Download in PDF.