Usaid Investment Climate Improvement Project (Icip) Monitoring Report

First American Chamber
of Commerce Abroad
Technical Report
INVESTMENT CLIMATE IMPROVEMENT PROJECT

(ICIP) MONITORING REPORT
MARCH 2006 FEBRUARY 2007
by Arlan Z. I. Brucal
Prepared for
The American Chamber of Commerce
of the Philippines
Submitted for review to

USAID/Philippines OEDG
April 2007
Economic Modernization through Efficient Reforms and Governance Enhancement (EMERGE)

Unit 2003, 139 Corporate Center, 139 Valero St., Salcedo Village, Makati City 1227, Philippines
Tel. No. (632) 752 0881 Fax No. (632) 752 2225
Preface
This report is the result of technical assistance provided by the Economic Modernization through
Efficient Reforms and Governance Enhancement (EMERGE) Activity, under contract with the
CARANA Corporation, Nathan Associates Inc. and The Peoples Group (TRG) to the United
States Agency for International Development, Manila, Philippines (USAID/Philippines)
(Contract No. AFP-I-00-00-03-00020 Delivery Order 800). The EMERGE Activity is intended
to contribute towards the Government of the Republic of the Philippines (GRP) Medium Term
Philippine Development Plan (MTPDP) and USAID/Philippines Strategic Objective 2,
Investment Climate Less Constrained by Corruption and Poor Governance. The purpose of the
activity is to provide technical assistance to support economic policy reforms that will cause
sustainable economic growth and enhance the competitiveness of the Philippine economy by
augmenting the efforts of Philippine pro-reform partners and stakeholders.
The American Chamber of Commerce in the Philippines (AmCham) submitted an unsolicited
proposal to EMERGE on January 25, 2006, for a grant to set up a mechanism to identify and
communicate to the Philippine Government activities that will generate additional investments
and jobs in the country. It was called the Investment Climate Improvement Project (ICIP), and
the key actors were Mr. Robert M. Sears, AmCham Executive Director, Mr. John D. Forbes,
AmCham Legislative Committee Chairman, and Mr. Robert W. Blume, AmCham Desk Officer
at the Philippine Board of Investments (BOI). Mr. Richard Umali was added to the team as a
Project Assistant. EMERGE subsequently hired Mr. Arlan Z. I. Brucal to help AmCham draft
this and other summary reports.
The views expressed and opinions contained in this publication are those of the author and are
not necessarily those of USAID, the GRP, AmCham, EMERGE or the latters parent
organizations.
Table of Contents
Executive Summary
iii
I.
Introduction
II.
Conceptualizing the Investment Climate
III.
Analysis of the Philippine Investment Climate

A.
Governance
B.
Infrastructure
3
3
5
IV.
Recent Developments in Investment Climate Components

A.
Governance
(i)
Reduction in Bureaucracy and Corruption
(ii)
Improvements in Judicial, Regulatory and Enforcement
B.
Infrastructure
(i)
Power Sector
(ii)
Biofuels Sector
(iii) Transportation
(iv)
Financing
6
6
6
7
7
7
8
8
9
V.
Investment Situation in the Philippines

A.
Approved Investments
B.
Approved Foreign Direct Investment
C.
Domestic Capital Formation
11
11
13
17
VI
Investment Situation and Challenges in Key Sectors

A.
Health and Retirement Sector
B.
Information and Communication Technology
C.
Manufacturing
D.
Mining
E.
Tourism
21
21
23
25
27
31
VII.
Achieving Targets for Local and Foreign Direct Investment
32
ii
Executive Summary
As part of ICIP, the American Chamber of Commerce of the Philippines (AmCham) organized
and spearheaded an informal network of private sector business firms or their associations, with
the aim of developing an effective capability in the private business sector to monitor the
business environment that affects investment decisions.
This Investment Climate Monitoring Report looks at the key developments in the investment
climate in the country during the project period. As conceptualized by the World Bank and the
Asian Development Bank, the investment climate is composed of three broad sets of factors: (1)
macro-fundamentals, (2) infrastructure, and (3) governance and institutions.1
Analysis on the Investment Climate of the Philippines. Reports from internationally
recognized surveys and publications, including, among others, The Global Competitiveness
Report 2006-2007, IMD World Competitiveness Yearbook, WB Doing Business 2007, and 2006
Index of Economic Freedom, place macroeconomic instability and inadequate infrastructure
among top concerns of the business sector in the Philippines. Indeed, the Philippines continues to
lag behind on key investment indicators, such as in government efficiency, corruption, and tax
administration. Meanwhile, the country belongs to the lowest quartile in terms of access to
physical assets and to adequate and inexpensive financing.
Recent Developments in Investment Climate Components. In the governance component,
much of the government intervention centered on efforts to reduce red tape and corruption.
Presidential Task Forces have been formed, such as the Anti-Red Tape Task Force and the
National Competitiveness Task Force, in order to promote and develop result-oriented economic
reforms and programs that will help improve the investment climate in the Philippines. The year
2006 also saw consensus building exercises among public and private organizations, resulting in
numerous development agenda and, most importantly immediate government actions such as
executive issuances and memorandum orders that addressed major concerns raised in the events.
As regards infrastructure, mixed progress in the power sector occurred in 2006. These
developments centered on lowering power prices through (a) National Power Corporation
(NPC)s time-of-use program, which allows lower pricing during periods of low demand, (b)
lower-price power for commercial and industrial consumers using 1KW+ monthly, and (c) start
of Wholesale Electricity Spot Market (WESM) operations. Unprecedented interest in the biofuel
investment was also noted, particularly in biofuel production for domestic use and for export, in
anticipation of the mandatory blending requirements stipulated in the Biofuels Act. In
transportation sectors, major financed projects have started construction (Subic-Clark-Tarlac
Expressway and Northrail). However, work on many others has barely started (the South Luzon
Expressway (SLEX) rehabilitation). The expropriated Ninoy Aquino International Airport
(NAIA) International Passenger Terminal 3 remained unopened while the LRT1 extension,
MRT3 Phase 2, MRT7 and the C-5 to NLEX connection road project remain stagnated in their
development phase.
World Development Report 2005-A Better Investment Climate for Everyone (2005). Washington, D.C.: The World
Bank. Improving the Investment Climate in the Philippines (2005). Manila: Asian Development Bank.
iii
In finance, development was focused on two laws implemented in 2006. One was the legislated
Expanded Value-Added Tax (EVAT) that improved public financing in 2006. Also in 2006,
President Arroyo signed Republic Act (RA) 9343 extending the Special Purpose Vehicle (SPV)
Law, which expired in April 2005, to help reduce the bad loan ratio of banks and free unused
capital and assets.
Investment Situation in the Philippines. Investment pledges for the first nine months in 2006
stood at Php 283 billion, 88 percent more than the Php 150 billion reported for the equivalent
period. An upsurge in local investments was reportedly boosted by a BOI-approved project to
engage in power generation valued at Php 44 billion, representing 60 percent of total pledges
from Filipino nationals.
Approved FDI for the first nine months of the year posted a 156 percent growth, totaling Php 152
billion compared to the Php 60 billion worth of FDI approvals in the same period of 2005. Such
robust growth rate was driven by the manufacturing sector which gained cumulative approved
FDI of Php 106 billion, an expansion of 163 percent over 2005. The cumulative projected
employment for FDI was estimated at 110,279 jobs, 45 percent higher than 2005.
Meanwhile, domestic capital formation increased to Php 215 from Php 219 billion in 2005,
posting a 2 percent rise in real terms, reflecting strong confidence in future economic conditions.
Foreign capital inflows increased, in line with global trends of increased capital flows into
ASEAN and other emerging markets.
FDI as measured by the BSP for the first nine months of 2006, rose to Php 85 billion, an
encouraging increase of 54 percent from the net inflow of Php 55 billion in 2005. In March
2007, the BSP announced that total net FDI inflow into the Philippines in 2006 reached $2.35
billion, up by $491 million from the previous year level of $1.85 billion.
While the recent improvement in investment is encouraging, there were also investment plans
that were cancelled, if not deferred. A good example would be Tiger Airways decision of not
pursuing the intended setting up of its $300M regional hub and base at least six new Airbus 320s
for Asia-Pacific operations in Clark as a result of policy reversals in the aviation industry. BOI
also reported a number of failed investment plans in the power sector due to financial difficulties
encountered.
Health and Retirement. Contrary to the growing retirement, second-home and health tourism
industry in some successful developing countries, the Philippine retiree program has had limited
success, while medical tourism is just beginning. In 2006, Philippine investment, both domestic
and foreign direct investment, has been modest in this sector while other important investment in
the sector are still in the pipeline as foreign and local inventors expressed their intention to either
expand existing facilities or put up new ones in the country. The sector faces serious challenges,
including the absence of quality transportation infrastructure coupled with an apparent lack of
effective strategy to market the country as an alternative destination in Asia. Restrictive laws
iv
prohibiting foreign professionals and foreign ownership of hospitals and retirement homes are a
deterrent to FDI in the sector.
Information and Communication Technology. In ICT, continuing strong activity in fast-growing
IT-enabled services (ITES) was seen particularly in 2006. Meanwhile, FDI in ICT industry
showed a 96 percent increase in 2006 while Filipino nationals pledged less investment in ICT
with a decline of 41 percent from 2005s commitments. The declining quality of English
language proficiency continuously threatens this promising sector. Also included among the top
concerns is the need to encourage the growth of a national cyber services corridor that will
eventually yield to job creation and less concentration in Metro Manila. Finally, it was suggested
that the Philippines should also aim to move up the value chain, following Indias effort to move
to Knowledge Process Outsourcing (KPO).
Manufacturing. BOI and PEZA data show continuing modest expansion of many existing export
manufacturing plants and some new firms locating in the country. A few export plants have
closed to centralize operations elsewhere in ASEAN after low AFTA tariffs created regional
economies of scale. Manufacturing for the domestic market appears to be in gradual decline as
cheaper goods from China are competing in local markets. The growth in manufacturing is led
by the electronics sector. Semiconductor and Electronics Industries in the Philippines, Inc.
(SEIPI) reported in the first quarter of 2006 that Philippine Economic Zone Authority (PEZA)registered new investment by 20 semiconductor and electronic firms totaled Php 4.4 billion,
compared to Php 663 million during the same period in 2005. For all of 2006, SEIPI estimated
$1 billion new investment. There are numerous challenges facing the growth of manufacturing,
and several are reflected under most of the main ICIP reform clusters: red tape, power and
transportation infrastructure, and education.
Mining. The future of mining was thrown into question after the suspension of operations
following minor spill at the Australian Rapu Rapu mine in Albay but rebounded before the
second half of 2006. Thereafter, the country experienced an influx of new investment projects,
such as the Berong nickel project of TMM Management in Palawan; the gold project of
Greenstone Resources, Red V and JCG Resources (Australian) in Surigao del Norte; the coppergold project of Colet Mining and Development in Negros Occidental; the Tampakan copper
project of Sagittarius Mines in South Cotabato; and the copper project of Silangan Mindanao
Mining in Surigao del Norte, among others. Strict implementation of the Mining Act remains to
be the top challenge for the industry to attract investments in the coming years.
Tourism. The potential for tourism in the Philippines to grow to volumes as high as Malaysia and
Thailand has remained unrealized. The total number of visitor arrivals in the Philippines reached
to a new record high of 2.8 million in 2006, an increase of 8.4 percent from the 2.6 million in
2005 (including balikbayans), still below the Department of Tourism (DOT)s target of 3 million
foreign tourists. With the increased tourist influx to the Philippines, the number of new
accommodation facilities has increased, while existing hotels are venturing into expansion and
refurbishment. Major challenges to tourism growth include inadequate infrastructure,
internationally substandard tourist facilities and services, internal security and restrictions on
foreign nationals owning land for resorts and to engage in retail services (restaurants, rentals,
tourist operations, etc) by the high investment threshold ($2.5 million) of the Retail Trade Act.
Achieving Targets for Local and Foreign Direct Investment. Following the better
performance of investment in the country, the government set its investment target at a modest
12 percent expansion, which translates to at least Php 306 billion target in 2007 for commitments
to establish new or expand existing business ventures in the country. However, according to a
Workshop on FDI held on October 5, 2006 by the Joint Foreign Chambers of Commerce of the
Philippines, an estimated $9 billion in FDI could possibly flow into the Philippine economy
every year over the next four years if the countrys investment climate, labor quality and physical
infrastructure continue to improve. These investments, if realized, would generate over 2.9
million direct and indirect jobs annually from 2007-2010.
ICIP believes that these targets are attainable if significant economic reforms are sustained and
further developed. Priority and support for the development of infrastructure, especially in
strategic and industrial areas is essential. The government should also consider looking at the
impediments to entry and restrictions to foreign investors as FDI, particularly those coming from
developed countries, prefer investing in a country without these restrictions. The political will to
implement economic reforms and pro-business policies is also necessary to improve the
investment climate in the Philippines.
Overall, the ICIP envisions that the country will have a more encouraging investment climate in
the future, driven by proactive government actions, stronger private sector participation and
better infrastructure and physical and human resources.
vi
I.
Introduction
Overview of ICIP. The American Chamber of Commerce of the Philippines (AmCham)

Investment Climate Improvement Project (ICIP) is intended to correct factors impeding domestic
and foreign investment in the Philippines. Through ICIP, AmCham pinpoints problems in the
Philippine investment environment, assesses their importance to the investment climate and
works toward finding and implementing effective solutions.
Commencing on March 1, 2006, after the signing of the grant agreement with the United States
Agency for International Development (USAID) EMERGE Project on February 28, 2006 (which
was followed by the signing of a ceremonial Memorandum of Agreement between the United
States Ambassador to the Philippines Kristie Kenney and AmCham Vice President Henry Co on
April 19, 2006), this 12-month long project already identified impediments and disincentives that
hindered domestic and foreign investment inflows to the Philippines. The ICIP, through its
advocacies and network alliances, has been instrumental in identifying and communicating to the
Philippine Government activities which have high potential of generating additional investment
and jobs as well.
Core Components. ICIP has three core components: (1) networking and investment climate
monitoring, (2) policy research and analysis and (3) investment climate reform advocacy. These
are explained in the ICIP Advocacy Plan2, which identifies 6 reform clusters (red tape and
corruption, education, power infrastructure, Subic-Batangas transport corridor, judicial reforms,
legislative priorities, and political stability and security) and 5 reform sectors (healthcare and
retirement, information and communications technology, manufacturing, mining, and tourism) as
ICIP priorities, which closely adhere to the analysis and recommendations of the Roadmap II
More Foreign Investment3 released in June 2004 (with the exception of population policy).
Methodology. The ICIP implementation methodology employed several strategies to advance
ICIP reform advocacies. Within AmCham, firm members and committees and the American
Desk at the Board of Investments applied their resources and networks. Outside AmCham,
reform alliance partnerships were joined with other foreign chambers of commerce, Philippine
business associations, academics, foreign governments and multilateral aid groups and influential
individuals and firms. Voicing reform advocacies in the domestic and international media was an
especially effective method to influence target opinion and decision makers. Information
regarding ICIP reform advocacies was disseminated in multiple forms and through multiple
channels. Letters to and meetings with senior GRP officials in the Executive and Congress were
used to explain the importance of reforms to investment. Media releases, comments and
interviews were especially effective in presenting ICIP positions and often triggered additional
comments in editorials and columns. Four workshops were held, all but one with published
recommendations. All letters, reports and statements were made publicly available on the
AmCham website and through other means of distribution.
Investment Climate Improvement Project Advocacy Plan (2006). Makati City: The American Chamber of
Commerce of the Philippines.
3
Roadmap II More Foreign Investment (2004). Makati City: The American Chamber of Commerce of the
Philippines.
As part of the ICIP activities, AmCham organized and spearheaded an informal network of
private sector business firms or their associations, with the aim of developing an effective
capability in the private business sector to monitor the business environment that affects
investment decisions.
This Investment Climate Monitoring Report is the culmination of all the efforts of involved
business organization in the ICIP project, with greater thrust on key developments in the
investment climate in the country during the project period. In particular, it intends to analyze
available data on new investments, disinvestments, and failed investment plans, covering both
domestic and foreign direct investment while focusing on the five reform sectors of ICIP.
Moreover, it also aims to analyze emerging problems that prevent new investments or drive
existing businesses out of the country. Finally, this report seeks to provide recommendations for
improving the investment climate in the Philippines.
II.
Conceptualizing the Investment Climate
In 2005, the World Bank (WB) and the Asian Development Bank (ADB) released reports
on the investment climate. With the theme A Better Investment Climate for Everyone, the
World Development Report 2005 described the investment climate as that which reflects the
many location specific factors that shape the opportunities and incentives for firms to invest
productively, create jobs, and expand.4 More specifically, the ADB identified three broad sets
of factors that make up the investment environment: (i) macro fundamentals, (ii) infrastructure,
and (iii) governance and institutions. Macro fundamentals include macroeconomic stability (e.g.,
reasonable fiscal and external balances, realistic exchange rate, low inflation and interest rates),
competitive markets, and social and political stability. Infrastructure has to do with availability
and quality of physical infrastructure, such as transportation (roads and ports),
telecommunications, power and water supply. Governance and institutions refer to transparency
and efficiency in regulation, taxation, and legal system; strong and well-functioning financial
sector; labor market flexibility and skilled labor force.5
Given the conceptualization above, this report proceeds with the assessment of the
Philippine investment climate during the project period by focusing on two major components:
(a) Governance, which include macroeconomic and political stability, bureaucratic regulation,
legislation, and the judicial system; and (b) Infrastructure, which include hard infrastructure
particularly power, airports, seaports, rails, and roads, and soft infrastructure specifically
education and English. The same components are also considered in assessing the status of the
ICIP reform sectors.
World Development Report 2005-A Better Investment Climate for Everyone (2005). Washington, D.C.: The World
Bank.
5
Improving the Investment Climate in the Philippines (2005). Manila: Asian Development Bank.
III.
Analysis of the Philippine Investment Climate
The metrics used in analyzing the investment climate of the Philippines is based on the results of
internationally recognized surveys, including, among others, the WEFs Global Competitiveness
Report, the IMD World Competitiveness Yearbook, and the WB Doing Business report.
A.
Governance
The ADBs Asia 2015 conference in 2006 showed that macroeconomic instability was the top
concern of most firms in the Philippines (see Figure 1).6 Nearly 40 percent of firms reported that
macroeconomic stability in the Philippines is an impediment to business, third to Indonesia
(50%) and Bangladesh (40%). In contrast, India is reported to have the least concern in both
uncertainties in macroeconomic and regulatory policy.
Figure 1. Percentage of firms reporting political or economic risk as impediment to business
Source: Asia Conference 2015 (2006).
Institutions are also seen as a major concern in the Philippines in 2006. The Global
Competitiveness Report 2005-2006 indicated that the country ranked 89th out of the 117
surveyed countries in terms of competitive institutions. The Philippines also ranked low in terms
of overall government efficiency in the 2006 IMD World Competitiveness Yearbook, brought
about by the very low rankings in risk of political instability, bribing and corruption, customs
authorities, public service and country credit rating (see Table 1).
Other international publications also support the claim that governance is a major deterrent of
investment and business growth in the Philippines. For example, the report in the Corruption
Perceptions Index 2005 stressed that corruption remains a problem in the country as it ranked
117th out of the 146 rated nations, even lower that Vietnam which ranked 107th. At the extreme,
the Global Competitiveness Ranking of the World Economic Forum (WEF)s 2005-2006 Global
Competitiveness Ranking rated the Philippines second to the worst for corruption among 102
ASIA 2015 Promoting Growth, Ending Poverty (2006). Asian Development Bank.
surveyed countries, and its corruption ranking was the 60th of the 61 countries in the 2006 World
Competitiveness Yearbook.
Table 1. Survey results on Philippine Government Efficiency, IMD-WCY, 2006
Source: Forbes (2006). Trends in international rankings of the Philippines.

Presentation during the Workshop on FDI.
The Philippines remains inefficient and uncompetitive in terms of the cost of doing business. The
2005-2006 Global Competitiveness Ranking of the World Economic Forum (WEF) placed the
Philippines 98th among the 102 surveyed countries in red tape, while 2005 Asian Development
Bank poll of 1,000 private sector firms operating in the Philippines revealed firm managers spent
9% of their time dealing with bureaucrats.
Meanwhile, the ADB reported that tax rates and tax administration are also major constraints of
the investment climate in the country as tax forms one significant part of the set of regulations
facing businesses. A heavy tax burden generally increases production costs, while inefficient tax
administration increases compliance costs, discouraging investment. A weak judicial system is
also a major impediment to business in the country, according to the World Investment Climate
Survey (Phillips, 2006). In particular, the arbitrariness of local systems of justice and the great
variation in the interpretation of laws have contributed to the low confidence of investors in the
judicial system of the country.
B.
Infrastructure
Access to and quality of physical assets roads, ports, power, water, telecommunications are
perceived to be relatively worse in the Philippines than in more competitive economies. In the
recent Global Competitiveness Report, the Philippines ranked 90th out of the 117 countries rated.
The country ranked 94th in overall infrastructure quality, 103rd in railroad infrastructure
development and 93rd in terms of telephone lines (see Table 2).
Electricity remains a major concern to business in the Philippines, followed by transportation,
according to 2006 World Bank Investment Climate Survey. This translates to reduction in global
competitiveness, particularly for the electronics and semiconductor industry which utilizes
electricity as a significant percentage in the cost of production.
IV.
Recent Developments in Investment Climate Components
A.
Governance
Reduction in Bureaucracy and Corruption

Since mid-2006, the highest levels of the government have begun efforts to reduce red tape and
attendant corruption. Alarmed by the low ranking for the Philippines (49th of 61 countries) in the
2006 World Competitiveness Yearbook, President Arroyo in May 2006 asked the Philippine
Chamber of Commerce and Industry (PCCI), Export Development Council (EDC) and National
Economic and Development Authority (NEDA) to organize public-private sector task forces to
review actions needed to improve Philippine competitiveness weaknesses. The initiative led to
the holding of the first National Competitiveness Summit in October 2006 in Malacaan Palace.
With 300 high-level participants both from the government and private sector, the Summit
tackled competitiveness issues and developed an action agenda pertaining to better public and
private sector management, and improved transaction flows and costs, among others. At the
Summit, President Gloria Macapagal-Arroyo issued:
Administrative Order No.161, institutionalizing quality-systems management in
government;
Memorandum Order No. 228, directing all departments, bureaus, commissions,
agencies, offices and instrumentalities of the national government to improve
transaction costs and flows in order to enhance Philippine competitiveness;
A Memorandum directing the department of Transportation and Communication
(DOTC) to provide seamless infrastructure networks to enhance Philippine
competitiveness;
A memorandum directing the Department of Energy (DOE), the Philippine
National Oil Company (PNOC) and the National Power Corporation (NPC) to
lower the cost of and ensure self-sufficiency in energy to enhance Philippine
competitiveness;
A memorandum directing the Department of Education (DepED), the
Commission on Higher Education (CHED) and the Technical Education and
Skills Development Authority (TESDA) to develop programs to improve the
students proficiency in English, Science and Math in order to enhance Philippine
competitiveness; and
EO 571 which creates the public-private sector task force on Philippine
competitiveness attached to the Office of the President (OP). The task force shall
promote and develop national competitiveness by seeing the implementation of
the action agenda for competitiveness resulting from the National
Competitiveness Summit.
In May 2006, President Arroyo issued EO 428 instructing all government offices to simplify
rules and regulations and reduce reporting requirements to facilitate business and encourage
investments. The initiative was further strengthened with the Presidents State of the Nation
Address (SONA) in July 2006, highlighting her agenda of reducing red tape intended to reduce
business costs and increase competitiveness. Following this, President Arroyo issued EO 557
6
which created the Anti-Red Tape Task Force (ARTFF) headed by Department of Trade and
Industry (DTI) Secretary Peter Favila. In the same month, PCCI and AmCham ICIP organized
the Anti-Red Tape and Corruption Workshop, which generated recommendations for the passage
of the anti-red tape bill and strengthened Ombudsman, e-governance, e-procurement to reduce
agency-level corruption.
Aiming to streamline further business processes in the country, President Arroyo signed EO 587,
ordering DTI to establish and manage a Philippine Business Registry system to increase
commercial activities by facilitating a seamless transaction environment for business
registration across government agencies such as the DTI, SEC, BIR and SSS. Workshops and
several consensus building activities are being conducted among concerned government agencies
and the private sector to formulate and develop an action plan towards establishing and
implementing this system.
Improvements in Judicial, Regulatory and Enforcement
Few indications of major improvements have been noted in the areas of judiciary, regulatory and
enforcement in 2006. A glairng failure has been unhindered smuggling of used vehicles. In 2006,
the Supreme Court (SC) affirmed its decision of upholding right of the Philippine government to
prohibit the importation of used motor vehicles from freeports into the country customs territory.
However, smuggling continues up to the present as officials at Subic Bay Metropolitan Authority
(SBMA) purportedly have not received instruction from Manila to enforce the SC decision,
according to AmCham.
In line with enforcement, some low and mid-level customs personnel were suspended or
dismissed as the result of life-style checks, although no cases were brought against the so-called
big fish. Several convictions were also reported in 2006, including, among others, the
conviction of a Union Bank branch manager for violating the anti-money laundering law.
B.
Infrastructure
Power Sector
In 2006, progress in the sector centered on lowering power prices through (a) NPCs time-of-use
(TOU) program, which allows for lower pricing during periods of low demand, (b) lower-priced
power for commercial and industrial consumers using more than 1 kilowatt-hour (KW) monthly,
and (c) commencement of Wholesale Electricity Spot Market (WESM) operations. In addition,
the Energy Regulatory Commission (ERC) continued to strengthen its role as industry regulator,
and the Supreme Court avoided any disruptive interventions.
In 2006, the NPC and the Manila Electric Company (MERALCO) signed a Memorandum of
Agreement (MOA) allowing customers consuming at least one megawatt-hour (MW) to choose
their own power supplier. MERALCO also introduced its Consumer Choice program, which
functions similarly with NPCs TOU. Moreover, dialogue among MERALCO, NPC and large
power consumers also intensified regarding lower rates during the period.
WESM started commercial operations in mid-2006 and by end of year had sizeable suppliers and
customers trading power at reduced rates. WESM is a centralized venue for buyers and sellers to
engage in the trading of electricity as a commodity. It is, in effect, a market for electricity. The
success of WESM signals the governments effort to level the playing field for all industry
players and is likely to provide confidence for investors in the power sector to finance future
merchant plants, thus giving opportunity for the country to provide new power supply to the
Luzon grid and avoid future power shortages.
In sum, the power sector investment climate still needs to advance faster towards open access
and privatization. 2007 will be a critical year for the Power Sector Assets and Liabilities
management Corporation (PSALM) to demonstrate real progress on sales of generation and
transmission assets. DOE estimates that the country needs over $4 billion in energy sector
investments to meet estimated needs by 2014.
Biofuel Sector
Unprecedented interest in biofuels investment was observed in 2006, particularly in biofuels
production for domestic use and for export, in anticipation of the mandatory blending
requirements stipulated in the Biofuels Act. Large new investment projects in 2006 include the
development of a $140M cane-based ethanol plant in Pampanga for export through Subic to
Japan by the US-based Far East Biofuels; the opening of the P1-billion Filipino-owned Chemrez
coco-biodiesel plant in Quezon City; and the committed P2-billion bio-ethanol project of San
Carlos Bio-Energy, a joint venture between National Development Corporation (NDC) and
Bronze Oak Philippines, in Negros Occidental.
International donor agencies including the WB/IFC also expressed interest in funding and
financing biofuels development projects and renewable energy opportunities in the country. The
government, through the Land Bank, also supported the initiative as it allocated $350M of funds
for loans to proponents of biofuel and renewable energy projects.
Transportation
More high-level attention was given to major infrastructure modernization, especially in
transportation, in 2006 than at any other time since the 1997 Asian financial crisis. Indeed,
President Arroyo, in her 2006 SONA, committed to prioritize a large array of transportation and
other projects spread throughout five super-regions7, which would cost nearly P2 trillion over the
next four years, of which 65 percent will be funded by the government and the remaining 35
percent by the private sector. The goal is raise future total infrastructure spending to a
respectable 5 percent of GDP, while creating a conducive environment for Public-Private
Partnership (PPP).
The creation of super regions in the Philippines was made by President Gloria Macapagal-Arroyo in her July 2006
State of the Nation Address. These regions are the (1) North Luzon Agribusiness Quadrangle, (2) Metro Luzon
Urban Beltway, (3) Central Philippines, (4) Mindanao Super Region, and (5) Cyber Corridor.
Government initiatives in increasing infrastructure projects strengthened when the Infrastructure

Monitoring Task Force was established as a result of the issuance of Executive Order No. 553.
The Task Force, headed by Presidential Management Staff (PMS) chief Arthur Yap, shall take
steps to speed up the implementation of projects by regularly monitoring and resolving problems
of major infrastructure projects, especially in the transport sector.
Starting from the expropriated Ninoy Aquino International Airport (NAIA) International
Passenger Terminal (IPT) 3, the Philippine government paid Philippine International Airport
Terminal Corporation (PIATCO) P3 billion initial payment for the GRP to operate it. NAIA IPT3 opening was postponed to March 2007 to allow for repairs.
While some financed projects had started construction such as the Subic-Clark-Tarlac
Expressway and Northrail, work on others barely started including the South Luzon Expressway
(SLEX) rehabilitation. Another group (LRT-1 south extension which will connect Manila to
Cavite, MRT-3 Phase 2 Edsa North Transit, MRT-7 in Manila and the C-5 to NLEX road
connector) remained short of financial closure and start of construction.
While it is laudable that the government has targeted hard infrastructure modernization programs
and plans, the government has failed to improve the policy framework to increase competition
and a regulatory environment to promote productivity and competitive costs to spur investments.
At the top of these concerns was the sudden policy reversal that occurred in the air transport
sector in the latter part of the 2006. The protectionist EO 500-A signed by President Arroyo in
mid-2006 reversed EO 500, which allowed pocket open skies for foreign airlines at Clark and
Subic airports, under which Clark has rapidly developed as low-cost airline hub. The measure
impedes permanent access to Clark for carriers not covered by GRP bilateral air agreements,
including Tiger Airways which was given a 5-year permit by the Civil Aeronautics Board. The
incidence also made the company defer its intention to set up its $300M regional hub for AsiaPacific operations in Clark.
Financing
Significant reforms in public sector financing were observed in 2006, which resulted in generally
better credit standing for the Philippines as a whole. For instance, reports from AmCham stated
that increased revenues from the legislated Expanded Value-Added Tax (EVAT) allowed the
Philippine government to budget counterpart funding, to resume availment of Japan Bank for
International Corporations (JBIC) project loans as well as to fund more projects internally.
Also related to financing was the proposed Corporate Recovery Act, which was strongly pushed
for enactment by the Bangko Sentral ng Pilipinas (BSP) in 2006. The bill seeks to improve the
process of corporate restructuring and bankruptcy by increasing legal options for distressed
indebted enterprises. The proposed Corporate Recovery Act offers different means of relief
namely Court Rehabilitation, Pre-negotiated Rehabilitation, Fast-Track Rehabilitation, and
Dissolution and Liquidation.
Another proposal pending in committee in both chambers was the Personal Equity Retirement
Account (PERA) bill which seeks to create a tax-free individual retirement program similar to
the US IRA. PERA accounts can be managed by BSP-accredited banks or trust companies,
investment companies, investment houses accredited by the Securities and Exchange
Commission, and life insurance and pre-need companies accredited by the Insurance
Commission. PERA would strengthen the capital market and provide an investment for
remittances of overseas Filipinos.
Finally, President Arroyo signed in 2006 Republic Act 9343 extending the Special Purpose
Vehicle (SPV) Law, which expired in April 2005, to help reduce bank bad loan ratio. SPVs
acquire non-performing assets at substantial discounts and seek to sell them later for a profit.
Based on BSP estimates, the extension will enable the banking industry to dispose of P100
billion more of non-performing assets by granting tax exemptions and reduced registration and
transfer fees.
10
V.
Investment Situation in the Philippines
Approved Investment
Reports from the National Statistical Coordination Board (NSCB) reveal that investment pledges
for the first nine months in 2006 grew to Php 283 billion, 88 percent more than the Php 150
billion reported for the equivalent period (see Table 3). The Board of Investments (BOI) was the
top source of project approvals for the combined investment of Filipino and foreign nationals,
with total value of Php 142 billion in the first nine months of the year. This was 26 percent
higher than Php 113 billon for the same period in 2005. Other investment promotion agencies
(PEZA, SBMA and CDC) likewise recorded significant improvements in cumulative values of
their investment approvals with a combined worth of Php 140 billion.
Table 3. Total Approved Investments by Nationality (Filipno and Foreign) and by Promotion Agency
January to September 2005 and 2006
(in million Pesos)
Growth rate
Agency
2005
2006
Jan-Sept. 2005 - Jan.-Sept. 2006
BOI
PEZA
SBMA
CDC
Total
% Share
to Total
Total
113,239.3
35,640.2
1,032.1
434.6
150,346.2
Filipino*
82,266.7
8,074.1
297.1
252.8
90,890.7
Foreign
30,972.6
27,566.1
735.0
181.8
59,455.5
Total
142,341.4
58,102.5
69,943.0
12,316.8
282,703.7
Filipino*
105,584.6
19,035.1
1,526.9
4,512.2
130,658.7
Foreign
36,756.9
39,067.4
68,416.1
7,804.6
152,044.9
100.0
60.5
39.5
100.0
46.2
53.8
Total
25.7
63.0
6,676.7
2,734.0
88.0
Filipino
28.3
135.8
413.9
1,684.9
43.8
Foreign
18.7
41.7
9,208.7
4,192.8
155.7
Source: National Statistiscal Coordination Board

* includes al committed investments of Filipnos in wholly or partially owned companies
Note: details may not add up to totals due to rounding.
The total cumulative projected employment from investment commitments from January to
September 2006 reached 125,665, a 39 percent increase from last years 90,487 jobs. The
Philippine Export Zone Authority (PEZA) topped in the generation of potential jobs with a total
of 62,215 employment opportunities. PEZAs employment potential represents 50 percent of the
total projected employment for the period.
Meanwhile, FDI comprised 54 percent of the total investment pledged in the first nine months of
2006, with 45 percent or Php 68 billion of the Php 152 billion approved through SBMA. Pledges
from Filipino nationals stood at Php 131 billion, 81 percent or Php106 billion of which were
approved by BOI. Notably, approved investments by Filipino nationals in the third quarter of
2006 surged to Php 72 billion, more than 9 times its year-ago level of Php 8 billion. This upsurge
in local investments was reportedly boosted by a BOI-approved project, which engages Filipino
investors in power generation valued at Php 44 billion, representing 60 percent of total pledges
from Filipino nationals in the quarter.
11
Table 4. Total Approved Investments (Filipino and Foreign) by Industry

(in million Pesos)
Industry
January - September
2005
Agriculture
Mining
Manufacturing
Electricity
Gas
Water
Construction
Trade
Transportation
Storage
Communication
Finance and Real Estate
Services
Total
93.9
602.3
111,809.6
17,473.5
90.2
83.3
303.9
941.5
25.2
2,019.5
5,523.6
11,379.6
150,346.2
2006
Growth Rate
Percent to total
Jan-Sept. 2005 Jan-Sept. 2006
Jan. Sept. 2006
4,660.5
3,671.4
118,424.2
45,352.6
180.0
26,151.7
1,677.9
25.7
38,982.1
19,529.1
24,048.6
282,703.7
1.6
1.3
41.9
16.0
0.1
9.3
0.6
13.8
6.9
8.5
100.0
4,863.8
509.6
5.9
159.6
115.9
8,506.2
78.2
2.0
1,830.3
253.6
111.3
88.0

Notes:
Details may not add up to totals due to rounding.
The services industry includes hotels/restaurant businesses, computer software development,
health care program services, renting and leasing of water sport equpment, training services,
protection/security training course, college education and other services.
Of the sectors, manufacturing, the largest proportion of approved investment, rose by 6 percent
in the first three quarters of 2006, reaching Php 118 billion from Php 112 billion in 2005 (see
Table 4). Pledges to the electricity and communication sectors were also substantial at Php 45
billion and Php 39 billion, respectively, comprising almost 30 percent of total investment
pledged during the period. Approved investment plans in services reached Php 24 billion, more
than doubling the Php 11 billion in the equivalent period in 2005.
Strong growth was observed in agriculture, trade (wholesale and retail), and communication.
Improvement in trade could be attributed to the booming franchising industry. In 2006,
franchising outlets reached 100,000 in the country while franchising concepts reached 850. In
particular, several retailers such as HBC (personal care), Bayo (womens ready-to-wear), 7eleven (convenience store), and PR Gaz Haus Holdings, Inc. (liquefied petroleum gas company)
expanded their market through franchising during the period. Improved investment in
communication is driven mainly by the surge in FDI in the information and communication
technology (ICT) sector from Php 12 billion in 2005 to Php 24 billion this year, a 96 percent
growth rate. The introduction of the third-generation (3G) mobile technology partly helped to
boost the sector. In 2006, more than nine companies signified interest in becoming 3G operators.
12
Approved Foreign Direct Investment

Approved FDI for the first nine months of the year posted a 156 percent growth, totaling 152
billion compared to the Php 60 billion approved FDI approvals in the same period in 2005 (see
Figure 2).
F ig u r e 2 . A p p r o v e d fo r e ig n d ir e c t in v e s tm e n ts :
J a n u a ry - S e p te m b e r 2 0 0 5 a n d 2 0 0 6
2 0 0 .0
1 5 2 .0
1 5 0 .0
in
b illio n
1 0 0 .0
PhP
5 9 .5
5 0 .0
J a n -S e p t. 2 0 0 5
J a n -S e p t. 2 0 0 6
S o u r c e : N a t io n a l S t a t is t ic a l C o o r d in a t io n B o a r d
The cumulative approved FDI from January to September 2006 for the manufacturing sector
reached Php 106 billion, an expansion of 163 percent over Php 40 billion in 2005 (see Table 5).
FDI pledges to the sector comprised 7o percent of the total investment commitments for the
period. Meanwhile, the trade sector was the second top recipient of investment commitments in
the first nine months of 2006, growing to Php 20 billion from Php 84 million in 2005. The
services sector likewise improved to Php 16 billion, more than doubling its level of Php 7 billion
last year.
Table 5. Total Approved Foreign Direct Investments by Industry
(in million Pesos)
Industry
January - September
2005
Agriculture
Mining
Manufacturing
Electricity
Gas
Water
Construction
Trade
Transportation
Storage
Communication
Finance and Real Estate*
Services
Total
330.2
225.3
40,243.9
10,863.5
90.2
33.9
84.0
339.6
0.1
128.0
7,413.8
59,455.5
2006
Growth Rate
Percent to total
Jan. Sept. 2006
2,355.8
724.1
105,902.7
439.0
80.5
19,542.5
887.3
8.9
2,669.7
3,516.1
15,918.1
152,044.9
1.5
0.5
69.7
0.3
0.1
12.9
0.6
1.8
2.3
10.5
100.0
6,986.5
221.4
163.2
(96.0)
137.4
23,170.9
161.3
7,237.3
2,646.3
114.7
155.7
* Includes Economic Zone Development and Industrial Park

Notes:
The services industry includes hotels/restaurant businesses, computer software development,
health care program services, renting and leasing of water sport equpment, training services,
protection/security training course, college education and other services.
13
Among the investment promotion agencies, SBMA approved the most FDI, with 45 percent or
Php 68 billion of total FDI approved in the first nine months of 2006 (see Table 6). The positive
growths in FDI pledges approved by BOI and PEZA and the significant improvement in
approvals by CDC further boosted the collective January-September results.
Table 6. Total Approved Foreign Direct Investments by Promotion Agency
(in million Pesos)
Approved FDI
Growth Rate
Percent to
January - September
Agency
Jan-Sept. 2005 total Jan2005
2006
Jan. Sept. 2006
Sept. 2006
BOI
30,972.6
36,756.9
24.2
18.7
27,566.1
39,067.4
25.7
41.7
PEZA
735.0
68,416.1
45.0
9,208.7
SBMA
CDC
181.8
7,804.6
5.1
4,192.8
Total
59,455.5
152,044.9
100.0
155.7
Notes:
In terms of country-specific investors, Koreans were the top source of FDI commitments in the
first three quarters of 2006 with Php 53 billion, constituting 35 percent of the FDI for the period
(see Table 7). The USA and China with Php 35 billion and Php 18 billion worth of
commitments, respectively, followed in second and third places. Japan, in the fourth place,
closely followed China with Php 17 billion. Together, the top four contributed 81 percent of
potential FDI for the period.
China, the UK, and Malaysia also posted high growth rates in 2006. China pledged to inject Php
18 billion, all of which is committed to the manufacturing sector, according to the NSCB (see
Table 8). Moreover, significant investment commitments from China were also reported in the
latter part of 2006 in the infrastructure, mining, and energy sectors.
Britains major investments in the Philippines concentrated in financial and other services. Table
8 shows that British investors were the largest in finance and real estate, with investments
reaching to Php 3 billion, during the first three quarters. In addition, British firms are also
interested in entering into joint ventures with call center and business process outsourcing
companies, and in pharmaceutical ventures in the Philippines.
.
14
T a b le 7 . T o t a l A p p r o v e d F o r e ig n D ir e c t In v e s t m e n t s b y C o u n t r y o f In v e s t o r
J a n u a ry to S e p te m b e r 2 0 0 5 a n d 2 0 0 6
( in m il lio n P e s o s )
A p p r o v e d In v e s tm e n ts
C o u n try
J a n u a ry - S e p te m b e r
2005
A u s t r a lia
B r . V ir g in I s .
F ra n ce
G e rm a n y
HongKong
I n d o n e s ia
I t a ly
Jap an
K o re a
M a la y s ia
N e t h e r la n d s
PROC
S in g a p o r e
Sw eden
S w it z e r la n d
T a iw a n
T h a ila n d
UK
USA
M anx
N a u ru
C a y m a n I s la n d s
O th e rs
T o ta l
5 5 8 .9
4 0 9 .0
2 2 .5
3 9 8 .4
1 4 .0
7 .7
2 3 ,5 0 3 .6
1 0 ,5 1 6 .2
1 9 .5
7 ,5 9 0 .7
8 2 .3
2 6 6 .6
8 1 7 .2
1 ,1 5 2 .0
1 ,5 3 3 .5
1 0 2 .2
1 0 ,2 3 7 .2
2 2 3 .9
5 9 ,4 5 5 .5
P e rc e n t to to ta l
J a n -S e p t. 2 0 0 6
2006
5 7 7 .7
6 2 8 .4
4 2 .5
9 3 .5
4 5 6 .7
1 1 .0
1 8 .4
1 7 ,4 8 1 .4
5 2 ,7 1 5 .3
8 3 3 .3
7 ,0 3 9 .0
1 7 ,7 9 3 .6
6 ,1 2 4 .5
5 3 1 .4
1 ,0 6 6 .6
2 2 .2
9 ,0 1 4 .9
3 4 ,7 1 1 .8
4 3 9 .0
3 8 4 .0
2 ,0 5 9 .4
1 5 2 ,0 4 4 .9
0 .4
0 .4
0 .1
0 .3
1 1 .5
3 4 .7
0 .5
4 .6
1 1 .7
4 .0
0 .3
0 .7
5 .9
2 2 .8
0 .3
0 .3
1 .4
1 0 0 .0
G ro w th R a te
J a n -S e p t. 2 0 0 5 J a n . S e p t. 2 0 0 6
3 .4
5 3 .6
8 8 .7
(7 6 .5 )
3 ,1 6 7 .4
1 4 0 .1
2 5 .6
4 0 1 .3
4 ,1 7 8 .1
(7 .3 )
2 1 ,5 1 4 .1
2 ,1 9 7 .6
(3 5 .0 )
(7 .4 )
(9 8 .6 )
8 ,7 1 7 .5
2 3 9 .1
(7 .4 )
1 5 5 .7
S o u r c e : N a t io n a l S t a t i s t is c a l C o o r d in a t io n B o a r d
N o te :
D e t a ils m a y n o t a d d u p t o t o t a l s d u e t o r o u n d in g .
15
Table 8. Approved Foreign Direct Investments, by Nationality and by Sector

January - September 2006
Manufacturing
Mining
Storage
Electricity
Australia
53.2
413.4
109.8
1.2
577.7
Br Virgin Is
33.2
595.2
628.4
150.6
76.9
384.0
16.8
12.7
13.0
42.5
85.8
7.7
93.5
29.2
160.6
266.9
456.7
Indonesia
2.7
8.4
11.0
Italy
2.7
15.7
18.4
Japan
16,991.8
159.8
319.9
9.9
17,481.4
Korea
52,444.8
156.6
113.9
52,715.3
90.9
1.2
741.2
833.3
434.9
469.2
6,135.0
7,039.0
16,629.6
8.1
277.8
14.4
854.4
9.3
17,793.6
495.5
1.2
1,352.1
6,124.5
0.0
0.0
4.7
526.7
531.4
1,017.2
5.2
0.5
34.7
8.9
1,066.6
Thailand
22.2
22.2
UK
65.6
2,631.4
2,800.5
21.3
5,518.9
17,209.1
335.5
4,092.6
1.0
13,073.6
34,711.8
208.0
310.7
749.7
65.7
673.6
49.2
2.5
2,059.4
105,902.7
724.1
2,669.7
3,516.1
12,422.1
80.5
887.3
19,542.5
Cayman Islands
France
Germany
Hong Kong
Malaysia
Nauru
Netherlands
PROC
Singapore
Sweden
Switzerland
Taiwan
USA
Others
Grand Total
1,920.0
156.6
Transportation
TOTAL
Agriculture
Nationality
Finance &
Real Estate
Sectors
ConsServices
truction
Communication
Trade
2,355.8
2,355.8
8.9
439.0
439.0
439.0
148,548.9
16
Domestic Capital Formation

In 2006, domestic capital formation increased to P224 from P220 billion in 2005, posting a
sluggish but positive 2.1 percent growth in real terms (see Table 9). Fixed capital grew by 0.6
percent, recovering from a negative growth rate of 3.9 percent in 2005, but still the lowest since
2002. Public construction spending grew by 13 percent, although private construction remained
sluggish and further slipped by 3 percent. Durable equipment spending continues to remain low.
Table 9. Domestic Capital Formation, 2002-2006.
(Levels in Million Pesos)
AT CONSTANT 1985 PRICES
Capital Formation
A. Fixed Capital
1. Construction
2. Durable Equipment
3. Breeding Stock & Orchard Dev't
B. Changes in Stocks
GROSS DOMESTIC PRODUCT
Net factor income from abroad
GROSS NATIONAL PRODUCT
2002
212,081
213,270
96,337
100,593
16,340
-1,189
1,034,094
71,601
1,105,695
2003
218,412
221,286
95,154
109,869
16,263
-2,874
1,085,072
86,359
1,171,431
2004
234,065
224,176
94,402
113,359
16,415
9,889
1,152,174
98,014
1,250,188
2005
219,926
215,399
93,550
105,298
16,551
4,527
1,209,473
111,208
1,320,681
2006
224,583
216,593
96,196
103,849
16,547
7,991
1,274,415
128,312
1,402,727
2002
2003
2004
2005
2006
(Growth Rates)
Capital Formation
A. Fixed Capital
1. Construction
Net factor income from abroad
GROSS NATIONAL PRODUCT
(4.3)
2.1
(0.7)
4.8
3.3
(109.3)
4.4
0.5
4.2
3.0
3.8
(1.2)
9.2
(0.5)
141.7
4.9
20.6
5.9
7.2
1.3
(0.8)
3.2
0.9
(444.2)
6.2
13.5
6.7
(6.0)
(3.9)
(0.9)
(7.1)
0.8
(54.2)
5.0
13.5
5.6
2.1
0.6
2.8
(1.4)
(0.0)
76.5
5.4
15.4
6.2
(GDP-based Percent Distribution)

Capital Formation
A. Fixed Capital
1. Construction
2002
2003
20.5
20.6
9.3
9.7
1.6
(0.1)
100.0
2004
20.1
20.4
8.8
10.1
1.5
(0.3)
100.0
2005
20.3
19.5
8.2
9.8
1.4
0.9
100.0
2006
18.2
17.8
7.7
8.7
1.4
0.4
100.0
17.6
17.0
7.5
8.1
1.3
0.6
100.0
Source: National Accounts of the Philippines

National Statistical Coordination Board
Actual foreign capital inflows increased, in line with global trends of increased capital flows into
ASEAN and other emerging markets. FDI, as measured by the BSP for 2006, rose to Php 85
billion, an encouraging increase of 54 percent from last years net inflow of Php 55 billion, and
even higher than the global FDI inflow growth rate of 34 percent (see Table 10). Contributing
significantly to the rise in FDI inflow was the reversal of the other capital account to a net inflow
of Php 37 billion from last years net inflow of Php 10 billion.
17
Table 10. Balance of Payments Foreign Direct Investments*

(in million Pesos)
Growth Rate
January to September Percent to total
2005
2006
Jan. Sept. 2006
Non-residents' investments in the Phils.
Equity Capital (net)
Reinvested Earnings**
Other Capital
55,140.6
56,817.7
7,877.9
9,555.0
85,006.1
48,863.0
(588.8)
36,731.9
100.0
57.5
(0.7)
43.2
54.2
(14.0)
(107.5)
484.4
Source: Bangko Sentral ng Pilipinas

* Date last updated: 11 December 2006
** data includes reinvested earnings from banks only
Failed investment plans

Probably the biggest failed investment plan in the country in 2006 occurred during the latter half
of the year, when President Arroyo amended EO 500 - a law which liberalizes air access of
international passengers to the Diosdado Macapagal International Airport (DMIA) and the Subic
Bay International Airport (SBIA), and gave airlines some assurance of permanent permits to
operate there - by signing EO 500-A, even before the former was implemented. As discussed
previously, EO 500-A essentially reverses EO 500 as it specifies that only designated airlines
from 60 countries with existing Air Service Agreements with the Philippines can operate at
DMIA and SBIA, but limited to only third and fourth freedoms. EO 500-A restricted the
expansion plans of Tiger Airways, a Singaporean company, because it is not a designated carrier
like other foreign airlines currently operating at DMIA. In 2006, Tiger Airways deferred setting
up its $300M regional hub and base at least six new Airbus 320s for Asia-Pacific operations at
Clark. Tiger Airways was estimated to generate some 10 million passengers over a five-year
period and expand its network to cover routes between Clark and Thailand, Macau, China,
Taiwan, Korea, Malaysia and Indonesia and, possibly, Vietnam and Australia.
Data on cancelled registered investment at BOI is not well-maintained. What is available for
2006 is presented in Table 10. Most of these consist of capital-intensive geothermal power
activities which indicated financial difficulty as main reason for their failure to start operations.
Other problems include conflict between the investor and the local community and unfavorable
economic development.
18
Table 10. BOI-registered mining and infrastructure projects canceled as of December 2006
Firm
1. Natural Resources
Mining Devt. Corp.
Ownership
CR No./
Date
Filipino 100%
2005-162/
28-Oct-05
2. Goldsun Cement Corp.
Taiwanese-50%
Res. Chinese50%
3. LMI Holdings Corp.
Activity/ Capacity
Plant Location
Target
Operation Date
Project Cost
(P000)
Reason(s) for NonImplementation

Temporarily stopped
operations since last
quarter 2006 due to
financial problems
Problems with local
residents regarding
environmental
concerns
Due to unfavorable
economic
development for the
industry
Peace and order
problem in firms
exploration sites
Exploration Project
Sitio Depot, Monkayo,

Compostela Valley,
Davao
June 2005
204,300
98-027/
28-Jul-98
Cement /
1,600,000 MTPY
Sitio Abagatanen, Brgy.

Macaboboni, Agno,
Pangasinan
January 2004
12,766,231
Filipino 100%
98-075/
21-Aug-98
Cement /
1,500,000 MTPY
Cebu Province
February 2000
6,565,000
4. TVI Resource Devt.

Phils., Inc.
Canadian 40%
Filipino 60%
95-192/
13-Oct-95
Mining Exploration/
5,000 HAS.
Rapu-Rapu, Albay
July 1995
44,364
5. Ilocos Norte Power Corp.
Filipino 100%
97-092/
14-May-97
Bunker-C fired
power plant/ 60MW
Brgy. Of Alejo Malasig, Municipality of

Vintar, Province of
Ilocos Norte
December 2001
2,123,460
Financial Difficulty
6. PNOC Energy Devt.

Corp.
Filipino 100%
2001-138/
07-Sep-01
Bo. Saoit & Pagali

Pagudpud, Ilocos Norte
October 2004
2,171,400
Financial problems
7. PNOC Energy Devt.

Corp.
Filipino 100%
95-378/
24-Sep-96
Labo, Camarines Sur
December 1998
6,045,040
Technical problems
8. PNOC Energy Devt. Corp
Filipino 100%
2004-059/
21-May-04
Palinpinon, Southern
Negros
March 2006
2,580,000
Financial problems
9. PNOC Energy Devt. Corp
Filipino 100%
2004-056/
12-May-04
Mailum, Bago City,

Negros Occidental
July 2006
7,414,000
Financial problems
10. Talisay Bioenergy Inc.
Filipino 100%
2004-124/
28-Oct-04
Barangay Dos
Hermanas, Talisay City
August 2006
3,141,800
Financial problems
11. Agusan Power

Corp.
Filipino 95%
American 5%
2002-058/
16-Apr-02
Magdagooc, Jabonga,
Agusan del Norte
July 2004
703,763
Financial problems
New operator of
geothermal power
plant/
40MW
New operator of
geothermal power
plant/
120 MW
New operator of
geothermal power
plant/
26MW
New operator of
geothermal power
plant/
54MW
New operator of
cogeneration power
plant/
30 MW
Hydro Power Plant/
22 MW
Source: Board of Investments
20
V.
Health and Retirement Sector

The health and medical tourism industry is growing globally, with growing spillover effects on
tourism spending. In fact, tourism may be combined with wellness and medical treatment. The
report from the October 2006 Workshop on FDI estimated that the global healthcare tourism
industry is estimated at $40 billion, with close to 50% in wellness and spas.
The senior market (65 years and above) is growing significantly over the last decade. Henry
Schumacher, executive vice president of the European Chamber of Commerce of the Philippines,
estimated that Japan would have 30 percent of its population belonging to the senior market by
2010 from 21 percent in 1996; Germany would have 25 percent in 2010 from 21 percent in 1996;
and Italy would have 26 percent in 2010 from 22 percent n 1996. With demographic aging in
developed countries, the growth potential for retirement and medical tourism in low-cost tropical
countries is considerable.
Several tropical developing countries (e.g. Costa Rica, Malaysia, Mexico and Thailand) have
been successful in attracting considerable numbers of retired residents from developed countries.
India, Singapore and Thailand are attracting increasing numbers of visitors seeking inexpensive
medical and dental services.
Table 11. Prices of Selected Medical Treatments in Asia, 2003.
21
Thailand has taken a leading position in Asias medical and cosmetic tourism markets. Thailand
is stealing a lead on its competitors as it successfully attracts Western and non-Western patients
for low cost treatments with packages that offer post-recovery resort stays (see Table 11).
The Philippines has yet to leverage its strengths to carve out a share of this growing market. The
Philippine retiree program has had limited success, while medical tourism is just beginning. With
more than 1,200 hospitals and many medical and nursing schools, the country has a considerable
health infrastructure, including several modern facilities located in Metro Manila. However, few
non-resident foreigners receive treatment in the country.
In 2006, Philippine investment, both domestic and foreign, has been modest in this sector. Only a
few major investments occurred in 2006, including:
The Php 3 billion earmarked funds of UST Hospital for upgrading facilities as a medical
tourism destination; and
The Php 350 -billion-worth Benavides Cancer Institute recently opened by UST, the first
of its kind in the country.
Other investment for the sector are reportedly still in the pipeline as foreign and local inventors
expressed their intention to either expand their existing facilities or put up new ones in the
country. Some of which were:
Cebu Doctors Hospitals plan to put up an integrated retirement village facility in Naga,
utilizing the 250-bed Cebu Doctors' South General Hospital as medical component;
Investment plan of Asian Hospital to expand its operation under a partnership with
Thailands leading hospital group;
Cardiovascular Hospitals of Americas investment plan to establish a P1B medical
facility in Cebu.
The new Philippine law on dual citizenship may encourage some Philippines-American doctors
to return as health care investors. Meanwhile, a large number of Filipinos that have worked in
health care services in the US and other countries could be a great potential to be medical service
providers in the Philippines if they return home.
In 2006, the President declared the retirement industry a flagship program. The new
government retirement agency chief, former Philippine National Police (PNP) head Aglipay, and
new Philippine Retirement Inc. head Ordonez announced an extremely ambitious target goal of
one million foreign retirees by 2015. This initiative is supported by the JFC.
The sector faces numerous challenges. For example, a study of the University of Asia and the
Pacific (UA&P) in 2006 pointed out problem areas in medical tourism including the absence of
good infrastructure coupled with an apparent lack of effective strategy to market the country as
alternative destination.
The restrictive laws covering practice of foreign professionals and foreign ownership of hospitals
and retirement homes also deter FDI in the sector. AmCham member Palafox Associates, for
example, told press that the Philippines could miss out on the $42 billion market for second
homes of foreigners if GRP does not repeal obsolete laws. The same concern was also raised
22
during the Workshop on FDI in October 2006. Concerns over the deteriorating transportation
infrastructure remain, particularly in Metro Manila and Cebu.
Aside from the processing, maintenance and other fees charged to retirees, there is also a
growing concern over the tedious and costly processing of visas and other required documents
for foreign nationals to enter the country.
Information and Communication Technology
After India, the Philippines is viewed as the best low-cost location although far smaller than
India in terms of the size and skills of its workforce for the growth of internetenabled
services, such as call centers, business processing, animation, medical transcription,
engineering/design and other services provided remotely over the internet. Several new locations
in low-cost countries are entering the market, adding to the competition. Nevertheless, the
demand for such work to be performed in the Philippines exceeds the supply and will only be
met by improvements in the skills of the workforce, both near-term remedial training and longer
term through reversing the decline of education in the country.
In March 2006, President Arroyo committed to prepare one million Philippine workers by 2010
for jobs in the rapidly-growing call center and business process outsourcing sector, up from the
200,000 currently working. While such a five-fold increase is optimistic, the government has
made a good start by establishing a remedial training scholarship fund for 100,000 ICT nearhires who failed to obtain jobs because of deficient language or IT skills. The DepEd is also
working to improve the poor quality of English, math and science teachers. PEZA prepared an
attractive mix of incentives for new investors in the sector, while Department of Labor and
Employment (DOLE) consistently grants waivers for female employees to work at night. PEZA
designated as IT Zones 3 buildings in NCR including Market! Market! shopping mall. Related to
this, President Arroyo signed eight proclamations for new PEZA IT zones in Metro Manila and
Cebu.
The first half of 2006 saw continuing strong activity in the fast-growing IT-enabled services
(ITES) sector with many investor inquiries, firms visiting to evaluate and announcements of start
of operations and expansions. Two of the largest Philippine companies are buying into
established BPO firms. Data from the NSCB showed that approved FDI in the ICT industry
showed a 96 percent increase, from Php 12 billion in 2005 to Php 24 billion this year. Filipino
nationals pledged less investment in ICT during the period, with only Php 2 billion, a decline of
41 percent from Php 3 billon in 2005.
Of the total FDI investment approvals in ICT as of September 2006, 53 percent of Php 13 billion
was intended for manufacturing. Investments in IT services reached Php 11 billion while the
trade subsector stood at Php 3 million worth of FDI. There were no FDI investment applications
for the telecommunications sector during the period.
23
Table 12. List of reported investments in ICT

Actual
Planned
Clark Cyberservices and Shogee
$10+ million investment of Bigfoot
Studios announced $10M computer
Entertainment in digital entertainment
movie studio project at Clark to employ
production facility in Cebu.
500.
Dell dedicated new customer care
center located in Mall of Asia,
AmCham member Accenture will
invest $20M over next 18 months,
employing 1,400 call center personnel;
expanding workforce to 12,000 from
Dell later announced 2nd RP call center
current 7,500.
at Eastwood SEZ.
GE Indian affiliate GENPACT opened

500-person shared services center.
People Support to invest $15 M to add

2,000 seats in 2006.
ICT Group opened 3rd contact center

located in a former textile plant in
Marikina. ICT Group announced it will
add 800 more seats at Philippine call
centers.
Araneta Center plans to invest P4B in a

Cyber Park of 11 low-rise buildings,
located near MRT3 and LRT2.
Ayala Land announced plans to spend

$10M for two BPO campuses.
AmCham
member
Convergys
dedicated a new facility in Makati. It
also announced the opening of its 2nd
call center in Cebu and 8th in RP with
700 employees.
AmCham member TeleTech plans to

open 4 more call center sites and
increase its workforce from 8,000 to
15,000.
Ayala Land plans to invest P6B in

science and technology park on 38-ha
property of UP Diliman campus.
P1B facility of Sutherland Global

Services at Clark SEZ, its 3rd in RP.
Source: American Chamber of Commerce, 2006.
Despite these strong positive developments, there are ICT sector weaknesses restraining growth.
T declining quality of English language proficiency continuously threatens this promising sector.
As such, more private sector involvement is highly recommended to undertake improvement in
the quality of Filipino English-speakers. The government should also consider review,
assessment and improvement in the College Curriculum gearing towards enhancing demanddriven education.
24
The Philippines should also struggle to move up the value chain, following Indias efforts to
progress from business process outsourcing to knowledge process outsourcing. This can be done
through continuous improvement in the productivity of workforce through training, capability
building efforts, etc. Specialization and market-niche targeting (i.e., wireless apps, gaming,
medical transcription, etc.) could also benefit the development of the Philippine ITES sector.
Manufacturing
BOI and PEZA data show a continuing modest expansion of many existing export manufacturing
plants and some new firms locating in the country (see Figure 3). A few export plants have
closed to centralize elsewhere in ASEAN after low AFTA tariffs created regional economies of
scale. Manufacturing for the domestic market appears to be in gradual decline as cheaper goods
from China are competing in local markets.
Figure 3. Total Approved FDI in Manufacturing, by Agency, 1996-2006
Although local manufacturing continued to decline, manufactured exports increased, led by

electronics, and foreign investment in the sector strengthened. Several large foreign
manufacturing investments were announced. The electronics industry association predicted its
members will invest up to $1 billion this year to meet growing global demand.
SEIPI reported in the first quarter of 2006 that PEZA-registered new investment by 20
semiconductor and electronic firms totaled P4.4 billion, compared to Php 663 million in the same
period in 2005.
There are numerous challenges facing the growth of manufacturing, and several of these are
reflected under most of the main ICIP reform groups: red tape, power pricing and availability,
education, security and transportation infrastructure. Wages are not a major concern for
exporters, although there are concerns to limit minimum wage increases; labor and immigration
laws need modernization. The Philippines retains potential to grow export manufacturing
25
significantly if labor productivity can be increased and reforms implemented to make the country
a more efficient operating location.
During the October 2006 Workshop on FDI, recommendations to improve manufacturing in the
country include:
Modernize the Labor Code;
Allow foreign ownership of commercial, industrial and residential land;
Reduce smuggling and hijacking;
Train more engineers and scientists;
Develop electronics testing and R & D subsectors;
Hold/Stop investment-unfriendly legislations;
Resolve issue on constitutional barriers;
Be and be perceived as a stable government;
A unified government-senate/congress/executive healthy working relationship.
Finally, consensus was achieved both in the Workshop on FDI and the National Competitiveness
Summit for the fast and seamless delivery of infrastructure projects in the Presidents SONA,
both in the short- and medium-term.
Box 1. Significant Developments in the Manufacturing Sector
Recent Major Approved FDI in Manufacturing
PEZA-approved project to engage in the fabrication of solar wafers, worth Php14 billion which
comprised almost 50% of FDI pledged in Q4 2005 to the manufacturing sector
SBMA-approved project involving the manufacture of glass products, worth Php 16 billion
which constituted 66% of FDI pledged in Q2 2006 to the manufacturing sector
New and Planned Investment Projects
Cold chain facilities being constructed in 3 cities in Mindanao
Colgate Palmolive Philippines to undertake $40 M expansion
Ford Philippines launched FFV (Flexible Fuel Vehicle) Technology. Ford plans $40 M
investment to manufacture FFV engines in Philippines
Hanjin Heavy Industries began work on $1B shipyard at Subic to employ up to 20,000
Hebei Jingniu Group said going ahead with $312M glass project at Subic
Honda inaugurated $25 M motorcycle plant
Hyundai Motor may assemble vehicles; Philippine 2005 sales doubled
Temic Automotive plans 4-year, 77M investment program for parts manufacturing
Tsuneishi Heavy Industries committed to invest $100M to expand Cebu shipyard
Wistron investing additional P400M to assemble GPS devices at Subic
BOI approved P12B investment of SW Cement in new clinker-based cement plant in Cebu with
pioneer status but granted non-pioneer ITH
Ichia Technologies expressed interest to build $60M manufacturing facility for keypad and
circuit boards in RP
Investment Opportunities in the Electronics Industry
Components/ Parts Manufacturers: Plastics, metals, cables, PCBs, flex circuits, etc.
Higher Value Services Providers for the Semiconductor Industry: test engineering, design and
product development services, etc.
Original Equipment Manufacturers (OEMs): Computing, communications, consumer,
automotive, industrial, and medical electronics
Electronics Manufacturing Services (EMS) Providers
Original Design Manufacturers (ODMs)
26
Mining
For more than a century, American firms have been involved in developing Philippine natural
resources in mining, petroleum and natural gas, the later involving the largest investment project
in Philippine history. A 2004 Supreme Court decision that affirms foreign participation in mining
has kindled considerable international interest in several dozen potential projects.
Mining has the potential to create a considerable number of jobs and provide the government
with large royalty income. While the government is generally supportive, there is strong distrust
of the mining industry among local communities, including Roman Catholic bishops in dioceses
where the mining projects are located. Based on widespread abusive environmental practices of
extractive mining and logging activities in the past, the bishops remain to be convinced that
future projects will benefit local communities and protect the environment.
A waste dam overflow at a foreign mining project in Albay in early 2006 created considerable
negative publicity. Other foreign projects in Nueva Ecija and Zamboanga have elicited local
protest.
Figure 4. Mineral Potential Map of the Philippines
Source: Philippine Mineral Exploration Association
27
Box 2. Significant Developments in the Mining Sector

Major Mining Investment/Operations
Coral Bay Nickel in Palawan
silver-gold project of TVI Resource Development in Zamboanga del Norte
Rapu-Rapu Polymetallic project of Lafayette in Albay
gold project of Lepanto in Benguet
copper mine expansion of Philex Mining in Benguet
O going Constructions and Development:
copper-gold project of Australasian Philippines Mining in Didipio, Nueva Vizcaya
nickel project of Surigao Integrated Resource in Surigao del Norte
In final feasibility and financing stage
gold project of Filminera Resources in Masbate
Carmen copper project of Atlas in Cebu
Nonoc nickel project of Pacific Nickel Philippines in Surigao del Norte
King King copper project of Benguet and NDC in Mindanao
Far Southeast Gold project of Lepanto in Benguet
Itogon gold project of Itogon Suyoc Mines in Benguet
cement project of Eagle Cement in Bulacan
New and Planned Investment Projects
GRP l proposal to Jinchuan Non-Ferrous Metals to take over Philnico for $1 billion investment
Lepanto to resume copper operations in Benguet as global prices rise
Philex Mining to revive Bulawan gold mine project in Surigao
TVI Resources to invest $23 million for Canatuan, Zambales gold mine
Filminera Resources said it will start Aroroy gold mining project in Masbate in first quarter of 2007,
involving $100 million in new investment
MRI Resources AG in talks to provide financing to Atlas Consolidated Mining
Rio Tinto Group (Australian) and Chemical Vapour Metal Refining to invest as much as $3 billion in
nickel mining in RP
AngloGold, MRI Resources, Harmony Gold Mining expressed interest in mining projects
Subject of pre-feasibility studies and advance exploration are: Berong nickel project of TMM
Management in Palawan; gold project of Greenstone Resources, Red V and JCG Resources in Surigao
del Norte; copper-gold project of Colet Mining and Development in Negros Occidental; Tampakan
copper project of Sagittarius Mines in South Cotabato; and copper project of Silangan Mindanao Mining
in Surigao del Norte
Indophil Resources completed pre-feasibility study in South Cotabato, confirming copper-gold deposits.
Xstrata Queensland would fund $30M feasibility study of copper-gold mining in Tampakan (South
Cotabato), Columbio (Sultan Kudarat) and Kiblawan (Davao del Sur). Estimated cost of Tampakan mine
reached to $1.4 billion
Berong Nickel - subsidiary of Atlas Mining - to start full-scale commercial mining of laterite nickel ore
in Palawan
Philnico agreed to pay initial $45 million for Nonoc nickel mine, which would move Jinchuan NonFerrous Metals (PRC) closer to $1 billion investment.
28
The future of the promising mining sector was thrown into question after the suspension of
operations following a minor spill at Australian Rapu Rapu mine in Albay. After the Catholic
Bishops Conference of the Philippines (CBCP) issued an anti-mining statement, President
Arroyo caused foreign investor concerns by naming an anti-mining bishop to head a fact-finding
commission and telling the press the government would amend the 1995 Mining Act which
experts regard as meeting world standards. Notwithstanding the contradicting results of the factfinding Committee, the Department of Environment and Natural Resources (DENR), upon the
inspection of the Secretary, allowed Rapu Rapu a 30-day test run, resulting in several mining
projects moving forward in 2006.
By mid-2006, the country saw continued high activity by foreign mining companies exploring
new projects and somewhat less public controversy than in previous months. The Rapu Rapu
mine where the minor spill became highly sensationalized successfully passed test run before
resuming normal operations. Australian, Canadian, Chinese, Philippine and South African firms
are most active in the mining sector.
However, the DENR, as a result of the controversy at Rapu-Rapu, instituted a more complicated
review of permit applications, which created a processing backlog and increased transaction
costs.
It is estimated that the mining sector could add some $5 billion a year to exports. But mining
sector is unable to attract the huge amounts of foreign capital and technology required until the
legal regime is less risky and uncertain than at present. In this note, ICIP advocacies, together
with its allied business organizations, have proven to be successful in influencing the
government to move towards revitalizing the sector. In particular, ICIP was able to resume Rapu
Rapu mining project with better safeguards and local consultation. In relation to this, the
government, in partnership with the private sector should provide and discuss information on
sound mining practices and benefits.
Concerning legislative and/or constitutional reforms, participants from the October 2006
Workshop on FDI and various fora called for the implementation of the Mining Act, in contrast
to another revision of the law. Moreover, the government should look into establishing a separate
agency that will be responsible for the development and regulation of mineral resources. Before,
it was recommended that development and promotion of mineral resources be transferred from
the DENR to DTI or BOI in order to eliminate conflicts of interest. It was also recommended that
the government strive to create the Department of Mines.
Resolutions from the FDI workshop also made administrative recommendations, such as the
allotment of sufficient funding for mining promotion through the Mines and Geo-science Bureau
(MGB); setting up a mine site rehabilitation facility; continue to rehabilitate existing closed and
abandoned mines; rationalization of all different mining promotion entities into one organization;
the development of 3 to 5 world class mines as showcases of best practices with the GRP priority
projects, policy consistency and elimination of arbitrary rules that scare off foreign investors;
establishment of a partnership between the national and local government aiming to disseminate
better information on the benefits of mining and educational campaign on responsible mining;
and the acceleration of permitting systems.
29
Tourism
Much of the potential for tourism in the Philippines has remained unrealized, while neighboring
Malaysia, Thailand and Vietnam have experienced dynamic growth. The Philippines receives a
mere one percent of the global tourist market. However, with tourism rising in Asia, the
Philippines is experiencing 20 percent growth in overall tourist arrivals. The job multiplier of
tourism spending remains high, with one downstream job created from the spending of every
visitor to the country. Tourism directly benefited hotels, travel operators, and the tour-guiding
business. Other industries that benefited from the tourism industrys strong performance include
the airline, transportation and retail industries
The total number of visitor arrivals in the Philippines reached a new record high of 2.8 million in
2006, an increase of 8 percent from the 2.6 million in 2005. However, the 2006 figure was below
the Department of Tourism (DOT)s target of 3 million foreign tourists.
The most significant trend was a 17-percent rise in Korean visitors. Koreans have displaced
Americans at the top of the list of number of tourist arrivals in the Philippines, with 572,133
recorded arrivals in 2006. Small Korean businessmen have been able to work around Retail
Trade Act investment limits; and, along with DOT promotion in Korea, have provided a positive
image of the country to Koreans. English study has also been popular with Koreans, with tens of
thousands enrolled in schools centered in Baguio, Cebu and Manila. Tourist arrivals from North
America, Europe and Japan were stagnant.
In terms of employment, the tourism industry generated an estimated 300,000 new jobs in 2006,
raising the total number of workers employed by the industry to 3.7 million from 3.4 million in
2005. Employment opportunities came mostly from hotel chains and restaurants.
With the increased tourist influx to the Philippines, the number of new accommodation facilities
has increased, while existing hotels are venturing into expansion and refurbishment. Since 2004,
de luxe hotels have been enjoying occupancy rates of at least 70%, especially hotels in Metro
Manila, Palawan, Cebu, Boracay, Bohol and Davao. Some of the investment and commitments
noted in the industry for the period include:
MGfnd to invest in Php 495 million condo-hotel at Subic Free Port
Clark Development Council signed an agreement with Widus International Leisure to
build $4 million condotel
BOI granted tax perks to Philippine Hoteliers for the Php 520 million renovation of 520
rooms and to Mactan Shangri-la Hotel & Resorts for the Php 336 million modernization
program for 188 rooms
Landco Pacific and Escudero family to launch a multibillion-peso tourism and real estate
project on 250 hectares of Villa Escudero coconut plantation on Laguna/Quezon border,
to include building lots, hotels, 18-hole golf course, food and entertainment, themed
shopping centers and spas.
Freeport Service Corporation reported Sema & Lyk will invest Php 600 million to
develop beach resort in Subic to target high-end foreign tourists with total of 124 guest
rooms
30
A Korean-Filipino hotel called Imperial Palace Waterpark Resort and Spa will soon open
in Lapu-Lapu City, Cebu. The construction of the 616-room hotel started in July 2006.
While the country offers great natural beauty, good weather, eco-tourism and varied recreational
activities, there are major challenges to tourism growth. Inadequate infrastructure reduces
mobility. Hotels, food and service are often below international standards. There are too few
international flights and points of entry. English in the hospitality sector is deteriorating, and
often workers with better skills take overseas jobs. Internal security concerns and negative travel
advisories discourage many potential first-time visitors. Foreign investors cannot own land for
resorts and are legally prevented from retail services (restaurants, rentals, tourist operations, etc)
by the high investment threshold of the Retail Trade Act.
Progress on open skies was slow with major setback when President Arroyo issued EO 500-A- a
policy issuance that reverses the granting of rights to international flights in Subic Freeport Zone.
To accelerate progress and realize the great potential of his country in tourism industry, several
recommendations have been put forward in the October 2006 Workshop on FDI:
The need to improve infrastructure of key tourism areas (e.g. Bicol, Bohol, Cagayan de
Oro/ Camaguin, Cordilleras, Davao, Palawan, Subic/Clark);
Passage of Tourism Act of 2006 with amendments to encourage foreign investment in
tourism and open skies;
Advocacy towards more open skies and discount airlines to increase flights;
Support for more international flights to destinations outside Central Luzon;
Advocacy for more balanced travel advisories;
Improvements in the surface traffic flow.
Concentration of tourism development promotions in a few strategic areas such as Subic,
Clark, Cebu, Western Visayas, Davao; and
The need to declare Open Skies in Clark, Laoag, Cebu and Davao
31
VI.
Achieving Targets for Local and Foreign Direct Investment
Investment pledges for the Philippines rose by double digits in 2006 over 2005. Because of this
performance, the government raised its investment target to a 12 percent expansion in 2007.
However, according to a Workshop on FDI held on October 5, 2006 by the Joint Foreign
Chambers of Commerce of the Philippines, an estimated $9 billion in FDI could possibly flow
into the Philippine economy every year over the next four years if the countrys investment
climate, labor quality and physical infrastructure continue to improve. These investments, if
realized, would generate over 2.9 million direct and indirect jobs annually from 2007-2010.
For some, such ambitious targets would seem to be fanciful, if not impossible, to be realized.
Yet, constituents of the Investment Climate Improvement Project believe that these targets are
attainable if significant economic reforms will be sustained and further developed. Major
investments occurred and concrete feasible investment projects were presented, thus giving basis
for the achievement of the targets.
First and foremost, priority and support to the development of infrastructure, especially in
strategic and industrial areas, is highly recommended. Numerous wish list and
recommendations pertaining to specific infrastructure reforms have been presented, in this report
as well as in other consensus building exercises of both the public and private sector, including
the National Competitiveness Summit and the October 2006 Workshop in FDI. Most
importantly, the government should ensure consistency and predictability of policies in order to
avoid disinvestments or failed investment plans.
The government should also consider looking back at the impediments to entry and restrictions
to foreign investors as they, particularly those based from developed countries, prefer investing
in a country without these restrictions. As in the case of mining, the elimination of restrictions on
entry, ownership and the granting of foreign investors access to industries paved the way for the
revitalization of the industry in 2006. It would be worthwhile to study the constitutional and legal
provisions which impose restrictions on foreign equity participation in certain areas of
investment like public utilities. Additionally, governments can utilize data on likely benefits
from such reform (e.g. incremental growth rates) to facilitate change.
The government should also pay attention to improving its policy framework to increase
competition and enhance the regulatory environment to promote productivity and competitive
costs to spur investments.
The Philippines continues to lag behind, especially when compared to faster growing countries in
Southeast Asia, in capturing a sizeable portion of foreign investment flows. In this light, the ICIP
suggests that having the political will to implement economic reforms and policies is still the
most important and lacking factor to fully improve the investment climate in the Philippines.
Overall, the ICIP envisions that the country will have a more encouraging investment climate in
the future, driven by proactive government actions, stronger private sector participation and
better infrastructure and physical and human resources.
32
References
Blume R. (2006) Total FDI Projections, 2007-2010. Presentation during the Workshop on
Foreign Direct Investment.
Board of Investments (BOI) http://boi.gov.ph
De Dios, J.V. (2006) Investment Opportunities: Power, Biofuels, Oil and Gas. Presentation
during the Workshop on Foreign Direct Investment.
De Ocampo, R. (2006) Foreign Direct Investment Trends in South East Asia. Presentation during
the Workshop on Foreign Direct Investment.
Forbes, J. (2006) Trends in International Rankings of the Philippines.. Presentation during the
Workshop on Foreign Direct Investment.
Improving the Investment Climate in the Philippines (2005). Manila: Asian Development Bank.
Investment Climate Improvement Project (ICIP) Advocacy Plan (2006). Makati City: The
American Chamber of Commerce of the Philippines.
Medalla, E. and J. Balboa (2006). State of trade and investments in the Philippines. Discussion
Paper Series 2006-15. Makati City: Philippine Institute for Development Studies.
National Economic and Development Authority (NEDA). http://www.neda.gov.ph
National Statistical Coordination Board (NSCB). http://census.gov.ph
Phillips, L. (2006). Growth and Investment Climate: Progress and Challenges for Asian
Economies. Topic Paper 1 of Session 2, Asia 2015 Conference.
Roadmap II More Foreign Investment (2004).
Commerce of the Philippines.
Makati City: The .American Chamber of
Robbins, T. (2006) Mineral Industry Opportunities in the Philippines. Presentation during the
Workshop on Foreign Direct Investment.
Schumacher, H. (2006). Opportunities in Healthcare, Retirement and Tourism. Presentation
during the Workshop on Foreign Direct Investment.
Tan, A. (2006). Philippine Manufacturing Sector. Presentation during the Workshop on Foreign
Direct Investment.
The Wall Street Journal (2007). Index of Economic Freedom, http://www.heritage.org/index/
Accessed 20 February 2007.
33
United Nations Conference on Trade and Development (2007). World Investment Report 2006:
Country fact sheet Philippines. http://www.unctad.org/en/docs/wir2006_ en.pdf.
Accessed 20 February 2007.
Valdes, J. (2006) Subic-Clark-Batangas (SCB) Corridor. Presentation during the Workshop on
Foreign Direct Investment.
Von Amsberg, J. (2006) How the Philippines can attract $3 billion a year in FDI: Perspective
from the World Bank. Presentation during the Workshop on Foreign Direct Investment
World Development Report 2005-A Better Investment Climate for Everyone (2005).
Washington, D.C.: The World Bank.
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First American Chamber

INVESTMENT CLIMATE IMPROVEMENT PROJECT

Submitted for review to

Economic Modernization through Efficient Reforms and Governance Enhancement (EMERGE)

Conceptualizing the Investment Climate

Analysis of the Philippine Investment Climate

Recent Developments in Investment Climate Components

Investment Situation in the Philippines

Investment Situation and Challenges in Key Sectors

Achieving Targets for Local and Foreign Direct Investment

Overview of ICIP. The American Chamber of Commerce of the Philippines (AmCham)

Conceptualizing the Investment Climate

Analysis of the Philippine Investment Climate

Source: Asia Conference 2015 (2006).

Source: Forbes (2006). Trends in international rankings of the Philippines.

Recent Developments in Investment Climate Components

Reduction in Bureaucracy and Corruption

Government initiatives in increasing infrastructure projects strengthened when the Infrastructure

Investment Situation in the Philippines

Source: National Statistiscal Coordination Board

Table 4. Total Approved Investments (Filipino and Foreign) by Industry

Source: National Statistiscal Coordination Board

Approved Foreign Direct Investment

* Includes Economic Zone Development and Industrial Park

Table 8. Approved Foreign Direct Investments, by Nationality and by Sector

Domestic Capital Formation

(GDP-based Percent Distribution)

Source: National Accounts of the Philippines

Table 10. Balance of Payments Foreign Direct Investments*

Source: Bangko Sentral ng Pilipinas

Failed investment plans

2. Goldsun Cement Corp.

3. LMI Holdings Corp.

Reason(s) for NonImplementation

Sitio Depot, Monkayo,

Sitio Abagatanen, Brgy.

4. TVI Resource Devt.

5. Ilocos Norte Power Corp.

Brgy. Of Alejo Malasig, Municipality of

6. PNOC Energy Devt.

Bo. Saoit & Pagali

7. PNOC Energy Devt.

Labo, Camarines Sur

8. PNOC Energy Devt. Corp

9. PNOC Energy Devt. Corp

Mailum, Bago City,

10. Talisay Bioenergy Inc.

11. Agusan Power

Source: Board of Investments

Investment Situation and Challenges in Key Sectors

Health and Retirement Sector

Table 12. List of reported investments in ICT

GE Indian affiliate GENPACT opened

People Support to invest $15 M to add

ICT Group opened 3rd contact center

Araneta Center plans to invest P4B in a

Ayala Land announced plans to spend

AmCham member TeleTech plans to

Ayala Land plans to invest P6B in

P1B facility of Sutherland Global

Source: American Chamber of Commerce, 2006.

Although local manufacturing continued to decline, manufactured exports increased, led by

Source: Philippine Mineral Exploration Association