Changing fortunes of Philippines


  • Economy
  • Saturday, 19 Sep 2015

IN the recent flight in foreign funds in many emerging markets, the Philippines was left the least unscathed. This is particularly due to it having relatively low levels of foreign investment in its bonds and stocks.

Also, the lack of raw materials compared with countries like Malaysia and Indonesia means it is less vulnerable to falling commodities prices. Even though China has become one of its fastest growing trade partners, the Philippines is still not as exposed as other Asian emerging markets.

It also helped that the country’s source of growth is dependent more on the domestic consumption rather than foreign consumption, although there are plans to increase the latter.

The Philippine economy grew 5.6% in the second quarter, the highest among neighbouring countries such as Malaysia, Indonesia and Thailand, which recorded growth of 4.9%, 4.67% and 2.8% respectively.

“The Philippines of today is no longer the sick man of Asia. In fact some say it’s the darling of Asia, but I think there’s still lots of work to be done but we will point Philippines in the right direction,” says Philippines’ Finance Secretary Cesar V. Purisima.

In a recent interview in Makati, Manila, Purisima talks about how the Cebu Action Plan (CAP), which promotes more inclusive economic growth, will fuel Asia Pacific Economic Cooperation (Apec) economies and trade.

He says the CAP would help to accelerate inter-Asean trade.

Finance ministers from the 21-member regional group approved the CAP on Sept 11, 2015. The CAP’s initiatives are in four key areas: financial integration, fiscal transparency, financial resiliency, and infrastructure development and financing.

The Philippines, Malaysia, Singapore, Indonesia, and Australia are among 21 countries that form the Apec, which was established as an economic forum predominantly concerned with trade and economic issues.

One of the key contributing sectors to the Filipino economy is the business process outsourcing (BPO) and IT industry, which makes up about 6% of gross domestic product (GDP). In 2014 alone, the sector employed more than a million people and generated almost US$19bil in revenue.

Accenture Philippines country managing director Lito Tayag says the industry is projected to increase to US$21.8bil in 2015 and US$25bil in 2016.

In terms of employment, the industry’s workforce count is expected to increase to 1.23 million by the end of 2015.

“The Philippines remains to be a strong provider of voice or contact centre services. In fact, globally, the Philippines is now No. 1 in voice, and No. 2 in non-voice, which includes back-office, engineering, finance and accounting, healthcare and animation,” he says.

Tayag is also the vice-chairman for the Information Technology and Business Process Association of the Philippines (IBPAP).

IBPAP is currently working on a new industry roadmap for the next six years, which will be released by the first half of next year.

“The roadmap will set targets for the next six years and state what we need to do in terms of talent and government support, and also for industries such as telecommunications and infrastructure,” says Tayag.

Currently, more than 30% of the industry is located in the next wave cities while more than 50% of new locators are initially considering setting up shop outside of Metro Manila, he adds.

Challenges to sustain current growth levels would be getting the right people with niche and mid-level management skills, as well as ample infrastructure and resources for growth outside of Metro Manila.

Keeping up with new technologies would also be a challenge, Tayag adds.

He says that many university courses in the Philippines are aligned to the requirements of the IT/BPO industry.

The IBPAP will continue partnering with Filipino government and academia to create a steady pool of talent.

“The industry is one of the success stories and bright spots of the Filipino economy. It is providing quality employment and this translates into inclusive growth and will result in many transitioning into the middle class,” he says.

Meanwhile, on the water industry, Manila Water Co Inc increased its service coverage to more than six million people from about half prior to 1997. Chief operating officer Ferdinand M. Dela Cruz says that public private partnerships (PPP) were the key to increasing access to clean water.

The company, a subsidiary of Ayala Corp, is the main water service provider in the east zone of Metro Manila. It is now working on replicating the PPP model in other parts of the Philippines and South-East Asia.

Previously, only 26% of the east zone had 24-hour access to clean water. This has grown to 99% of the service area over 18 years.

“Before the PPP, there was a lot of water but about two-thirds treated does not reach the homes. We replaced 90% of the water network to bring down water losses to 11% now from 63% previously. So now, the network is more efficient and the water we saved allowed us to serve more customers,” says Cruz.

Manila Water has so far extended its reach to other Filipino cities such as Clark, Boracay, Cebu, Laguna and Zamboanga. Manila Water’s success with PPP has also allowed it to penetrate other countries in South-East Asia such as Vietnam and Myanmar, says Cruz.

Its investment in Vietnam with Saigon Water is a leakage reduction project in one of the zones in Ho Chi Minh. It now supplies 35% of the bulk water requirements of Ho Chi Minh city.

The company also has a leakage reduction project in Yangon and Mandalay.

At the moment, it is scouting for projects in Indonesia. “We see there are a lot of similarities in both countries. We feel our expertise and capabilities can be done in Indonesia,” says Cruz.

Cruz’s vision is to double Manila Water’s profits by 2020 from 5 to 6 billion pesos currently. Also, the target is to have equal contribution from Metro Manila and non-Metro Manila markets, from the current 86:14 contribution ratio.

Manila Water’s concession agreement with the Metropolitan Waterworks and Sewerage System will end in 2037.

“Our biggest challenge is we are relying on one dam. In the middle of this dam is a fault line that begins from the dam through South Metro Manila. We are very vulnerable because that 97% of the water comes from that one dam,” says Cruz.

Based on statistics, Cruz says the next earthquake would happen in 43 years. He feels that more resources is needed for earthquake mitigation. “We feel that a new water masterplan is needed to support the development of Metro Manila. Water infrastructure is very important to sustain that goal,” he says.

He adds that the government is now working on developing another dam. “Water security or new water sources for Manila should be top priority for the government,” he says.

Separately, a new area for growth in the Philippines is in the tech start-up sector. Non-profit incubator and accelerator IdeaSpace Foundation aims to build the tech entrepreneurship landscape in the Philippines.

It does this by investing in the operations of start-up companies, whereby prospective companies enter into a competition where about 10 companies are selected to receive funding and incubation at IdeaSpace’s headquarters for a six-month period.

It receives about 1,000 applications and narrows it down to 10. These 10 would receive between US$25,000 and US$30,000 each in funding.

IdeaSpace is funded by First Pacific, one of the largest business groups in South-East Asia that focuses on telecommunications, energy, infrastructure and agriculture, with an aggregate revenue of over US$17bil.

President and co-founder Earl Valencia hopes that in the long-term these investments will increase higher-value jobs in the Philippines as well as net imports from a GDP perspective.

IdeaSpace has so far made 38 investments, averaging between 10 to 15 per year. It is also working on building the Philippines’ version of Silicon Valley. It will work in PPPs to build the national innovation centre aimed at fostering advancement of technology and innovation within the country.

In return for its investment in a start-up, IdeaSpace will get equity, says Valencia. “We would own about 20% of the company, and any equity and returns we get goes back into the fund,” he says.

IdeaSpace’s goal is to achieve an internal rate of return of between 10% and 15%. One of its investments is in Salt, a company producing lamps that are powered by tap water and table salt. Salt uses electrochemistry to produce an efficient lighting system that is sustainable and cost effective and on-par with battery-operated lamps.

Part of its plan is to promote the innovation culture in traditional companies, of which a majority are either state-owned companies or family businesses.

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