The Global Challenge in Services Trade

Transcription

THE GLOBAL
CHALLENGE IN
SERVICES TRADE
A Look at Philippine Competitiveness
THE GLOBAL
CHALLENGE IN
SERVICES TRADE
A Look at Philippine Competitiveness
Edited by
Gloria O. Pasadilla
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES
Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Copyright 2006
by the Philippine Institute for Development Studies (PIDS)
and the German Technical Cooperation (GTZ)
Printed in the Philippines. All rights reserved.
The findings, interpretations, and conclusions in this volume are those of the
authors and do not necessarily reflect those of GTZ and PIDS and other
institutions associated with the studies presented in this volume.
Please address all inquiries to:
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES
NEDA sa Makati Building, 106 Amorsolo St.
Legaspi Village, 1229 Makati City, Philippines
Tel.: +63-2 8942584; 8935705
Fax: +63-2 8939589; 8942584
Email: publications@pidsnet.pids.gov.ph
Website: http://www.pids.gov.ph
ISBN
RP
978-971-564-056-5
09-06-500
Photo credits (cover): PIDS photo files (first and second rows, left photos); The Farm at San
Benito (first row, right photo); for collage, second row, right photo: www.hpproductions/
lc.com/production.htm (reel, foreground); www.elitehomevacations.com/images/film.jpg
(reel, background); www.ststours.ca/cms_images/clapper.jpg (clapper, foreground).
iv
Table of Cont
ents
Contents
List of TTables
ables ………………………………………………………………………………
List of Figures and Boxes …………………………………………………………
List of Appendices ………………………………………………………………………
vii
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xiv
F o r e w o r d Josef T. Yap …………………………………………………………………
F o r e w o r d Anja Gomm …………………………………………………………………
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Acronyms ……………………………………………………………………………………
xix
Chapter 1
er vie
w : A Look at Ser vices TTrade
rade in the Philippines
Over
view
Ov
Gloria O. Pasadilla
Importance of Services in the Economy: Some Facts and Figures ……
Prospects of Services as Dollar Earner …………………………………………
Outsourcing Opportunities, Medical Tourism, and Others …………………
Contribution of this Volume …………………………………………………………
References ………………………………………………………………………………
2
5
15
18
18
Chapter 2
oss-bor
der TTransactions
ransactions in Higher Education: Philippine
Cross-bor
oss-border
Cr
Competitiveness
Andrea L. Santiago
Abstract ……………………………………………………………………………………
Background ………………………………………………………………………………
Principal Issues and Concerns in Education Services ………………………
State of Philippine Higher Education ……………………………………………
Measuring Philippine Competitiveness
in Higher Education Trade …………………………………………………………
The Asian Context ………………………………………………………………………
Experts’ Views on Cross-border Transactions …………………………………
Summary …………………………………………………………………………………
Insights and Recommendations …………………………………………………
Conclusion …………………………………………………………………………………
References ………………………………………………………………………………
Chapter 3
rade: Philippine Case
Challenges in Health Ser vices TTrade:
Maria Cherry Lyn S. Rodolfo and Jovi C. Dacanay
Abstract ……………………………………………………………………………………
Introduction ………………………………………………………………………………
Global Trends in Health Services Trade …………………………………………
Assessment of Capabilities …………………………………………………………
Other Strategic Options ………………………………………………………………
Appendices ………………………………………………………………………………
References ………………………………………………………………………………
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Chapter 4
Audiovisual Services Sector: Can the Philippines Follow
“Bollywood”?
Gloria O. Pasadilla and Angelina M. Lantin, Jr.
Abstract ……………………………………………………………………………………
Global Overview of the AVS Sector …………………………………………………
An Overview of the Philippine AVS Sector ………………………………………
The Philippine Film Industry …………………………………………………………
The Television Broadcasting Industry ……………………………………………
Summary and Conclusion ……………………………………………………………
Appendices ………………………………………………………………………………
References ………………………………………………………………………………
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Chapter 5
ormation and Communication TTechnology
echnology
Information
The Philippine Inf
Sector: Evolving Structure and Emerging Policy Issues
Winston Conrad B. Padojinog
Abstract ……………………………………………………………………………………
Background ………………………………………………………………………………
The ICT Sector and Its Impact on the Philippine Economy …………………
Evolving Structure and Behavior …………………………………………………
ICT Absorption and Penetration ……………………………………………………
Policy Framework to Close the Divide ……………………………………………
References ………………………………………………………………………………
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Chapter 6
Sustaining Philippine Advantage in Business Process Outsourcing
Ceferino S. Rodolfo
Abstract ……………………………………………………………………………………
Introduction ………………………………………………………………………………
Business Process Outsourcing ……………………………………………………
Growth of BPO Worldwide ……………………………………………………………
The Philippine BPO Industry …………………………………………………………
RP’s Attractiveness as a BPO Location: Industry Value Chain ……………
Policy Recommendations ……………………………………………………………
Areas for Further Study ………………………………………………………………
References ………………………………………………………………………………
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Chapter 7
rade R
epresentativ
e Of f ice?
Representativ
epresentative
Does the Philippines Need a TTrade
Gloria O. Pasadilla and Christine Marie M. Liao
Abstract ……………………………………………………………………………………
Introduction ………………………………………………………………………………
Trade Policy Formation in the Philippines ………………………………………
Institutional Inefficiencies in the Current Structure …………………………
An Agenda for Reform …………………………………………………………………
Appendices ………………………………………………………………………………
References ………………………………………………………………………………
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About the Authors ………………………………………………………………………
317
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List of TTables
ables
Chapter
Table 1.
Table 2.
Table 3.
Table 4.
1
Sector share to GDP (in percent) ………………………………………
Sector share in employment (in percent) ……………………………
Distribution of FDI stock, by industry (in percent)…………………
Average family expenditures by income class in
the Philippines, 2000 ……………………………………………………
Table 5. Services as growth driver? ………………………………………………
Table 6. Exports of services (balance of payments), 1999-2004 ………
Table 7. Revealed comparative advantage of the Philippines,
2000 and 2003 ……………………………………………………………
Table 8. Embodied and disembodied service trade
(in thousand PhP) ……………………………………………………………
Table 9. Comparison of OFW remittances with other BOP flows
(in million US$) ………………………………………………………………
Table 10. Percentage share of newly deployed OFWs
by skill category………………………………………………………………
Table 11. Alien employment permits issued by selected occupation
group, Philippines: selected years……………………………………
Chapter 2
Table 1. Number of FAAP- and AACCUP-accredited programs,
SY 2002-2003 ……………………………………………………………
Table 2. Average number of students per HEI, SY 1994-1995
to 2001-2002 ………………………………………………………………
Table 3. Number of foreign students studying in Philippine
HEIs per school year …………………………………………………………
Table 4. Foreign students enrolled in selected Asia-Pacific
countries, 2001 ……………………………………………………………
Table 5. HEIs with the most number of foreign students,
SY 2002-2003 ………………………………………………………………
Table 6. Number of foreign students in Philippine HEIs
by national origin ……………………………………………………………
Table 7. Number of Americans in Philippine HEIs, SY 1997-2002 ……
Table 8. Top 10 courses enrolled in Philippine HEIs by foreign
students, SY 2002-2003 ………………………………………………
Table 9. Number of foreign students at AIM’s
major degree programs ……………………………………………………
Table 10. Growth competitiveness index and components, 2001 ………
Table 11. Current competitiveness index and components, 2001 ……
Table 12. Tuition and living costs in the Philippines, 1999,
in PhP and US$ ………………………………………………………………
Table 13. Tuition and living costs, selected Asian countries,
low-end in US$, 2001 ………………………………………………………
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Table 14. Tuition and living costs, selected Asian countries,
high-end in US$, 2001 ……………………………………………………
Table 15. Tuition and living costs across major programs,
selected countries, in US$ ………………………………………………
Table 16. An Asia-Pacific regional typology of cross-border education …
Table 17. China’s cooperative relations with foreign institutions …………
Chapter 3
Table 1. Median wait time and waitlists for British Columbia,
as of 31 March 2005 ………………………………………………………
Table 2. Comparative costs of treatment (in US$) ……………………………
Table 3. GATS modes of supply ………………………………………………………
Table 4. Categories of consumers moving abroad ……………………………
Table 5. Major health tourism destinations in Asia …………………………
Table 6. Japanese residents overseas: long stayers and
permanent retirees …………………………………………………………
Table 7. Summary of how US health plans treat healthcare
received abroad ……………………………………………………………
Table 8. Investment rules on hospital and insurance companies ………
Table 9. Supply of health professionals …………………………………………
Table 10. Enrollment in medical schools …………………………………………
Table 11. Health and social services in the GATS Scheduling Guidelines
and in the UN Central Product Classification (CPC) List …………
Table 12. Overview of commitments for Modes 1, 2, and 3 on medical,
health-related, and social services ……………………………………
Table 13. Summary of specific commitments in the GATS …………………
Chapter 4
Table 1. Market share of US films in different countries,
2000-2003 …………………………………………………………………
Table 2. Top 10 world box office films, 1900-2005
(in million US$) ………………………………………………………………
Table 3. Top 10 countries producing feature films, 2002 …………………
Table 4. Top 10 countries in film investment, 2002 ………………………
Table 5. Number of screens, 1990-2003 ………………………………………
Table 6. Number of screens in Asia, 2002 ……………………………………
Table 7. Breakdown of the television industry’s sources of
revenue (in percent) ………………………………………………………
Table 8. Minimum quota requirements for different countries …………
Table 9. Foreign ownership and investment requirements ………………
Table 10. Gross domestic product by industrial origin (in million
PhP at constant 1985 prices and at current prices) ……………
Table 11. Gross revenue of the audiovisual services sector as of 2001
(in thousand PhP) ……………………………………………………………
Table 12. Growth rate of GDP and major sectors, 1994-2003
(based on constant prices with 1985 as the base year) ………
Table 13. Percentage distribution of employees engaged in the
AVS sector, 2003 ……………………………………………………………
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Table 14. Employed persons in major industry groups, 2003 ……………
Table 15. Regional distribution of employees engaged
in the AVS sector, 2003 ……………………………………………………
Table 16. Percentage distribution of establishments engaged
in the AVS sector, 2003 ……………………………………………………
Table 17. Motion picture and video production
gross revenue, 2001 ………………………………………………………
Table 18. Television broadcasting and relay stations and studios
including closed circuit television services
gross revenue, 2001 ………………………………………………………
Table 19. Film contribution to the Philippine economy ………………………
Table 20. Number of movie theater houses and screens ……………………
Table 21. Statistics of theatrical films (prints) reviewed by the
MTRCB, 1983-2003 ………………………………………………………
Table 22. Statistical distribution of local films
based on rating, 2003 ……………………………………………………
Table 23. Number of NTC-registered Internet service providers
and estimated subscribers, 1996-2004 …………………………
Table 24. Summary of statistics for radio and television broadcasting
(in thousand PhP) ……………………………………………………………
Table 25. Top 20 television programs (Mega Manila) …………………………
Table 26. Number of cellular mobile telephone subscribers,
2003-2004 …………………………………………………………………
Chapter 5
Table 1. Telecommunications industry’s range of services and
number of players …………………………………………………………
Table 2. Major market segments for IOS services ……………………………
Table 3. Broadband services in the Philippines, 2001 ……………………
Table 4. ISP subscription ……………………………………………………………
Table 5. Initiatives of Internet data centers, 2001 …………………………
Table 6. Sample of e-commerce models in the Philippines ……………
Table 7. PEZA-registered companies in ICT services, as of 2002 ………
Table 8. Total approved foreign direct investments (in million PhP) …
Table 9. Presence of telecommunications companies in the
value chain of ICT ……………………………………………………………
Table 10. Mainstream value chain activities showing high levels
of market concentration …………………………………………………
Table 11. Estimated individual users of ICT ……………………………………
Table 12. Number of respondents and ICT users by major industry
group, 2001 …………………………………………………………………
Table 13. Regional distribution of telephone lines ……………………………
Table 14. Interpretation of Test of English for International
Communication (TOEIC) scores ………………………………………
Table 15. Average TOEIC scores by job category, 2004 ………………………
Table 16. Average TOEIC scores of graduating college students
of selected universities ……………………………………………………
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Table 17. Number of persons assessed and certified
by priority sector ……………………………………………………………
Chapter 6
Table 1. Modes of supplying services for cross-border transactions …
Table 2. Distribution of inward FDI stock in services
(in percent share) …………………………………………………………
Table 3. List of typical BPO services ………………………………………………
Table 4. Offshoring and outsourcing: some definitions ……………………
Table 5. Estimated market for BPOs ……………………………………………
Table 6. Global market for IT-enabled services (2002 estimates) ………
Table 7. Projected 2005 market for IT-enabled services
(in billion US$) ………………………………………………………………
Table 8. Market size of outsourcing, IT-enabled services, and BPO ……
Table 9. Summary of Philippine BPO segments ………………………………
Table 10. Comparative call center industry sizes in Asia
(in number of seats) ………………………………………………………
Table 11. Representative foreign companies with IT-enabled activities
in the Philippines ……………………………………………………………
Table 12. Structure of BPO costs ……………………………………………………
Table 13. Philippine labor pool statistics …………………………………………
Table 14. Trends in International Mathematics and Science Study,
1999 and 2003 ……………………………………………………………
Table 15. Ranking of the Philippines in political factors ………………………
Table 16. Competitiveness of Philippine IT infrastructure …………………
Table 17. Key ICT indicators: Philippines vs. India and
the United States ……………………………………………………………
Table 18. Annual average salary of call center agents, 2004-2005 ……
Table 19. Philippine wage rate statistics (2003 estimates) …………………
Table 20. Overall comparison of labor force attractiveness ………………
Table 21. Workforce demand for IT workers ……………………………………
Table 22. Average acceptance and turnover rates by industry, 2003 …
Table 23. DTI’s factors for Philippine BPO competitiveness ………………
Table 24. SGV’s Knowledge Institute’s factors for Philippine BPO
(call center) competitiveness ………………………………………
Table 25. Factors for Philippine BPO (call center) competitiveness ……
Table 26. Overall attractiveness of the Philippines ……………………………
Table 27. Overall assessment of Philippine BPO value chain ………………
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List of Figures and Boxes
Chapter 1
Figure 1a. BOP growth index for goods and services, Japan and Korea,
1991-2003 (1991=100) ……………………………………………
Figure 1b. Growth index for goods and services, Philippines and World,
1996-2003 (1996=100) ……………………………………………
Chapter 4
Figure 1. Evolution of broadcasting with digital technology: the shift in
the pattern of media consumption ……………………………………
Figure 2. Evolution of broadcasting with digital technology:
gatekeepers in the delivery chain …………………………………
Figure 3. Breakdown of the film industry’s sources of revenue ………
Figure 4. Flow of business in the film industry ………………………………
Figure 5. The film production process …………………………………………
Figure 6. Average channel shares for evening programs, 2004 ………
Figure 7. Average channel shares for daytime programs, 2004 ………
Figure 8. Net sales of ABS-CBN global, 2000-2003 …………………………
Figure 9. The Media Plus Programme ……………………………………………
Figure 10. Institutional framework of India ………………………………………
Box 1.
The success of the hybrid foreign-produced programs …………
Chapter 5
Figure 1. Relationship between Internet penetration rate per 1000
and gross national income ………………………………………………
Figure 2. Internet penetration rate in Southeast Asia ………………………
Figure 3. The methodological framework of the study ………………………
Figure 4. Share of foreign equity investments and portfolio
investments in the telecommunications industry to total
foreign equity direct and portfolio investments ……………………
Figure 5. Fixed and mobile wireless penetration rates,
1996-2010 (in percent) …………………………………………………
Figure 6. Market share of ISPs (end of 2001 estimates) ……………………
Figure 7. Market share of computer platform companies
Figure 8. Market share of Philippine-based manufacturers of data
storage devices ………………………………………………………………
Figure 9. Market share of packaged software companies
Figure 10. Market share of customized software companies
Figure 11. Market share of IT consultancy companies
Figure 12. Global BPO market by 2010 ……………………………………………
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Figure 13. Board of Investments-approved ICT investments
(in million US$) ………………………………………………………………
Figure 14. ICT employment in export processing zones ………………………
Figure 15. ICT exports of locators in processing zones ………………………
Figure 16. Broad ICT value chain ……………………………………………………
Figure 17. Voice/Web Integration ……………………………………………………
Figure 18. Number of fixed and wireless mobile subscribers in
Southeast Asia ………………………………………………………………
Figure 19. Market share of digital and analog users in CMTS ………………
Figure 20. Global circuit capacity ……………………………………………………
Figure 21. Mobile-to-fixed and fixed-to-mobile interconnection rates
(in US$ per minute) …………………………………………………………
Figure 22. Dial-up Internet prices in Southeast Asia
(30 hours of use per month in US$, October 2001) ……………
Figure 23. Internet access rate per sector, 2002 …………………………………
Figure 24. Relationship between Internet penetration and Internet
monthly price …………………………………………………………………
Figure 25. Internet and broadband penetration rates
in selected countries ………………………………………………………
Figure 26. Comparison among simple literacy, newspaper readership,
and Internet penetration rates …………………………………………
Figure 27. NSAT mean scores in the Philippines, 1997-2000 ……………
Figure 28. Relationship between the size of the rural population
and Internet penetration rates, 2002 ………………………………
Chapter
Figure 1.
Figure 2.
Figure 3.
Figure 4.
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
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6
Outsourcing as a business model ……………………………………
Modes of supply under the GATS ………………………………………
Shift in services trade structure (in percent share) ………………
Structure of other commercial services exports
(based on 1998 data) ……………………………………………………
5. Shift in the structure of inward FDI stock
(in percent share) ……………………………………………………………
6. Gartner’s BPO model ………………………………………………………
7. Limiting BPO definitions: services-oriented
and IT–enabled ………………………………………………………………
8. Locating BPO …………………………………………………………………
9. Global BPO market by 2010 ……………………………………………
10. BPO industry structure in the Philippines ……………………………
11. BPO industry value blocks ………………………………………………
12. Structure of BPO costs ……………………………………………………
13. Population structure by age ………………………………………………
14. Annual population of college students ………………………………
15. Graduates by discipline ……………………………………………………
17. Venture capital availability ………………………………………………
18. Comparative labor costs …………………………………………………
19. ICT workforce demand growth, 2004-2005 ………………………
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Figure 20. Educated population as an advantage
(math and science) …………………………………………………………
Box 1.
Sample definitions of outsourcing ……………………………………
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Chapter
Figure 1.
Figure 2.
Figure 3.
Figure 4.
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The
The
The
The
organizational chart of the TRM …………………………………
organizational chart of the TCWM ………………………………
development of negotiating positions …………………………
dispute processing mechanism …………………………………
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List of Appendices
Chapter 3
Appendix A. Brief Profile of Health Tourism in Selected Countries …
Appendix B. The Private Hospital Industry in the Philippines ……………
Appendix Table B1. Average number of beds in private hospitals …
Appendix Figure B1. Total fixed assets of top private hospitals
vs. total book value of fixed assets of surveyed establishments
in the private healthcare industry (in PhP ‘000) ………………………
Appendix C. Healthcare Financing in the Philippines ………………………
Appendix Figure C1. Distribution of healthcare spending ……………
Appendix Figure C2. Personal and public healthcare spending
by sources of funds (actual vs. targeted based on
health sector) ……………………………………………………………………
Appendix Table C1. Output and income coefficients of variation
in the healthcare industry and health-related sectors ……………
Chapter
Appendix
Appendix
Appendix
Appendix
4
A.
B.
C.
D.
Gross Revenue of AVS Sector ………………………………………
Television Audience Measurement (TAM) Methodology …
List of Television Channels in Metro Manila ……………………
Some Insights on the Philippine Film Industry …………………
Chapter 7
Institutional Studies of Different Countries …………………………………………
Appendix A. United States ………………………………………………………………
Appendix Figure 1. Flow of trade dispute settlement in the US ………
Appendix B. European Union ……………………………………………………………
Appendix Figure 2. Flow of trade negotiation in the
European Union …………………………………………………………………
Appendix Figure 3. Flow of trade dispute settlement in the
European Union …………………………………………………………………
Appendix C. Canada…………………………………………………………………………
Appendix Figure 4. Flow of trade negotiation in Canada …………………
Appendix Figure 5. Flow of trade dispute settlement in Canada ……
Appendix D. Japan……………………………………………………………………………
Appendix figure 6. Flow of trade negotiation in Japan ……………………
Appendix E. Malaysia ………………………………………………………………………
Appendix Figure 7. Flow of trade negotiation in Malaysia ………………………
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Foreword
This book highlights the new way services are being rendered—their mobility
and accessibility across borders. While before, co-workers were just tables away
from each other, today, it is not uncommon to work with people who reside in
other countries with the Internet as their connection. Health problems or wellness
programs and even education are pursued away from one’s country with quality
and lower prices as main considerations. The list could actually go on and on.
The services sector has now become the fastest growing area in the global
economy. A huge number of employment in many countries belongs to this
sector and provides 60 percent and more of the global output. In the Philippines,
it has outpaced industry and agriculture in terms of growth rates and shares to
GDP. Between 2000 and 2005, it grew by an average of 6.3 percent, higher
than the growth rates of agriculture and industry at 2.0 and 5.3 percent,
respectively. As a result, 47.7 percent of our GDP came from the services sector,
again higher than the shares of agriculture and industry.
In this volume, the Philippine Institute for Development Studies (PIDS)
aims to give a comprehensive analysis of selected subsectors within the services
sector. The potentials they have created for the country are highlighted, along
with the issues and challenges ahead. For a developing country like the
Philippines, whose economic growth these days primarily emanates from the
services sector, the further enhancement of this new growth engine will spell
greater progress for the country.
For instance, in the education arena, the opportunity lies in attracting
students from neighboring nations to pursue further studies in the Philippines
instead of going to the more expensive Western universities. The Philippines’
strength in the English language, in addition to the inexpensive tuition and living
expenses, remains as its competitive advantage.
In the health and medical field, the Philippines has a huge potential in the
health tourism industry that could very well be the much-needed measure to
arrest the worsening internal brain drain.
The audiovisual sector, meanwhile, can play a major role in the continued
growth of the services sector. While the United States has led the pack all these
years with its “Hollywood” fame, India has been exporting many of its movies to
different parts of the world and is quite successful with its own “Bollywood.” For
the Philippines, it may still be a long road to follow suit but definitely a path
worth taking.
Likewise with the business process outsourcing sector, which includes the
contact center industry, animation, finances, software development, and other
works that have helped ease some of the nation’s unemployment problem.
These can be seen as an alternative to overseas employment.
Of course, integral to all of these is the information and communication
technology sector that provides the necessary infrastructure support to the
xv
services sector in the country. In view of this, it is critical that the appropriate
parties urgently address the various issues, in particular, competition issues,
that seriously restrain the full blossoming of this subsector’s potential.
In addition, to help in making the overall services sector more globally
competitive, there are issues in the international negotiating arena that the
Philippines could advance. Crucial for the country to do so is to have, first and
foremost, a strong, well-prepared, and capable negotiating entity that will
intelligently articulate the country’s concerns. The issues related to this are
boldly tackled in a chapter in this volume.
I hope that what PIDS has started in this book will contribute to making a
deeper understanding of the services sector and the big role it plays in the
country’s economic development. Further research, publication, and other
activities to support the growth of the service sector are, of course, highly welcome.
My deepest gratitude for the generous support of the GTZ office in Manila—
our co-publisher of this volume—particularly the Trade Policy and Trade Promotion
Project headed by Ms. Anja Gomm; to Dr. Dante Canlas, Dr. Cayetano Paderanga,
Jr., Dr. Joy Abrenica, and Dr. Aniceto Orbeta, Jr. for sharing their time and expertise
in reviewing the chapters of this book; to Dr. Gloria Pasadilla for her dedication
in leading this project and serving as its overall technical editor; and to Dr. Mario
Lamberte, former PIDS president, for providing the vision on the importance of
a research project on services and for his unwavering support in this endeavor.
Finally, this book is dedicated to all the actors and stakeholders involved
in the services sector. We hope that what is said in this volume will further push
them to make the sector not only continue to grow but to fly.
JOSEF TT.. YYAP
AP
President, PIDS
August 2006
xvi
Foreword
The increase in services trade in the international economy and the growing
relevance of international trade negotiations in the services sector have profound
consequences for the growth and development of Philippine economy. For society
as a whole, greater trade in services can signify reduced welfare costs of
overpriced services in monopolistic/closed sectors, improved and increased
human capacity building through the transfer of knowledge and job creation,
and increased individual and overall income.
For businesses, services trade provides the opportunity to tap a larger
foreign market, and to learn state-of-the art products, processes, and services.
The services sector’s strong interlinkages with the goods sector, coupled with
exposure to foreign capital, know-how, and business partnerships, can fan growth
to the domestic economy.
On the other hand, the government also stands to benefit from a growing
and carefully outward-oriented services sector through additional income and
employment. The Philippines still needs to grow and exploit its competitive
advantages, evidenced in the prevailing lack of domestic employment
opportunities forcing many Filipinos to look for jobs abroad and join the large
number of overseas foreign workers. The services sector’s share in GDP and
employment has grown dramatically over the years; yet, there is still a need to
actualize the full potentials of the sector.
Given the significance of international trade in services, it is important to
identify some determinants of the competitive advantages of services and how
they apply to the Philippines. These determinants of growth in services trade
include greater competition, better domestic supply structures, greater foreign
market access and demand, and improved regulation.
First, the state of the services sector can be improved with healthy
competition. Lack of competition creates inefficiencies in services provision
that cause high prices and unbalanced bargaining positions. In this regard, there
is a need to allow more market entry and to create a coherent, clear, and
comprehensive framework for competition to better ensure predictability.
Second, domestic supply structures must be reliable for international
investors if the services sector is to grow internationally. Service suppliers and
exporters have to be strategically linked in sufficient quantity. They need to be
aware of their mutual dependence (to meet market demands) and their need
for independence (maintaining flexibility and enabling innovation).
Small and medium enterprises (SMEs) are potential suppliers but there is
a need for a better mechanism to channel the multitude of interests that they
have in the services trade. Large companies have a voice in the national platform
for policy debate and trade regimes. But should they be the only ones equipped
to take advantage of windows of opportunity in services trade?
The quality of linkages between service sector actors and other relevant
factors (i.e., technology, prudent banking products tailored for service sector
xvii
needs, high skills, and access to foreign know-how, among others) is another
important aspect. These high-value linkages also need to be established with
the large population of overseas foreign workers. Being a source of capital,
know-how, and experience, they are a strategic asset and therefore should be
systematically tapped
Third,, foreign markets need to be understood in the evaluation of potentials
for growth in global markets. As such, information on both opportunities and
barriers to trade is crucial in the assessment of potentials in these markets.
Existing expertise in the country must be pooled and coordinated in a way that
allows all players—policymakers and entrepreneurs—to benefit and base their
decisions on sound analyses.
Finally, the government and the private sector should undertake measures
to improve services sector regulations. The government has already taken
regulatory reforms in various service sectors such as finance,
telecommunications, transport and energy but more needs to be done and
more sectors should be included in such reforms. Parallel to this, regulatory
capacities need to strengthened in order to ensure the independence and
competence of relevant regulatory bodies.
In export and investment promotion, greater focus should be given to
“existing winners” and not on creating winners given the public budget
restrictions. The choice of winners should be determined mainly by the global
market. The country’s comparatively liberal trade and investment regime can
be used as an advantage against regional competitors. For example, easing the
limits on entry and foreign ownership in certain sectors can attract more foreign
investments and hasten the growth of the sector.
Unfortunately, all the prospects and potential of the services sector are
not very clearly understood. Because of the heterogeneous nature of the sector,
trade negotiations become difficult and complex to communicate. Thus, the
Philippines’ services sector must be studied in detail so that the country can
better position itself in international trade in services negotiations and
developments in the global market. The first step to any progress is knowledge.
This publication can be seen as a first step to increase appreciation and
understanding of the services trade and improve the analytical base for
decisionmaking.
ANJA GOMM
Manager, Trade Policy and
Trade Promotion Project
German Technical Cooperation (GTZ)
August 2006
xviii
Acronyms
AACCUP
AACSB
ABC 5
ABS-CBN 2
ACSC-AAI
ADB
AEP
AIM
APEC
ARMM
ASEAN
AVS
AXN
BITR
BOI
BOP
BPO
BSP
CAS
CBFC
CCI
CHED
CICT
CIIT
CITEM
CMTS
CNC
COD
COE
COREPER
CPC
CPE
DepEd
DFA
DFAIT
DFF
DICT
DOH
DOT
DOTC
DSL
DTH
DTI
Accrediting Agency of Chartered Colleges and Universities
in the Philippines
Association to Advance College Schools of Business
Associated Broadcasting Network
Alto Broadcasting System-Chronicle Broadcasting Network
Association of Christian Schools and Colleges-Accrediting
Agency, Inc.
Asian Development Bank
alien employment permit
Asian Institute of Management
Asia-Pacific Economic Cooperation
Autonomous Region of Muslim Mindanao
Association of Southeast Asian Nations
audiovisual services
Action Network
Bureau of International Trade Relations
Board of Investments
balance of payments
business process outsourcing
Bangko Sentral ng Pilipinas
conditional access system
Central Board of Film Certification (India)
current competitiveness index
Commission on Higher Education
Commission on Information and Communications Technology
Canadian International Trade Tribunal
Center for International Trade Expositions and Missions
cellular mobile telephone system
Centre National de la Cinématographie
Centers of Development
Centers of Excellence
Committee of Permanent Representatives (European Union)
Central Product Classification
continuing professional education
Department of Education
Department of Foreign Affairs
Department of Foreign Affairs and International Trade (Canada)
Directorate of Film Festivals (India)
Department of Information and Communications Technology
Department of Health
Department of Tourism
Department of Transportation and Communication
digital subscriber line
direct-to-home
Department of Trade and Industry
xix
EDGE
EDR
ENT
EPG
EQUIS
ES
ESPN
ETPI
EU
FAAP
FAC
FAMAS
FAP
FCC
FDCP
FDIs
FIT-ED
FTA
GATS
GCI
GDP
GMA 7
GNP
GOCCs
GRPS
GSM
GVA
HBO
HEIs
HIDF
HIPAA
HMOs
IAS
IBC 13
ICHEFAP
ICT
IDC
IDCs
IDP
IGF
IMF
IOS
IPP
ISPs
ISR
ITCan
ITECC
xx
enhanced data rates for GSM revolution
E-commerce Development Report
economic needs tests
electronic program guide
European Quality Improvement System
establishment survey
Entertainment and Sports Programming Network
Eastern Telecommunications Philippines, Inc.
European Union
Federation of Accrediting Associations in the Philippines
Foreign Affairs Canada
Filipino Academy for Movie Arts and Sciences
Film Academy of the Philippines
Federal Communications Commission
Film Development Council of the Philippines
foreign direct investments
Foundation for Information Technology Education
and Development
free trade agreement
General Agreement on Trade in Services
growth competitiveness index
gross domestic product
Republic Broadcasting System, Inc.
gross national product
government owned and controlled corporations
general packet radio service
global system for mobile communications
gross value added
Home Box Office
higher education institutions
National Health Industry Development Forum
Health Insurance Portability and Accountability Act
health maintenance organizations
International Affairs Services
Intercontinental Broadcasting Corporation, Inc.
International Comparative Higher Education Finance
and Accessibility Project
information and communication technologies
International Data Corporation
Internet data centers
International Development Programme
International Gateway Facilities
International Monetary Fund (IMF)
Internet over satellite
Investments Priorities Plan
Internet service providers
international simple resale
International Trade Canada
Information Technology and Electronic Commerce Council
ITES
ITU
IX
JPEPA
KAPP
KBP
KDPP
KNTO
LGUs
MAFF
MATRADE
METI
MIB
MICE
MIT
MITI
MIX
MMS
MoF
MoFA
MPDAP
MRA
MSITS
MTRCB
MTV
NAFTA
NAPs
NASSCOM
NCR
NEDA
NES
NFDC
NGOs
NSAT
NSO
NTC
NTU
NUS
OCWs
OECD
OFWs
OMB
PAASCU
PACU-COA
PC
PCPC
PEZA
IT-enabled services
International Telecommunications Union
Internet exchange
Japan-Philippines Economic Partnership Agreement
Katipunan ng mga Artista ng Pelikulang Pilipino
Kapisanan ng mga Brodkaster ng Pilipinas
Kapisanan ng mga Director ng Pelikulang Pilipino
Korean National Tourism Organization
local government units
Ministry of Agriculture, Fishery and Forestry (Japan)
Malaysian External Trade Corporation
Ministry of Economy, Trade and Industry (Japan)
Ministry of Information and Broadcasting (India)
meetings, incentives, conferences and events
Massachusetts Institute of Technology
Ministry of International Trade and Industry (Malaysia)
Manila Internet exchange
multimedia services
Ministry of Finance (Japan)
Ministry of Foreign Affairs (Japan)
Movie Producers and Distributors Association of the Philippines
mutual recognition agreements
Manual on Statistics of International Trade in Services
Movie and Television Review and Classification Board
Music Television
North American Free Trade Agreement
network access points
National Association of Software and Service Companies (India)
National Capital Region
National Economic Development Authority
network-enabled services
National Film Development Corporation (India)
nongovernmental organizations
National Secondary Achievement Test
National Statistics Office
National Telecommunications Commission
Nanyang Technological University
National University of Singapore
overseas contract workers
Organisation for Economic Co-operation and Development
overseas Filipino workers
Optical Media Board
Philippine Accrediting Association of Schools, Colleges,
and Universities
Philippine Association of Colleges and Universities–
Commission on Accreditation
personal computer
Philippine Centralized Product Classification
Philippine Economic Zone Authority
xxi
PHIX
PIDS
PIM
PISO
PLDT
PMPC
PMPPA
PRA
PRC
PSIC
RCA
RPN 9
RTAs
SA
SAGITs
SAS
SIAs
SMS
SMU
SPS
STCW
SUCs
SWOT
TCWM
TELOF
TESDA
TFC
TNCs
TOEIC
TPRG
TPSC
TRM
TWF
UK
UN
UNCTAD
UNIDO
US
USF
USITC
USTR
VAS
VCRs
VoIP
VRB
WAP
WTO
xxii
Philippine Internet Exchange
Philippine Institute for Development Studies
Program in International Management
Philippine Internet Services Organization
Philippine Long Distance Telephone Company
Philippine Movie Press Club
Philippine Motion Picture Producers Association
Philippine Retirement Authority
Professional Regulation Commission
Philippine Standard Industrial Classification Code
revealed comparative advantage
Radio Philippine Network
regional trade agreements
Standards Authority
Sectoral Advisory Groups on International Trade
service areas scheme
sustainability impact assessments
short message services; subscriber management system
Singapore Management University
sanitary and phytosanitary standards
Standard of Training, Certification and Watch-Keeping
for Seafarers
state universities and colleges
strengths, weaknesses, opportunities, threats
Technical Committee on WTO Matters
Telecommunications Office
Technical Education Skills Development Authority
The Filipino Channel
transnational companies
Test of English for International Communication
Trade Policy Review Group (United States)
Trade Policy Staff Committee (United States)
tariff and related matters
Television Without Frontiers
United Kingdom
United Nations
United Nations Conference on Trade and Development
United Nations Industrial Development Organization
United States
Universal Service Fund
US International Trade Commission
United States Trade Representative
value-added services
video cassette recorders
voice-over-Internet protocol
Videogram Regulatory Board
wireless access protocol
World Trade Organization
Chapter 1: Overview 1
1
Overview: A Look at Services Trade in
the Philippines
Gloria O. Pasadilla
Why study services? When the Philippine Institute for Development Studies
(PIDS) embarked on this project to study the services sector in the Philippines,
we considered three important reasons: first, because services, now, has the
dominant share in the economy of many countries; second, because it evidently
shows huge export possibilities for middle-income developing countries; and
third, because, unlike manufacturing, there is relatively little indepth knowledge
about the services sector.
That services would dominate the economies of rich countries has long
been predicted. It had almost been an unquestioned dogma in development
economics that as the economy grows, the share of agriculture in the economy
shrinks, while the shares of manufacturing and of services increase. Further
growth eventually makes services the main motor of the economy, edging out
the pre-eminent place of manufacturing in the economy.
In the United States (US) and in other developed economies, this trend has
indeed been observed. In the Organisation for Economic Co-operation and
Development (OECD) markets, services now account for 67 percent share of
the economy, while manufacturing accounts for only 30 percent, and agriculture
virtually accounts for an insignificant proportion of the gross domestic product
(GDP). What has not been predicted is how quickly developing countries would
catch up with the trend of having services dominate the other sectors, which
seems to be happening now. The economies of the Association of Southeast
Asian Nations (ASEAN), for example, are now highly dependent on services,
albeit with still less proportional share in GDP than those of the OECD economies.
Partly, the reason for the fast growth of the services sector in middleincome countries could be exports. Services exports, incomplete data
notwithstanding, have ballooned starting in the mid-1980s. Global trade in
commercial services, those that are captured by the balance of payments (BOP)
accounts, rose from less than US$400 billion in the early 1980s to US$1.6
trillion in 2002. Commercial services exports’ share to total exports of highincome economies averaged more than 21 percent from 1998 to 2001, and
had grown steadily from 17 percent in 1980. Low- and middle-income countries’
2 The Global Challenge in Services Trade
commercial services exports, on the other hand, grew from 11 percent of its
total exports to 14 percent in 2001. With technological advances, these are
seeking to take a more significant share of global trade in services, thanks to
global outsourcing activities of multinational and big domestic firms in rich
countries, especially in the US.
In the Philippines, services now take about more than 50 percent share of
GDP. Like other developing countries, the Philippines is looking at the huge
export potential for outsourced service activities, travel demands for services,
as well as foreign employment possibilities for a burgeoning and increasingly
mobile Filipino population.
IMPOR
TANCE OF SER
VICES IN THE ECONOMY
IMPORT
SERVICES
ECONOMY::
SOME FFA
ACTS AND FIGURES
Services sector is now the dominant source of growth in the Philippines and in
the ASEAN economies. ASEAN’s share of services to GDP has dominated
manufacturing and agriculture for more than a decade. Since 2000, it has
averaged close to 50 percent of GDP and showed the fastest growth compared
to agriculture and manufacturing. In the Philippines, services have been the
fastest growing sector, bagging the greatest share in GDP since the 1990s (Table
1). This share, though large at 53 percent of GDP in 2004, still pales in comparison
to the share of services in the economy of developed markets.
Table 1. Sector share to GDP (in percent)
1990-1994
1995-1999
2000-2004
OECD (average)
Agriculture
Industry
Services
5.3
32.3
62.4
4.5
30.5
65.0
3.7
29.5
66.8
ASEAN 5 (average)
Agriculture
Industry
Services
16.3
38.3
45.3
11.7
38.9
49.4
10.1
40.8
49.1
Philippines (average)
Agriculture
Industry
Services
21.7
33.3
45.0
19.0
31.7
49.3
15.0
32.4
52.6
In nominal terms.
Source: World Bank (2005).
In terms of employment, the services sector has also contributed a
substantial number of jobs and is the biggest source of employment in the
Philippines and ASEAN. In the Philippines, about 50 percent of the labor force is
employed in services sector, one-third of which are in wholesale and retail trade,
another third in community, social, and personal services, and the rest in other
services sectors. In developed countries, 65 percent are in services (Table 2).
Table 2. Sector share in employment (in percent)
1990-1994
1995-1999
2000-2004
OECD (average)
Agriculture
Industry
Services
9.9
29.7
60.0
8.4
28.1
63.0
7.4
27.5
64.8
ASEAN 5 (average)
Agriculture
Industry
Services
36.0
22.3
41.6
30.8
23.1
46.0
29.9
22.8
47.1
Philippines (average)
Agriculture
Industry
Services
45.3
15.7
39.0
40.8
16.2
43.0
37.4
15.8
46.8
Foreign direct investments (FDIs) have also markedly shifted from
manufacturing to services. UNCTAD (2004) reports that in 2002, services
account for 60 percent of total inward FDI stock, 66 percent of FDI inflows, and
70 percent of FDI outflows. Selected countries in the Asia-Pacific also show an
increased share of FDI stock in services, except for China, where manufacturing
retains the lion share of FDI. In the Philippines, manufacturing and services
take 55 and 28 percent of FDI, respectively, in 1995, but in 2002, their respective
shares have changed to 39 and 44 percent (Table 3).
In the spending pattern of Philippine households, services hold the secondto-the-largest share in average expenditures. Although food remains the biggest
single expenditure of most households, services come next, with 23 percent of
expenditures. For wealthier families, the share of food is less than the country
average of 44 percent while that of services is markedly higher. Of the services
expenditures, education, telecommunication and transportation, and fuel and
energy expenditures take the greatest chunk of household expenses (Table 4).
But how important is services as a growth driver? The analysis of Pasadilla
and Liao (2006) indicates that manufacturing, not services, remains the most
important growth-inducing sector of the economy. Analyzing forward and
Table 3. Distribution of FDI stock by industry (in percent)
Economy
1995
Primary Manufacturing Services Unspecified
China a
Hong Kong, China
India
Indonesia
Macao, Chinac
Malaysiad
Pakistane
Philippines
Republic of Korea
Singapore f
Sri Lankag
Thailand
1.6b
7.9
18.2
4.5
2.1
17.0
0.2
6.0
58.5 b
8.3
83.4
64.5
52.7
24.5
55.0
62.2
38.2
56.8
36.6
36.1 b
91.7
8.7
17.2
33.5
73.4
28.0
35.2
61.7
43.2
57.4
3.8 b
9.3
2.4
-0.9
2002
Primary Manufacturing Services Unspecified
1.9
24.0
6.1
10.9
0.5
2.4
63.3
2.8
12.6
38.0
22.2
39.3
57.4
36.1
41.0
37.7
31.4
93.0
..
87.4
38.0
71.7
43.9
42.0
63.8
59.0
56.8
3.4
4.3
5.9
0.1
3.1
Source: UNCTAD (2004).
Based on cumulative approved FDI flows since 1979.
b
Based on cumulative approved FDI flows during 1979-1997.
c
Based on stock of 2001.
d
Based on application of the proportion of gross FDI stock by sector for the period 1998-2002 to 2002.
e
2001 data are 1995 stock values plus cumulative flows during 1996-2001.
f
Data for 1995 comprise equity investment (i.e.paid-up shares and reserves) only. Data for 2001 and 2002 incorporate net lending
from foreign investors to their affiliates in Singapore. Data for 2002 are preliminary.
g
Data refer to estimated foreign investments in projects approved by the BOI since 1978.
a
Table 4. Average family expenditures by income class in the Philippines, 2000
Expenditure group
and area
All income Under P20,000- P30,000- P40,000- P50,000- P60,000- P80,000- P100,000- P250,000class P20,000 P29,999 P39,999 P49,999 P59,999 P79,999 P99,999 P249,999 and over
15,270
Total no. of families (‘000)
100.0
Percent of families (%)
118,002
Average expenditures (PhP)
Percent of expenditures
100.0
43.6
Food
0.7
Alcoholic beverages
1.1
Tobacco
22.9
Services
6.3
Fuel, light and water
Transportation and
6.8
communications
2.3
Household operations
4.2
Education
0.5
Recreation
Medical care
1.9
House maintenance
0.9
and minor repairs
Personal care and effects
3.6
2.7
Clothing, footwear and other wear
0.2
Nondurable furnishings
Durable furniture and equipment
2.5
Rent/rental value of occupied
dwelling unit
14.2
2.1
Taxes paid
3.3
Miscellaneous expenditures
Other expenditures
2.9
Source: D0LE (2000).
1,983 1,496
9.8
13.0
65,555 81,671
100.0 100.0
54.4
57.8
1.0
1.1
1.8
1.9
17.9
16.7
6.9
6.7
4,813
31.5
132,779
100.0
46.8
0.7
1.2
21.6
6.8
2,021
13.2
352,146
100.0
31.2
0.4
0.5
28.5
5.5
3.6
1.6
2.3
0.2
1.5
4.2
1.5
2.6
0.3
1.6
6.0
1.7
4.0
0.4
1.9
9.8
3.3
5.8
0.7
2.3
0.7
3.6
2.6
0.2
0.6
0.8
3.8
2.7
0.2
1.1
0.8
4.0
2.7
0.2
1.6
0.8
4.0
2.8
0.2
2.2
1.1
3.3
2.7
0.3
3.6
8.7
0.2
2.4
2.8
9.7
0.2
2.6
2.1
11.4
0.4
2.9
1.8
13.2
1.4
3.5
2.6
18.2
4.1
3.8
3.5
365
2.4
16,955
100.0
65.5
1.1
1.5
14.0
7.3
837
5.5
27,173
100.0
64.0
1.2
1.7
14.0
7.2
1,171
7.7
36,559
100.0
63.5
1.2
1.8
14.1
6.6
1,389
9.1
45,514
100.0
61.9
1.1
1.8
14.6
6.5
1,196
7.8
53,602
100.0
60.4
1.2
2.0
15.2
6.5
2.2
2.2
0.7
0.1
1.1
2.2
2.1
0.9
0.1
1.0
2.6
1.9
1.2
0.1
1.1
2.7
1.7
1.6
0.1
1.3
2.9
1.7
1.9
0.2
1.3
0.4
2.3
1.5
0.1
-
0.5
2.8
2.0
0.1
0.1
0.6
3.0
2.2
0.2
0.3
0.7
3.3
2.4
0.2
0.7
8.0
0.3
1.3
4.3
7.8
0.2
1.8
4.4
8.1
0.2
1.9
3.7
8.3
0.2
2.1
3.2
backward linkages and multipliers from the 1994 Philippine input-output table,
manufacturing shows greater links to the economy and can create more direct
and indirect effects. Table 5 shows that for every unit change in final demand in
manufacturing, overall output increases by 2.5, while in the case of a unit change
in services demand, economic output increases by only 1.8. These linkages and
multipliers, however, may change as a new input-output table that would
presumably incorporate the change in economic structure and the growth in the
services sector throughout the 1990s comes out soon.
To summarize, services has grown in importance in terms of its share to
GDP, employment, FDI, and even average expenditures of Philippine households.
But based on a somewhat dated input-output table, it has not yet edged out
manufacturing in terms of its linkages in the economy and of its direct and
indirect effects.
Table 5. Services as growth driver?
Agriculture
Manufacturing
Services
Forward
Linkages
Backward
Linkages
Multipliers
0.8461
1.8011
1.1313
0.9778
1.6867
1.1461
1.7277
2.5333
1.8119
Source: Pasadilla and Liao (2006).
Note: Based on 1994 Philippine input-output table.
PROSPECTS OF SERVICES AS DOLLAR EARNER
For developing countries like the Philippines, the exciting aspect of growth in
services is its strong potential as a major dollar earner. Globalization of services
and advances in telecommunications technology have made many erstwhile
nontradable activities like accounting services, medical consultation, education,
or architecture services, to cite but a few, tradable. To the extent that service
activities rely on a huge number of skilled manpower, developing economies
endowed with these resources possess some comparative advantage. This
explains the huge shift of FDI on services described above, owing partly to the
outsourcing activities from developed countries.
Besides technological development, the huge wage gap between
professionals, say in the medical field, and in the cost of certain services (e.g.,
surgery), is fuelling a new trend called medical tourism, whereby citizens from
developed countries travel to a middle-income country to undergo surgeries/
treatments where cost is usually a bare fraction of what they would have to pay
in their home countries. Finally, the demographic trend in most developed
countries is likewise leading to new demands for retirement and recreational
facilities that are friendly to retirees. Most often, these entail the availability of
trained caregivers and medical professionals to cater to the needs of the elderly.
Of the developing countries in the Asia-Pacific, India has been most
successful, particularly in bagging technology-related service business, while
China and the Philippines are actively seeking to emulate India’s example.
Thailand and other middle-income countries are also trying to lure more tourists
into medical tourism and retirement communities. The advantages of these
countries are their large educated population and good infrastructure support
services like telecommunications facilities, and medical and recreational
facilities.
Receipts and economic contributions from these relatively new services
export activities are, unfortunately, hard to compute. First, the reporting
mechanism of many central banks, including that of the Philippines, which
tracks down BOP flows, does not specify business process outsourced (BPO)
activities but rather lumps these together with the “other business services”
category along with other foreign exchange flows. Second, the World Trade
Organization (WTO) General Agreement on Trade in Services (GATS) stipulates
different trade in services by mode of supply. In most countries, the services
trade that gets reported in the BOP are only those supplied by mode 1 (crossborder exports) and mode 2 (consumption of services abroad). Figures for mode
4 services supply or payment for services rendered by Filipino professionals
working abroad are available but are reported elsewhere in the BOP or in other
economic accounts, and would require some reclassification to add up total
services trade. The more difficult figure to capture is services supply by mode 3
(service activities in the domestic market by foreign-owned establishments)
because these are not currently collected by statistics agencies in the developing
world.
Because of the importance of the GATS, we briefly discuss next the WTO
agreement governing trade in services.
G ATS and Measurement of Ser vices TTrade
rade
The GATS is the set of multilateral rules that govern international trade in services
(excluding governmental services). The agreement defines four modes of
delivering services. Mode 1 or cross-border supply is akin to trade in goods
where services are supplied from one country to another. Examples are services
by call centers in the Philippines attending to consumers abroad via
telecommunication or internet. Mode 2 (consumption abroad) is when consumers
use services outside their own country. Examples are hotel and accommodation
expenses by tourists in the Philippines. Mode 3 (commercial presence) is when
a foreign company establishes subsidiaries or branches in another country.
Examples are banking services by foreign-owned banks in the Philippines. Mode
4 (movement of natural persons) is when a service provider moves temporarily
into the territory of the consumer to provide the service. Example is the shortterm employment of construction workers and domestic helpers in Hong Kong.
The way the GATS defines services differs from how BOP statistics are
collected and reported. First, as previously mentioned, most of services trade
data derived from the BOP of countries cover only those of modes 1 and 2, and
exclude those of modes 3 and 4. Usually, the trade in commercial services
takes the form of cross-border trade (mode 1), except for receipts from tourism
which is mode 2. Besides, the methodologies and definitions of commercial
services employed by countries varied in the past, making the comparability of
these data across countries difficult.
Second, service supply using mode 3 is not recorded in the BOP, and, to
date, only a handful of countries are able to collect data on the sales of foreign
affiliates in the host economy. These mode 3 types of activities, if collected,
nevertheless, remain outside of the BOP, but are rather reported as a mere
supplement to gain a better picture of a country’s international trade in services
according to the GATS typology. Currently, in the Philippines, construction services
are classified under mode 3 receipts in so far as this usually requires commercial
presence (establishment of a subsidiary or branch) in the host countries. This is
thoroughly inadequate, especially considering that more and more Filipino food
and retail companies are opening franchise operations in other countries like
the US, China, and the Middle East. These franchise operations are a form of FDI
outward flows, but whose sales activities abroad should be considered receipts
under mode 3. This type of data is not available, however.
Third, remittances of workers abroad are captured in the current account,
but the definitions somewhat differ between the BOP manual and the GATS. For
example, temporary workers, according to the GATS, can be those working abroad
for up to five years, while as per the residency rule of the International Monetary
Fund (IMF) BOP Manual, temporary workers are those employed for a year or
less. Beyond this, earnings abroad no longer appear as part of the current account
transactions in the BOP. Moreover, the record of remittances in the BOP does
not distinguish between remittances from Filipino workers abroad and emigrants.
The latter, according to the GATS, are not supposed to be considered part of
international services trade.
Finally, some services trade transactions can be carried out by using different
modes. For example, many computer-related services may deliver their program
codes through mode 1, yet a portion of that might have used mode 4 service
supply, as in the case of computer engineers doing on-site analysis of computer
software needs of clients abroad before doing the program codes back in the
home country. The new Manual on Statistics of International Trade in Services
(MSITS) proposes a simple approach in these cases by allocating the service to
the most important mode in terms of time and resources associated with it. In
the example above, almost always, computer-related services are classified
under mode 1.
Trade in Ser vices
Preliminary estimates
A look at the commercial services trade statistics and the reclassified GATScompatible statistics provides some interesting observations (Table 6). While in
total services exports, there is no discrepancy between the two when only modes
Table 6. Exports of services (balance of payments), 1999-2004
Mode of Supply
1999
2000
2001
2002
2003
2004
Mode 1: Cross-border supply
Transportation
Communication services
Insurance services
Financial services
Computer and information services
Royalties and license fees
Other business services
Personal, cultural and recreational services
1428
862
142
12
67
57
6
271
11
1650
1018
182
12
80
76
7
263
12
1645
976
328
12
33
22
1
258
15
1749
928
427
12
32
37
1
305
7
1809
951
433
12
38
28
4
334
9
2062
1090
487
12
43
33
11
379
7
Mode 2: Consumption abroad
Travel
2578
2156
1742
1761
1544
2017
Mode 3: Commercial presence
Construction services
58
97
64
30
48
71
7599
1442
6157
8625
1976
6649
9214
2472
6742
10102 10643 11013
2606 2624 2763
7496 8019 8250
4064 3903
11663 12528
3451
12665
3540 3401 4150
13642 14044 15163
Transportation
Insurance services
Financial services
12.24 13.17
21.21 26.08
3.49 4.66
0.30 0.31
1.65 2.05
1.40 1.95
0.15 0.18
6.67 6.74
0.27 0.31
12.99
28.28
9.5
0.35
0.96
0.64
0.03
7.48
0.43
12.82 12.88 13.6
26.21 27.96 26.27
12.06 12.73 11.73
0.34 0.35 0.29
0.9 1.12 1.04
1.05 0.82 0.80
0.03 0.12 0.27
8.62 9.82 9.13
0.2 0.26 0.17
Travel
63.44 55.24
50.48
49.75
45.4
48.6
2.49
1.85
0.85
1.41
1.71
65.15 68.85
12.36 15.77
52.79 53.07
72.75
19.52
53.23
74.05 75.78 72.63
19.1 18.68 18.22
54.95 57.1 54.41
100.00 100.00
100.00
100.00 100.00 100.00
Mode 4: Presence of natural persons
Compensation of employees (M4)a
Workers’ remittances (M4)
Total services exports (TSE)
Total services exports (TSE M4)
% Share to TSE
Mode 4: Presence of natural personsa
Compensation of employees (M4)
1.43
Table 6. (continued)
2000
2001
2002
2003
2004
Transportation
Insurance services
Financial services
15.55
18.10
28.17
0.00
19.40
33.33
16.67
-2.95
9.09
-0.3
-4.13
80.22
0.00
-58.75
-71.05
-85.71
-1.9
25
6.32
-4.92
30.18
0.00
-3.03
68.18
0.00
18.22
-53.33
3.43
2.48
1.41
0.00
18.75
-24.32
300.00
9.51
28.57
13.99
14.62
12.47
0.00
13.16
17.86
175.00
13.47
-22.22
Travel
-16.37
-19.2
67.24
Mode 4: Presence of natural persons
Compensation of employees (M4)
13.50
37.03
7.99
6.83
25.1
1.4
9.64
5.42
11.18
Total services exports (TSE M4)
-3.96
7.42
-11.58
1.09
2.58
7.71
Mode of Supply
Coverage
1999
Growth Rate (in %)
1.09 -12.32 30.63
-34.02 -53.13
30 47.92
5.36
0.69
6.98
3.48
5.3
2.88
-3.93 22.02
2.95 7.97
Source: BSP (2005).
a
Share to TSE M4.
1 to 3 are considered, this total increases by almost fivefold when mode 4 is
added. In 2004, total services exports without mode 4 amount to four billion US
dollars, but with mode 4, it shoots up to more than 15 billion US dollars. This
implies that the BOP statistics under-reports the economic contribution of
services trade without receipts from mode 4 service supply which, alone,
constitutes more than 70 percent of total exports of services, dwarfing the
contribution of travel receipts and transportation and communication. Moreover,
growth in services exports has not been consistently positive since 1999, but
when mode 4 is included in the reckoning, growth has been positive since
2000.
Almost half of commercial services exports come from travel receipts1
which is a mode 2 services export. Transportation and communication constitute
almost a third of commercial services exports, while other business services
(where IT-enabled services presumably fall under) is less than 10 percent.
1
The BSP, howerever, does not distinguish between goods and services purchased by
travelers. Hence, this entry may be overestimated (BSP 2005).
.
Contribution to services exports receipts from mode 3 is expected to be small in
the case of the Philippines. As of now, included in the BOP accounts for mode 3
are only construction services, not the sales activities of Filipino-owned branches
or franchises abroad. These estimates may still change as the BOP data-gathering
methodology of services transactions improves.
Goods vs. services
In other countries, services exports2 have increased faster than goods trade. For
instance, both in Japan and Korea, and in most advanced economies, growth
index of services exports in the 1990s exceeds that of goods (Figure 1a). Because
of poor and developing countries’ influence, global trade in services has grown
only apace with trade in goods, not exceeding it, unlike the picture in the richer
countries. In the Philippines, despite the perceived potential of services exports,
growth has, so far, not gone beyond growth of exports of goods (Figure 1b), and,
in fact, seems to have declined after 1997. This may be partly due to poor
accounting or underestimation of trade in services in the BOP accounts, and
partly due to the fact that when it comes to services, except for a few niche
areas like call centers, the comparative advantage of the country does not
generally lie in services.
Figure 1a. BOP growth index for goods and services, Japan and Korea, 1991-2003
(1991=100)
Source: IMF Balance of Payments Statistics, various years.
2
In the foregoing discussion, services trade means only commercial services trade as
reported in the BOP.
Figure 1b. Growth index for goods and services, Philippines and World, 1996-2003
(1996=100)
Source: IMF Balance of Payments Statistics, various years.
Table 7. Revealed comparative advantage of the Philippines, 2000 and 2003
Services
Transportation
Travel
Other Services
Communication
Construction
Insurance
Financial
Computer and information
Royalties
Personal, etc.
2000
2003
0.48
0.47
0.88
0.29
0.97
0.89
0.45
0.16
0.33
0.06
0.20
0.47
0.39
0.35
0.68
0.32
3.09
0.41
0.29
0.19
0.09
0.02
0.15
0.13
Source: Author’s own computation based on IMF Balance of Payments Statistics, various years.
Table 7 shows a computed revealed comparative advantage (RCA)3 index
for services in the Philippines for 2000 and 2003. Except for communication
services, which exceeded 1.0 in 2003, perhaps reflecting the call service centers
RCA was computed as RCAij = (Xij / Xit) / (Xwj / Xwt) where Xij is the values of country i’s exports
of product j and Xwj is the world exports of product j while Xit and Xwt is the country’s total
exports and world total exports, respectively.
3
operations, all the other services sectors show RCA index below 1.0, indicating
that the Philippines has no comparative advantage in these sectors.
That the Philippines’ comparative advantage does not lie in services is not
a surprise, if you think of services as financial and insurance services,
communications, and transportations, where huge capital investments are
usually required and which, historically, have been dominated by multinationals
based in developed countries. But in certain niches of services that require
huge skilled manpower requirement, the Philippines might, indeed, have
comparative advantage, as the RCA for communication services sector perhaps
indicates.
Embodied and disembodied services trade
Another type of service trade may be indirect, in the form of embodied services
trade. This is because export goods use producer services as inputs, for example,
garment exports use design and engineering services, advertising, as well as
accounting services, to name a few. In developed economies, the share of
services in export goods production has risen, adding to the types of services
traded internationally, although this time, in the form of goods trade. The
computation of disembodied and embodied (or direct and indirect) services
trade using the input-output table4 data is shown in Table 8. In other countries
that have huge manufactured goods exports like Japan, embodied services
exports exceed that of direct (disembodied) services exports, but not so with
the Philippines. Direct trade in services, based on 1994 data, is almost double
Table 8. Embodied and disembodied service trade (in thousand PhP)
Disembodied service trade
Export
Import
Net export
Construction
Electricity, steam and water
Transportation,
communication, storage
Trade
Finance
Real estate
Private services
Government services
Service total
Embodied service trade
Export
Import Net export
1,430,789
1,037,766
-4,622,060
0
-3,191,271
1,037,766
2,240,736
-4531,795
18,368,831 -32,779,089
-2,291,059
-14,410,258
28,509,229
76,643,759
30,691,155
1,565,536
43,724,343
0
-5,312,438
0
-27,926,586
-100,616
-18,231,459
0
23,196,791
76,643,759
2,764,569
1,464,920
25,492,884
0
20,191,506
29,243,159
11,588,655
2,957,278
15,045,009
0
-34,657,033
-50,210,602
-20,045,771
-5,154,434
-27,048,380
0
-14,465,527
-20,967,443
-8,457,116
-2,197,156
-12,003,371
0
183,602,577
-56,193,159
127,409,418
99,635,172 -174,427,103
-74,791,931
Source: Author’s own computation based on 1994 input-output table of the Philippines.
The formula for embodied services trade is QE’ = (I-A) -1E’ where (I-A) -1 is the Leontief
inverse matrix and E’ is the export vector of goods, i.e. E’ = (e1’, e2’,…ei’, 0, 0, …,0) where the
zeros correspond to all the services sectors (Urata and Kiyota 2000).
4
that of indirect service trade, partly because the goods exports of the Philippines
is not that large. Furthermore, considering that many of the imported goods
come from developed countries where services value added already dominates
the economy, the embodied (indirect) service import is more than triple the
disembodied (direct) services import. Thus, the Philippines is a net importer of
embodied services, but a net exporter of disembodied services. Embodied services
exports constitute 35 percent of total services exports (direct plus indirect),
while embodied services imports comprise 76 percent of total imports of services.
Movement of Workers
As discussed above, services, not including mode 4 receipts, has not outpaced
the growth of goods exports and that, furthermore, the Philippines does not
have comparative advantage in many services sectors. Nevertheless, the
Philippines is competitive in certain service activities that require huge skilled
manpower and is already a significant player in manpower exports. Mode 4
receipts or remittances from abroad had outpaced receipts from garments
exports, the second highest export earner in the Philippines next to
semiconductor. In 2003, the garments sector earned more than US$2 billion,
compared to close to US$8 billion of remittances from workers abroad5. In
2005, total remittances exceeded US$10 billion, which dwarfs the combined
FDI and aid flows to the Philippine economy. If imported materials are deducted
from exports of semiconductors, its net export receipts contribution is actually
not much higher than OFW remittances (Table 9).
Of the hundreds of thousands of Filipinos deployed annually to different
countries, approximately 60-75 percent can be considered engaged in services
or service-related tasks, while the rest are agriculture or production workers.
Because of the huge number of service workers, the exodus of many Filipino
workers is an issue within the ambit of services trade or GATS coverage. In
2002, about one-third of the newly deployed Filipino workers work as service
workers, another third as professional and technical workers, a few percentage
work in service-related jobs, while less than one percent work as managers
(Table 10).
Yet, while the OFWs have contributed significantly to foreign exchange
earnings, warning signs are being raised, especially in the medical services sector.
From a developmental standpoint, the loss of a huge portion of the educated
labor force can lead a country to a low level economic equilibrium characterized
as ‘poverty trap’. Indeed, many countries find it hard to grow out of their economic
situation because of the inadequacy of human capital (read: skilled human
resources). With the existing trend of huge out-migration, the Philippines is running
the risk of being trapped in poverty, especially because even though the
stereotypical Filipino migrant may be a domestic helper or nanny in Singapore or
The usual caveat that this figure might include remittances from Filipino emigrants abroad
applies.
5
Table 9. Comparison of OFW remittances with other BOP flows (in million US$)
1985
1990
1995
2000
2003
Foreign direct investment
105
550
1,459
1,345
Official development assistance and official aid
460
1,277
890
578
7,578 10,689
Total exports *
4,629
8,186
17,447
38,078
35,751
Manufactured goods
Electric and electrical equipment/parts
and telecom
Garments
Textile yarns/fabrics
2,539
1,056
5,706
1,964
13,868
7,413
33,988
22,179
31,182
18,255
623
39
1,776
93
2,570
208
2,563
249
2,269
243
Total imports *
5,111
12,206
26,391
34,491
33,057
508
584
1,794
1,106
3,572
3,772
3,151
7,309
3,245
6,363
140
547
872
804
727
Manufactured goods
Mat/acc for the manufacture of electrical
equipment
Textile yarn, fabrics and made-up arts
319
319
6,050
Overseas Filipino worker’s remittances
2005
Sources: Bangko Sentral ng Pilipinas and World Bank (2005).
Note: Official development assistance data came from World Bank (2003).
* Per National Statistics Office’s total.
Table 10. Percentage share of newly deployed OFWs by skill category
Skill Category
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Total deployment (thousand)
686,457 696,457 719,602 653,574 660,122 747,696 831,643 837,020 841,628 867,599 891,908
Newly hired OFWs
260,594 256,197 214,157 214,157 205,791 221,241 219,215 237,260 253,030 258,204 288,155
Professional and technical workers
28
25
20
20
18
23
25
26
31
38
35
Managerial workers
11
0.13
0.16
0.16
0.15
0.26
0.18
0.14
0.11
0.15
0.13
Clerical workers
2
2
2
2
2
2
1
1
1
1
1
Sales workers
1
1
1
1
1
1
1
1
1
1
1
Service workers
32
35
38
38
41
35
37
35
36
36
34
Agricultural workers
1
1
0.46
0.46
0.40
0.25
0.18
0.19
0.21
0.21
0.21
Production workers
37
36
39
39
37
39
34
34
23
22
24
For reclassification
0.03
0.03
0.05
0.09
1
0
1
2
8
2
4
Source: Philippine Overseas Employment Administration.
Hong Kong, professional and technical workers that include medical professionals
have actually grown to be the majority of departing OFWs. In 2002, more than
one-third of the OFWs that left are from this educated category.
The yearly deployment of OFWs dwarfs the number of alien workers
permitted to come into the country. Based on alien employment permits (AEP)
issued to foreigners, the number of foreign workers allowed into the country has
not exceeded 10,000, majority of these ranging between 54 and 74 percent
are engaged in the services sectors. And, quite expectedly, because of strict
regulations of mode 4 entry into the domestic market, majority of the AEPs are
for high-ranked individuals, normally managers, presidents or vice-presidents,
or directors of foreign-owned subsidiaries or branches (Table 11).
In summary, even though the Philippines has no comparative advantage for
services as a whole, a niche market exists for manpower exports, or mode 4
type of export service supply. Yet, while the remittances of OFWs are helping
prop up the Philippine economy, the huge out-migration, especially of large
portions of the educated class, also poses a threat to the economy in the long
run. In the meantime, however, because of lack of sufficient work opportunities
in the country, this can be considered as a stop-gap measure. Besides,
government officials contend that working abroad is also a way of acquiring
skills and technology that could benefit the country when the OFWs eventually
return home. The first-best scenario, however, is if work opportunities are
expanded within the Philippines through economic growth and investments.
This is where the opportunities from outsourcing service activities in the
Philippines play a role.
OUTSOURCING OPPORTUNITIES, MEDICAL TOURISM,
AND OTHERS
Outsourcing holds more promise for the Philippines, a medium player in the
global outsourcing business, especially in voice-related services, because of its
huge English-speaking population and cultural affinity with the US. Aside from
call service centers, there is also an increasing number of outsourced business
processes or shared services, especially accounting and finance services, though
they are currently mostly housed within multinational firms. Animation, medical
transcription, architectural services, and other IT-enabled services in which the
Philippines has a minor presence in the international market hold great
possibilities for exploiting.
Outsourcing service activities can mitigate the employment problem in the
country by providing an alternative to overseas employment. Considering the
huge social problem associated with overseas employment, like family breakups,
youth delinquencies, etc., the employment prospects from outsourcing are a
welcome development.
Another services sector that, like outsourcing, encourages educated
professionals, especially medical professionals, to stay in the country, is the
medical/health tourism and medical services sector. This sector can take
Selected occupational
group
1985
1980
Total % Share Total % Share
Selected occupational
group
1992
1990
1988
1994
Total % Share Total % Share Total % Share Total % Share
Managers, executives, presidents,
heads, and directors
375
43.9
204
54.0
Professional, technical, and
related workers
346
21.2
352
21.8
400
18.7
611
19.7
Advisers, consultants, and technical
workers
100
11.7
49
13.0
Administrative, executive, and
managerial workers
942
57.6
1,001
62.0
1,469
68.5
2,092
67.6
Other professional workers
180
21.1
52
13.8
Clerical and related workers
1
0.1
1
0.1
-
5
0.2
Chefs, cooks, and related
Workers
66
7.7
31
8.2
Sales workers
10
0.6
12
0.7
1
0.05
8
0.3
Service workers
117
7.2
105
6.5
63
2.9
110
3.6
Agricultural, animal husbandry
and forestry workers,
fishermen and hunters
27
1.7
31
1.9
71
3.3
73
2.4
Production and related workers,
transport equipment operators
and laborers
191
11.7
112
6.9
140
6.5
195
6.3
Craftsmen, technicians, and semiprofessional workers
Occupation not adequately defined
All selected occupations
Source: DOLE (2000).
133
15.6
28
-
14
854
378
7.4
3.7
Occupation not adequately defined
All occupations
-
-
-
-
1,634
1,614
2,144
3,094
Table 11. Alien employment permits issued by selected occupational group, Philippines: selected years
different forms: medical treatment of foreigners in the Philippines, spa or tourism
industry, and retirement villages. The advantage of the Philippines is again due
to a good number of educated professionals in health-related fields as well as
the Filipinos’ token sense of hospitality.
Unlike IT-enabled services sectors and medical tourism where the
Philippines has had some positive and highly successful experiences to cite,
many possibilities in other services sectors in the global market remain to be
explored. In particular, the Philippines has hardly made a dent in the audiovisual
services, unlike India and China, which had cracked into the entertainment
taste of the West. Even Mexico and South Korea have had enormous global
success with their telenovelas, which are avidly watched by a significant number
of Filipinos and have displaced the popularity of many locally produced shows.
The education services industry is another sector where the Philippines
may find some niche opportunities. It is worth noting that Singapore and Hong
Kong have been actively attracting educational investments and tie-ups with
major universities abroad. The Philippines is belatedly waking up to this export
prospects, particularly in teaching English to cost-conscious Asian students who
want proficiency in the language, or in giving nursing training to Chinese or
Indonesian students to cater to the large expatriate communities in their
countries. The opportunities and challenges that accompany these ‘unchartered’
services exports are addressed in the papers in this volume.
While strictly not a services export sector, telecommunications in the country
provides the necessary infrastructure support for all the services exports of the
Philippines. Hence, the volume has a chapter on the study of the information
and communication technology (ICT) and the competition policy issue arising
from the few operators in the market.
Finally, although it may look like an ‘odd man out’ among studies on services
sectors, the paper on the institutional study for a possible trade representative
office in the Philippines actually complements the rest of the book. This is
because we have commissioned the sectoral studies supposedly in service to
GATS negotiations—to provide a better understanding of services sectors that
are of potential export interests to the country and how the WTO or regional
trading arrangements (RTA) negotiations process could be used to assist these
sectors. Along the way, we need to understand how the negotiations work, and
more importantly, how the local consultation mechanism and decisionmaking
process go. Alas, we discover an existing institutional framework that leaves so
much to be desired, compared to those of other countries, not the least of which
is the lack of adequate reliance on solid research to back up their trade positions.
The paper therefore proposes some measures to improve the institutional
framework and design to make our engagement in trade negotiations more
effective.
CONTRIBUTION OF THIS VOLUME
The above services sectors, which hold strong potential for foreign exchange
earnings, are studied in greater depth in this volume on services. For most of
these sectors, information were scattered here and there, so this volume is one
of the first attempts to have a more comprehensive look, particularly highlighting
their export potential. The idea at the PIDS is to have a ‘source book’ for services
industries that would give a preliminary introduction to the structure, prospects,
and nature of competition in these sectors. We would have wanted to provide a
better view of trade barriers in services, both in the domestic and foreign markets,
as well as cover more service industries, particularly professional services, but
time and resources were not on our side. For a sector that is so little known, we
hope we have made a contribution toward greater understanding of an
increasingly important economic sector. Our hope is that other research work
would pick up from where we leave off.
REFERENCES
Bangko Sentral ng Pilipinas (BSP). 2005. Measuring international trade in services. Paper
prepared for the 3rd Development Policy Research Month Seminar on Services,
September 27-28, 2005, Dusit Hotel Nikko, Makati City, Philippines.
Department of Labor and Employment (DOLE). 2000. Yearbook of Labor Statistics. Manila,
Philippines: Department of Labor and Employment
Pasadilla, G. and M. Liao. 2006. Contribution of services to output growth and productivity
in Philippine manufacturing. Working Paper. Forthcoming.
International Monetary Fund (IMF). Balance of payment statistics. Various issues.
United Nations Conference on Trade and Development (UNCTAD). 2004. World investment
report. New York, USA: United Nations Conference on Trade and Development.
Urata, S. and K. Kiyota. 2000. Services trade in East Asia. In Trade in services in the AsiaPacific region, edited by T. Ito and A. Krueger. NBER-EASE Vol. 11. University of
Chicago Press.
World Bank. 2005. World development indicators. Washington, D.C., USA: World Bank.
Chapter 2: Cross-border Transactions in Higher Education
2
19
Cross-border Transactions in Higher
Education: Philippine Competitiveness1
Andrea L. Santiago
ABSTRACT
The international education service sector is undoubtedly growing. The
movement of students across nations is expected to grow fourfold in the next
quarter of a century. Undaunted by the current domination of English-speaking
providers, countries in Asia particularly Singapore, Mainland China, Malaysia,
and recently, Hong Kong, have taken big steps to become centers of education
in the region. Their single-mindedness in the pursuit of this vision has already
made them countries to contend with.
The Philippines is actually strategically located and may ride the wave of
west-to-east or even east-to-east student flows. However, the current state of
Philippine higher education when compared to its Asian neighbors is
discouraging. This paper shows that concerted effort is required of
policymakers, academic institutions, and the Commission on Higher Education
to enhance the quality of education at least of specific degree programs where
the country can niche. A unified voice is essential and should be backed by
appropriate fund allocation, enactment of relevant laws, as well as
establishment of an independent and credible higher education body that may
Hearfelt thanks to the following for their assistance: Ms. Editha Abergas, National Economic
Development Authority; Dr. Antonette Angeles, Ateneo De Manila University; Dr. Paz Diaz,
University of the Philippines Open University; Mr. Teodullo Estrada, Bureau of Immigration
and Deportation; Dr. Ester Garcia, former Chair, Commission on Higher Education (CHED) ;
Bro. Andrew Gonzalez, FSC, former Secretary, Department of Education, Culture and Sports,
De La Salle University-Manila; Ms. Elizabeth King, World Bank East-West-Pacific Region;
Dr. Ricardo Lim, Dean, Asian Institute of Management; Mr. Tomas Lopez, Chair, iAcademy;
Bro. Armin Luistro, De La Salle University-Manila; Dr. Francisco Nemenzo, University of the
Philippines; Dr. Cristina Padolina, CHED Commissioner; Dr. Robert Padua, former CHED
Commissioner, Mindanao Polytechnic University; Dr. Ely Santos, Chair, Southeast Asian
Interdisciplinary Studies Institute; Ms. Nelia Sarcol, Center for International Education; Dr.
Edita Tan, University of the Philippines; Dr. Tereso Tullao Jr., De La Salle University-Manila;
Dr. Editha Agnes Valenzuela, CHED; Dr. Mona Dumlao-Valisno, Office of the President of the
Philippines; and Dr. Bernie Villegas, University of Asia and the Pacific.
1
20
enforce higher standards without compromise. Only then can the Philippines
take advantage of its competitive edge in English, combined with cost-effective
education in a tourist-laden environment.
BA
CK
GR
OUND
BACK
CKGR
GROUND
Globalization and internationalization in higher education is inevitable. While
economists still argue whether globalization serves to equalize the disparity
between rich and poor countries, or whether it serves to further disadvantage
the already disadvantaged, the moves toward lowering trade barriers and
allowing free flow of resources, especially for goods, has long begun. Where
education is concerned, however, the pace is much slower. Commitments to
liberalize trade in education is said to be present but not substantive, perhaps
owing to the debate whether such moves would infringe on a nation’s rights
over social policy objectives and affect national identity, or if education can be
treated as a commodity, thus should be governed by the rules of competition.
In general, despite hesitations to make explicit commitments to the General
Agreement on Trade in Services (GATS), players in the global trade of education
services are open to simple agreements between countries as well as
universities. The scholarship and exchange programs for faculty and students
of the Ford Foundation, Fulbright, Rockefeller Foundation, Reinhard-MohnFellowship, East West Center, ASEAN University Network, and Japan International
Cooperation Agency, to name a few, prove that trade in the area of student
mobility has been ongoing way before the fuss over globalization and
liberalization commitments. It has, of course, intensified during the last decade
due to the developments in information and communication technologies (ICTs)
as well as the dynamics experienced by providing and consuming countries.
The commotion over cross-border education continues to build up as major
international education agencies predict a tremendous growth in unmet higher
education needs most especially in the Asian region. By 2025, it is projected
that worldwide learners would reach close to 200 million, four times greater
than the present figures, and foreign exports, even at the same proportions it is
today, would hit 8 million. The inflow of revenues has helped the economies of
traditional English providers of foreign education such as the United States (US),
the United Kingdom (UK), Canada, and Australia, as public spending on education
decreases and the proportion of private higher education institutions (HEIs)
increases. The popular destination countries, however, are faced with the small
but definite moves of Singapore, Malaysia, and China that are positioning
themselves to become knowledge hubs in the Asia-Pacific region. If successful,
the popular sources of foreign students would be lost.
The developed countries are obviously looked upon as providers of
education services. Among them, the most notable are the US, UK, Germany,
France, and Australia. The World Bank reports that developed countries can
boast of producing the most number of scientists per capita as well as producing
a greater portion of scientific articles and patents. These quality indicators
serve as a strong attraction for developing countries believing that improved
21
education, especially at the tertiary and post-tertiary levels, can help boost their
own economies. After all, educated people are said to be more productive in
society.
Concomitantly, the limited resources of many developing countries in Asia,
Africa, and Latin America prevent them from meeting the growing demands for
higher education. Not only is there a financial toss among the different sectors
in society, there is also a dilemma on whether limited financial resources should
be allocated to basic education as against higher education. Thus, many have
looked toward the private sector to meet the gaps in the area. But even if the
private sector has been moving toward an international curriculum in higher
education, the limited spaces and the question of quality still make foreign
education attractive.
As developing countries are driven to seek better level of quality education
to fulfill its unserved demand, the competitiveness and pride of developed
countries act as a magnet that further draws more foreign consumers toward
them. In effect, trade in services of exporting countries improves.
With continued interest in education service provided by developed
countries, the inevitable issue of cost effectiveness comes in. Consequently,
other forms of service delivery are being explored especially in areas where
well-established local HEIs tie up with foreign institutions—both at the regional
and global levels—even to the extent of commercial presence. Thus, the future
in higher education would see the continued growth of alliances and consortia
between and among universities in different countries, where English would be
the second language. This scenario is expected, notwithstanding trade
negotiations brought about by the GATS. Denman (as cited in Chan 2004)
points out that there has been a dramatic increase in the creation of international
university organizations, hitting close to 180 in 2000 from just only 90 two
decades earlier.
Amid the excitement over cross-border education is the Philippines, the
largest English-speaking country in Asia. Positioned as a cost-effective alternative
to acquiring higher and advanced education degrees in a tourist-laden
environment, the Philippine government hopes to further attract students
primarily from China, Taiwan, South Korea, and Thailand. Efforts in the past year
have increased the intake of foreign students, most likely offsetting the number
of students who go abroad to take further studies. But can the Philippines
compete with its Asian neighbors in the realm of cross-border education?
It would appear that the Philippines had lost its competitiveness in the
trade of many goods and services. Neighboring countries have been able to
surpass its gains due to the strong and focused commitment of their governments.
In education, the Philippines has long been known to be the largest Englishspeaking country outside of the US, UK, Australia, and New Zealand. Yet even
this advantage is currently threatened.
However, the potential for the Philippines in the education services trade
is tremendous. It has the cost-effective advantage of attracting students in the
region to take further studies in its schools instead of pursuing them in Western
22
countries. But the country has not been able to harness this potential to the
fullest unlike Singapore, Malaysia, and China that are singlemindedly pursuing
cross-border transactions. Their governments currently use available modes of
supply to build their capacities in teaching and research. To quickly build worldclass institutions, they have allowed the entry of foreign academics, programs,
and institutions, albeit in a controlled manner. For instance, Singapore and
Hong Kong have partnered with such universities as Harvard, Wharton, and
Northwestern Kellogg to strengthen their higher education sector. At the same
time, they have developed incentives to attract locals pursing their degrees
abroad to return and work for national development.
This focus and determination is not present in the Philippines, which is
characterized by an unusually high dependence on the private sector to meet
the growing demands for education. Marred by a highly politicized setting and
inadequate resources, the education sector struggles in its aim to provide
education for the growing population at an affordable rate and still maintain a
decent level of quality. With these conditions, the Philippines can only hope to
find a niche and attract foreign students and academics into specific programs
and institutions, hopefully with the concerted support of government. If the
government is serious in its desire to compete internationally, policymakers
must address squarely the barriers to achieving this, including the enactment of
laws to facilitate the influx of education services trade.
PRINCIP
AL ISSUES AND CONCERNS
PRINCIPAL
IN EDUCA
TION SER
VICES
EDUCATION
SERVICES
Education is one of the services sectors where negotiations under the GATS
have been deliberately slow. The 1994 Uruguay Round of Multilateral Trade
Negotiations yielded commitments from 42 World Trade Organization (WTO)
members and more than 80 percent of the 30 member-countries of the
Organisation for Economic Co-operation and Development (OECD) (OECD/CERI
2002). The snail pace progress in the education services trade is attributed to
many factors and could be best explained by the modes of supply. Trade in
education services essentially looks at the mobility of people, programs, and
institutions. In the GATS, these three occur in four modes though not necessarily
in exclusivity. These modes are cross-border supply, consumption abroad,
commercial presence, and presence of natural persons (OECD/CERI 2002).
A major concern with respect to cross-border supply or distance education
has to do with intellectual property rights since some countries may disregard
international agreements regarding this matter (Atkinson 2001; Lenn 2001;
Larsen et al. 2002; Salmi 2002). The question of quality of education comes
into play since there is uncertainty about the level of involvement a faculty
would have in ensuring that its students understand concepts, a task that may
be more evident in the traditional classroom setting (Atkinson 2001). Other
concerns have to do with restrictions on the use and importation of educational
materials, considered tools of the trade (Copeland 2002; Sauve 2002). For
23
instance, Lenn (2001) disclosed that some countries with strong religious
influence restrict the entry of medical or health materials that show the naked
body. On the technology side, another hurdle would be the barriers of access to
ICTs such as national telecommunications laws that restrict the use of satellites
and receiving dishes to transmit educational content (Lenn 2001; Salmi 2002).
Finally, on the consuming end, is the unreliable access of potential students to
the Internet.
Consumption abroad or student mobility also has its share of setbacks.
The easier ones to hurdle would involve the granting of student visas in the light
of the tightening security measures adapted especially by the US. Others refer
to funding opportunities and foreign exchange requirements for the students to
cover expenses such as tuition, accommodation, and travel (Hirsch 2002;
Bernardo 2003). There is also a concern whether the credits earned or the
degree obtained would be recognized by the home country institutions (Atkinson
2001; Lenn 2001; Sauve 2002; Tullao 2003). Finally, many countries have
had to deal with the issue of brain drain. This is a tricky concern as there are
sometimes more university graduates than there are opportunities in the local
market (The Futures Project 2000).. Some argue that work experience in a
foreign country actually contributes to brain gain as skills and networks acquired
outside can be useful upon the return of these individuals to their home country
(OECD 2004a).
Of all four modes, commercial presence offers the greatest concern in the
trade of education services. There is the fear of consuming countries that
higher education provided by developed countries, particularly in their local
territory, may interfere with their social objective of educating their citizens on
local values and content (Altbach 2001). It is also feared that the profitmaximization objectives of “for-profit” institutions, especially those that are not
university based, may lead to the commercialization and massification of
education that, in turn, may lead to lower quality. Consequently, these questions
arise: Who determines the quality of education? Which body should accredit
global education institutions, if such is necessary to maintain world-class
standards in education (Altbach 2001; Van Damme 2002; UNESCO 2003)?
Already, the Hong Kong Council of Academic Accreditation has helped organize
with 50 member-countries the International Network of Quality Assurance
Agencies in Higher Education.
Other concerns on commercial presence have to do with the desire of
some national governments to impose tighter control over foreign HEIs. Such
controls can come in the form of local partnership requirement, minimum number
of local seats in the board, and limited foreign ownership (Tullao 2003)..
Apparently, some providing countries have experienced or expressed
apprehensions regarding limitations on ownership and foreign equity,
discrimination in tax treatment for foreign institutions, restrictive policies on the
repatriation of earnings, as well as excessive fees imposed on licensing or
royalty payments (Sauve 2002). It is these countries that look toward the GATS
commitment to improve their level of competitiveness.
24
The fourth mode of supply, also known as the presence of natural persons,
has similar concerns with student mobility and a little more. There are the usual
visa regulation issues that restrict the free flow of academics (Lenn 2001).
From the point of view of the providing country, there is risk that these academics
may seek more permanent employment given the more attractive salaries and
work conditions in the host country (Altbach 2003). On the part of the consuming
country, this would mean a loss of local capacity in education thereby defeating
the purpose of utilizing the gains of cross-border education for national
development (Pillay 2003; Sauve 2002; Salmi 2002). Altbach (2003) notes,
however, that academics generally maintain scientific and academic
relationships, granting them opportunities to return to their host country, thus
they do not desire for a permanent stay after an exchange program.
For all modes of supply, the value of international education lies in mutual
recognition. This recognition allows for mobility of students so that studies may
be pursued in foreign countries even partially. This would entail that foreign
institutions recognize units already taken in local HEIs as partial credits to a
course, and that units taken in foreign HEIs are also recognized by local HEIs.
The pursuit of higher education degrees, started and completed abroad, also
entails recognition by the home country.
Other forms of international and mutual recognition call for countries and
their institutions to recognize degrees offered by HEIs in other countries as
comparable to their own. This would mean that graduates from a local university
may qualify for advanced degrees in a foreign institution without the need to
take bridging units prior to being accepted in another institution. This would
also mean that graduates with local degrees may qualify for employment in
other countries and their diplomas likewise recognized as full credentials.
Similarly, recognition entails that professional credentials that result from meeting
the requirements of local professional regulation commissions are also
considered comparable with foreign countries’ own standards for professionals.
This also applies to scientists and academics, who seek to work in a foreign
university in a visiting capacity.
In many instances, however, there is lack of international comparability
and mutual recognition of credentials between developed and developing
countries, with the latter having to constantly negotiate for recognition. In the
Asia-Pacific region, Philippine education officials observed that it has taken
time for Japan to recognize credit units, degrees, and professional credentials
taken abroad, whether from a developed or a developing country, as comparable
to their own. However, progress has been made with the efforts of the AsiaPacific Economic Cooperation (APEC) Human Resource Working Group that has
sought for recognition of qualifications within the region.
The quality of education seems to be at the core of internationalization
and trade in higher education. The issues of recognition of academic and
professional qualifications stem from the perceived difference in quality
standards. This difference in quality standards compels students from one
country to seek their education in another. But should this be an exercise of the
25
individual? Shouldn’t governments be more proactive on the issue of crossborder transactions?
OECD (2004a) presents four approaches to cross-border education that
countries may adapt. The first is the mutual understanding approach whereby
international mobility is supported through scholarships, exchange programs, and
academic partnerships between institutions. The second approach calls not only
for promoting the education sector but goes a step further by encouraging talented
students to work in the host country. This is called the skilled migration approach.
For the producing countries, the revenue-generating approach to cross-border
education looks at international mobility as an additional source of income. In
some institutions especially in the UK, the tuition fee structure for international
students is much higher. Finally, from the point of view of the consuming country,
international education can be looked upon as a means to build capacity quickly.
Thus, scholarships are channeled to academics and civil servants who are expected
to transfer the knowledge they obtained from another country to their home country.
Twinning programs aimed at students that transfer knowledge from a foreign to a
local university also help the capacity-building process.
Governments should decide how they intend to participate in the higher
education trade. While the approaches mentioned are not mutually exclusive,
these require resources. Consequently, knowing full well where to channel
limited resources allows a country to better position itself.
In the Philippines, there are two primary restrictions that may impede crossborder trade in the area of commercial presence and movement of natural
persons. First, the 1987 constitution disallows a foreign entity from having 100
percent ownership of a business in the country. Second, there are restrictions in
the practice of foreign professionals in the country. This stems from Republic
Act 5181, which prescribes permanent residency and reciprocity in the practice
of a profession (Tullao 2003).
It should also be noted that under Executive Order No. 285, only authorized
HEIs are allowed to admit foreign students. These include schools with programs
accredited by the Federation of Accrediting Associations in the Philippines (FAAP)
or declared by the Commission on Higher Education (CHED) as Centers of
Excellence or Centers of Development. Also authorized to admit foreign students
are schools allowed by the Bureau of Immigration, including the Standard of
Training, Certification, and Watch-Keeping for Seafarers (STCW)-compliant maritime
schools. Finally, to operate abroad, a CHED endorsement is necessary. It is given
only to institutions that have at least a Level 2 accreditation.
ST
ATE OF PHILIPPINE HIGHER EDUCA
TION
STA
EDUCATION
The Philippine higher education system, unlike in most other countries, has
been helped greatly by the private sector. To date, CHED databases reveal more
than 2.5 million students enrolled in the 1,526 HEIs in the country, of which
1,353 are privately held. The country has the highest proportion of private
institutions in higher education in the world, followed by Japan and Korea (Guruz
2003; UNESCO/OECD 2003).
26
The higher education sector is under the jurisdiction of the CHED, created
in 1994 in response to the need for education reforms. It is composed of a set
of commissioners duly appointed by the President of the Philippines using specific
criteria set forth in its enacting law. The daily operations are managed by an
executive director who supervises the offices of program and standards, student
services, policy, planning, research, and information; 15 regional field offices;
the finance, administration, and legal divisions; and a special unit on
international affairs services (IAS). As mentioned in CHED’s website, it is the IAS
that promotes the country’s higher education sector in the international sphere
and seeks recognition of academic and professional qualifications.
Upon its creation, CHED began to establish its information systems and
monitoring mechanisms. It identified degree programs with exceptional quality
standards and dubbed the programs as either Centers of Excellence (COE) or
Centers of Development (COD), with the commitment of the selected universities
to help upgrade the standards of other HEIs. CHED records 275 programs of 85
HEIs declared either COEs or CODs.
Quality assurance mechanisms were also set in place. There are four
accrediting bodies and one superbody—the Federation of Accrediting
Associations in the Philippines (FAAP). The agencies that accredit private HEIs
are the Philippine Accrediting Association of Schools, Colleges, and Universities
(PAASCU) for Catholic schools, the Philippine Association of Colleges and
Universities–Commission on Accreditation (PACU-COA) for nonsectarian schools,
and the Association of Christian Schools and Colleges-Accrediting Agency, Inc.
(ACSC-AAI). For public HEIs, there is the Accrediting Agency of Chartered Colleges
and Universities in the Philippines (AACCUP).
The accrediting agencies use a combination of self-report, peer evaluation,
and on-site visit to determine the quality of programs, faculty, staff, and facilities.
In addition, the PAASCU solicits the views of students, alumni, and the society at
large on their perception of quality, and ties all output with statistical information
on graduation rate, performance on licensure examination, and the like. On the
other hand, the AACCUP, in its 10 years of existence, has revised its
instrumentation four times to ensure relevance and improve standards.
However, in a system where the members are also its owners, credibility is an
issue.
It should be noted that accreditation is voluntary and sought by institutions
for the prestige and privileges attached to it, such as autonomy from supervision
for higher level accreditation. However, while there are accrediting bodies, three
of which are members of the International Network for Quality Assurance in
Higher Education, not all HEIs and their programs have gone through accreditation.
For instance, of the 10,240 baccalaureate programs offered by the 1,526
HEIs in the country, only 11.32 percent has been accredited as of 2002-2003.
The public sector has a higher accreditation rate of 16.81 percent compared
with the 9.36 percent in the private sector. Most of the programs (76%) were
accredited at Level 2. At the masteral level, the accreditation rate is lower at
9.62 percent, with the public sector again showing higher accreditation rates.
27
The summary of accredited programs by sector is shown in Table 1. In terms of
HEIs, only 11 percent have baccalaureate programs that are accredited by the
FAAP and AACCUP. The public sector HEIs also show better accreditation rates
with 17 percent compared with only 9 percent in the private sector.
Table 1. Number of FAAP - and AACCUP-accredited programs, SY 2002-2003
Sector Programs
Baccalaureate
Masteral
Doctoral
Public
No. of programs
No. of accredited programs
Accreditation rate
2,695
453
16.81%
1,312
121
9.22%
266
49
18.42%
Private
No. of programs
Accreditation rate
7,545
706
9.36%
1,660
99
5.96%
265
9
3.40%
Total HEIs
No. of programs
Accreditation rate
10,240
1,159
11.32%
2,972
220
7.40%
531
58
10.92%
Source: Compiled by CHED MIS from reports of the FAAP and AACCUP.
On the average, there is a student population per HEI of only 1,700 (Table
2). At this level, private HEIs have complained about the competition with
public HEIs. Consequently, many HEIs had to forego investments in research so
that the teachers’ hours may be spent in the classroom. For the public HEIs,
Table 2. Average number of students per HEI, SY1 1994-1995 to 2001-2002
Year
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
Source: CHED (2003).
Student enrollment
No. of HEIs
Average enrollment
1,871,647
2,017,972
2,061,300
2,067,965
2,279,314
2,373,486
2,430,842
2,466,056
1,185
1,287
1,316
1,374
1,382
1,404
1,380
1,428
1,579
1,568
1,566
1,505
1,649
1,691
1,761
1,727
28
research is also compromised due to limited government funds for research.
On the average, 80 percent of the budget of state universities and colleges
(SUCs) is allocated for personnel services, 17 percent for operating expenses,
and only 3 percent for equipment/capital investment. This is in contrast to
private HEIs that allot 60 percent of their budget to personnel services, 30
percent to operating expenses, and the rest to improvement of facilities. For
both private and public sectors, however, there is little allocation for research
(Tullao 2000).
Despite the growing number of public HEIs, the 15 billion budget for CHED
has remained quite steady. This effectively decreases the amount allocated to
each HEI. Concerned about the equity of distribution, CHED commissioned a
study on the costs of degree programs as its initial step to adapt a normative
financing approach to budget allocation. The study revealed the range of costs
required to educate a single student up to the completion of a particular degree
given the size of the institution and its accreditation level, or the lack thereof
(Santiago et al. 2004).
Historically, the most popular course is business administration. Due to its
large enrollment, it would cost an HEI anywhere from PhP85,000 to PhP110,000
to educate one student through the entire four-year course. Teaching agribusiness
raises this cost by PhP70,000 per student. On the other hand, less populated
courses like BS Fishery cost an HEI PhP600,000 to educate one student. Thus,
in many institutions, there are cross-subsidies. In general, one could expect
course delivery to be between PhP20,000 and PhP25,000 per student per year
(Santiago et al. 2004).
The study of the higher education system remains meaningless without a
corresponding study of the labor market. Orbeta (2003) presents a
comprehensive model that clearly shows the relationship among education,
labor market, and the countries’ own development objectives. In his book,
Orbeta confirms the high enrollment rates in higher education, even at the
tertiary level, and the corresponding increase in the qualifications of the labor
force. However, it should be pointed out that even college graduates are not
spared from unemployment and underemployment. The proportion rose to 16
percent in 2000 from 12 percent in 1976 for unemployment, and 37 percent
from 23 percent for underemployment. Consequently, many nationals have
opted to seek employment in other countries. For employability purposes,
however, their professional qualifications must first be recognized.
It is the Professional Regulation Commission (PRC) that issues the
certificates of registration to professionals. Under the PRC Modernization Act of
2000, the body is tasked to administer, implement, coordinate, and supervise
various boards of examiners. It is consequently the role of the PRC to seek
recognition of Philippine professionals abroad. Unfortunately, with the removal
of the Continuing Professional Education (CPE), the country’s professionals have
become less competitive (Tullao 2003; Udano 2003).
29
MEASURING PHILIPPINE COMPETITIVENESS
IN HIGHER EDUCA
TION TRADE
EDUCATION
In its brochure, CHED has positioned the Philippines as a cost-effective alternative
for securing higher education. Primarily, the tuition fees and living expenses are
considered reasonable, and travel to and from the country is affordable. Higher
education is also primarily taught in English. The country is also a tourist haven,
with Asians, most expecially Chinese, as the target market.
How the Philippines positions itself should, however, be taken in context
with factors that influence the choice of international students. A study by Follari
(2004) has shown that while international students have largely chosen Englishspeaking countries as their study destination, their primary consideration in their
choice of institution is the perceived quality of education. Consequently, they
look for world-recognized institutions, safe environment, affordable cost of living,
and employment prospects overseas. While the study was limited to Australia as
the country of destination, the chief factor of quality is universally applied as
emphasized by international organizations in their reports on higher education.
Quality of Education
In the 2004 higher education supplement of the Times of London, the top
universities in the world still come from the US, UK, Germany, and Australia. In
the same list, Asian institutions belonging to the top 50 include the National
University of Singapore (18), Kyoto University (29), Hong Kong University (39),
Indian Institute of Technology (41), Hong Kong University of Science and Technology
(42), and Nangyang University (50). Evidently, in terms of world-class recognition,
the Philippines is not yet a player. Indeed, CHED’s reports reveal that the country
is able to attract only 2,000 to 4,000 foreign students each year compared to the
two million students studying abroad (Table 3). This performance is similar to
Thailand (Table 4).
Table 3. Number of foreign students studying in Philippine HEIs per school year
School
year
Total
number
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
2002-2003
4,791
5,284
4,864
4,419
3,516
2,602
2,323
2,836
4,667
Sources: CHED (2003); CHED Office of Student Services.
Increase/decrease
(%)
10.29
-7.95
-9.15
-20.43
-26.00
-10.72
22.08
64.56
30
Table 4. Foreign students enrolled in selected Asia-Pacific countries, 2001
Asia
OECD nations
Australia
Japan
Korea
New Zealand
North
South
Oceania Africa America America Europe Unknown Total
77,849
58,170
3,299
7,971
6,534
443
28
1,200
3,837
676
44
143
5,477
1,474
220
648
920
761
41
106
12,763
2,106
135
998
Non-OECD nations
India
4,004
Indonesia
266
Malaysia
16,217
Philippines
1,656
1,445
Thailand
31
31
57
28
30
2,558
3
1,552
69
19
275
26
67
503
113
0
0
24
4
4
120
51
553
63
147
3,409
7
83
3
110,789
63,637
3,850
11,069
422
6,988
377
18,892
2,323
2,508
750
Source: OECD (2004a).
Narrowing down the top universities in Asia in terms of number of foreign
students, the 2000 Asiaweek list included only three Philippine schools, namely,
De La Salle University (ranked 70), Ateneo de Manila University (74), and the
University of Sto. Tomas (75). These three schools had the largest number of
foreign students in school year 2002-2003. There were more than 300 foreign
students at the De La Salle schools, 280 in Ateneo, and 250 in UST (Table 5).
The University of the Philippines (UP)-Diliman was also able to attract about 225
international students. Other HEIs, even if they were not considered top
universities in Asia or in the world, were able to attract a good number of foreign
students as well.
Table 5. HEIs with the most number of foreign students, SY 2002-2003
Name of HEI
Lyceum-Northwestern
Virgen Milagrosa University Foundation
Adventist University of the Philippines
Cebu Doctors College
Silliman University
Adamson University
AMA Computer College
Ateneo De Manila University
Region
Number
of foreign
students
1
1
4
7
7
NCR 2
NCR
NCR
112
188
180
207
112
119
153
288
31
Name of HEI
Region
De La Salle University-College of St. Benilde
De La Salle University-Manila3
Fatima Medical Science Foundation
University of Manila
University of Santo Tomas
University of the East-Manila
University of the Philippines-Diliman
Saint Louis University
University of Baguio
All Others
Total
NCR
NCR
NCR
NCR
NCR
NCR
NCR
CAR
CAR
87
Number
of foreign
students
232
100
217
157
252
170
225
203
195
1,557
4,667
Source: CHED Office of Student Services.
Similar to other destination countries, most of the international students
in the Philippines come from other Asian countries. Over a six-year period, the
largest delegation came from Korea (4,000), followed by China (2,800) and
Taiwan (1,600). However, as shown in Table 6, over the same period, the
Philippines was also able to attract a sizeable number of American students
although records by the Open Doors (1997, 1998, 1999, 2000, 2001, 2002,
2003) show disparate figures (Table 7).
Of the top 10 courses enrolled by foreign students in the Philippines, the
most popular are undergraduate courses in arts and sciences, followed by
medicine, business administration, computer studies, and dentistry (Table 8).
Education accounts for only four percent of the foreign students enrolled in the
top 10 courses. At DLSU-Manila, for instance, education is not a popular choice
among foreign students in the undergraduate level but a master’s degree in
education is the most popular advanced degree in that university. In the US, the
most popular courses studied by international students are business, engineering,
mathematics, and computer science.
At the graduate level, the institution reputed to attract the most number of
foreign students is the Asian Institute of Management (AIM). While the AIM was
not recognized by the Financial Times as belonging to the top 100 MBA schools
in the world, the Asiaweek ranked it as third in terms of reputation among
Master of Business Administration (MBA) schools in Asia. It was also recognized
as having the best executive MBA in Asia.
In addition, the AIM holds the prestige of being the only educational
institution in the Philippines to have gained recognition from the European
Quality Improvement System (EQUIS) and the Association to Advance College
Schools of Business (AACSB). It has 30,000 alumni.
32
Table 6. Number of foreign students in Philippines HEIs by national origin
Nationality
American
Bangladesh
British
Canadian
Chinese
Indian
Indonesian
Iranian
Japanese
Korean
Malaysian
Nepalese
Sudanese
Taiwanese
Thai
Vietnamese
All Others
Total
1997-1998
1,111
36
87
80
729
112
217
109
89
823
35
108
46
221
124
16
476
4,419
1998-1999 1999-2000
860
92
67
49
575
83
128
63
51
676
25
117
39
265
107
22
297
3,516
764
52
27
48
337
57
70
81
27
558
19
138
54
144
38
13
175
2,602
2000-2001 2001-2002
452
74
29
43
243
66
127
54
29
394
20
97
31
325
32
54
253
2,323
454
61
25
33
300
97
122
122
34
604
18
113
49
434
83
36
253
2,838
2002-2003 Total
748
89
48
60
630
184
256
185
97
1,069
22
138
81
474
108
82
396
4,667
Source: CHED (2003).
Table 7. Number of Americans in Philippine HEIs, SY 1997-2002
School Year
Number of
Americans
1993-1994
1994-1995
1995-1994
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
57
44
60
71
108
129
107
108
102
Source: Extracted from Open Doors (2000, 2001, 2002, 2003).
4,389
404
283
313
2,814
599
920
614
327
4,124
139
711
300
1,863
492
223
1,850
20,365
33
Table 8. Top 10 courses enrolled in Philippine HEIs by foreign students,
SY 2002-2003
Top 10 Courses
Level
Doctorate
Master in Business Administration
Master of Arts
Medicine
Master of Science
Arts and Sciences
Business Administration
Computer Studies
Dentistry
Education
Engineering
Advance
Advance
Advance
Advance
Advance
Higher
Higher
Higher
Higher
Higher
Higher
Percentage
7
4
6
11
4
30
10
9
9
4
6
Source: CHED Office of Student Services.
In the last five years, the AIM was able to attract 618 foreigners for its three
major degree programs, which is approximately 38 percent of the total student
enrollment. The full tuition fee rate is US$12,000. While some of the foreign
students are financed through scholarships grants, it is estimated that revenues
from payment of tuition fees and use of dormitory facilities by foreign students
reach over US$2 million annually.
Table 9 shows the breakdown of foreign students at the AIM per sending
country. As can be seen, the proportion of students from India is unparalleled.
Further inquiry into this phenomenon reveals that Indian students who go to the
AIM are those who wish to pursue advanced degrees but cannot enter the
prestigious Institute of International Management in India. They see the AIM as
the next best choice especially given the exchange program component of its
MBA course that allows the best students to attend top universities in the US
and Europe for a term while paying the lower tuition fees at the AIM.
AIM’s student exchange program began in 1997 when it was invited to
become a member of the Program in International Management (PIM). This
paved the way for the signing of about 60 memoranda of understanding/
agreement on student exchange with member-institutions and other foreign
HEIs. There are about 30 active affiliated institutions where about 40 percent
of MBA students are allowed to take one semester for credit.
Besides the AIM, other HEIs also have cooperative alliances with foreign
institutions for both their undergraduate and graduate programs. The
international cooperation programs are in the areas of faculty and student
exchange, joint-research, and offshore education. There are also active twinning
and joint degree programs. In a 1998 CHED survey, it was found that there were
107 Philippine HEIs with ongoing collaborative programs with 487 foreign
institutions of higher learning in 28 countries in 33 fields or disciplines (UNESCO
34
Table 9. Number of foreign students at AIM’s major degree programs
Countries
Bangladesh
Bhutan
Cambodia
Canada
China
Czech Republic
France
India
Indonesia
Japan
Lao PDR
Malaysia
Maldives
Mongolia
Myanmar
Nepal
Russia
Singapore
Taiwan
Thailand
United Kingdom
United States
Vietnam
Others
Total
1999
2000
2001
2002
3
3
1
2
6
5
2
2
3
4
2
11
6
1
6
2
48
17
1
3
4
59
21
2
4
2
46
7
3
1
26
22
3
4
2
3
2
3
1
2
7
1
90
5
4
2
6
2
11
1
121
109
2003
2004
1
3
1
1
49
5
3
1
2
81
5
1
1
1
2
1
1
1
4
38
1
1
1
1
4
7
12
5
76
120
102
Total
8
18
15
1
28
1
1
309
77
6
11
11
1
2
7
50
1
1
1
12
1
6
48
2
618
Source: AIM Office of Admissions.
2000). UP-Diliman alone has alliances with over 50 institutions in more than a
dozen countries (CHED undated).
If recognition by other universities is a measure of the quality of education,
it can be assumed that the Philippines, through its recognized institutions, can
be considered a potential study destination for Asians.
Safe Environment
Hurdling the quality factor, the Philippines still has to contend with providing a
safe environment for international students. Safety has been a major concern
considering the sensationalized crime reports and the incidents of terrorism in
the Philippines. Many attribute the poor safety environment to the unstable
economic and political condition.
Seemingly, the weakness in the education sector is parallel to the weakness
of the country as a whole. The IMD World Competitiveness Yearbook of 2004
35
shows the Philippine’s overall performance to be declining. Previously ranked at 35
in 2000, the 2004 report puts the country at 52. The 2003 report of the Asian
Development Bank (ADB) also shows the Philippines not to be faring well.
There are two general measures of national competitiveness used by the
World Economic Forum. The first refers to the growth competitiveness index
(GCI), which is determined by technological capacity, quality of public institutions,
and quality of macroeconomic environment. The GCI measures the ability of a
nation to sustain its growth. The second measure is the current competitiveness
index (CCI) that looks at the microeconomic foundation of a country’s gross
domestic product (GDP) and determines if the GDP per capita can be sustained
in the long run. The scores and ranking of selected countries in Asia for the GCI
and CCI are found in Tables 10 and 11, respectively. Using these indices, the
data show that the Philippines has continually been outperformed by Korea,
Malaysia, Thailand, and China.
A better educated society would lead to a stronger economic base, and
investments in science and technology are paths to a better economy (ADB
2003a). In more industrialized societies, anywhere from 1.5 percent to 3.8
percent of the GDP is spent on research and development (InterAcademy Council
2003). This is not the case for developing countries that have to spread their
budgets quite thinly.
If safety is tied to the conditions of a country, it would appear that the
Philippines cannot assure international students that it is a safe study
destination. This is in contrast to Singapore where the economy is stable and
the crime rate is low.
Table 10. Growth competitiveness index and components, 2001
Economy
GCI rank
Singapore
Taipei
Hong Kong
Korea
Malaysia
Thailand
China
Philippines
India
Viet Nam
Sri Lanka
Indonesia
Bangladesh
4
7
13
23
30
33
39
48
57
60
61
64
71
Source: ADB (2003a).
Public
Macro
GCI Technology
institution
economic
score index rank Score index Score environment Score
rank
index rank
5.84
5.59
5.47
5.13
4.83
4.53
4.4
4.16
3.84
3.77
3.74
3.69
3.04
18
4
33
9
22
39
53
40
66
65
59
61
74
5.44
6.19
4.93
5.66
5.36
4.54
4.05
4.53
3.54
3.56
3.82
3.76
2.83
6
24
30
44
39
42
50
64
49
63
58
66
75
6.27
5.3
6.01
4.25
4.53
4.36
4.1
3.53
4.11
3.58
3.84
3.35
2.48
1
15
4
8
20
16
6
28
45
37
60
41
48
5.52
4.69
5.12
4.94
4.59
4.68
5.04
4.42
3.88
4.15
3.56
3.96
3.81
36
Table 11. Current competitiveness index and components, 2001
Economy
Singapore
Hong Kong
Taipei
Koea
India
Malaysia
Thailand
China
Philippines
Indonesia
Sri Lanka
Viet Nam
Bangladesh
Current
competitiveness index
rank
2001
2000
1999
10
18
21
28
36
37
38
47
54
55
57
62
73
9
16
21
27
37
30
40
44
46
47
12
21
19
28
42
27
39
49
44
53
53
50
Company
Quality of national
2001 GDP
operations and business environment per capita
strategy rank
rank
(PPP adj.)
2001 2000 1999
2001
2000
1999
15
23
18
25
40
30
47
38
43
51
14
24
17
27
48
25
43
31
34
47
5
14
21
28
37
30
40
45
46
47
12
18
22
30
43
31
39
50
46
52
50
51
9
16
21
30
34
38
39
47
54
57
55
64
73
52
49
15
21
20
26
43
37
42
39
45
50
58
64
72
23,000
24,448
17,223
17,311
2,403
8,924
6,489
3,953
3,956
3,014
3,512
1,974
1,561
Source: ADB (2003a).
Af f or
dable TTuition
uition FFees
ees and Cost of Living
ordable
In brochures prepared by the CHED, the Philippines is being positioned as a
relatively inexpensive destination alternative to securing a degree in higher
education taught primarily in English. At today’s exchange rate, it would cost
annually anywhere from US$1,000 to US$3,000 to pay the tuition and other
incidental expenses at the undergraduate level. At the AIM, tuition fee alone
costs US$12,000. However, in computations made by the International
Comparative Higher Education Finance and Accessibility Project (ICHEFAP) of
the Graduate School of Buffalo University using 1998 purchasing power parity
(PPP; US$1 to PhP12.13 for 1998), these expenses could range from US$3,870
to US$12,877 (Table 12).
Using the computed PPP, the cost of education in the Philippines is higher
than that in Singapore, both in the low and in the high ends (Tables 13 and 14).
Using 2001 data, it is costliest to study in Hong Kong, with tuition and living
expenses ranging from US$10,000 to US$25,000. Higher end schools in Korea
also reached the US$20,000 mark.
A recent study by the International Development Programme (IDP) of
Australia (Follari 2004) computed the total cost that international students
would have to pay to complete various degree programs. Despite the expensive
degrees in the US, it is still the most popular destination for both undergraduate
and graduate levels (Table 15). This implies that costs alone do not determine
student mobility. In countries where tuition is relatively low or nonexistent, the
number of international students is not necessarily large (OECD 2004a).
37
Table 12. Tuition and living costs in the Philippines, 1999, in PhP and US$
Expenses
PhP
Public Low
US$ (at PPP
US$1=PhP12.13)
Private High
US$ (at PPP
US$1=PhP12.13)
500
50,000
24,000
4,000
78,500
36,000
26,000
2,500
13,200
77,700
156,200
16
692
400
165
1,273
594
660
618
725
2,597
3,870
200
Upfront fee
8,400
Tuition fee
4,850
Other fees
2,000
Books and incidentals
15,450
Subtotal
7,200
Lodging
8,000
Food
7,500
Transportation
Other personal expenditures 8,800
31,500
Subtotal
46,950
Total
PhP
41
4,122
1,979
330
6,472
2,968
2,143
206
1,088
6,405
12,877
Source: ICHEFAP Web site (www.gse.buffalo.edu.org).
Table 13. Tuition and living costs in selected Asian countries, low-end in US$, 2001
Expenses
Philippines1 Singapore2
Upfront fee
16
Tuition fee
692
Other fees
400
165
Subtotal
1,273
Lodging
594
Food
660
Transportation
618
Other personal expenditures 725
Subtotal
2,597
Total
3,870
0
1,023
57
114
1,194
227
341
136
682
1,386
2,580
Korea3 Japan4
India5
Hong China7
Kong6
23
195
1,945
305
2,468
3
20
9
73
105
37
552
116
24
729
834
62
5,048
12
180
5,302
1,166
1,199
1,101
1,484
4,950
10,252
293
1,220
1,513
3,981
1,916
2,974
39
295
5,224
71
735
697
1,701
3,204
8,428
0
518
104
622
259
1,936
52
258
2,505
3,127
1
1998 PPP US$1= PhP12.13; 21999 PPP US$1= S$1.76; 31999 PPP US$1= won 656; 41999 PPP US$1=
¥161; 52001 PPP US$1= Indian rupees 11.78; 61999 PPP US$1= HK$8.34; 71999 PPP $1= Y1.93.
Employment Prospects
Orbeta (2003) noted that despite an increasing number of educated Filipinos,
the rates of unemployment and underemployment are still high. Providing jobs
to international students after they have obtained their degrees in the country
may displace local job seekers. Consequently, there can be no promise of
employment in the country. Indeed, the employee profile of companies in the
38
Table 14. Tuition and living costs in selected Asian countries, high-end in US$, 2001
Expenses
Philippines Singapore
Upfront fee
41
Tuition fee
4,122
Other fees
1,979
330
Subtotal
6,472
Lodging
2,968
Food
2,143
Transportation
206
Other personal expenditures 1,088
Subtotal
6,405
Total
12,877
0
8,778
80
227
9,085
773
818
455
1,420
3,466
12,551
Korea
1,537
10,136
1,524
13,197
2,741
1,372
293
3,659
8,065
21,262
Japan
1,840
5,283
2,173
492
9,788
4,208
2,102
294
2,601
9,205
18,993
India
17
37
50
51
155
255
1,019
39
19
1,332
1,487
Hong
Kong
China
90
5,048
17
719
5,874
10,162
5,600
612
2,777
19,151
25,025
0
4,145
518
4,663
2,591
2,072
518
1,554
6,735
11,398
Table 15. Tuition and living costs across major programs in selected countries,
in US$
Bachelor Bachelor Bachelor of
Master of
Master
Mater of
of
of
Information
Business
of
Information
Business Engineering Technology Administration Engineering Technology
Australia
60,464
Canada
71,039
China
31,731
Hong Kong
38,192
New Zealand 59,331
Singapore
54,938
UK
77,890
US-Private 167,828
US-Public
119,882
90,019
81,037
32,812
38,202
88,699
77,962
91,670
167,828
119,882
61,818
59,909
32,836
38,198
62,745
77,962
91,208
110,292
33,856
39,844
16,901
30,506
32,268
22,599
42,870
92,580
69,085
46,013
40,215
24,167
45,296
35,364
24,242
23,884
46,338
42,429
41,771
64,249
31,136
30,052
Source: Follari (2004).
Philippines shows a lack of diversity especially when compared to places like
Singapore and Hong Kong.
THE ASIAN CONTEXT
The OECD (2004a) has categorized Asia-Pacific countries according to their
cross-border capability (Table 16). Expectedly, Australia and New Zealand belong
to one end of the spectrum that shows great export potential. On the other end
are countries like Lao PDR, Myanmar, and Bangladesh that are net importers of
39
Table 16. An Asia-Pacific Regional Typology of Cross-Border Education1
Level 1
Level 2
Level 3
Level 4
Level 5
Developed
exporter nations
with strong
domestic
capacity and
minor role as
importers.
Developed
nations with a
strong domestic
capacity but also
active as
importers.
Developed or
intermediate
nations with
inadequate
domestic
capacity; active
in both import and
export.
Intermediate
nations with
inadequate
domestic
capacity; globally
active as
importers only.
Undeveloped
nations, with low
domestic
participation and
relatively weak
demand for
education
imports.
Autralia, New
Zealand
Japan, Korea
(Taiwan)
Singapore,
Hong Kong
(Taiwan)
(Malaysia, India)
China, Vietnam,
Philippines,
Thailand,
Indonesia, Sri
Lanka, Pakistan
(Malaysia, India)
(Bangladesh, Fiji)
Laos, Cambodia
Myanmar, Papua
New Guinea,
small island
nations
(Bangladesh, Fiji)
Trade focus.
English language
education creates
market potential
as exporters.
Language base
limits exporter
function though
Japan is a large
exporter. Nontrade objectives
dominate policy
approach.
Major markets for
provider nations.
Import and export
is mostly Englishlanguage
education.
Mixture of trade
and other
policies. Focus
on building
knowledge
economy.
Major markets for
provider nations,
especially
English language
education. Policy
dilemmas: import
or build domestic
capcity?
As they develop,
these nations will
join Level 4.
1
Intermediate cases are indicated in parentheses.
cross-border education, although their demand for foreign education is quite
insignificant. In this typology, the Philippines is categorized together with China,
Vietnam, Thailand, and Indonesia, in level four, indicating a need for foreign
education to compensate for the inadequacy of the domestic environment to
meet the demand for higher education. Moreover, it is perceived that the
countries in this category should resolve on how best to improve their capability
to provide quality education. The typology also shows that Malaysia and India,
while belonging to the same category, are building their capacity and investing
heavily in English education to remain competitive. These two countries are
40
expected to become active consumers and providers of foreign education
services so as to parallel the efforts of Singapore and Hong Kong.
University education in Singapore had always been offered by two state
universities—the National University of Singapore (NUS) and the Nanyang
Technological University (NTU). However, driven by the desire to be recognized
as knowledge hub in the Asia-Pacific region, the government decided to build
the capacity of its academe in the shortest time possible to immediately gain
from the education trade. Thus, in the last decade, the Singaporean government
has allowed the collaboration with only the best schools in the world. Its first
alliance was in the area of research with the Massachusetts Institute of
Technology (MIT). MIT professors intensively reviewed the engineering curricula
of the NUS and NTU (Tan 1999). Five years later, the three decided to bring
engineering education and research to the next level by offering graduate distance
education programs.
In 1998, the Wharton School of Business of the University of Pennsylvania
partnered with the Singaporean government through the Singapore Institute of
Management to establish the Singapore Management University (SMU). SMU
opened its doors in 2000. It was the first university that followed an American
education model (Glasner 1998) and the first private university funded by the
government (SMU website). In 1999, the Wharton-SMU Research Center was
established. SMU’s latest collaborator is the Carnegie Mellon, which has agreed
to develop an undergraduate business program using its expertise in information
technology systems. The School of Information Systems shall be the fourth
school under the SMU. It attracts foreign academics by paying them at
competitive rates.
In 2000, INSEAD, recognized as one of the world’s top-tier business schools
with base in Fontainebleau, France, offered its first MBA class in Singapore. In
the same year, the University of Chicago-Graduate School of Business also began
to offer an international executive MBA program. Likewise, the Duke University
Medical Center has partnered with the NUS to establish the country’s first
graduate medical school (PR Newswire 2004). There is also a joint master’s
program in hospitality management between Cornell University and NTU, which
will be offered at the latter’s campus by 2006.
Clearly, Singapore has been very singleminded in its desire to become a
hub of international higher education in Asia. In 1997, the government purposely
invited academics from prestigious universities abroad to make
recommendations on how to elevate the status of their university education to
world-class level. Simultaneously, Singapore has been active in the recruitment
of Singaporeans working overseas as well as foreigners to participate actively in
research in line with its goal to become a“science hub.”
Singapore is currently building a so-called “country brand.” Unlike the
traditional foreign providers that strongly rely on the efforts of individual
universities, the Singaporean government is promoting the country’s education
sector as a whole. At the onset, it has been able to attract students from nearby
neighbors such as Malaysia and Indonesia.
41
Like Singapore, Hong Kong also aims to become a knowledge hub. To
build local capacity, the Hong Kong government has allowed countries like
Australia to provide courses in Hong Kong. For a time, overseas institutions
were unregulated until the government received complaints on the quality of
education. Thus, an ordinance came into operation in 1997 to regulate the
provision of nonlocal courses (Evans and Tregenza 2001).
Private education in Malaysia is a recent development. It has grown from
100 institutions to 600 in just five years (UNESCO 2003). The education system
of Malaysia was inherited from Britain although the current system has a large
local flavor (Middlehurst and Woodfield 2004). The quality of education is
under the purview of the National Accreditation Board.
Malaysia is one of the first Asian countries that quickly opened its doors to
foreign institutions beginning in 1996 after realizing it may not be able to educate
over five percent of its population on its own (Lenn 2001). To date, the country
has six foreign institutions in its soil, four of which come from Australia. The
government has also partnered with several international universities particularly
for its International Medical University established in 1992 (OECD 2004a).
OECD (2004a) reports that in 2001, Malaysia spent over half a million
dollars on education imports, representing 3.5 percent of the services sector.
The country was able to generate US$65 million in export revenues from
students coming mostly from China and Indonesia. It had over 18,000 foreign
students, from only 3,500 in the previous year.
Striving to improve its capacity, India’s commitment to education is taken
from its 1950 constitution that mandates free education for all children up to
14 years old (Lin 2001). This is supported by the 1986 National Policy on
Education as well as the 1992 Plan of Action. The sector is regulated by the
University Grants Commission.
The higher education system began with 25 universities in 1947 (Lin 2001).
It has since grown to 300 universities and more than 10,000 colleges to support
the enrollment of 6.5 million (DAIIE 2001). Other estimates place the figure of
student enrollment at 9.3 million (UNESCO 2003).
The Indian higher education system is greatly influenced by its British
colonizers. Two of its most prestigious undergraduate institutions are the St.
Stephens College in Delhi and the Presidency College in Calcutta (DAIIE 2001).
Notwithstanding this affiliation, India was able to establish ties with US
institutions in the formation of the Indian Institutes of Technology and the Indian
Institutes of Management.
On distance education, one of the largest open universities in the world
can be found in India. Established in 1985, the Indira Gandhi National Open
University (IGNOU) was conferred the status of excellence in distance education
by the Commonwealth of Learning (Joshi 1998).
Despite the establishment of these institutions, India is principally an
importer of education services. In 1998-1999, for instance, there were 42,000
Indians who studied in the US while only 709 Americans studied in India. The
increase in Indians studying abroad resulted from the liberalization of the Indian
42
economy that spurred the rise of the new middle class (DAIIE 2001). Most of
these students, however, look toward foreign countries for advanced education.
Despite its large imports, India is looking toward developing a regional
market for education, targeting Arab countries and other countries situated in
the Indian Ocean region (UNESCO 2003).
For China, the government believes that education is the key to its
development. Consequently, it enacted the Education Law of 1995 and, in this
regard, presented its education reforms up to 2010. In higher education, the
government aims to attain a student enrollment of 9.5 million, with the education
financed primarily through tuition fees. The government intends to help students
through scholarship grants, student loans, and work-study programs (Lin 2001).
By 2002, actual student enrollment hit 15.1 million (UNESCO 2003).
China has also set a national objective of “Invigorating Nation Through
Science and Education” (NIER). Project 211 aims to establish 100 world-class
universities (OECD 2004a). Its strategy is to fast-track the country’s capabilities
by sending Chinese nationals abroad and utilizing their talents when they return.
While the Chinese have the highest stay rates in a study by Finn (2003), the
government has began to set mechanisms in place to encourage the return of
Chinese nationals, most especially those who have been sponsored by the
Chinese government. These mechanisms include attaching conditions to
scholarships and setting career prospects for the scholars.
China has also opened its doors not only to joint programs with foreign
institutions but also to the entry of foreign institutions and academics. It has
cooperative relations with over 600 institutions worldwide (Table 17). As of
May 2003, it has 425 programs or part-programs with Australia alone, in all
levels including English language and vocational studies.
Meanwhile, Indonesia continues to be a net importer of foreign education
services. It has the largest unmet demand for higher education (OECD 2004a).
Table 17. China’s cooperative relations with foreign institutions
Country
United States
Australia
Canada
Japan
Hong Kong
Singapore
United Kingdom
Taipei
France
Germany
Korea
Total
Number of institutions
154
146
74
58
56
46
40
31
24
14
12
655
43
With continued low national expenditures on education, the country is expected
to remain a net importer. It has, however, taken steps to improve the quality of
its higher education by legally allowing the partnership of Indonesian institutes
with foreign universities. Indonesia’s higher education sector is monitored by
the Accreditation Board for Higher Education and the Directorate General of
Higher Education of the Ministry of Education (UNESCO 2003).
EXPERTS’ VIEWS ON CROSS-BORDER TRANSACTIONS
Given the OECD’s classification (Table 16), it would appear that the Philippines
is an importer in the education trade. Does this mean it cannot compete with its
neighbors? To assess whether the Philippines has a comparative advantage in
the education services trade, one should look at the following:
• Can Philippine HEIs offer distance education programs to nationals
of other countries?
• Can Philippine HEIs attract foreign students to pursue their studies
in the country?
• Can Philippine HEIs establish branch campuses and programs
abroad?
The views on whether the Philippines should market itself as an education
hub in Asia or open its doors to foreign students, academics, programs, and
institutions is as wide as the continuing debate on whether an economy should
protect its industries or allow free market forces to govern. However, there has
been a lot of pragmatism in the response of experts interviewed2 when asked
whether the Philippines should develop itself as an education hub.
Admittedly, the country is in a poor economic state. Education experts believe
the situation constantly challenges the ability of HEIs to deliver quality programs.
Both the public and private sectors have limited resources for education. With the
limited paying ability of students, HEIs are forced to compromise some of their
standards to sustain their operations. Public HEIs have to contend with national
government subsidies that are barely sufficient to meet their needs. Private HEIs, on
the other hand, rely on endowments and donations from their alumni, but even
these are limited. Hopefully, business owners such as John Gokongwei, Henry Sy,
and Alfonso Yuchengco will continue to include the education sector as beneficiary
of their social responsibility programs.
Notwithstanding, HEIs that have been recognized as top educational
institutions in the country continually strive to improve the quality of education
delivery. Administrators encourage their faculty to pursue further studies abroad
and undertake collaborative research with international academics. They also
seek to improve their curriculum by benchmarking with international HEIs and
partnering with institutions in the delivery of their program. But all of these are
efforts of individual faculty, departments, and colleges. While HEIs maintain
2
Names of those interviewed appear on page 1 (footnote).
44
institutional linkages, the responsibility to provide an international environment
rests, at best, at the college level.
In terms of international recognition, the top HEIs in the country have
ambitions to be accredited internationally. However, the accreditation process
is costly and is viewed by some as biased toward international HEIs with large
financial resources. Consequently, even if a program is considered of high
quality, if an HEI does not have a large endowment, then the chances of getting
accredited is perceived to have been drastically cut. So far, only the AIM has had
international accreditation by an American and a European accrediting body.
Moving to the modes of cross-border transactions, one form is online education.
In the Philippines, there are very few HEIs offering this form of education and most
of them target only the local market. Education leaders who were interviewed do
not believe that this is an area for education trade since many of the programs are
still in the exploratory stage. Moreover, there is poor access to ICT facilities either
due to their limited number, expensive access, or poor connectivity.
On the aspect of attracting foreign students, there are two basic
considerations. Initially, there are simply limited student places. If an HEI has to
accommodate a foreign student, this would mean displacing a local student.
For instance, at UP-Manila, where medicine is taught, there are limited slots
available, as the residency program can accommodate only 160 students.
Institution leaders at UP and other HEIs have indicated a preference to serve its
domestic market first. Consequently, while there are HEIs that have a good
number of foreign students, there is no active campaign to attract more.
In the argument that foreign students could bring in more revenues, the
usual response was the unattractiveness of the Philippines as an education
destination due to high security risks, lack of campus environment expected of
international schools, and limited number of quality programs supported by
state-of-the-art technology. Interviewees acknowledge that unless the Philippines
can market itself in a total package, then it does not make sense to position
itself as an education hub. There is simply no way to compete with Singapore
and Malaysia that have a very high per capita and thus could afford to invest in
education infrastructure and facilities, and pay for good quality academics.
Except for a few HEIs, the move to offer local degrees abroad, as another
form of export trade, has been quite slow. Previously, the AIM had offered shortterm executive programs in India and Malaysia, but these have been sparse.
The top HEIs are not too excited about offering their programs abroad because
this entails too much resources that could be better utilized in the undergraduate
programs in the country. Consequently, only schools like the AMA Education
System hope to target the Asian market abroad.
With respect to the entry of foreign institutions, the interviewees do not
feel threatened at all. Some education experts, however, expressed resistance
to commercial presence because it could draw away students who could afford
to pay. Nonetheless, they do not believe that a foreign institution can sustain
“for-profit” operations in the country since there are very few students who
could actually afford the expected higher tuition fees. Also, locals carry a
45
mentality that if they can pay, they might as well get the real thing by studying
abroad. In the aspect that foreign institutions could bring in students from
neighboring countries, it is again countered by the argument that the country is
economically and politically unstable.
However, some interviewees actually look forward to the entry of foreign
institutions in the hope that it may drive local HEIs to improve the quality of their
education delivery. But they cast doubts on the interest of world-renowned
universities to establish branch campuses in the country. They also fear that
mediocre HEIs would be allowed to come in. Since the service is paid and
consumed before one reaps the benefits, then it may be possible that some
locals may be defrauded of quality of education. In this aspect, they look toward
a regulatory body to ensure that only quality HEIs are allowed to enter.
To reap the benefits of international presence, there are administrators
who believe that foreign institutions should be allowed to enter but on a
partnership basis. This means that existing local HEIs will seek to maintain
strong ties with preselected international institutions. Obviously, there is still a
constitutional prohibition against the entry of foreign entities in education and,
for this reason, the aspect of commercial presence is not seriously considered
by some HEIs. Also, there are those that expressed wariness on the idea because
of perceived poor marketability resulting from the expected higher tuition fees.
Thus, a strong partnership with the objective of capacity building rather than
profit maximization is needed.
Due to the aforementioned articulations, one gets the impression that
many educators would rather be inward looking and would prefer to channel
their resources to meet local demands. However, they recognize that with
globalization, they have to be more open in their outlook. Thus, an increasing
number of HEIs are seeking recognition and accreditation of their courses to
help their graduates pursue advanced degrees or practice their profession
abroad. Indeed, internationalization has intensified since the turn of the century,
causing educators to revisit their views on the education trade.
All things being said, it was a consensus that English still remains as the
country’s competitive advantage, in addition to its relatively inexpensive
education. English courses are attractive as evidenced by the 60,000 students
who enrolled in Australian institutes in the past year just to study the language
(IDP website), and the 50,000 students who enroll in intensive English courses
in America yearly (Open Doors 2003). However, local educators are looking for
serious students who intend to use the acquired English facility for further studies
and not simply as a past-time endeavor of tourists who are just wishing to
extend their stay in the country.
Finally, the educators agree that the Philippines should continually harness
programs that have gained worldwide acceptability. These are in the areas of
dentistry, health-related services, maritime education, and even engineering
and teacher-training. Schools like UP Los Baños should also be continually
funded so that the gains in agricultural education and research can continually
attract international recognition.
46
SUMMARY
The competitiveness of the Philippines in the area of education exports is greatly
impeded by a number of factors. First, there is a lack of focus by the Philippine
government in determining the position of the Philippines in export education.
Unlike its neighbors that have taken giant steps to improve their education
systems and reverse the trends in the education trade, the Philippines appears
to plod along. Consequently, limited financial resources are spread too thinly
without sufficient mass to support quality education.
If there is poor financial support for local higher education, then one cannot
expect any significant support for international education. Even the private
sector finds difficulty in providing financial assistance for faculty and student
exchanges or in paying foreign professors to share their expertise. Much is
dependent on foreign scholarship grants to encourage the flow of academics
into the country and outward to other countries.
The Philippines also works within a highly politicized environment. Currently,
there are over 100 bills in Congress for the conversion of arts and trade schools
into state colleges, and state colleges into state universities. This further strains
the limited resources for higher education, thereby affecting service delivery.
The strong influence of politicians on the CHED also restricts its ability to impose
strict sanctions for the inability of HEIs to provide quality education.
Quality education is essential for the recognition of degrees as well as
professional qualifications of Filipinos wanting to pursue advanced degrees or
practice their profession abroad. The recognition has been quite limited and is
a continuing negotiating effort between countries. Apparently, there is a lack of
credibility on the ability of accrediting agencies to impartially grant accreditation
levels. If accrediting agencies cannot ensure the quality of education of local
HEIs, who should? Given this perception, who should likewise accredit the
programs of foreign institutions?
Furthermore, true to the Filipino territorial nature, there is a lack of
cohesiveness and cooperative behavior among Philippine HEIs so that higher
education can be marketed on a national level rather than on the level of
individual HEIs. Singapore, for instance, is more focused on coming up with a
country brand, thus channels resources to this endeavor. However, given that
there are only few recognized Philippine institutions in Asia, perhaps it also
makes sense to concentrate resources on these institutions, rather than trying
to market the Philippines as a whole. After all, the country also fairs poorly in the
perception that it is a safe environment. Highly sensationalized crimes deter
the entry of foreign students, academics, and institutions.
Despite these weaknesses, the Philippines still has its strong points. The
proficiency in the English language remains a competitive advantage. Its
proximity to the major consumers of the education trade is still a plus factor.
Moreover, its reputed expertise in customer-oriented fields like nursing,
caregiving, dentistry, medicine, maritime services, and even its popularity in the
arts and sciences can be harnessed. Finally, it is a cost-effective alternative to
other countries given its more affordable tuition fees and living expenses.
47
INSIGHTS AND RECOMMEND
ATIONS
RECOMMENDA
The potential for cross-border transactions is overwhelming. Based on statistics
presented by the UNESCO, OECD, IDP, and the World Bank, foreign student
enrollment is expected to continually grow and reach eight million by 2025, four
times more than what it is today. This is attributed to globalization and the sheer
increase in the adult population seeking for higher and advanced education. Many
view China, India, and Indonesia as large sources of foreign students in Asia.
Due to the expected growth in cross-border education, governments are
interested to become major providers of post-secondary education. Traditional
providers are the recognized English-speaking countries—Australia, US, and UK.
But there is now the entry of other countries that believe they can be the center
of higher education specifically in the Asia-Pacific region. These countries are
Singapore, Malaysia, and China. At the same time, there are countries like India
and Indonesia that are strengthening their education systems so that many of
their nationals could continue their education in their home country.
This research shows the competitiveness level of various countries with
respect to cross-border education. At the forefront is the US, which has about
half a million international students, followed by countries belonging to the
Commonwealth, which tend to attract students from member-countries.
Members of the Commonwealth that are positioned to become active providers
of foreign education are Australia, Canada, India, Malaysia, New Zealand,
Singapore, and the UK. They are likely to attract students from Brunei, Pakistan,
Sri Lanka, and the African continent, which have a predisposition to the British
education system. European countries would also tend to attract their colonized
countries, targeting Indonesia, Vietnam, and Cambodia, including Thailand. This
leaves parts of China and the United Arab Emirates as free-for-all markets.
Notwithstanding, the end-user view of international higher education is
that students can improve their living standards by getting the best possible
education. Thus, it is important that the educational institutions from where the
students receive their degrees are recognized not only locally but in other
countries as well. This, together with reasonable tuition and living costs,
determines the country and the institute that potential students will choose.
Clearly, if recognition is of prime importance to students, then there must
be perceived quality. An institution must be recognized worldwide as a center of
excellence at least for particular degrees that they would like to be known for.
Unfortunately, each HEI in the Philippines strives to be good in all of its course
offerings, spreading its resources quite thinly. Then, there are the public HEIs
that compete with private HEIs for student enrollment but whose limited financial
resources make them ill-equipped to provide quality education.
CHED’s creation a decade ago was a welcome move to arrest the
deteriorating quality of higher education. It was envisioned that the commission
would provide the vision, structure, and resources needed to ensure that the
Philippines regains its reputation for excellence. However, it is beset by many
challenges that greatly hamper its ability to be effective. First, it is a government
agency and, as such, is governed by laws, policies, and guidelines with respect
48
to the acquisition and use of resources. Next, the commissioners are appointed
by Malacañang. While certain criteria are used in their selection, it cannot be
helped that political influence would determine the selection of commissioners.
Problems arise, too, with the hiring of personnel whose tenure is protected by
law. Many of the employees of the defunct Bureau of Higher Education were
transferred to the CHED, even if they have lost their usefulness. Thus, processes
are slow and bureaucratic, despite the CHED’s dictum for excellence.
Another challenge is securing and utilizing financial resources for its
operations. Like other government agencies, the CHED has had to tough it out
with Congress and Senate even just to maintain its budget at current levels.
Once it has an approved budget, the untimely fund releases greatly affects the
pace and effectiveness of its programs and projects.
The commission has undertaken several researches (i.e., normative
financing, corporatization, typologies, CHED tracer study) that looked into the
Philippine higher education system. Such studies include a review of state
universities and colleges’ charters and enabling laws, typologies of Philippine
HEIs, comprehensive cost analysis of degree programs, access of the poor to
higher education, models of amalgamation, corporatization of selected SUCs in
the Philippines, and quality performance indicators in higher education. Millions
of pesos were spent tapping the best researchers in the country to recommend
higher education reforms. There are policy recommendations and changes, but
implementation is slow. Legislators have been warned that the creation of
more SUCs would mean lesser resources and lower quality of education. Yet,
bills are continually being presented in the legislative branch that, if passed,
would result in even more public HEIs.
It had also recommended the closure of certain HEIs and programs due to
their inability to meet the standards of excellence. There is great resistance, as
stakeholders use all possible means to prevent its implementation. Fr. De La
Rosa, chair of the CHED, was decisive to stop the offering of nursing courses by
23 HEIs. Can this police power be exercised consistently?
The decreasing budget allocation for public HEIs has triggered the need to
find other financing sources. Naturally, this would redound to tuition fee hikes.
Raising tuition fees either in the public or in the private sector is not politically
advisable. The rate of PhP25-PhP100 per unit is one of the lowest in the region.
Increasing the tuition fees would deprive many Filipinos of higher education.
Consequently, this could widen the gap between the rich and the poor. Currently,
the Philippines has one of the highest gross enrollment rates at the tertiary
level. Unemployment rates double due to the poor economy that cannot support
the number of college graduates each year.
Another policy recommendation expecting great resistance from politicians
is the use of the normative financing model in allocating budget for public HEIs.
Under this scheme, heads of HEIs no longer need to defend their budget requests
since each HEI is given an allocation based on the number of student places.
This is a critical issue since some HEIs may receive lesser budgetary allocations
because the number of student places is determined by the ability of the HEI to
49
provide quality education. The number of student places is then multiplied by a
standard cost per degree.
These are some of the challenges that the CHED faces in its quest to improve
the state of Philippine higher education. If international recognition is granted only
to the COE/COD HEIs, which represent only six percent of total HEIs in the country,
there is clearly a need to improve the quality of higher education to improve the
chances of competing in the world market. Does the Philippines aspire to become
a major player in education trade at least in the Asian region? During the 1997
World Congress on Higher Education held in Manila, then President Fidel V. Ramos
mentioned the “pole-vaulting” strategy intended to diminish the gap between this
country and its neighbors (Ramos 1997). He envisioned the Philippines as a
knowledge center in the Asia-Pacific region in maritime and medical services. Yet,
the Philippines is not any closer to its aim of diminishing that gap. The recent
dissolution of the CHED’s Office of International Affairs in favor of an Internal Audit
group sends mixed signals as to the priorities of the commission. Seemingly, the
education sector’s priority at the moment is the efficient managemetn of its
resources. Only when this is settled can the sector move to address the competition
in the international market for education.
Prior to undertaking any changes in leadership and organization, policies,
and programs, the national government has to be more definite about its plans
for the education sector. A number of issues need to be addressed. Should the
government maintain its aspirations for “education for all”? If so, up to what
level of education is it ambitioning for? What kind of support is the government
willing to provide to meet its objectives? Does the government have the will
power to pursue its objectives at all costs? What role will the private sector play
in the government’s master plan?
Moreover, the national government must determine the extent of the country’s
participation in cross-border transactions. Should the Philippines continue to be a
net importer of education services? What is the government’s viewpoint on the
brain drain issue? Is the government more interested in the dollar remittances of
domestic students who study abroad and eventually work there, or is it interested in
attracting these foreign-educated Filipinos to work in the Philippines and contribute
to the development of the nation? Can the Philippines be an exporter of education
services? What price is the government willing to pay to attract foreign students,
academics, programs, and institutions? How can the government build the local
capacity so it can become a credible alternative?
There are many strategies the government can undertake to improve the
quality of higher education. Previous recommendations include the corporatization
of universities and the establishment of a single university system or regional
universities. It is possible, too, that resources are set aside for HEIs already recognized
for quality education, with strict provisions that the benefits should trickle down to
other HEIs. International scholarship allocations can be rationed to academics
rather than to students for the improvement of teaching and research abilities. The
national government may also invite foreign institutions for capacity-building
purposes instead of for-profit activities. If the government would like to improve the
50
capabilities of its adult population without necessarily resulting in brain drain, then
scholarship grants can be diverted to distance education.
Regardless of the choices the government makes, it is clear that the level
of education must be raised. To be successful in this endeavor, there should be
a concerted effort between the executive and the legislative branches. If the
CHED is the superbody that governs higher education, it should be allowed to
carry its function without interference from legislators. As a matter of wishful
thinking, it is hoped that individuals chosen to be in the CHED are selected
objectively and held accountable for their actions, with operations supported by
lump sum funds and managed with integrity. An independent auditor can thus
ensure that the funds are properly utilized and accounted for.
Notwithstanding, the government must be more purposive. Given the
present position of the Philippines in global education services, it is folly to
compete on the basis of providing quality education across all fields. The best
strategy perhaps is to niche and claim excellence in the fields of nursing,
dentistry, medicine, caregiving, language education, and information technology.
Engineering and science cannot be an area of competitive advantage unless
the government is willing to invest in laboratories, equipment, and talent, which
are needed to establish world-class institutions and academics. Alternatively,
they can strengthen partnerships with industry and foreign institutions so that
engineers, scientists, and researchers can utilize their skills more effectively.
The peace and order situation has to be addressed so as to attract
foreigners. The government may consider building an apolitical university city
outside of Metro Manila. Here, foreign institutions may situate themselves
together with other centers of excellence. This may be a way of circumventing
the constitutional provision prohibiting foreign investment in education and the
practice of profession by academics.
More importantly, foreigners expect to see world-class campuses with credible
professors delivering relevant curricula. Infrastructure and laws to support this are
necessary, including provisions for the mutual recognition of degrees. The legislative
branch in the Twelfth Congress and Third Regular Session already issued Resolution
No. 73, Concurring in the Ratification of the Regional Convention on the Recognition
of Studies, Diplomas, and Degrees in Higher Education in Asia and the Pacific.
Additionally, the Philippine government must be more definite in its position
on cross-border education. Should quality of education be improved internally
or with the help of foreign academics and institutions? If quality is to be enhanced
internally, then there is a need for a stronger CHED capable of implementing
policy changes without interference from politicians. Moreover, the government
should establish a more credible accrediting agency, whose standards are
uniformly adapted, privately owned and managed, or otherwise. If quality is to
be enhanced with foreign assistance, then the government must review its
laws, and address issues such as ownership and repatriation.
Finally, Internet access to education needs to be widened to facilitate
exchange of programs. The enactment of laws on intellectual property rights
has been quite helpful and is a good direction toward the support for e-learning.
51
CONCLUSION
The study of cross-border education invariably redounds to the study of a country’s
higher education system. In most Asian countries, the quality level of education
had been low. However, countries like Hong Kong, China, Singapore, and
Malaysia have been serious in improving their education sector. They have been
quite aggressive in building capacity using the fastest means possible, that is,
importing the services of foreign academics and institutions. They have looked
toward the importation of education services only as it serves their end purpose
of establishing themselves to become knowledge hubs. Indeed, these countries
have cross-border transactions significant enough to be part of world statistics.
Compared to its Asian counterparts, the Philippines presents both
advantages and disadvantages. On the positive side, cost of living in the
Philippines is low, and its courses are taught in English. Thus, the country is able
to offer cost-effective options especially to those who need to learn English.
Also, the country is known to be a major supplier of nurses, caregivers, and
seafarers. Consequently, this lends credibility to HEIs that offer these courses.
On the negative side, the Philippines ranks “average” in the competitive
measures presented by the World Economic Forum and the United Nations
Industrial Development Organization (UNIDO). In terms of GDP per capita, data
show that the Philippines has been overtaken by Thailand, Taiwan, Korea, and
Hong Kong. Because of this, investments in education have been wanting.
Quality of education is of great emphasis in cross-border education. In a
2002 Asiaweek survey, only three local universities made it to the list of top
Asian universities in terms of number of foreign student enrollees. This shows
that the Philippines is not perceived as provider of quality education, thus not
considered a prime destination of foreign students.
Reviewing the higher education system and considering the selection criteria
used by international students, quality of education emerged as a primary concern
in the choice of institution. Apparently, the Philippines cannot compete with the
more progressive Asian countries. It struggles internally, saddled by a poor economy
and a highly politicized environment. These realities affect the CHED in performing
its functions well. This inability thereby allows mediocrity to persist among HEIs.
To be competitive in the education services sector entails a strong political
vision for the country. With clear focus, Hong Kong, China, and Singapore have
strengthened the capabilities of their local universities by engaging in crossborder transactions. Unfortunately, this clear focus, as well as the cooperative
relationship between and among the lawmakers, the executive branch, and the
best academic minds, is missing in the Philippines.
Finally, regardless of the choice the government makes and the organization
it hopes to maintain, efforts on higher education will be wasted if population
growth is not abated. There are just too little financial resources to sufficiently
meet the requirements of a growing population. Although it can be argued that
many of the country’s resources are actually lost to graft and corruption, it cannot
be denied that the growing population only serves to further shrink the already
shrunk higher education budget.
52
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update011701.pdf. [Accessed July 2004].
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provision in meeting global demand for tertiary education: Mapping, regulation,
and impact. Canada: Commonwealth of Learning and UNESCO.
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D.C. http://www.riseu.net/gatsal.pdf. [Accessed July 2004].
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glance: OECD indicators. France: Organisation for Economic Co-operation and
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challenges. France: Organisation for Economic Co-operation and Development.
————. 2004b. Quality and recognition in higher education: the cross-border challenge.
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International Education.
————. 2001. Report on international educational exchange. New York: Institute of
Orbeta, A. Jr. 2003. Education, labor market and development: A review of the trends and
issues in the Philippines in the past 25 years. Perspective Series No. 9. Makati City:
Philippine Institute for Development Studies.
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on Higher Education. Manila: Commission on Higher Education.
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possible ways forward for the Southern Africa Development Community (SADC)
[online]. Paper presented at UNESCO Conference on Globalization and Higher. http:/
/www.rti.org/pubs/Pillay.pdf. [Accessed July 2004].
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ACCT=109&Story=/www/story/05-05-2004/0002167. [Accessed July 2004].
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Salmi, J. 2002. New challenges for tertiary education. The World Bank report . International
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newsletter/News28/text003.htm. [Accessed July 2004].
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6TESauveH.pdf. [Accessed July 2004].
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News14.text7.html.
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[Accessed July 2004].
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————. 2003. Domestic regulation and trade in service: The role of the Commission on
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The International Comparative Higher Education Finance and Accessibility Project
(ICHEFAP), Graduate School of Buffalo, http://www.gse.buffalo.edu.org.
Chapter 3: Health Services Trade 55
3
Challenges in Health Services Trade:
Philippine Case1
Maria Cherry Lyn S. Rodolfo and Jovi C. Dacanay
ABSTRACT
There is a growing emphasis on the role of trade in health services (telehealth,
health tourism and retirement, investments and deployment of medical
professionals) in easing fiscal constraints, generating jobs and income,
improving infrastructure and financing, and upgrading the capacities of health
professionals. This paper seeks to identify the opportunities, barriers, and
risks for the Philippines in participating in global trade in health services. It
examines the country’s capabilities in engaging in trade and identifies strategic
directions that the Philippines can pursue. It also presents the different market
niches that can be tapped relative to the opportunities—the aging populations
of the Organisation for Economic Co-operation and Development (OECD)
countries, the shortage of medical professionals in those countries, the long
waiting lines in hospital facilities, the Health Insurance Portability and
Accountability Act of the United States, and the poor healthcare systems in
other countries. It also addresses the weaknesses in the supply capabilities of
the Philippines—the lack of a policy framework to develop the healthcare services
sector in a globalized environment, the lack of human resources planning, and
the lack of alignment in the initiatives of the government and the private sector.
INTRODUCTION
The Philippines has been a major supplier of healthcare workers, particularly
nurses to the world. The growth in the demand for nurses and the economic
incentives offered by developed countries have triggered rapid migration in
recent years. There are fears of the local healthcare system collapsing due to a
number of reasons: migration of doctors to work as nurses abroad; closure of
private hospitals due to lack of patients and manpower; decline in enrollment in
medicine and allied courses (except nursing); and meager budget for public
1
Abridged version of the full report, September 2005.
56
healthcare. The sustainability of the local healthcare industry will depend to a
great extent on how migration is managed and how healthcare delivery and
financing are improved.
There is a growing interest among developing countries on the role of
exportable health services in easing fiscal constraints, generating jobs and
income, improving infrastructure (number and quality of health facilities) and
financing, and upgrading the capabilities of health professionals. Countries like
Thailand, India, Chile, Singapore, and Malaysia are embarking on aggressive
health tourism programs. For India and Pakistan, business process outsourcing
(e.g., medical transcription, backroom operations) is proving to be another growth
area. For developed countries, investments in health facilities abroad tend to
expand income streams. The United States (US) and Singapore are aggressive
in establishing their presence in foreign shores through their healthcare brands
(e.g., John Hopkins and Mayo Clinic for the US and Gleneagles International for
Singapore). On the other hand, developed countries are importing healthcare
professionals in order to sustain their own healthcare systems. Indeed, these
evidences reveal that trade is being used to enhance a country’s strengths and
make weaknesses irrelevant in the field of healthcare services.
Given this background, this paper is an initial attempt to map out the
issues related to tradable health services for the Philippines. It will:
1. assess the trends, market opportunities and challenges in global
healthcare services trade;
2. examine the current state of healthcare delivery and financing (e.g.,
strengths and weaknesses) in the Philippines that will affect the ability
to explore the market opportunities; and
3. explore strategic directions to enhance competitiveness in healthcare
services.
The following section maps out the changes in global healthcare that are
driving the trends in tradable health services. The barriers and risks to strategic
directions are likewise discussed. Another section defines the health services
industry and examines the current healthcare situation in the country. The
paper concludes with some next steps for further research and the actions that
may be considered by the public and private stakeholders.
GL
OBAL TRENDS IN HEAL
TH SER
VICES TRADE
GLOBAL
HEALTH
SERVICES
This section maps out the opportunities in the global healthcare market that
can be tapped to manage migration and sustain the local healthcare delivery
and financing.
Healthcare Spending on the Rise
In 2000, global healthcare spending reached US$3 trillion—a 14 percent growth
from the 1990 level. Asia’s healthcare market accounts for US$390 billion.
Japan’s per capita healthcare spending alone is US$1,314-US$2,400 annually,
comprising 77 percent of the regional market. By 2010, the Asian healthcare
market is expected to be valued at US$600 billion, with Japan spending US$422
billion. Other Asian countries are projected to spend at least US$190 billion by
2013. The Centers for Medicare and Medicaid Services report that in the US,
the overall cost of healthcare—from hospital and doctor bills to the cost of
pharmaceuticals, medical equipment, insurance and nursing home—doubled
from 1993 to 2004. In 2004, the US spent almost US$140 billion more for
healthcare than in the previous year.
From the demand side, the growth is driven by the aging populations,
expanded reach of mandatory insurance schemes, emergence and/or discovery
of new diseases, and lack of incentives for patients to economize since
healthcare is covered by most insurance schemes. From the supply side, the
growth is driven by the lack of incentives to relate the cost of treatment with
benefits, introduction of more expensive technologies, shortage of health
professionals, insufficient healthcare planning, and unfocused treatment by
doctors (WTO 1998). These factors have contributed to the high cost of
healthcare delivery and have forced governments to consider reforming their
financing schemes and explore ways to reduce the costs and/or increase the
revenue streams by engaging in health services trade.
At least four major trends impact either positively or negatively on the
healthcare system of a developing country that has a relatively abundant supply
of human resources such as the Philippines.
Aging populations
The number of persons aged 60 years and older is projected to grow to almost
2 billion by 2050 in which the population of older persons will be larger than the
population of children for the first time in history (World Bank 1998). Today, the
majority of the world’s older persons reside in Asia (54%) while Europe has the
next share (24%). Japan is the only developed country that is aging at a very fast
rate. In 2025, the proportion of the population aged 65 years and above will be
highest in Japan, followed by Italy and Hong Kong. Although the US is also aging,
in relative terms, its population will be much younger than Japan’s.
The OECD countries are increasing healthcare spending allocation for elderly
people—from one-third to one-half. Japan spends the largest proportion (47%),
while Germany spends the least (34%). The US is near the middle (38%). In
looking at the ratio of per capita spending for people 65 years and older
compared with those under 65 years, Japan spends proportionally the most
(4.8 times), while Germany spends the least (2.7 times).
In most OECD countries, the aging population is forcing them to open their
doors to healthcare workers particularly from developing countries. In some
cases like Japan, the government has been encouraging their citizens to consider
retirement in foreign shores.
Shortage of healthcare professionals and long waiting times
More people are living longer but the number of healthcare workers available to
take care of the aging populations is declining in countries such as the US,
58
Canada, and the United Kingdom (UK) due to low birth rates and the decline in
interest in the healthcare profession (particularly nursing and caregiving). In
developing countries, health professionals are needed not just to take care of
the elderly but also to provide healthcare services for the general population. In
14 sub-Saharan countries in South Africa, for instance, there are no radiologists.
Rural areas hardly have access to doctors. In addition, the waiting times for
treatment are quite long. In the UK, for instance, the average waiting time for
kidney transplantation is eight months to three years. In Canada, there are 352
patients waiting for organ transplants in British Columbia alone. Table 1 presents
the waiting time in British Columbia, Canada.
Table 1. Median wait time and waitlists for British Columbia, as of 31 March 2005
Surgical specialty
Median wait time (in weeks)
No. of waitlisted patients
Dental surgery
7.1
Ear, nose and throat surgery
5.4
Eye surgery
8.6
General surgery
3.4
Gynecology
4.3
Neurosurgery
4.0
Orthopedic surgery
9.3
Plastic surgery
6.6
Urology
4.7
Vascular surgery
2.7
Cardiac surgery
8.6
Corneal transplant
17.6
Cancer services (Radiotherapy)
0.6
Organ transplant
N/A
Total
Specific procedures (included in totals above)
1,673
5,111
13,836
12,314
5,860
1,293
20,101
4,541
5,689
932
301
603
268
352
72,784
3.0
9.4
5.1
21.8
28.3
121
12,850
1,571
3,044
5,464
Endarterectomy head/neck
Cataract surgery
Gall bladder
Hip replacement
Knee replacement
Source: www.health.gov.bc.ca/cpa/mediasite/waitlist/median.html
High cost of medical services in OECD countries
People are moving abroad to seek treatment at lower costs. Table 2 gives
some indicative figures on certain treatments in countries like Thailand,
Singapore and Malaysia that are aggressively positioning themselves as
medical hubs.
Table 2. Comparative costs of treatment (in US$)
Treatment
USA
Singapore
Malaysia
Thailand
Philippines
Cataract Surgery
Total knee replacement
Liposuction
2,500-3,500
5,000
2,800 –5,700
1,749
6,207
3,221
1,014
4,342
1,711
950
5,500
1,365
1,424
5,639
1,400
Poor access to healthcare facilities and services
Apart from lack of healthcare workers, developing countries do not have
sufficient facilities to provide quality healthcare to their local population. There
are only 140,000 hospitals in Asia that are currently serving a population of 3.5
billion. The wealthy and the middle class of Asia are willing to pay for quality
healthcare services. It is estimated that at least 130 million Asians can afford
private services (Singapore Healthcare Services Working Group 2002).
These trends have changed the landscape of health services delivery. The
high cost of medical services, for instance, has stimulated the application of
technology to reduce transaction costs and address the shortage of professionals
through telemedicine. Thus, there are increasing discussions on the use of
telehealth as an effective way of providing healthcare access. The high cost of
healthcare and the long waiting times have also been driving consumers to
seek these services in other countries.
The next section explores how countries use trade to take advantage of
these opportunities and threats.
How Countries Export Health-Related Services
There are four possible ways based on the General Agreement on Trade in
Services (GATS) by which the Philippines can explore these opportunities (Table 3).
The following discussion explores each of these modes and identifies
the opportunities and threats that exist and how to make the four modes
work for the Philippines’ advantage.
Mode 1: TTelehealth
elehealth
Under Mode 1, trade in health services is aided by telecommunications (socalled “telehealth”). Trade is aided by the use of computer-assisted
telecommunications to support the functions for clinical (e.g, telemedicine) and
nonclinical purposes (e.g., medical transcription, business process outsourcing,
management, surveillance, literature and access to knowledge). Two market
niches to be considered are telemedicine and medical transcription.
Telemedicine. There is a relatively wide spectrum of telemedicine services
such as teleconsultations, telepathology, teleradiology, telepsychiatr y,
teledermatology, and telecardiology. The European Commission’s Healthcare
Telematics Program in 1996 defines telemedicine (“medicine at a distance”)
as the rapid access to shared and remote medical expertise by means of
60
Table 3. GATS modes of supply
Treatment
Description
Examples in the healthcare
services
1 Cross-border trade in
services
The possibility for nonresident
service suppliers to supply
services cross-border into the
Member’s territory.
Telehealth (e-health)
o All forms of telemedicine
o For nonclinical purposes:
(a) shared medical services
(medical transcription), laboratory
services or claims processing;
(b) hospital management
functions; data collection for
statistical or educational
purposes, back-up advisory
facilities for local staff abroad.
2 Consumption of health
services abroad
The freedom for the Member’s
residents to purchase services
in the territory of another
Member.
o Consumers who travel
abroad for medical care
o Tourists who incidentally need
medical care abroad
o Retirees abroad
o Temporary or migrant
workers
o Cross-border commuters
who may have multinational
coverage options
o Residents of multinational
areas with integrated health
systems
Medical and health sciences
education provided to foreign
students
3 Establishment of trade or
commercial presence
4 Movement of health
professionals
The opportunities for foreign
service suppliers to establish,
operate, or expand a commercial
presence in the Member’s
territory, such as a branch,
agency, or wholly owned
subsidiary.
The possibilities offered for the
entry and temporary stay in the
Member’s territory of foreign
individuals in order to supply a
service
Source: WTO (1998); Blouin et al. (2005).
o Investments in hospitals
o Investments in health
insurance companies
o On ad-hoc basis (under shortterm contract as an
organization)
o Two forms for the international
trade in health services are
existing: (a) temporary
movement of health personnel
to provide services abroad;
and, (b) short-term health
consulting assignments.
telecommunications and information technologies (e.g., telephones, fax
machines, personal computers, and other forms of multimedia) no matter where
the patient or relevant information is located. Information exchange takes the
form of data, audio and/or visual communication between physicians and
patients or between physicians and healthcare professionals in geographically
separate locations to facilitate the exchange of information on medical,
healthcare, research, and/or educational purposes. Although the applications
are mostly within the national systems, there are evidences of cross-border
trade especially in the areas of radiology and pathology. Globally, the major
factor driving telemedicine is the high cost of medical services particularly for
the aging populations. The flows of telemedicine exports, however, are still
largely from developed to developing countries where there is poor access to
healthcare.
Telemedicine will be needed as the Philippines positions itself for medical
tourism and retirement. A patient seeking treatment in the Philippines can
consult with a Filipino doctor online and send the latter his records before
actually coming to the Philippines and after his treatment. Furthermore, foreign
retirees living in retirement communities in the provinces can access doctors
from medical zones or city hospitals via telemedicine. Tele-education is another
area where the Philippines has comparative advantage given its expertise in
the study of tropical diseases. At this stage, the country can provide radiological
and other medical diagnostic support to these countries through second opinion
or standard reading of results in health screening programs or tests for patients.
The major obstacles include the recognition of licenses and the liability
issue. The practice of cross-border telemedicine, for instance, requires Filipino
physicians to be licensed in the markets being served. A healthcare facility can
have a pool of foreign-certified physicians working with a bigger pool of locally
licensed physicians or healthcare professionals (similar to the strategy of India).
There are existing disparities in standards and technology to achieve accuracy
in the transmission of images, data, and electronic records.
The costs can be prohibitive if the provider has other priorities in terms of
equipment upgrading. On the other hand, the use of store-forward technology
requires less investment costs compared to real-time telemedicine practice
which is not yet integrated in everyday use of hospitals or healthcare providers.
Most patients still prefer to see their physicians so the trust on the accuracy of
findings generated through telemedicine needs to be built up. Partnering between
a local healthcare provider and a reputable institution in the target market may
help overcome this barrier. Another barrier is the lack of privacy and security
regulations. In other countries, the lack of interest on the part of the providers is
the main barrier. This can be due to the absence of viable business models or
cases. There is a need therefore to study how telemedicine can be integrated in
everyday practice and how payment schemes can be facilitated.
Telemedicine can also provide opportunities for the Philippines in tapping
the expertise of foreign-based institutions without its citizens having to leave
the country. For instance, some Filipino patients from well-to-do families have
62
started to secure medical services in local hospitals that have tie-ups with
foreign hospitals, such as the Makati Medical Center which is affiliated with the
Stanford Hospital in California, USA.
Cross-border telemedicine can impose risks and imbalances on the local
healthcare system. A dichotomy in healthcare delivery can exist if cross-border
telemedicine develops while local access to healthcare through telemedicine
lags behind. There are minimal evidences on telemedicine application even in
the national health system. Engaging in cross-border practice requires some success
stories or models that the private sector can use as reference to make the business
case for investing in the telemedicine business. Furthermore, there is a need to
articulate a national policy and strategic framework on the practice of telemedicine
for the local and foreign healthcare markets. The key to a successful
telemedicine initiative is to have a champion who will mobilize ready providers.
What is needed is a pool of Filipino doctors who have licenses to practice in the
US market. They will form part of a larger pool of practitioners who will conduct
the diagnosis but the certification will be done by the licensed practitioners. The
government through the Department of Health (DOH) and the University of the
Philippines-Philippine General Hospital’s National Telehealth Center—having
initiated a national telemedicine project on teledermatology and tele-education
for regional hospitals—can be tapped to work with the private sector in
developing the national framework for the practice of telemedicine (including
cross-border). This framework should be able to address the logistics of
telemedicine applications—from the products to be offered up to the payment
or reimbursement coverage. The equity issue should likewise be articulated in
the national framework.
Medical transcription
transcription. Another exportable health-related service
includes business process outsourced activities such as medical transcription
and backroom operations (e.g., insurance claims and bills processing). In medical
transcription, a doctor in another country, say the US, sends his recording via the
Internet to a transcriptionist in the Philippines. The transcription is then sent
back to the doctor within 3 to 24 hours depending on the urgency of the need.
The major driver for the growth of the medical transcription industry in
developed countries is the need by healthcare professionals to document
patients’ records (e.g., diagnosis, treatment procedures, findings) to facilitate
processing of claims and avoid malpractice suits. In the US, healthcare providers
need to comply with the Health Insurance Portability and Accountability Act of
1996 (HIPAA). Also, the need of hospitals to restructure their operations and
costs has increased the demand for business process outsourcing in the form
of insurance claims and bills processing. This offshore medical transcription
industry is estimated at US$17 billion for the US alone. Based on the Department
of Trade and Industry - Information and Communication Technology (DTI-ICT))
Report, about 6,700 US hospitals have yet to convert their medical records into
electronic format. This is in compliance with the Federal Certification, a US law
requiring all medical records to be computerized. The figure represents about
42 percent of US demand that requires outsourcing. India has already captured
80 percent of the market while the rest are being shared by Pakistan, Philippines,
Sri Lanka, and Australia. To meet the demand, the US market alone needs about
230,000 medical transcriptionists. The Philippines has tapped only around 1 percent
of the outsourcing demand of the US. The bigger portion of the demand is being
served by India, which is recognized as the market leader today. Its outsourcing
industry has around 200,000 employees. India has the first mover advantage.
On market access, the lack of a data protection and privacy law is a major
concern of the industry. As experienced by India in the early 1990s, companies
could easily lose customers due to lack of data protection. US clients require
that their providers are HIPAA compliant. Rodolfo (this volume) elaborated on
these issues.
One way to manage the migration of healthcare workers and generate economic
contributions for the country is by bringing the consumers of healthcare and
related services (tourists, patients, students) to the Philippines.
Health tourism
tourism. The categories of consumers moving abroad include
(Table 4):
• Consumers who travel abroad for wellness purposes and medical care;
• Tourists who incidentally need medical care abroad;
• Retirees abroad;
• Temporary or migrant workers;
• Cross-border commuters who may have multinational coverage options;
and
• Residents of multinational areas with integrated health systems.
Health tourists are usually motivated by factors such as higher quality,
lower cost, reduced waiting time in the availment of treatments, and availability
of services that are either unavailable or illegal in their country of residence
(Blouin et al. 2005). For a long time, the US has been a major health hub given
its established expertise in medical care through its well-known brand names
such as Mayo Clinic, Johns Hopkins, and Stanford Hospital. Recently, however, a
growing number of countries such as Thailand, Malaysia, Jordan, Singapore and
India have started to offer medical services at relatively lower costs and
sometimes bundled with leisure or tourism-related services (Appendix A). Table
5 presents a profile of the health tourism activities in these destinations.
Retirement. Retirees move to another country because of the high costs
of retirement in their own country, which their pension money may not sustain.
Their governments’ fiscal resources are not sufficient to support their needs.
They move to destinations such as Florida, the Caribbean, Panama, and emerging
ones such as Dubai, Malaysia, and Thailand that offer a wide range of incentives
(e.g., political, financial, health and social security) and choices of care (e.g.,
independent living, assisted living and continuing care). These countries generate
employment and income in a number of service-oriented industries (e.g., private
and personal, community, manufacturing, tourism) outside of healthcare
Those who travel
to specific places
to benefit from natural endowments
such as hot
springs and spas.
Health Tourism
Spa Wellness
Health tourism
market
Medical Wellness Those who travel
abroad for leisure
but incorporate
consultations for
second opinion or
diagnostics
Sample
Client group
Capacity
Target markets for
requirements
the Philippines
Spas
Lifestyle/Healthy
vacations
Nature tourism
Ecotourism
Community
tourism
Resorts
Herbal treatments
Complementary
healing
Upper middle
to high income
Healthy
Low health
risk
All ages
Good facilities
Skilled
manpower
(i.e.,
therapists, tour
operators)
All tourists who
visit the
Philippines
Diagnostic
Upper middle to
high income
Healthy enough
to travel
All ages
Potential market
for repeat visits
to seek further
medical
information
Specialist skills
Skilled support
groups (e.g. tour
operations)
Overseas
Filipinos
USA
China
South Korea
Australia
Language and
cultural affinities
Importance of
Major Players
insurance coverage
No
Yes
(currently
consultations are not
covered by insurance
and patients are
willing to pay in cash)
United States
Canada
Germany
Thailand
Singapore
Indonesia
Austria
Singapore
Thailand
India
US
Malaysia
Australia
Categories/
Products
64
Table 4. Categories of consumers moving abroad
Health
Health Tourism
Tourism
Categories/ Health tourism market
Products
Those who travel
abroad looking for
specialized (invasive)
surgical treatments that
employ advanced
technology which
may not be available
at home or from
prestigious health
institutions.
Client group
Capacity
Target markets for
requirements
the Philippines
Importance of
Major Players
insurance coverage
Elective
surgery
Cosmetic
surgery
Joint
replacement
Cardiothoracic
services
Eye surgery
Cancer
treatment
Upper middle
to high income
Healthy
enough to
travel
Specific
surgical or
medical
requirements
Variable health
risk
All ages
Specialist
All tourists who
skills
visit the Philippines
Broad range
needed for
intervention
and backup
Higher level of
Technology
Skilled
manpower
(e.g. nurses,
therapists,
etc.)
Language and
cultural
affinities
Yes (Cosmetic
treatments are not
covered by
insurance and
patients tent to be
willng to pay on their
own as long as the
costs are
competitive relative
to those in their
country of residence)
Singapore
India
Thailand
Cuba
Malaysia
Specialist skills Guam
Broad range
Micronesia
needed for
intervention and
backup
Higher level of
technology Skilled
manpower (e.g.,
nurses, therapists,
etc.)
Yes (nonportability of
public and private
insurance is a major
barrier but some
private insurance
companies are
starting to accredit
some facilities that
meet their standards)
United States
Singapore
Great Britain
Australia
India
Upper middle to
high income
Healthy enough to
travel
Specific surgical or
medical
requirements
Variable health risk
Middle age to
elderly
Those who travel for
medical, dental, cosmetic,
eye and other related
outpatient treatments
(noninvasive procedures),
similar quality to that they
can receive at home, but
less expensive or for
specific services not
available in the country of
origin. Emigrants living
abroad and border
patients are important
groups of clients. Usually
pursuit for aesthetic
purposes rather than for
recuperation
Sample
Rehabilitation/ Those who travel for
Long stay
convalescence and not
necessarily retirees.
Sample
Client group
Capacity
Target markets for
requirements
the Philippines
Recuperation
from cancer
treatment
Higher income
Specific needs
Other health
conditions
Low to
medium health
risk
Elderly
substance
abusers
More
All tourists who
therapeutic
visit the Philippines
intervention
than medical
Language and
cultural
affinities
Higher income
Variable health
risks
Potential
market for
retirement
Skilled
manpower
(e.g., nurses,
therapists, etc.)
Language and
cultural affinities
Health Tourism
Therapy
Dialysis
Addiction
programs
Importance of
Major Players
insurance coverage
Yes
Thailand
Malaysia
Florida
Carribbean
economies
Yes
Thailand
Malaysia
Carribbean
economies
Retirement
Elderly care
programs
Long stay/
Migrant
retireesa
Retirees who travel
abroad to spend long
holidays (at least 6
months) or escape from
the cold winter months
and may seek medical
attention during their
stay.
Japan
USA
Products
66
Products
Retirement
Immigrants
Sample
Those who travel
abroad to retire
permanently in countries
where the costs of living
are lower or where the
climate is favorable
among other things.
They can live in three
different types of
retirement communities:
(a) independent living;
(b) assisted living; and
(c) continuing care.
Client group
Upper middle
to higher
income
Specific needs
Middle to
elderly age
Capacity
Target markets for
requirements
the Philippines
Skilled
manpower
(e.g., nurses,
therapists,
etc.)
Specialist
skills
Language and
cultural
affinities
AllOverseas
tourists who
visit
the Philippines
Filipinos
Importance of
Major Players
insurance coverage
Yes
Florida
Panama
Spain
Canada
Australia
Thailand,
Carribbean
economies
There are three segments of the retiree market: retiring individuals, retired, and the retired eldery. Retiring individuals can be the potential market for long stay. Retired
and retired elderly are for the retirement industry.
a
Sources: Adapted from Gonzales et al. (2001); authors.
68
Table 5. Major health tourism destinations in Asia
Estimated market size Current markets
Target markets for
expansion
Target revenues
Singapore
150,000- US$915 M Indonesian and Ma- Affluent Asian mar200,000
laysians account for ket--residents and
70-85%
expatriates (including
Philippines)
1 million international patients per
year contributing
US$3 B by 2012
Thailand
1.1 M
Japan
Rest of Southeast
Asia
US$2 B (2012)
Malaysia
122,000 US$94 M 60% of foreigners
who seek treatment
are from Indonesia,
another 10% are
from Brunei, Vietnam, Singapore and
Thailand. The rest
are from West Asia,
South
Asia
(Bangladesh and India) and Japan.
Middle East and
China, Vietnam,
Myanmar, Cambodia and Brunei.
US$1 B by 2010
India
150,000 US$333 M Middle East (Kuwait, Southeast Asia,
Qatar, Saudi Arabia) West Asia, Africa,
and South Asia UK and USA
(particularly
Bangladesh)
US$2.2 B (2010)
Country
Volume
Philippines
?
Value
US$470 M Japanese 130,000
Americans 59,000
British 14,000
?
Micronesia, Indone- USA, Japan, South
sia, USA (primarily Korea,
China,
Overseas Filipinos), Micronesian States
South Korea,
Japan
?:
services. Some governments encourage their citizens to travel and consider
retirement (long stay and/or permanent) abroad. In Japan, for instance, the
government has encouraged its citizens to seek retirement in other countries
such as Costa del Sol in Spain during the 1980s under the Columbia Plan.
Because of Japan’s increasing silver market, it has become a major target of
countries positioning themselves in the retirement business. As of 2003, a total
of 911,000 Japanese are living abroad either as long stayers or permanent
residents (Table 6). A number of those living in the Philippines are married to
locals. The development of the retirement industry is closely tied to tourism,
which serves as a pull factor for attracting retirees to consider other destinations.
Table 6. Japanese residents overseas: long stayers and permanent retirees
Country/Region
Asia
ASEAN
Brunei
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippnes
Singapore
Thailand
Vietnam
China (incl. Hong Kong, Macau)
Oceania
North America
Central America, Caribbean
South America
West Europe
Central and East Europe, NIS
Middle East
Africa
South Pole
World
Long-term
stayersa
Permanent
residentsb
Totalc
199,122
83,231
73
727
10,867
384
9,959
606
8,981
19,987
28,181
3,466
76,168
35,152
240,033
5,056
5,491
119,293
5,260
4,749
5,069
44
619,269
7,399
5,076
8
6
741
2
810
34
1,669
1,117
595
94
1,016
27,866
129,606
2,528
88,819
33,540
455
1,108
472
0
291,793
206,521
88,307
81
733
11,608
386
10,769
640
10,650
21,104
28,776
3,560
77,184
63,018
369,639
7,584
94,310
152,833
5,715
5,857
5,541
44
911,062
Source: Website of Ministry of Foreign Affairs, Japan.
Note: As of April 2004
a
Permanent residents: Japanese nationals with permanent residence status of the country of residence.
b
Long-term stayers: Japanese nationals staying overseas for more than 3 months with no permanent
resident status.
c
Total: Total of long-term stayers and permanent residents.
For the Philippines, the natural markets are the US and Northeast Asia and
some European countries such as Germany and the UK.
At this stage, there is still a need to define the health tourism and retirement
products of the Philippines. There are bits and pieces of initiatives being
undertaken but there is no concrete program for positioning the country as a
whole. The product or service offering should translate into a brand of Philippine
health services (e.g. similar to Singapore Medicine). By virtue of Executive Order
No. 1037 of 1985, the Philippine Retirement Authority (PRA) was mandated to
develop and promote the country as a retirement haven. To date, however, the
industry has not yet taken off due to several barriers.
70
The major barrier to movement of consumers for health tourism and
retirement is the lack of insurance portability, particularly public insurance. US
citizens who wish to seek medical treatment or even retire in the Philippines
cannot use their Medicare insurance in the country (Table 7). To some extent,
Table 7. Summary of how US health plans treat healthcare received abroad
Plan
US population
covered in Year 2004
Medicare and
Medicaid
26% of US population
(mainly retirees, lowincome families and
disabled families)
Tricare
3.5% of US population
(active duty and retired
US military personnel
and their families)
25% of all employees in
the US with employersponsored health
insurance
HMO plans
Heathcare received overseas
Covered or not?
Emergency Care
Non-emergency Care
Not covered, except when
beneficiary is a border
resident, and lives closer
to the foreign provider
than the US provider.
Covered, with
overseas network
provider handling the
claim filling.
Covered but as an outof-network benefit
requiring higher
consumer cost-sharing.
Initially beneficiary pays
entire cost out of pocket
but qualifies for
reimbursement only
when claim form and
itemized bill are
submitted to insurer
upon return to the US.
Not covered.
Covered, if beneficiary is
stationed or retired
overseas, until the age of
65.
Not covered.
Port of Service 15% of all employees in
Plan (POS)
insurance
Same as HMO.
Not covered.
Preferred
Provider
Organizations
(PPOs)
Same as HMO.
However, some plans
have a network of
overseas providers
who accept US
insurance (e.g., Blue
Cross Blue Shield) and
would handle claim filing
on consumer’s behalf.
Not covered by most plans.
When covered (e.g., World
Bank employee health plan)
it is treated as an out-ofnetwork benefit requiring
higher consumer cost
sharing.
55% of all employees in
insurance
Source: Adapted from Matto and Rathindran (2005).
private insurance is already portable as long as the healthcare provider in another
country is accredited by the insurance company or the health maintenance
organization (HMO). In the case of the Japanese market, patients can seek partial
reimbursement of their medical cost outside Japan. However, long-term care
insurance, which is more relevant in the movement of retirees, is not yet portable.
Emotional insecurities can also slow down the movement of patients or
retirees. Language and cultural barriers may hinder them from seeking treatment
abroad. This is particularly true for the Japanese market. Even if a retiree has
already been staying for some time in the Philippines, he still goes back to Japan
to seek medical treatment because of language concerns and the issue of
cultural differences (Rodolfo and Padojinog 2004).
Beginning 2005, the government embarked on a bold move to position
the Philippines as a medical services hub in Asia (Mode 2). The Arroyo
administration issued EO 372 that created the Public-Private Partnership Task
Force on Globally Competitive Industries. The Task Force is mandated to pursue
strategic directions for three sectors—health and wellness, IT-enabled services,
and logistics. The Committee on Health and Wellness designated the Department
of Health’s Office of Undersecretary for Special Concerns to mobilize hospitals
and clinics. This program is likewise intended to encourage local healthcare
workers to stay in the country. The DTI’s Board of Investments (BOI) identified
health and wellness (including retirement villages) as a priority sector in the
2005 Investments Priorities Plan (IPP) and incorporated incentive schemes for
pioneer and nonpioneer investment projects (Mode 3). To date, the Philippine
Economic Zone Authority (PEZA) is working with the Department of Tourism
(DOT) and the DOH in defining the incentives for health tourism and retirement
villages. However, the policy framework on the development of health tourism
and retirement in relation to the local healthcare situation has yet to be
developed. In the meantime, hospitals, clinics, and physicians are steadily
attracting foreign patients while some real estate projects are serving as hosts
to foreign retirees.
There are still unresolved issues related to health tourism and retirement.
These include the following:
• How will foreign direct investments (FDIs) help improve equity in
healthcare services?
• How will the government address the incentive structure for FDIs and
for local healthcare providers that are starting to export health services?
• Will the entry of foreign healthcare professionals matter in the country’s
bid to become a medical services hub? If yes, to what extent will the
Philippines allow foreign healthcare professionals to practice in its soil?
• To what extent will the government give incentives to foreign retirees to
consider the Philippines for their retirement?
• To what extent will public healthcare workers be given incentives to
participate in medical tourism and retirement without causing internal
brain drain?
72
•
•
How will the Philippines sustain these export initiatives given the
weaknesses in the local healthcare delivery and financing?
How will the revenues from health tourism and retirement be channelled
to the health services, tourism, and allied sectors? What mechanisms
can be used?
Movement of students
students. Students are another group moving abroad to
consume health-related services. There are incentives for students to pursue
undergraduate and postgraduate medical education (e.g., traditional and
nontraditional) abroad. First, specific programs may not be available in their
home country. Second, scholarships on medical education require students to
pursue the program in another country and not in their home country. Third,
foreign institutions have a good reputation in their desired fields of specialization.
Among the medical education hubs are the US, Australia, and Singapore (and
China for traditional Chinese medicine). Fourth, due to cost considerations,
students from more developed countries go to lesser developed ones with a
good reputation in medical education. The establishment of satellite or affiliate
schools by developed countries in developing ones through joint venture
agreements has encouraged medical students to study in their home country.
Some universities in the Philippines have started to strengthen their marketing
efforts to attract foreign students in order to address the decline in enrollment
and encourage investments in their educational system. For instance, St. Paul
University of Tuguegarao has partnered with the Yan Jing Overseas Chinese
University of the Peoples Republic of China for the delivery of a Bachelor of
Science in Nursing program. There are also hospitals (e.g., St. Luke’s Medical
Center, Capitol Medical Center, University of Santo Tomas, and Cebu Doctors
Hospital) that provide postgraduate training to foreign doctors for specialization.
One barrier that schools and hospitals face in their drive to develop this niche
market is the lack of government guidelines on the scope of responsibilities of
foreign doctors who are training in the Philippines. Santiago (this volume)
discusses further the issues related to the movement of students.
The major barriers faced by foreign students when they move to another
country for their education are the lack of mutual recognition of diplomas or
certificates between countries and the visa regulation and processing. The
possibility of these students not returning to their home country is another
major concern among developing countries. The application of new technologies
in education delivery via teleconferencing could encourage students to pursue
their degrees in their home country since it could give them access to expert
education without having to go abroad.
Mode 3: Foreign commercial presence
This mode includes the establishment of commercial presence in a foreign
market to provide health-related services to clients. It is categorized as follows:
Hospital operation/management sect
or
sector
or. Hospital management
companies usually enter foreign markets through joint ventures with local
partners or triad ventures with local and third country investors. Specifically, it
concerns the acquisition of facilities, management contracts and licensing, and
local partnerships to gain access to certified and qualified medical personnel as
well as local markets.
The presence of foreigners in the industry is relatively strong in developing
countries such as Indonesia and Thailand. A number of investments came at
the height of the Asian crisis, when most hospitals either declared bankruptcy or
failed to become profitable. Major investors in hospital services come from
Australia and Singapore; some are from Malaysia and Japan. Even hospital
management is a common practice in cities like Jakarta (where at least five
hospitals are owned or managed by foreign firms and individuals), Surabaya,
Java, and Bali. In Dubai, a medical zone was constructed to house the famous
clinics of Mayo Clinic and Harvard Medical Center. These are currently patronized
by the rich citizens of Arab countries. The Singapore-based Parkway Group
Healthcare Pte. has developed the Gleneagles International as its brand in
acquiring or investing in hospital facilities. It has acquired so far 11 hospitals,
10 in Asia and one in Britain. A majority share in a dental surgery chain is
operating throughout Southeast Asia.
Health insurance sect
or
sector
or. Some countries have opened up their health
insurance markets with some restrictions imposed on foreign insurance
companies investing in hospitals. Managed care operations (a combination of
managed care and insurance) have been used as a means to penetrate foreign
markets to circumvent foreign equity and nationality restrictions. They are
expected to reduce the total medical costs by requiring participating physicians
to provide the lowest cost treatment. Patients have raised concerns over the
discrimination by physicians between HMO patients and non-HMO patients.
Education sect
or
sector
or. Some well-known medical schools are establishing
themselves in foreign countries (as in the case of the John Hopkins School in
Singapore), including developing countries, usually through joint ventures with
local schools. This kind of foreign commercial presence is often accompanied
by movement of providers (e.g., professors) and movement of consumers (e.g.,
students moving from headquarters to subsidiaries and vice-versa). The interest
for the recipient country is to differentiate and upgrade the curricula available to
its students or medical personnel. On the other hand, the interest for the exporting
institution is to have access to new sources of revenue, spread its reputation
abroad, and avoid overcrowding in its headquarters. This move encourages
students in developing countries to pursue medical studies in their home country.
On an ad-hoc basis
basis. To upgrade facilities, some companies expand
abroad through contract-based activities under multilateral funding. Since it is
time limited, the exporting country provides opportunities for its medical
professionals without burdening the local healthcare system. Contracts can be
renewed depending on the needs of the importing countries and the resources
of multilateral agencies. The exporting companies can likewise develop a pool
of personnel to be deployed thereby upgrading the quality of the healthcare
workers.
74
In this context, health service providers can face government policies that
discriminate against overseas entrants into the marketplace. These can include
limits on foreign equity ownership (Table 8), discriminatory tax arrangements,
restrictive competition policies (including the lack of competitive neutrality),
clearance requirement of health ministries, quantitative limits on the number,
Table 8. Investment rules on hospital and insurance companies
Countries
Rules / Policies
France, Italy, Luxembourg,
the Netherlands, and Spain
The construction or expansion of hospital facilities is limited by a health
services plan that identifies local needs.
Austria
Foreign commercial presence commitments affecting all 27 healthcare
sectors require authorities to consider local interests before authorizing
foreign persons or companies to acquire property and before allowing
foreign concerns to invest in corporate entities.
Sweden
Maintains economic-need limitations on the number of private medical
service practices that may be subsidized through its social security
healthcare reimbursement system
Foreign commercial presence is allowed only through incorporation with
a foreign equity ceiling of 51 per cent.
Finland
France
Foreign acquisitions of the stock of newly privatized companies may
be limited if total foreign investment exceeds one third of total investment
or 20 percent of total equity.
European Union
Some form of economic-need limitations on the establishment of new
hospital facilities.
The establishment of hospitals or other healthcare facilities may be subject
to needs-based quantitative limits.
United States
Japan
Limits ownership of hospitals and clinics to national-licensed physicians
or groups of persons of whom at least one member is a Japaneselicensed doctor. Investor-owned hospitals that are operated for profit are
prohibited. Regulations are less strict in the nursing home sector where
foreign companies are benefiting from a dramatic increase in the over-65year-old population in Japan and a shortage of nursing homes and other
long-term care facilities in that country.
Brazil
India
Foreign companies cannot own hospitals or clinics.
Foreign companies can establish themselves only through incorporation,
with a foreign equity ceiling of 51 percent.
Mexico
Foreign investment is allowed up to 49 percent of the registered capital of
enterprises.
Economic needs tests. Foreign companies have to set up joint-venture
corporations with Malaysian individuals or Malaysian-controlled
corporation or both.
Malaysia
Source: WTO (1998).
location, staffing and management of foreign establishments, and pre-emptory
political decisions. Changes to these policies generally require high-level
negotiations with the relevant foreign governments. The Philippines has not
explored commercial presence of healthcare facilities abroad. What the
government is pursuing is the establishment of foreign presence in the country
in order to build the capabilities in modes 1 and 2.
Mode 4: Movement of natural persons
There are two types of movement defined under Mode 4 of the GATS. These are
short-term consulting arrangements and intracorporate transfers.
As mentioned under Mode 2, the aging populations of the OECD countries
present an opportunity to ease unemployment problems and augment income
generation in developing countries through the deployment of medical workers.
Among health professionals, nurses have been in great demand in recent years.
This is evidenced by the rapid movement of thousands of nurses from developing
countries including the Philippines. The major importing countries so far are
Saudi Arabia, US, UK, and Canada due to the shortage of nurses in these
countries (Calma 2005; Galvez-Tan et al. 2005).
Furthermore, there are new openings for nursing aides and caregivers for
the elderly and those with disabilities. The major sources are the Caribbean
nations, Philippines, and South African countries. There are many reasons why
health professionals move out of their home country. Primarily, they are attracted
to the more improved living and working conditions and the more lucrative
remuneration that employers in other countries could offer, which is about five
to six times more than what they would receive locally. This is a tremendous
help for their families back home. In addition, they want to upgrade their skills,
which they could pursue by working in more advanced healthcare institutions.
Cultural affinity and geographical proximity facilitate the movement of health
personnel abroad.
From a national perspective, the remittances of these health workers will
help finance the healthcare needs of the domestic population. In a way, migration
also tends to ease the unemployment problems in the country. The temporary
movement of health professionals is also beneficial at some point. The risk of
brain drain starts to happen when these professionals get married and decide
to live in other countries. It is aggravated when doctors leave their home country
to work as nurses abroad.
The relevant barriers to the movement of healthcare professionals or
workers include the economic needs test requirements, discriminatory licensing,
difficulties with accreditation or recognition of foreign professional qualifications,
and the nationality and residency requirements.
Other barriers include immigration regulations, examinations for completion
of qualifications and foreign exchange controls affecting the repatriation of
earning, and discriminatory regulation of fees and expenses. The movement of
Filipino healthcare workers will continue with the globalization of healthcare.
How can brain drain be addressed? One is to explore the export opportunities
76
under Mode 1 (particularly business process outsourcing) and Mode 2. At the
same time, the government (and even private institutions) can negotiate for
equity or compensation for the costs of training or the provision of scholarships
to sustain the local healthcare workforce.
ASSESSMENT OF CAP
ABILITIES
CAPABILITIES
There are two areas that need to be examined in relation to the Philippine’s
capabilities to explore the opportunities presented earlier. These are infrastructure
(facilities and services, cost structure, differentiated standards) and human resource
pool (availability and quality). The presence of networks and business linkages
enhance these two integral components of the healthcare delivery.
Infrastructure
The Philippines offers competitive prices in health-related services. One reason
is the relatively low cost of labor in the country. In telemedicine, for example, a
radiologist in the US is paid US$30-50 per plate read. Compare this to US$5-10
being paid to a radiologist in the Philippines per plate read. In medical
transcription, the main advantages of the Philippines are its telecommunications
infrastructure, labor, and reasonable office rental fees (see Rodolfo, this volume).
These are the three main cost items that matter in the competitiveness of
medical transcription companies. The Philippines also has a good track record—
a minimum accuracy rate of 98 percent and a turnaround time of 24 hours. It
normally charges 10-12 cents per line—a rate that is competitive with India’s.
While labor cost in the Philippines is higher than in India, it is very competitive
relative to the US. The average salary of a full-fledged transcriptionist in the
Philippines is US$2,500-US$4,000 per year, depending on level of skills. In
India, it is US$2,700 while in the US, the rate is US$25,000 to US$30,000. The
cost of telecommunications lines is also lower by 30-50 percent in the Philippines
than in India. Furthermore, procurement times are shorter (3 weeks as opposed
to 3 months) and there is less transmission delay. The bandwidth cost has
declined by 70 percent during the past four years, according to local IT service
and contact center providers. Other major advantages include the benefits of
the country’s deregulated telecommunications sector (see Rodolfo, this volume).
There are 29 medical transcription organizations and 10 medical transcription
schools under the Medical Transcription Industry Association of the Philippines.
Furthermore, the association worked with the Technical Education Skills and
Development Authority (TESDA) in developing a curriculum for medical
transcription, which is currently being offered in some schools in the country.
As far as the retirement industry is concerned, the cost of living in the
Philippines is lower than in developed countries. The Filipino-American
community in the US is a major market that should be tapped. Another is Japan,
although it is relatively more difficult to uproot the Japanese retirees from their
homeland unless their government will strongly support and recommend the
Philippines as a retirement destination. Japan has a dollar per capita income of
over US$30,000—30 times more than that of the Philippines. The daily cost of
hospitalization in the Philippines is also 30 times lower than in Japan while
medical charges in the Philippines are nine times lower (Padojinog and Rodolfo
2004).
The dwelling units in the Philippines also cost less. At the same time, they
provide more living space for the household. At present, there is no need to
construct new settlements just to serve the retirees. The soft property market
currently prevailing in the Philippines has caught many developers of both
subdivisions and condominiums with large inventories of unsold units. With
some adjustments in the standard of construction and amenities, many of these
housing developments can be relaunched or remarketed as retirement villages
or clusters or lifestyle communities. Active retirees prefer to still live in the
metropolis and simply spend some activities in the countryside.
The Philippines takes pride in its archipelagic nature and relatively abundant
tourism resources, including its network of hospitals, clinics, retirement facilities,
and medical schools. The major healthcare providers in the country consist of
1,723 licensed private and public hospitals that have a combined bed capacity
of 85,040. The 1,069 private hospitals account for 47 percent of total bed
capacity. Out of the 654 government owned and operated hospitals, the 72
retained DOH hospitals have a total of 23,755 beds or 28 percent of the total
beds of government hospitals. A profile of the hospital industry in the Philippines
is given in Appendix B.
Additionally, there are government specialty hospitals that have become
known for providing quality medical care. These are the National Kidney and
Transplant Institute, Philippine Heart Center, and the Lung Center of the
Philippines. There are private clinics (e.g. Asian Eye Institute, American Eye
Center, Makati Laser Eye Center, Eye Republic, Belo Medical Clinic, and Calayan
Center) and individual practitioners who have gained expertise and reputation
in their field (Dacanay and Rodolfo 2005).
The network has its own weaknesses that can affect the country’s ability
to service the demand of the health tourism and retirement markets. First,
there are only about four destination spas in the Philippines compared to Thailand
and Indonesia that have more. This can limit the economic opportunities for the
industry.
Second, there are no clear directions yet on the accreditation system for
the health tourism and retirement programs. International accreditation has
been cited as an important requirement for insurance portability. To date, only
St. Luke’s Hospital is accredited by the Joint Commission International, an
accrediting body based in the US. Nevertheless, there are already some ISOaccredited hospitals and this accreditation is what matters to the European and
Asian markets (particularly Japan). Some providers are already able to attract
markets in Guam and other Micronesian states, the US, Australia, and India,
even without international accreditation. Needless to say, international
accreditation is needed to expand the market base. In the short term, while
providers are beefing up their financial resources, a high-quality local
accreditation scheme can be applied.
78
Third, the network lags behind in terms of health information infrastructure
and management systems (e.g. information documentation, processing and
dissemination). This is one reason why most facilities are not yet ready for
international accreditation and integration of telemedicine in everyday practice.
Fourth, there is a maldistribution of bed capacity (Dacanay and Rodolfo 2005).
In the National Capital Region (NCR), the ratio is 371 patients per bed while in the
Autonomous Region of Muslim Mindanao, the ratio is 3,872 patients per bed.
Fifth, private hospitals are closing down due to lack of patients and fast
turnover of healthcare workers. The social healthcare financing has not
significantly improved compared to the targets of the Health Sector Reform
Agenda (Appendix C). Healthcare delivery and financing are interdependent.
Healthcare financing does not only reduce the cost of healthcare, it also increases
the ability of individuals to secure health services. The benefits and services
offered by the healthcare financiers also impact on the providers. With the
additional financial support from healthcare financing, people have greater
access to healthcare providers. Moreover, because one is dependent on the
other, policies that are directed to one part of the system also affects the others
in terms of costs and benefits.
Lastly, there is still a lot of work to be done—from the airport infrastructure
side to providing ease of entry and exit to consumers from abroad.
Human Resources
The Philippines’ greatest strength is people. Its healthcare professionals have
earned the global reputation of providing competent and compassionate care
to patients. Two important questions have to be considered, however. Does it
have the manpower to serve its own people as well as the foreign markets?
How can it sustain the quality of care?
Data from the Professional Regulatory Commission (PRC) reveal that there
are almost 100,000 licensed physicians in the country (Table 9). This is supported
by a network of schools that produce medical and health sciences graduates—
a total of 30,000 per year.
The Philippines has a pool of health professionals but as mentioned earlier,
there is maldistribution (Galvez-Tan and Rodolfo 2005). For instance, around
half of the surgeons are highly concentrated in the NCR. Enrollment in medicine
and allied courses, except for nursing, has declined in the previous years (Table
10). Thus, lesser number of medical graduates is expected in three to four
years’ time. The number of National Medical Admission Test examinees has
also dipped from 6,245 in 2000 to 2,912 in 2005. Doctors are leaving the
country to work as nurses abroad primarily for economic reasons. Registered
nurses earn an average of US$150 per month in the Philippines (Galvez-Tan
2005) whereas nurses in the US earn about US$4,000 per month and has the
opportunity to bring their families. Any move to increase the salary scale of
registered nurses by at least three to four times its current level may help abate
the increasing migration. A government subsidy or grant could encourage trained
nurses to stay. A fourfold salary increase equates to human capital investment
Table 9. Supply of health professionals
PROFESSION
Total as of 10 February 2006
Dentists
Midwives
Nurses
Nutritionists/Dieticians
Optometrists
Occupational therapist
Physical therapists
Physicians
47,758
146,296
390,059
12,374
9,636
2,286
19,454
98,240
Source: Professional Regulatory Commission.
Table 10. Enrollment in medical schools
Schools
Quota
2001-02
2004-05
Angeles University Foundation
Bicol Christian College of Medicine
Cebu Doctors College of Medicine
Cebu Institute of Medicine
Cagayan State University
Davao Medical School Foundation
De La Salle University - EAC
Far Eastern University
Iloilo Doctors College of Medicine
Lyceum Northwestern
Manila Central University
Mindanao State University
Pamantasan ng Lungsod ng Maynila
Remedios Romuladez Memorial Foundation
St. Louis University
St. Luke’s College of Medicine
South Western university
UERM-MMC
University of Sto. Tomas
University of the Philippines
University of Visayas
Virgen Milagrosa University Foundation
West Visayas State University
Xavier University
Zamboanga Medical School Foundation
150
160
200
260
80
160
200
360
160
160
210
80
160
80
160
120
210
360
410
72
25
120
115
33
88
257
379
78
57
148
42
160
73
112
128
138
309
421
167
80
68
99
55
30
30
19
99
77
19
100
117
248
20
19
54
54
135
30
64
76
78
200
440
160
40
24
100
63
33
160
160
160
100
80
Source: Association of Philippine Medical Colleges.
% Increase
-58.3
-24.0
-17.5
-33.0
-42.4
13.6
-54.5
-34.6
-74.4
-66.7
-63.5
28.6
-15.6
-58.9
-42.9
-40.6
-43.5
-35.3
4.5
-4.2
-50.0
-64.7
1.0
14.5
10.0
80
that would convey huge marginal benefits for the smooth functioning of the
healthcare system. There is also a concentration of medical and health science
schools in the NCR, Southern Luzon, Ilocos Region, and Western and Central
Visayas. Meanwhile, Mindanao suffers not only from the lack of access to
healthcare facilities but also from the lack of medical schools.
In medical transcription, a major concern faced by the industry is the lack
of workers to service the demand. According to the MT Academy report, there
are merely 5,000 professional medical transcriptionists in the Philippines from
only 40 medical transcription firms, a small number compared with the 100,000
workers in the call center industry. A deterrent to the entry of graduates from the
nonmedical allied courses is the opportunity cost of additional training that is
usually conducted for six months.1 Some find it more worthwhile to spend on
caregiving training as caregiving is an entry point to work abroad and seems to
have better opportunities for their families.
Even if the Philippines has the available manpower, the deteriorating quality
is a concern. Seemingly, low passing marks in the board exams is becoming a
trend. A number of established nursing schools are enjoying high enrollment
rates but the number of graduates and board passers continue to decrease
each year. There is indeed a need to improve the curriculum of these schools in
order to improve the quality of nursing graduates. An alternative career path
can be pursued for those who do not take and/or pass the board exams. This
would improve the future pool of human resources (Galvez-Tan et al. 2005).
As the Philippines positions itself in health tourism and retirement, the
industry must address the tension related to the entry of foreign medical
professionals in medical and retirement facilities. Again, a strategic framework
is needed. In what specialty areas can foreign doctors be allowed to practice
and under what arrangements? What is the spectrum of services or participation
for their entry? Some conditions regarding practice can be explored such as
allowing foreign doctors to stay in the country within a specific period of time
only. This can be done together with a team of Filipino doctors who will be
trained to specialize in relevant fields.
The Philippines has some experience in setting up foreign presence abroad,
particularly franchising of retail stores. In the field of health services, however,
franchising has been done in services such as spas and clinics like the Belo
Medical Clinic but mainly for the local market. Models for establishing the
presence of hospitals and other clinics abroad are needed. Overseas franchises
can start in communities with relatively large Filipino population. This is the
same strategy pursued by the Apollo Clinic of India.
The training basically consists of three modules and costs PhP20,000 per module or a
total of PhP60,000–PhP75,000 for all modules. The cost is borne by the prospective
applicants. The lack of English skills also makes companies spend on English language
modules. Graduates of medical and allied courses can cut short the training to three
months or even less and focus on two modules only—Medical Style and Grammar, and
Medical Transcription Technology.
1
As regards attracting investments to the Philippines, there is a network of
medical schools that can be positioned for joint ventures to encourage foreign
students. There is also a network of hospitals, particularly tertiary hospitals,
that can be upgraded to service the health tourism and retirement markets.
There is no doubt that markets exist. Demand is already high relative to
the supply capabilities of the OECD countries and the developing countries in
Asia. For years, the markets have been the US and the UK for the deployment of
healthcare workers. But the result has been the permanent migration of health
professionals along with their families, which translates to the disintegration of
the local healthcare system. It is therefore critical to develop, devise, and set up
a health service enterprise that takes into consideration the brain drain risks.
This is where Mode 2 comes in. It is the point where citizens of OECD
countries come, visit, spend time, and eventually retire in the Philippines. It
would be very significant in the sense that their consumption and medical care
expenditures in the country will create multiplier effects on the local economy.
Tourism, for instance, has the capability to generate direct and indirect effects
of around PhP2.25 for every PhP1.00 spent by a tourist. This goes with the
existing tourist attractions already in place like holiday spots and malls, among
others. However, it is not yet very clear which markets to tap in the short, medium,
and long terms for medical tourism and retirement.
The Philippines can also enhance telehealth-related products and services
(Mode 1) and commercial presence (Mode 3). Telehealth is an unexplored
service that can be provided to neighboring Asian countries. It can be in the form
of tele-education between top hospitals and schools. Telediagnosis is also part
of prehealth and posthealth tourism. Perhaps in the medium term, the top
facilities in the country can consider expanding their presence abroad, set up
satellite clinics or offices, and contribute to revenue generation. Such mode
can be linked to telehealth of Mode 1 when these satellite offices send their
diagnosis via telemedicine to their main facilities here in the Philippines. Such
arrangement can likewise serve to prepare patients for health tourism. Post
telediagnosis can therefore serve as another revenue source when these patients
return to their country of residence.
Encouraging foreign investments would help local hospitals upgrade their
health facilities and services. Partnerships with healthcare providers in other
countries would also provide the opportunity for technology transfer and
improvement of human resource capability. Asian Hospital, for instance, has
partnered with Bumrungrad International.
The Philippines should also consider the strategy of Australia in medical
education. To facilitate the flow of foreign patients to public and private clinics,
Australia established a medical visa. Australian medical schools also created
specialized international departments, set up joint ventures with foreign
universities, and opened medical schools in the target markets. Incomes earned
from overseas training activities have contributed up to 20 percent to the budget
of Australian universities. The Philippines can explore this mode in order to
increase the scholarships for Filipinos and improve the human infrastructure.
82
China’s strategy of forming health teams to work abroad on contract—both
in the framework of aid programs or strictly on a commercial basis—may be
worth pursuing as well. Under this scheme, Chinese institutions enter into
agreements with foreign governments or directly with medical institutions.
Furthermore, it has opened access to more than a dozen traditional Chinese
medicine and medical facilities in more than 20 countries. This is the same
strategy being pursued by India’s Apollo Clinic which is also looking at the
Philippines for its expansion program. This strategy requires developing a brand
of services to be exported abroad. Singapore’s Parkway Health Group developed
the Gleneagles International brand as part of its strategy. The Raffles Medical
Group is building up strategic alliances overseas by partnering with healthcare
organizations from developed countries.
OTHER S
TRA
TEGIC OPTIONS
STRA
TRATEGIC
There is a need for a roadmap that will address the sustainability of the health
services sector under a globalized healthcare environment. A common
denominator among countries that are exploiting the global opportunities of the
health services sector (such as Australia, Canada, Cuba, Jordan, India, Sweden,
and the UK) is the existence of a national structure to coordinate and promote
participation in the global market. Their export strategies highlight the strong
linkages between domestic production and external markets of healthcare
services. A public-private mix is ideal for the Philippines since this will optimize
scarce resources and create a forum for addressing political issues and other
concerns.
Such a national structure is important to bring together all sectors and networks
to develop a common vision and strategies. A key concern is to increase awareness
on the capabilities of the various firms and the modes of health services the country
can trade. A further interest is to identify barriers and obstacles that hinder market
access to local and foreign clients. Fostering cooperation in an environment of
competition is essential. Developing and maintaining a database of suppliers and
clients is a tool to determine business strategies.
In the Philippines, related questions include the following: What is the
national structure? Who is the authority behind this national structure? Is it the
PPP Task Force on Globally Competitive Industries (EO 372) or the National
Economic and Development Authority (NEDA)? At this stage, it is the Task Force
that should align the initiatives for wellness, medical tourism, and retirement.
The DOH can take the lead in addressing human resources development. Such
alignment will help provide a wholistic approach and strengthen the linkages
between domestic production and external markets for healthcare services
and benefit the Filipinos who should be at the core of all these developments.
The Philippines can consider the models of other countries. For example,
in the UK, the London Medicine was created in 1993 with sponsorship and
support from the national government as well as private medical and business
communities. It has two main objectives: (1) to promote and develop business
opportunities for London Medicine’s affiliates so as to increase the flows of
clinical, educational, and research work in London hospitals and medical schools,
and (2) to attract research contracts and investment from British and
international companies.
Meanwhile, Australia established the National Health Industry Development
Forum in 1994 and set up a program of assistance to private firms. It is geared
toward bringing various health industries together and developing a common
focus. The Forum is jointly convened by the ministries of industry and health,
with the support of Austrade. As part of its export strategy, Australia is focusing
on the modes of cross-border trade and movement of consumers.
Singapore has the Singapore Medicine that has consciously repositioned
the country as a medical hub by focusing on more complicated procedures that
do not directly compete with Thailand.
Based on the previous sections, there are four areas where strategies are
needed.
Market Niching and Product Development
•
•
•
•
•
Strengthen domestic market base. Word-of-mouth advertising and
promotion can be an effective tool to convince and encourage the
more affluent segment of the local population and subsequently the
foreigners to consider the healthcare services in the country.
Define the product. The private sector and the government (Department
of Health, Department of Trade and Industry, Department of Foreign
Affairs, Department of Tourism) should work together to define what
the embassies and commercial posts can promote abroad.
Identify specific markets for telemedicine, health tourism and
retirement, and medical schools, and conduct a more detailed
competitor analysis so the gaps can be identified and matched with
existing strengths. Development and promotion of noninvasive
procedures can spearhead the health tourism program. The retirement
industry can focus more on the active retirees given that there are
hardly any ready and fully integrated facilities that can be promoted to
more discriminating markets such as Japan and the European countries.
Acquire market intelligence. This is needed by private stakeholders.
This is where the linkages with government can be exploited through
the services provided by commercial and diplomatic offices abroad.
Such service can reduce search costs on the part of the private sector.
Develop and strengthen global linkages. To upgrade capabilities,
increase the access to medical technology and expertise, and facilitate
the entry of foreign clients (e.g. students, patients, retirees), local
hospitals and schools should develop strategic alliances with foreign
institutions (e.g., hospitals and schools). This initiative can be pursued
by the Private Hospital Association of the Philippines or the Philippine
Hospital Association, with support and guidance from the DOH, the
Commission on Higher Education (CHED), and the Professional
Regulatory Commission (PRC) in terms of rules and guidelines.
84
Human Resources Development
In the previous section, three main concerns related to human resource
development were raised:
1. how to encourage healthcare workers to stay in the country;
2. how to provide economic opportunities to them via exportable health
services; and
3. how to enable them to improve their services.
To address these, the following strategies are recommended:
• Develop a national policy and a national plan on health human
resources (PMA 2005). This will include a national database on human
resource development as well as local health professional registries.
The policy should likewise address the maldistribution in human
resources and medical schools.
• Adopt interventions to increase the supply of healthcare workers. One
suggestion to increase the number of applicants in medical schools is
to decrease the cost of medical education by tapping other sources of
funds such as government (through subsidies or scholarship programs),
business and philanthropic institutions, legislators through their
countrywide development fund, and foreign students. Another is to
actively recruit students through a coordinated marketing program with
the CHED and the Department of Education.
• Review the curricula for medicine and health sciences education to
properly prepare the graduates to the new healthcare environment.
The curricula should be able to equip students with the proper
knowledge, skills, and mindset to effectively serve both local and foreign
patients and retirees. Schools that have zero or very low passing rates
in the board exams should be phased out.
• Strengthen the linkages between the academe and the hospitals and
other healthcare providers. This is to address the mismatch between
skills required by the industry and the graduates of medical and health
sciences schools and to improve enrollment in health sciences.
• Institutionalize continuing education programs for healthcare
professionals. This can be done through the PRC as requirement for
license renewals. Associations and hospitals can likewise help support
this program to keep the professionals up to date with the changes in
economic, cultural, social and technological trends in healthcare
delivery.
• Manage migration of healthcare professionals. This can be done by:
(a) negotiating with foreign governments or recruiting institutions for
compensation schemes or equity; (b) providing economic opportunities
through health tourism, retirement and telehealth activities; (c)
rationalizing distribution of schools and healthcare facilities; and (d)
increasing coverage and health benefits for Filipinos. Any initiative of
the national government to increase health benefits would certainly
•
•
augment the incomes of healthcare professionals by at least 30 percent.
A rise in healthcare spending due to additional benefits like health
insurance would increase the demand for healthcare. As a whole,
strengthening the capacity of the Philippine Health Insurance
Corporation (PhilHealth) as a health insurer is likely to achieve a strong
ripple effect for the development of other sectors in the healthcare
industry, particularly among its providers.2
Strengthen the initiatives of healthcare professionals to establish clinics
or networks of professionals for group practice. This can provide
economic opportunities and enhance development of clusters of
providers. Some models are already observed in cosmetic surgery, eye
care, and dental treatment.
Align the training standards with international standards. This is needed
across all tradable health services. Workers must be continuously
trained to ensure quality services to both local and foreign markets.
Industry Infrastructure
The main concern is the right infrastructure the industry needs to deliver quality
services to domestic and foreign markets. The following strategies should be
considered:
• Do an inventory of facilities and capabilities of medical providers and
allied industries (e.g. schools, tourism providers, associations). This is
needed to identify critical skills and gaps in healthcare services and
facilitate the development of linkages and clusters of providers and
expertise
• Define incentive schemes for hospitals, clinics, retirement villages,
wellness providers (e.g., spas), and schools to encourage them to
support the local and international healthcare service industries. There
are no clear incentive systems for the health services sector as a whole.
The investment environment must be clearly defined under the wings
of the Board of Investments and the Philippine Economic Zone Authority
(PEZA). Local hospitals that are starting with their medical tourism
programs are concerned about the dual incentive structure that favor
institutions with larger foreign patient base.
The Thai government is aggressively making healthcare accessible for all starting 2002.
This move is foreseen to increase the demand for healthcare services by public or private
providers. The contingency fund of Baht 5.168 million for the development of hospitals
facing deficits and another Baht 5.168 million for human resource development is expected
to transform the Thai healthcare sector in two to three years to be at par with internationally
accredited healthcare providers. The additional healthcare insurance benefit made available
by the Thai government is meant to increase the utilization of existing facilities to promote
medical tourism particularly for outpatient care (e.g., health promotion, primary care, and
sickness prevention). This caters to both foreign and local markets.
2
86
•
•
•
Map out initiatives and implementation schedule for accreditation of
hospitals and retirement facilities by local and/or international
accrediting bodies to promote quality healthcare services for both local
and foreign clients.
Map out clusters of services that can be promoted as well as clusters
of facilities that can be linked up to build an efficient referral system,
which is highly needed by the retirement industry.
Improve marketing infrastructure. There is a need to increase the
country’s presence in the meetings, incentives, conferences and events
(MICE) market by providing competitive bids for medical meetings or
congresses. This is a way by which the Philippines can expose the
capabilities of its health professionals and become a health hub. Travel,
medical, and educational associations can hold symposia or meetings
to discuss the latest issues and propose strategies to the government.
The medical sector should also participate in talks regarding the
liberalization of the health services sector. There is also a need for
travel agencies, medical providers, and allied services to link up their
core competencies in order to focus on delivering quality service.
Trade Nego
tiating Issues
Negotiating
In studying trade in health services, there are two important classification lists
that should be used as reference—the UN Central Product Classification List
and the GATS Classification List. The commitments of countries to liberalize the
health sector are based on Section 8 of the GATS List. However, in discussing
the four modes of supply defined above, there is a need to refer both to the UN
CPC Division 93 and the GATS List. To illustrate, Table 11 reveals that under the
GATS, health and social services are defined under Section 8. These include
hospital services, other human health services, and social services. However,
trade in health services also covers the export of medical professionals that is
not covered in Section 8 but is in Section 1 (Professional Services) of the GATS
List. As noted by the WTO Secretariat (1998), such delineation between Sections
1 and 8 tends to ignore the strong complementarities between medical services
and hospital services.
There are other issues related to the sectoral classification list of the GATS
on health services. Consider activities such as health tourism (spas, cosmetic
surgery for aesthetic purposes, convalescent care, and rehabilitation of local
health services by tourists) as defined in Mode 2. Section 8 is not specific to
activities aimed at providing specialized treatments to tourists. The use of spas
can be categorized as professional services offered by midwives, nurses,
physiotherapists, and paramedical personnel provided they involve some
treatment with a medical doctor located in the premises as some wellness
programs do (Gonzales et al. 2001). As far as health services are concerned,
the export data are currently reflected in various accounts. In the case of medical
transcription or outsourcing, the export figures are part of communication
services. For health tourism, the data are part of travel and tourism. The
Table 11. Health and social services in the GATS Scheduling Guidelines and in the
UN Central Product Classification (CPC) List
Sectoral Classification
List under GATS
1. Business Services
a. Professional Services
h. Medical and dental services
i. Veterinary Services
J. Services provided by
midwives, nurses, physiotherapist s and paramedical
personnel
k. Other
8. Health Related and Social
Services
a. Hospital services
b. Other Human Health
Services
c. Social Services
Relevant
UN CPC
No.
Definition / Coverage in
Provisional CPC
9312
Services chiefly aimed at preventing, diagnosing and treating illness through consultation by
individual patients without institutional nursing.
Veterinary services for pet animals and animals
other than pets (hospital and non-hospital,
medical, surgical and dental services).
Services such as supervision during pregnancy
and childbirth… nursing without admission care,
advice and prevention for patients at home.
932
93191
n.a.
n.a.
9311
Services delivered under the direction of medical doctors chiefly to inpatients aimed at curing,
reactivating and maintaining the health status.
Ambulance services; residential health facilities
services other than hospital services.
9319
(other than
93191)
933
Social Services with accommodationa; social
services without accommodationb
Welfare services delivered through residential institutions to old persons and the handicapped (PPC 93311)
and children and other patients (93312); other social services with accommodation (93319).
b
Child daycare services including daycare services for the handicapped (93321); guidance and counseling
services not elsewhere classified related to children (93322); welfare services not delivered through
residential institutions (93323); vocational rehabilitation services excluding services where the education
component is predominant (93324); and other social services without accommodation (CPC 93329).
a
Sources: UN Statistical Classification System; World Trade Organization; Gonzales et al. (2001).
revenues generated by medical professionals working abroad are reflected as
overseas workers’ remittances.
Most of the members have unbound commitments on Mode 1, which
means they are free to introduce any new measure to regulate foreign service
provision in the domestic market— both in terms of market access and national
treatment (Table 12). The Philippines has not made any commitments in the
GATS (Table 13). To this end, the government and the private sector should work
88
Table 12. Overview of commitments for Modes 1, 2, and 3 on medical, healthrelated, and social services
Sector
Number of
members
(Full commitment
for Modes 1-3)a
Medical and dental
services
Veterinary
services
Midwives, nurses
etc.
Others
Hospital services
Other human
health services
Social services
Other health and
social services
a
b
c
d
e
f
g
h
Cross border supply
Consumption abroad
Commercial
presence
Full Limited Unbound Full Limited Unbound Full Limited Unbound
b
49 (12)
17
6
26
38
7
4
19
24
6
37 (10)c
17
2
18
33
1
3
19
14
4
26 (4)d
6
4
16
21
5
0
10
16
0
3 (1)e
39 (9)f
13 (6)g
2
11
6
1
1
1
0
27
6
2
31
6
1
5
5
0
3
2
1
18
8
2
17
4
0
4
1
19 (2)h
3 (2)i
3
2
0
1
16
0
4
2
13
1
2
0
5
2
13
1
1
0
Full commitments for both market access and national treatment and no limitations in sectoral coverage.
Brunei Darussalam, Burundi, Congo, Gambia (subject to horizontal limitations for Mode 3), Guinea,
Hungary, Iceland (subject to language requirement), Malawi, Norway, Rwanda, South Africa, and
Zambia.
Australia, Burundi, Congo, Finland, Gambia, Lesotho, Singapore, Qatar, South Africa, Saudi Arabia,
(subject to horizontal limitations for Mode 3).
Gambia (subject to horizontal limitations for Mode 3).
Iceland.
Burundi, Ecuador, Gambia (subject to horizontal limitations for Mode 3), Hungary, Jamaica, Malawi,
Saint Lucia, Sierra Leone, Zambia.
Gambia (subject to horizontal limitations for Mode 3), Hungary, Malawi, Sierra Leone, Zambia.
Hungary, Sienna Leone.
Sources: WTO (1998); ITC (2002).
together to use trade to the country’s advantage by considering the linkages
across all modes of supply. For example, if infrastructure investments are
needed and capital is lacking, then the Philippines can explore commercial
presence through incentives to foreign providers. But what should be the
conditions in the establishment of commercial presence? If 100 percent foreign
ownership is allowed, how can the country ensure the transfer of technology
and systems, and the capability building for research and development? How
can these FDIs increase equity to healthcare services and sustain human
resources for health? What are the monitoring mechanisms to ensure this
access? The FDIs can serve as an entry point for foreign expertise but the
country should set some conditions. For instance, the government may allow
foreign experts to stay for a specific period of time, or only require a certain
Table 13. Summary of specific commitments in the GATS
Philippines Thailand Singapore Malaysia India Indonesia
Accounting and finance
Advertising
Legal
Architectural and engineering
Telecommunications
Audiovisual
Construction/engineering
Distribution
Education
Health
Travel and tourism
Recreation/culture/sports
Transportation
Courier
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Sources: ITC (2002).
percentage of the total workforce to be filled up by foreign experts. The specific
fields of expertise needed can be determined by studying the critical skills
required vis-à-vis current gaps.
The following strategies should be considered:
• Develop a framework for linking trade in international health services
with the domestic healthcare system.
• Pursue mutual recognition agreements (MRAs) for the healthcare
professionals on a bilateral basis (or regional if possible). The proposed
MRAs should be developed by the private sector, specifically
associations, and the government.
• Build the capacities of the health services stakeholders (e.g.,
government, private sector, civil society) to understand the GATS and
the opportunities its offers. Capacity building will enable the
stakeholders to define a position on liberalization, which may lead to
improvements in the local healthcare situation. There is a need to
consolidate the position of the different stakeholders in order to
strengthen the overall bargaining position of the country in the health
services trade and address the imbalances resulting from the rapid
migration under Mode 4.
• Measure the economic contributions of tradable health services for
use in negotiations, policymaking, and industry and business planning.
This can be initiated by the National Statistical Coordination Board and
the National Statistics Office with from the DOH, Department of Tourism,
Depar tment of Trade and Industry, the National Economic and
Development Authority, and various associations and private providers.
90
•
Negotiate for public insurance portability with countries such as Japan,
South Korea, Taiwan, UK, and Australia that have high or 100 percent
universal coverage of social insurance. The US should also be
considered because of the Fil-Am market.
APPENDICES
Appendix A
of
ile of Health TTourism
ourism in Select
ed Countries
A.. Brief Pr
Prof
ofile
Selected
USA
The United States is a major exporter of health services as evidenced by the
relatively significant flows generated by institutions such as Mayo Clinic, Johns
Hopkins Medical Center, and the Massachusetts General Hospital from Mexico,
Argentina, and even Arab countries (WTO 1998). It has the first mover advantage
in capturing the movement of patients across borders.
Cuba
The Servimed in Cuba has been tapped to generate foreign exchange earnings
from the sale of health tourism packages and to establish joint ventures. Its
competitive advantage lies in viable prices due to low labor costs, highly qualified
health professionals, and certain exclusive treatments that are successfully
drawing patients from Latin and North America. Its health tourism program is
highly supported by the government.
Thailand
Singapore is facing stiff competition with the Bumrungrad Hospital (now
Bumrungrad International) of Thailand. Today, the Private Hospital Association,
which has more than 185 members, has been supporting this health tourism
project. Available treatments include dentistry, ophthalmologic surgery, and
plastic surgery, among others. Services in Bangkok can be 50-70 percent cheaper
than in Singapore. Around 800,000 foreign patients were treated in Thailand in
2003, generating US$470 million in revenues. The major markets of Thailand
today are the Japanese, Americans, and British. The Bumrungrad Hospital treated
350,000 patients in the same year. The infrastructure and marketing
investments of Bumrungrad helped increase the international patient volume
by 57 percent between 1999 and 2001 while revenue contribution from
international patients reached 37 percent . Bangkok’s International Medical
Centre also offers services in 26 languages, recognizes cultural and religious
dietary restrictions, and has a special wing for Japanese patients.
Malaysia
Malaysia is another country whose stakeholders are convinced about the value
of health tourism as a major growth engine. Under the 8th Malaysia Plan, the
government identified health tourism as a growth driver in 1998 and created
the National Committee for the Promotion of Health Tourism in Malaysia. The
Committee is tasked to spearhead the development of the medical and longstay programs, and to promote Malaysia as a “second home” for international
tourists. The Committee is composed of airlines, hospitals, travel and tourism
agencies, and the Malaysian Industrial Development Authority. Five
subcommittees were created to address the issues of: (a) identification of
markets; (b) tax incentives; (c) fee packaging; (d) advertisement; and (e)
accreditation. In 2003, there were 100,000 health tourists, an increase of
18.2 percent from 2002. Of the total number, 60 percent were from Indonesia
and 10 percent were from Brunei, Vietnam, Singapore, and Thailand. The rest
were from West Asia, South Asia (Bangladesh and India), and Japan. Total
revenue was estimated at US$10 million. Cardiology and general surgery services
have the highest demand among foreign patients. The Middle East is a major
target market given the large annual medical expenditures in these countries.
The government aims to generate around US$1 billion in revenues from health
tourism alone by 2010.
Singapore
Singapore is another aggressive player in the field serving its immediate regional
markets. An estimated 150,000 foreign patients sought treatment in Singapore
in 2000 and spent about S$345 million a year in healthcare. Based on figures
from the Ministry of Health, most of the patients were from Malaysia and
Indonesia (70-85%). Today, Singapore does not compete on the basis of price
alone but is boosting its image as a destination with high standards of healthcare.
Singapore is positioning itself as a center for health and wellbeing (e.g., health
screening, aesthetic and antiageing therapies) and for the treatment of various
illnesses. It also intends to establish one-stop centers in key regional markets to
make it more convenient for foreign patients to come to Singapore. It aims for
one million international patients per year by 2012 and total revenues worth
US$2 billion.
Appendix B. The Private Hospital Industry in the Philippines
Private hospitals are classified according to levels of complexity or specialization.
The hospital system in the Philippines basically follows a three-tier mode: primary,
secondary, and tertiary. Each level has well-defined roles, functions, capabilities,
facilities, organizational structure, and staffing standards. This categorization
allows the provision of a hierarchy of services utilizing appropriate resources at
each level. Appendix Table B1 shows the distribution of hospitals by category
for 1997-2003.
The DOH gives a more specific classification of the three levels. The
tertiary level is composed of specialty centers, specialized hospitals, medical
centers, regional hospitals, and provincial or general hospitals. Tertiary
hospitals have capabilities and facilities for providing medical care to cases
requiring sophisticated diagnostic and therapeutic equipment and the
92
Appendix Table B1. Average number of beds in private hospitals
REGION
RP TOTAL
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
NCR
CAR
ARMM
CARAGA
Primary
1997 1999 2003
15
11
12
10
12
13
16
16
14
14
16
20
16
17
15
16
16
14
12
11
11
12
13
16
17
14
13
15
19
14
15
16
17
17
14
12
11
12
4
20
75
16
14
14
15
19
14
16
17
20
12
Secondary
1997 1999 2003
30
26
20
21
25
27
36
39
26
31
40
50
37
34
36
32
29
27
30
22
25
28
38
40
31
32
41
44
33
31
32
15
32
Tertiary
1997 1999 2003
33
31
33
22
48
27
33
40
28
28
38
36
34
36
31
130
94
100
72
84
61
160
127
113
70
99
115
73
216
160
128
86
50
75
84
65
174
126
113
87
92
110
73
211
160
127
78
50
78
87
62
184
165
113
87
89
110
71
199
160
42
75
82
67
TOTAL
1997 1999 2003
34
22
17
22
28
20
69
56
25
21
27
31
25
84
28
16
24
35
22
18
24
29
21
71
56
26
23
27
31
23
86
27
17
26
38
22
19
27
29
28
95
73
26
24
29
32
25
87
32
20
22
Source: Department of Health.
Note: Shaded regions are those with average number of hospital beds greater than the national average.
expertise of trained specialists in the subspecialties. In particular, specialty
centers are equipped with expensive and sophisticated diagnostic and
therapeutic facilities for a specific medical problem area. These are hospitals
with fully departmentalized service capabilities and certified medical
specialists and other licensed physicians in the field of medical science
such as pediatrics, obstetrics and gynecology, surger y, and other
subspecialties and ancillary services. These are large-scale hospitals with
bed capacities ranging from 50 to over 700. Their medical equipment and
facilities are usually the most advanced and are constantly upgraded. They
are also considered as teaching and training hospitals.
The secondary level consists of district hospitals with capabilities and
facilities for cases requiring hospitalization. It also has the expertise of trained
specialists. Like tertiary hospitals, they have the support of licensed physicians
in the medical sciences and operate as admitting medical centers. They have
bed capacities ranging from 10 to 69. Occupancy rates range from 30 to 60
percent.
The primary level is composed of municipal and Medicare-affiliated
hospitals that have facilities and capabilities for first-contact emergency care
and hospitalization of simple cases. These are hospitals equipped with the
service capabilities needed to support licensed physicians rendering services in
medicine, pediatrics, obstetrics, and minor surgery. Bed capacity ranges from 6
to 25. Due to the limited number of beds and facilities, hospital operations are
not centered on inpatient activities. Primary hospitals operate more as outpatient
clinics than as admitting medical centers.
On average, medical personnel (doctors, nurses, midwives, and medical
technicians) are present for every bed in a primary hospital. Doctors and nurses
are employed as general practitioners or professionals. The average number of
doctors for secondary hospitals is 14, mostly resident physicians. Especially in
the rural areas, these hospitals experience difficulty in attracting doctors. On
average, secondary hospitals maintain 1.06 medical personnel for every bed.
Tertiary hospitals have an average of 145 doctors. No difficulty is experienced
in attracting doctors because of the perceived prestige attached to tertiary hospitals.
Many tertiary hospital administrators believe that they have a greater responsibility
in providing quality healthcare. The average medical personnel-to-bed ratio
maintained by tertiary hospitals is 2.28. An interview with industry participants
revealed that tertiary hospitals need an initial capital of about PhP5.6 million per
hospital bed. Financial viability can only be achieved upon reaching 500 beds.
Breakeven point happens on the tenth year of operation.
Each hospital is divided into several departments. Although the number of
these departments varies according to specialization, eight departments can
be distinguished: (1) cardiology department; (2) respiratory therapy; (3) laboratory;
(4) surgery; (5) radiology; (6) emergency room; (7) coronary care unit; and (8)
pulmonary care unit.
The distribution of private hospitals by category as of 1997 can be
characterized by the clustering of hospitals in areas with relatively high income
level such as the National Capital Region (NCR), and Regions 3 and 4. For
instance, NCR has an average of 200 beds per tertiary hospital whereas Regions
3 and 4 have an average of 100 beds per tertiary hospital. The larger, more
financially viable tertiary hospitals in the NCR have about 300 to 600 beds.
The financial viability of the private hospital sector is currently threatened,
hampering its ability to engage in expansion programs and social services such
as medical missions. This explains the marked decrease in the number of
hospitals and beds from 1964 to 2003. Among the major problems besetting
the sector include the increasing hospital operating expenses, high level of bad
debts and uncollected accounts, increasing costs of capital expenditures
(building expansion or equipment purchase), generally poor management skills
and shortage in the supply of hospital management specialists, delayed
reimbursements by Medicare, scarcity in long-term financing and high loan
default rates, maldistribution of hospital facilities especially in urban areas, and
low paying capacity for hospital services of the greater percentage of the
population. Private hospitals may have improved their productivity in the past
years but their capacity (in terms of number of beds per population) has not
significantly increased.
Private hospitals account for the majority of fixed asset investments in the
healthcare industry. From 2000 to 2003, the healthcare providers that had the
biggest fixed asset investments were the top three hospitals in the NCR—St.
94
Luke’s Medical Center, Professional Services, Inc. (Medical City), and Medical
Doctors, Inc. (Makati Medical Center). These hospitals accounted for 22 percent
of total book value of fixed assets in the private healthcare sector. They invested
a total of PhP8 billion in fixed assets from 2000 to 2003 equivalent to 33
percent of the total amount needed to modernize government hospitals and
healthcare facilities (Appendix Figure B1).
Appendix Figure B1. Total fixed assets of top private hospitals vs. total book
value of fixed assets of surveyed establishments in the
private healthcare industry (in PhP ‘000)
Sources: Annual Survey of Establishments (National Statistics Office) and Top 7,000 Corporations
(Philippine Business Profiles).
Appendix C. Healthcare Financing in the Philippines
The industry’s contributions to the gross domestic product (GDP) reached 3.4
percent in 2004. Per capita spending was US$35.3—a 24 percent increase
from its 2002 level. This can be explained by the low percentage share of
healthcare expenditures to an average family’s expenditures. This share
amounts to only 2-3 percent of average income.
In recent years, the private sector has become the major provider of health
financing (Appendix Figure C1). The government has been limited by its fiscal
constraints. Moreover, there is an increasing availability of private healthcare
companies. In private financing, a big portion is still financed by households as
revealed by the proportion of out-of-pocket expenditures to total private sector
financing. External financing, however, is quite limited to donations by
international agencies.
Appendix Figure C1. Distribution of healthcare spending
Source: Philippine National Health Accounts, National Statistical Coordination Board, as of July 2004.
Looking at the total health expenditures in 2004, government spending,
including social insurance, accounted for 40 percent. Private and other sources
were 58.6 percent and 2.8 percent, respectively. In 2003, government
expenditures increased to 43.7 percent while private sources declined to 54.9
percent. Health expenditures of the private sector came from private insurance
companies (1.34%), HMOs (5.7%), and individual out-of-pocket expenditures
(42.8%). Almost half of the healthcare expenditures were either financed without
healthcare plans or insufficiently covered by these healthcare plans.
Traditionally, the healthcare industry of the Philippines has been principally
financed by taxes and out-of-pocket payments of individuals. Nevertheless,
various financing mechanisms, particularly insurance and prepayment schemes,
are continuously increasing the contributions to health expenditures. Medicare,
the compulsory health insurance, has been the most established of all insurance
schemes. It has been in existence since 1972.
The actual percentage share of out-of-pocket spending, which falls significantly
above the targeted percentage share from the healthcare reform agenda, manifests
the dependence of the healthcare system on household personal disbursements.
As could be gleaned from Appendix Figure C2, the healthcare system is expected to
develop the capacity of social insurance to carry the burden of healthcare financing
as indicated by the target share of social insurance.
There is a pressing need for the country to invest on education and healthcare
to improve the quality of life and promote human development. If local financing is
insufficient, the country can explore opportunities from tradable health services.
Additional spending on health will generate additional output and income
for a number of sectors in the economy. The wide backward output and income
96
Appendix Figure C2. Personal and public healthcare spending by sources of
funds (actual vs. targeted based on health sector)
Source: Philippine National Health Accounts, National Statistical Coordination Board, as of July 2004.
linkages revealed in Appendix Table C1 imply that any increase in the spending
for healthcare services and related industries by households, investors, or the
government is beneficial to the development of the healthcare sector as a
whole, not only in terms of the output but also in terms of the incomes of
healthcare professionals.
Appendix Table C1. Output and income coefficients of variation in the healthcare
industry and health-related sectors
Industry description
Manufacturing
Drugs and medicine
Surgical, dental, medical and orthopedic
supplies
Ophthalmic goods
Services
Life and nonlife insurance
Private hospitals, sanitaria and similar
institutions
Private medical, dental, veterinary and
other health clinics and laboratories
Other social and related community
services
Public health services
Total medical and health-related services
Output linkages
Forward
Backward
Income linkages
Forward
Backward
narrow
narrow
wide
wide
wide
narrow
wide
narrow
narrow
narrow
narrow
narrow
wide
narrow
narrow
wide
Wide
narrow
narrow
wide
narrow
wide
narrow
narrow
narrow
wide
narrow
narrow
narrow
narrow
wide
narrow
narrow
narrow
narrow
narrow
Sources: Authors’ estimates based on NSCB 1994 Input-Output Table (NSCB 2003).
Most industries exhibiting high income multipliers are also typically labor
intensive or belonging to the services industry. The entire medical and healthrelated industry itself ranked sixth among all other industries in the economy. For
every one unit increase in final demand in the economy, there will be a PhP0.3387
increase in income of employees in the medical and health-related industry.
REFERENCES
Blouin, C., N. Drager and R. Smith, Editors. 2005. International trade in health services.
Geneva, Switzerland: World Health Organization and Washington, DC, USA: World
Bank.
Calma, J.R. 2005. The exodus of our vital supply of nurses. Masteral thesis. Pasig City,
Philippines: University of Asia and the Pacific.
Galvez-Tan, J. and C.L.S. Rodolfo 2005. Competitiveness of health and wellness.
Presentation during the Philippine Services Coalition Stakeholders Meeting. Makati
City, Philippines.
Galvez-Tan, J., F. Sanchez and V. Balanon. 2005. The brain drain phenomenon and its
implications for health [online]. Paper presented at the International Conference on
the Medical Workforce sponsored by the United States Educational Commission for
Foreign Medical Graduates (ECFMG), UP Diliman, Quezon City, 4-7 October 2004.
http://www.up.edu.ph/forum/2005/Jul-Aug05/brain_drain.htm.
Gonzales, A., L. Brenzel, and J. Sancho, J. 2001. Health tourism and related services:
Caribbean development and international trade. Submitted to the Regional Negotiating
Machinery.
Kaiser, K. 2005. The healthcare service market for the international consumer: an analysis
of the Philippines. The Small and Medium Enterprise Development for Sustainable
Employment Program (SMEDSEP). Project No. 01.2467.7-001.00. Makati City,
Philippines: European Chamber of Commerce of the Philippines and German Technical
Cooperation.
Mattoo, A. and R. Rathindran. 2005. Does health insurance impede trade in healthcare
services?” Mimeo. Washington, D.C., USA: World Bank.
National Statistical Coordination Board (NSCB). 2003. Philippine national health accounts
Makati City, Philippines: National Statistical Coordination Board.
Philippine Medical Association (PMA). 2005. Proceedings of the Philippine Medical Summit.
Quezon City, Philippines: Philippine Medical Association.
Rodolfo, M.C.L.S. and W. Padojinog. 2004. Philippine tourism’s big bold move. Staff Memos
10. Pasig City, Philippines: University of Asia and the Pacific.
Rodolfo, M.C.L.S. 2004. Health tourism: widely prescribed. Staff Memos 13. Pasig City,
Philippines: University of Asia and the Pacific.
Singapore Healthcare Services Working Group. 2002. Developing Singapore as the
compelling hub for healthcare services in Asia [online]. http://www.app.mti.gov.sg/
data/ [Accessed 30 July 2004].
World Bank. 1998. World development report 1998. Washington, DC.
World Trade Organization (WTO). 1998. Health and social services: Background on health
services trade [online] http//www.wto.org [Accessed 10 August 2004].
Chapter 4: Audiovisual Services Sector 99
4
Audiovisual Services Sector: Can the
Philippines Follow “Bollywood”?
Gloria O. Pasadilla and Angelina M. Lantin, Jr.
ABSTRACT
The paper is an industry study of the audiovisual services sector, especially the
film and television industries in the Philippines. It discusses the importance of
the sector in the economy and employment, its strengths and weaknesses,
regulations that affect it, and the competitive forces that influence the key
participants. The paper also discusses the technological developments such as
digital technology that are changing the mode of delivery and consumption of
audiovisual services. The paper notes its export potential given the growing Filipino
population abroad that continues to crave for local movies and programs, and
considers ways how the Philippines can replicate the relative success of India,
China, and Korea in breaking through the global market.
GL
OBAL O
VER
VIEW OF THE A
V S SECT
OR
GLOBAL
OVER
VERVIEW
AV
SECTOR
Introduction
The audiovisual services (AVS) sector, particularly the film industry, is among the
fastest growing sectors in different countries. The United States (US) or
“Hollywood” has dominated this sector around the globe, being the number one
producer and exporter of films. However, as technology developed and markets
opened, India and China are emerging as strong global players. These two
countries boast not only one-third of the world’s population, but also have thriving
film and television industries. For instance, India’s film industry, also known as
the “Bollywood,” is one of the largest in the world in terms of film productions
and admissions. It is currently worth about US$1,256 million, by far “peanuts”
compared to Hollywood resources. But the industry players are expecting a
growth rate of 18 percent compounded rate annually for the next five years. The
box office success of movies such as Bride and Prejudice, Bend it like Beckham,
and Monsoon Wedding have established a footprint for crossover films both in
India as well as in the international market. The return on investment for Indian
films is high due to low costs of production and high revenues. For instance,
Monsoon Wedding earned US$30 million worldwide on an investment of only
100
US$1.5 million. In 2004 alone, it is estimated that five Bollywood releases
generated more than US$2 million each in the US and the United Kingdom (UK).
With the ever-increasing Indian diaspora around the world, the number of such
movies with crossover themes is expected to rise substantially.1
Besides Bollywood, cinematic output and creativity are also rising in China,
Iran, South Korea, Taiwan, Japan, Singapore, and Hong Kong. The Chinese film
Crouching Tiger, Hidden Dragon has grossed more than US$100 million in the
US—the first foreign-language film to take in that kind of cash (Plate 2002).
Japanese horror movies are making waves not just in Asia but in North America
as well. Hollywood is even remaking these horror films, an example of which is
the American version of The Ring.2 Lastly, there are also the promising Iranian
films that depict very relevant themes and show the Iranian culture. The White
Balloon, The Apple, and Children of Heaven stir audiences everywhere.
With the success of Bollywood and of other countries, is there a chance for
the Philippines to be another “Bollywood?” Can the Philippines also penetrate
the international market as what the Chinese martial arts-inspired films or
Japanese horror films have done? Can Filipino films also stir the moviegoers
around the world like the Iranian films? What would it take to achieve it?
Answering these questions require an indepth analysis of the AVS industry.
What is its scope? What are the Philippine AVS industry’s strengths and
weaknesses? What are its exports potential and emerging market trends? This
paper is a first attempt to comprehensively study the sector.
The paper is divided into six sections. This section presents the global
overview of the AVS sector that includes some statistical information, global
trends and development in the sector, and trade barriers typically hoisted
across various countries. The next section discusses specifically the entire
Philippine AVS sector, while the third and fourth sections narrow their focus
on the film industry and the television industry, respectively. In both, a simple
SWOT (strengths, weaknesses, opportunities, and threats) analysis is
undertaken. The last section summarizes the study and recommends some
policy proposals.
Statistical Inf
ormation on the A
V S Sect
or
Information
AV
Sector
The AVS sector consists of several subsectors. In the WTO Services Sectoral
Classification List (MN.GNS/W/120), which was drawn up during the Uruguay
Round based on the United Nations Provisional Central Product Classifications
(CPC), AVS is only a subsector of the Communication Services. Under AVS are six
subsubsectors that include the following:
Entertainment and Media, India Brand Equity Foundation.
The Ring is originally a Japanese horror movie. With the success of the film, Holywood
decided to produce the same movie but employing American actors and shooting in American
cities.
1
2
1.
2.
3.
4.
5.
6.
motion picture and videotape production and distribution services (CPC
9611) 3;
motion picture projection service (CPC 9612)4;
radio and television services (CPC 9613)5;
radio and television transmission services (CPC 7524)6;
sound recording (CPC not applicable); and
others.7
In the Philippines, film and television industries are its biggest subsectors,
contributing significantly in the gross income of the total AVS sector. This paper,
therefore, focuses on these two major subgroups of the Philippine AVS industry.
It is extremely difficult to present comprehensive and accurate statistical
information for cross-country comparisons of the AVS sector. Information about
the trends and other developments in the sector is not easily available for
different countries, even for developed ones. Moreover, there are issues about
measurement, classification, desegregation, and coverage that make different
countries’ AVS industry not easily comparable.
It is, however, widely recognized that the US is the largest market for
audiovisual products and services as a whole, and is also the largest producer
and exporter of these services. In 1998, the US film, television, and home video
industries earned over US$12 billion through exports to 105 countries
(Mukharjee 2002).
Film
For the film industry, various coproduction arrangements, definitional differences,
and other related factors make it difficult to determine the overall number of
productions and the nationality of the films produced. Based on the main
producers’ nationality, however, US films have been dominating the film industry
of the different countries in the world, taking the lion share of income derived
from movies. In countries with greater trade barriers in the AVS sector like South
Korea and France, the United States takes a slightly lower, though still significant,
share in the domestic markets (Table 1).
This category includes: (a) promotion or advertising services (CPC 96111); (b) motion
picture or videotape production services (CPC 96112); (c) motion picture or videotape
distribution services (CPC 96113); and (d) other services in connection with motion picture
and videotape production and distribution (CPC 96114).
4
This category includes: (a) Motion picture projection services (CPC 96121) and (b) videotape
projection services (CPC 96122).
5
This category includes: (a) radio services (CPC 96131); (b) television services (CPC 96132);
and (c) combined program making and broadcasting services (CPC 96133).
6
This category includes: (a) television broadcast transmission services (CPC 75241); and (b)
radio broadcast transmission services (CPC 75242).
7
No CPC category specified, but could cover, for example, the contents of multimedia
products.
3
102
Table 1. Market share of US films in different countries, 2000-2003
Country
US
Canada
Australia
European Union (EU)
Spain
France
Italy
United Kingdom
Russia
South Korea
2000
2001
2002
2003
93.3
83
73
81.6
61.9
69.6
75.32
-
93.1
80.6
65.4
67
51
59.7
81.41
-
93.9
85
83.2
71.2
75
56
63.46
82.5
75
48.9
95.1
87.5
89.3
72.1
72
53
67
73.5
89.5
43.2
Source: Focus: World Film Market Trends, European Audiovisual Observatory, various years.
In addition, the top 10 films from 1900 to 2005 in the world are produced
and distributed by American film companies. Seven of these films solely
originated from the US and were solely produced by an American company. The
remaining three movies were coproduced by foreign companies that originated
in New Zealand. Titanic (released in 1997), Lord of the Rings: Return of the
King (released in 2003), and Harry Potter and the Sorcerer’s Stone (released in
2001) are the top three films of the 20th century (Table 2).
While the United States dominates the world film market in terms of
revenue, India beats the United States in terms of number of film production. In
2003, for instance, India produced 1,200 films while the United States produced
less than half of that (Table 3). Other countries like Japan, France, and Spain are
far behind.
Table 2. Top 10 world box office films, 1900-2005 (in millions US$)
Original title
1. Titanic
Nationality
Producer/
Distributor
US
Paramount Pictures/
Twentieth Century Fox
New Line
600.8
1234.6
1835.4
377
752.2
1129.2
Warner Brothers
317.6
658.2
975.8
Twentieth Century Fox
431.1
494.4
925.5
New Line
341.7
583
924.7
Universal Pictures
Dreamworks
357.1
436.5
563
444.4
920.1
880.9
2. Lord of the Rings
US/NZ
Return of the King 2003
3. Harry Potter and
US
the Sorcerer’s Stone, 2001
4. Star Wars: The Phantom
US
Menace, 1999
5. Lord of the Rings
US/NZ
The Two Towers, 2002
6. Jurassic Park, 1993
US
7. Shrek 2, 2004
US
US box International
office
box office
Total
Original title
8. Lord of the Rings:
the Fellowship of the
Ring 2001
9. Harry Potter and
The Chamber of
Secrets 2002
10. Finding Nemo, 2003
Nationality
US/NZ
Producer/
Distributor
US box International
office
box office
New Line
US
Warner Brothers
US
Disney / Pixar
Total
313.8
556
869.8
262
604.4
866.4
339.7
525.3
865
Source: www.worldwideboxoffice.com
Table 3. Top 10 countries producing feature films, 2002
Country
Number of films
India
United States
Japan
France
Spain
Italy
Germany
Philippines
China
Hong Kong
1,200
543
293
200
137
130
116
109
100
92
Source: www.mapsofworld.com/world-top-ten
One significant reason is the disparity in production and investment cost of
moviemaking across countries. Film production in the US is a hundredfold costlier
than in India where an average film cost less than US$500,000 to produce.
American movies, on the other hand, cost an average of US$27 million, followed
by those from the UK and Germany. US movie companies invest substantially in
special effects, postproduction and film marketing.
Music
For the music industry, the market for production of music content is highly
concentrated on five companies holding around 75 percent of the world sales8:
Bertelsmann Music Group or BMG (Germany), Polygram (Netherlands), Sony
8
The three European companies namely BMG, Polygram, and EMI dominate the music
industry and account for 40 percent of the market.
104
Table 4. Top 10 countries in film investment, 2002
Country
Number of films
Film expenditure
(US$ million)
US
Japan
UK
France
Germany
Spain
Italy
India
South Korea
Canada
543
293
84
200
116
137
130
1200
64
14661
1292
852
813
687
304
247
192
134
133
Average expenditure per
film (US$ million)
27
4.4
10.1
4.1
5.9
2.2
1.9
0.16
2.1
Source: www.mapsofworld.com/world-top-ten
(Japan), Time Warner (US), and Electric and Music Industries, Ltd. or EMI (UK).
Most of these companies (other than EMI) have diversified their operations, in
which music revenue accounts for a smaller share of the total revenue—10
percent for Sony and 33 percent for BMG9. In spite of such financial concentration,
there are many smaller players in the industry catering to niche customers.
Increasingly, these companies are forging alliances with the major players.
Although developing countries have significant export potential in music,
trade in this sector is skewed in favor of developed countries. This is primarily
because developing countries do not have large firms and financial structures
necessary to invest significant capital into sophisticated marketing and
distribution machinery with a global reach. Other factors affecting the growth
and export of music are weak institutional support, low levels of entrepreneurial
capability, massive copyright infringements, and the like.
Trends and Changes
The rapid expansion of international audiovisual trade has responded to the
rise in consumer demand, particularly in developed countries. Changing
consumption patterns in industrial and developing countries, greater affluence,
and more leisure time have helped generate higher demand for films and music,
which are considered, in economic parlance, as “normal” goods. At the same
time, many technological developments have helped production of even more
varied and affordable products that feed the information society. This subsection
discusses the supply and demand sides of the global trends in the AVS industry.
Recently, Sony Music and BMG merged to expand their coverage and operations. The two
companies have equal sharing.
9
Supply side
Digital development. Over the years, the number of entertainment options
has increased from radio to television to Internet. In addition to the increase in
the number of entertainment options, there has been an evolution in terms of
media consumption pattern (Figure 1). Before, consumers only enjoy limited
television channels and radio frequencies but as digital technology developed,
consumers now enjoy a wider range of choices, from digital multichannels and
narrowband Internet, to on-demand television viewing.
Figure 1. Evolution of broadcasting with digital technology: the shift in the
pattern of media consumption
Stage 1
Limited analogue
channels television
and radio
Stage 2
• Digital multichannels
television and radio
• Narroband Internet
Stage 3
On demand
-TV anytime
-Broadband internet
(wired and wireless)
Source: Digital Strategy Group of the European Broadcasting Union.
Technological developments (i.e., Internet, satellite, and digital networks)
have given consumers access to a multitude of entertainment and information
services, thereby stimulating the growth of AVS products around the globe. They
have also brought about a revolution in the way audiovisual contents are created,
produced, and distributed. For example, electronically developed audiovisual
products and services have encouraged investments in digital networks.
The way the broadcasters deliver their services to the consumers has also
evolved. A number of elements can act as “gateways”, including the conditional
access system (CAS), the multimedia interface (API), the subscriber management
system (SMS), the Electronic Program Guide (EPG), or the multiplex (MUX). In
each case, the organization responsible for the element controls access to the
user (Figure 2).
CAS allows consumers to select the television channels of their choice
and pay only for those channels. Services such as video-on-demand allow
consumers to receive programs at a time that is convenient for them. Television
production companies are in the process of launching entertainment portals,
which enables the customers to view their favorite programs at any time in any
time zones. EPG allows the viewer to take advantage of features such as program
summaries, search by subject or channel, immediate access to the selected
program, reminders, and parental control functions. It also enables services
such as video-on-demand, which may be free or pay-per-view. SMS is the system
106
Figure 2. Evolution of broadcasting with digital technology: gatekeepers in the
delivery chain
Broadcaster
Conditional Access
System (CAS)
Multimedia Interface
(API)
Digital Technology
Gatekeepers or
Gateways
Subscriber Management
System (SMS)
Electronic Program
Guide (EPG)
User
Multiples (MUX)
Source: Digital Strategy Group of the European Broadcasting Union.
that creates bills for subscribers and this system is more on the convenience of
the cable companies in keeping track of their subscribers. As a result of these
different modes of delivery of audiovisual content, companies are restructuring
their production and delivery system to target particular groups of audience.
Global programming companies have oriented their products to cater to local
markets. For example, the Entertainment and Sports Programming Network
(ESPN) in India carries more cricket and polo events than the ESPN service in
most countries. Music Television (MTV) has 28 separate channels around the
world, each of which is unique, with its own programming and local identity.
With these digital developments, changes in competition have also occurred
in the industry. The increase in the modes of delivery of the same service, for
example, results to a stiff competition between traditional service providers
and new entrants, forcing the former to enhance their technology. In addition,
since digital technology allows content to be used in many different formats,
thus opening up a wider market for the same product, corporate alliances
between companies involved in different sectors of the economy such as
broadcasting and telecommunications have ensued. With the increase in the
number of cross-sectoral and cross-media ownership, competition policy needs
to be applied with detailed attention to market, sectoral, product and
technological evolutions. Lastly, the use of computer-generated digital production
and special effects technologies have changed the employment pattern in the
AVS sector and increased the demand for skilled workers in the industry.
Infrastructure
Infrastructure. Over the years, there have been noticeable developments
in audiovisual infrastructure. For example, in the case of cinema, the
development of multiplexes, where both foreign and locally produced films can
be viewed side by side, together with digital sound system and modern
infrastructure have made moviegoing a broader based leisure and consumption
experience. In addition to digital theaters, theater owners are also innovating
ways on how to attract people to get out of their houses with the advent of
theater home devices. They are improving their services, thus providing not just
a simple projection of films but also offering fine dining and cocktail drinks. For
instance, the latest multiplexes in Florida aim for an upscale Las Vegas Hotel
wherein moviegoers can watch the latest film and have fine dining at the same
time. Going to a movie should be a “social outing.”
Globally, the number of screens has increased while the number of seats
per screen has decreased. Although there are no available data that will support
the decrease in the number of seats per screen, there are available data
concerning the trend in number of screens worldwide. The increase in the number
of screens can be verified through the tables presented below that show a
growth in cinema screen for the top three biggest audiovisual markets as well
as for Asian countries. As a result of these developments, many owners/
operators of cinemas such as Village Roadshow (Australia), AMC (USA), and
Golden Harvest (Hong Kong) have expanded their operations worldwide,
especially in developing markets.
Table 5. Number of screens, 1990-2003
Year
1991
1993
1995
1997
1999
2002
Average
Growth Rate (in %)
United Growth
EU
Growth
EU
Growht Japan Growth
States
rate (25 states) rate (15 states) rate
rate
24570
26689
27805
31640
37185
36764
9
4
14
18
(1)
9
23275
21605
21862
23298
25996
27648
(7)
1
7
12
6
4
17785
17671
18608
20487
23077
24835
(1)
5
10
13
8
7
1804
1734
1776
1884
1993
2524
(4)
2
6
6
27
7
Source: Mukharjee (2002).
In Asia, China has the highest number of cinema screens followed by India
then by Japan for the year 2002. In terms of growth rate from 2001 to 2002,
South Korea posted the highest growth rate of 19 percent followed by Thailand
which grew by 18 percent and Iran which grew by 11 percent.
Sources of revenue
revenue. There have been significant changes in the method
of financing audiovisual services. Traditional broadcasting media was primarily
financed by license fee and government grants, among others. When private
broadcasters entered the market in the 1970s and 1980s they were mainly
financed through advertisement revenues. With the proliferation of channels in
the late 1980s and 1990s, audience share per channel has become
108
Table 6. Number of screens in Asia, 2002
Number of screens
(2002)
65500
11000
2635
977
900
850
669
465
311
295
184
139
China
India
Japan
South Korea
Philippines
Indonesia
Taiwan
Thailand
Iran
Malaysia
Hong Kong
Singapore
Growth rate
(2001-2002)
0
(8)
2
19
(4)
(58)
(3)
18
11
(2)
5
6
Source: European Audiovisual Observatory, various years.
fragmented. Advertisement revenue is sometimes no longer sufficient to finance
many new channels. Although advertising revenue is still the highest source of
income of audiovisual services, the growth rate for this component is not as
high as the monthly subscription and pay-per-view. Companies have been seizing
this opportunity, initiating new modes of financing particularly with the monthly
subscription and pay-per-view.
These changes are evident in Europe as well as in the US. As early as 1990s,
the growth rate in revenue from television advertising has been below average,
while “direct” income, from cable subscriptions, pay TV, pay-per-view, video, and
cinema ticket sales, has grown fastest over the last 10 years. During late 1990s,
subscription revenues even gained more importance. It represented about 30
percent of the industry revenues and grew to approximately 35 percent in 2000.
In the case of the film industry, blockbusters are barely meeting the
production costs through the sale of cinema tickets. Estimates suggest that for
Table 7. Breakdown of the television Industry’s sources of revenue (in percent)
Source of
revenue
Advertising
Video
Cable
License fees
Cinema
Pay TV
PPV
World
46.9
15.6
13.1
10.7
6.3
7.4
0.50
Growth
‘94-’95
9.1
4.2
12.2
3.5
4.5
14.7
United
States
46.7
18.6
20.6
0.4
6.5
6.2
1
Growth
‘94-’95
4.2
1.3
10
3
1.8
4.4
Europe
42.5
10.9
7.7
21.4
7.2
10.7
0
Growth
‘94-’95
15.8
7.8
23
2.8
9.5
22.8
Source: Institut de l’Audiovisuel et des Télécommunications en Europe or IDATE (www.idate.fr).
a film to break even, it must earn at least twice as much at the box office as the
total costs of development and production, a goal achieved by only two-thirds of
big-budget films. However, the bulk of profits are accumulated through the sale
of other goods in multiplex cinemas, and sale of associated items such as
clothing, toys, and videos. An example of such situation was the movie The Lion
King (1994) of Walt Disney. The movie costs US$55 million to produce and
generated US$313 million in the US and US$450 million abroad in box-office
receipts. These figures are dwarfed by the US$3 billion sales of The Lion King
merchandise and the US$500 million video sales. Figure 3 shows the film
industry’s breakdown of revenue sources.
Figure 3. Breakdown of the film industry’s sources of revenue
Source: Algemene Bank Nederland and the Amsterdamsche-Rotterdamsche Bank
(ABN AMRO).
Demand side
Growth rate of audiovisual services is closely related to the level of development
of the country, growth of per capita income, level of urbanization, literacy level,
and existence of restrictions on entertainment options, to name a few. In most
developed and developing countries, the proportion of income spent on leisure
and entertainment comprises a growing proportion of the average household’s
budget. This is evident from different countries like the US, Korea, and Europe.
In the US, growth in 2002 in the major components of spending—food, housing,
apparel and services, transportation, health care, entertainment, and personal
insurance and pensions—averaged 2.9 percent, but spending for entertainment
rose 6.5 percent. In Korea, according to its National Statistical Office (1993),
the annual average household expenditure for culture and recreation rose to
US$660 million in 1992 as compared to US$14.4 million in 1972. In Europe,
recent estimates point to the doubling in the medium term of the share of
household expenditure for audiovisual software products. Specifically, in 1995,
French households spent an average of 3.5 percent of their budget on cultural
products.
110
R egulations and R
estrictions Af f ecting TTrade
rade
Restrictions
in Audiovisual Services
The AVS sector is considered an important and influential medium for cultural
expression. Many countries, therefore, usually appeal to cultural exemption
under the WTO rules in imposing trade regulations in AVS. Many WTO member
countries have raised concerns that the overwhelming presence of foreign
cultural products causes the erosion of cultural values and identities in receiving
societies. Regulations on audiovisual services, however, concern not only social
and cultural issues, but also promotion of domestic industry and protection
from foreign competition. With increased globalization, it has become difficult
for local producers to compete with imports from global players, especially
American studios.
Many countries impose trade barriers such as import quotas, high duties,
special and discriminatory taxes, foreign remittances restrictions, local ownership
requirements, screen and airtime restrictions, and subsidies to local film
industries. Motivations for imposing these restrictions vary from the
government’s desire for profits from the activity, to a decision to subsidize the
local film industry, to cultural protectionism.
Domestic programming quota and equity constraints
Countries promote and protect their indigenous audiovisual industry
through a variety of policy measures and institutions. The most comprehensive
policy framework is usually contained in legislation concerning the broadcasting
markets, content ownership, and programming. The most common restrictions
in the AVS services sector are the imposition of quota on foreign programs as
well as local content requirement, foreign ownership/investment requirement,
and subsidies/support provided to the local industry.
The imposition of a minimum quota for domestic programs is the most
common restriction in the AVS sector. These restrictions are in the form of
television broadcasting quotas, cinema hall exhibition quotas, and radio
broadcasting quotas, among others. Many important WTO members such as
the EU, Canada, Brazil, China, Malaysia, Korea, Egypt, and other countries have
implemented regulations imposing such restrictions. For instance, on October
3, 1989, EU adopted the “Television Without Frontiers” (TWF) directives that
allow broadcasters to reserve majority of their transmission time for European
origin programs. Table 8 presents the minimum quota requirement for different
countries.
Several countries have imposed restrictions on foreign ownership of
audiovisual services. The most common form of these restrictions includes
limits on foreign equity participation, local incorporation requirements, licensing
requirements, and nationality and citizenship requirements. Examples of such
restrictions are presented in Table 9.
Table 8. Minimum quota requirements for different countries
France
Italy
Spain
Canada
Korea
Malaysia
Forty percent
of the
broadcasting
must be
exclusively of
French origin
and additional
20% must be
of EU origin.
Over 50% of
the monthly
transmission
time, including
primetime
programming,
is reserved
for programs
of EU origin.
Fifty percent
of their annual
broadcast
time should
be allotted to
European
audiovisual
works.
“Seat and
screen”
quotas that
require all
multiplex
movie
theatres of
more than
1,300 seats to
reserve 1520% of their
seats,
distributed
over no fewer
than three
screens, for
showing
Italian and
EU films.
Domestically
produced
programs
must cover a
minimum of
50%
(nonterrestrial)
and 80%
(terrestrial) of
the
broadcasting
time.
Broadcasters
are required,
through
licensing
conditions, to
devote 7080% of
airtime to local
programming.
Forty percent
of songs on
almost all
private and
public radio
stations to be
Francophone.
Canadian
programs
should cover
60% of the
total television
broadcast
time and 50%
of the time
during
evening hours
(6 pm to 12
am).
For direct-tohome (DTH)
broadcast
services,
more than half
of the
channels
received must
show
Canadian
programs.
Upper limit for
the share of
total foreign
broadcasting
time for any
foreign films,
animation or
popular
music, from a
single country
is kept at
60%.
Spanish
movie
theatres are
required to
show at a
minimum one
day of
European
films for
every three
days of films
from a third
country.
Subsidy and domestic support
Often various support program, tax holidays, and subsidies are used to promote
the growth of domestic audiovisual industry. Increasingly these forms of
assistance are replacing the direct restrictions on foreign entry. Even developed
countries such as Australia, Canada, EU, and the US have a wide range of
support programs.
An example support program is the Media Plus Programme of Europe in
2001 to 2005. The third generation of the program entered into force in January
2001 and aims at strengthening the competitiveness of the European audiovisual
industry with a series of support measures dealing with the training of
112
Table 9. Foreign ownership and investment requirements
Japan
Under the Cable
Television
Broadcast Law,
foreign
investment in
satellite services
is restricted to
20% for program
suppliers, 33%
for facility
providers, and
20% for
suppliers of both
programs and
facilities.
Malaysia
Korea
Foreign
investors are
prohibited in
terrestrial
broadcasting.
Foreign
investors are
prohibited in
terrestrial
broadcasting.
Malaysian
government also
imposes a 20%
limit on foreign
investment in
cable and
satellite
operations
through licensing
agreements.
There is a foreign
equity ceiling of
49% on foreign
investors in
cable
transmission
network
business and
33% in Korean
satellite
broadcasting.
Mexico and
China
Foreign
investment
in broadcasting
is limited to
49%.
Philippines*
Foreign
investors are not
allowed to invest
in cable
infrastructure as
well as in other
mass mediarelated
businesses.
* 1987 Philippine Constitution
professionals, development of production projects and companies, distribution
of cinematographic works and audiovisual programs, promotion of
cinematographic works and audiovisual programs, and support for
cinematographic festivals.
Equipped with a budget of 400 million euros, the program brings support
both before and after production. The Media Plus Programme co-finances training
initiatives for the audiovisual industry professionals, the development of
production projects (i.e., feature films, television drama, documentaries,
animation, and new media), as well as the distribution and promotion of European
audiovisual works. Such program truly helped the sector to boost its
competitiveness and deliver good-quality service in both local and international
market.
Through Telefilm Canada (Canadian Film Development Corporation), the
Government of Canada partners with the private sector in the production of film
and broadcast material at all stages—screenplay development, final production,
distribution, and marketing of the finished products in Canada and abroad.
Australia also has various support programs for the film industry through various
organizations such as the Australian Film Commission that administers
government funds to assist the development of both feature and nonfeature
films and film-related organizations. Moreso, the Australian Film Finance
Corporation provides a mechanism for financing Australian features, miniseries,
telemovies, and documentaries.
In the US, public funding to support domestic content production is relatively
low, but individual states provide a range of incentives to attract production.
Federal funds are distributed for film and video art production by the National
Endowment for the Arts.
Other developed countries such as France, Germany, Australia, and Japan
provide aids and subsidies to the domestic audiovisual industry. The French
Centre National de la Cinematographie (CNC) requires the film distributors,
exhibitors, and exporters to pay a levy that is used to generate subsidies for the
local film industry. There are also special admission tax revenues and fees for
censorship, visas, permits, and registration that are used to generate subsidies
for the domestic industry. The German government provides aid for film promotion
and other related activities by imposing levies on box office receipts and home
video.
The Australian government provides tax concessions for investments in
particular formats and programs. These tax concessions are designed to
encourage private investment and they allow investors to claim 100-percent
tax deductions on certified films.
AN O
VER
VIEW OF THE PHILIPPINE A
V S SECT
OR
OVER
VERVIEW
AV
SECTOR
This section presents an overview of the Philippine AVS sector—the market structure,
performance, and its contribution to the economy. The first part deals with the
industry definition and contribution to the economy, while the second part discusses
the industry structure, followed by the domestic regulatory framework.
Co
V S Industr y
Covv erage of the Philippine A
AV
Following the WTO coverage of the AVS sector, the Philippine AVS sector
constitutes the industries under division 92 of the Philippine Standard Industrial
Classification (PSIC)—the recreational, cultural and sporting activities group.
This division is composed of the motion picture, radio, television and other
entertainment activities, and the recording or taping of sound. The motion
picture, radio, television and other entertainment activities (PSIC 921) is further
divided into three categories—motion picture and video production and
distribution (PSIC 9211)10, motion picture projection (PSIC 9212)11, and radio
and television activities (PSIC 9213)12. In addition to these industries is the
recording or taping of sound (PSIC 92493).
The motion picture and video production and distribution includes the production of
theatrical and nontheatrical motion picture, whether on film or video tape, for direct
projection in theaters or for broadcasting on television; production in a motion picture
studio or in special laboratories for animated films or cartoons; the products may be fulllength theatrical films, documentaries, shorts, etc., for public entertainment, for advertising,
education, training and news information as well as religious pictures, animated cartoons
10
114
AV S Industr y and the Macr
oeconom
Macroeconom
oeconomyy
Contribution to economy
Based on the 2003 figures, the Gross Value Added (GVA) of the services sector
amounts to 46.37 percent of the country’s total Gross Domestic Product (GDP)
at constant 1985 prices. Out of this 46.37 percent, almost 8 percent comes
from the private services sector, and in particular, recreational services contribute
about one percent to GDP (Table 10).
Based on available gross revenue figures of the major industry players
included in the top 12,000 corporations in 2001, the recreational, cultural, and
sporting activities earned PhP21.3 billion, of which PhP17.5 billion came from
the AVS industry. Among the sectors in the audiovisual services, the television
broadcasting and relay stations and studios contribute the highest percentage
of 80.56 percent, followed by motion picture distribution and production with
8.09 percent (Table 11). From 1997 to 2001, the average growth of gross
revenue of the AVS industry is 12.2 percent.
In terms of growth, the services sector has an average growth rate of 4.8
percent from 1993 until 2003 as opposed to the average growth rates of 2.6
percent and 3.7 percent of agriculture and industry sectors, respectively. Among
the private services sectors, recreational services rank fourth with an average
growth rate of 4.4 percent (Table 12).
Contributions to employment
The AVS sector is a labor intensive sector. In 2003 , there were 23,624 employees
engaged in this sector (Table 13). This comprised 0.15 percent of the total
employment in the services sector or 2.8 percent of the total employment in the
other community, social and personal service activities (Table 14).
of any kind, etc.; auxiliary activities on a fee or contract basis such as film editing, cutting
dubbing, etc.; distribution of motion pictures and video tapes to other industries but not to
the general public (this involves the safe rental of movies or tapes to other industries, as
well as activities allied to the distribution of films and video tapes such as film and tape
booking, delivery, storage, etc.). The PSIC code of motion picture and video production is
PSIC 92111 while the PSIC code of motion picture and video distribution is PSIC 92112.
11
The motion picture projection includes motion picture or video tape projection in theaters
or in open air and in private screening rooms or other projection facilities. Excluded in this
sector are those involving renting of space in theaters as well as the agency and casting
activities.
12
The radio and television activities involve the production of radio and television programs,
whether live or tape or other recording medium and whether or not combined with
broadcasting. The programs produced and broadcasted may be for entertainment, for
promotion, education or training or news dissemination; production of programs generally
results in a permanent tape which may be sold, rented, or stored for broadcast or rebroadcast;
production such as sports covering, whether forecasting, interviews, etc. This industry is
further divided into three—radio broadcasting and relay station and studios (PSIC 92131),
television broadcasting and relay stations and studios including closed circuit television
services (PSIC 92132), and radio and television program production (PSIC 92133).
Table 10. Gross domestic product by industrial origin (in million PhP at constant
1985 prices and at current prices)
At constant prices
Industry
2003
Percentages
to total
2003
Percentages
to total
214,327
372,048
506,942
87,748
180,768
52,312
50,804
82,161
9,068
13,824
10,713
10,969
21,136
13,764
2,687
53,149
19.60
34.03
46.37
8.03
16.53
4.78
4.65
7.51
0.83
1.26
0.98
1.00
1.93
1.26
0.25
4.86
632,007
1,409,553
2,317,485
313,178
603,305
187,826
269,603
539,203
116,076
69,364
85,721
46,894
131,403
78,826
10,919
404,370
14.50
32.34
53.16
7.18
13.84
4.31
6.18
12.37
2.66
1.59
1.97
1.08
3.01
1.81
0.25
9.28
1,093,317
100
4,359,045
100
1. Agriculture, fishery and forestry
2. Industry sector
3. Service sector
a. Transportation, communication and storage
b. Trade
c. Finance
d. Ownership of dwellings and real estate
e. Private services
Educational
Medical and health
Business
Recreational
Personal
Hotel and restaurant
Others
f. Government services
Gross domestic product
At current prices
Source: National Statistical Coordination Board.
Table 11. Gross revenue of the audiovisual services sector as of 2001
(in thousand PhP)
AVS sector
2001
Percentages to total
A. Motion picture and video production
B. Motion picture projection
C .Radio and television program production
D. Radio broadcasting and relay station and studios
E. Recording or taping of sound
F. Television broadcasting and relay stations and
studios including closed circuit television services
Total gross revenue
1,417,744
342,878
428,666
787,143
431,024
14,122,579
8.09
1.96
2.45
4.49
2.46
80.56
17,530,034
100
Source: Top 7,000 and 5,000 Corporations (2002-2003).
116
Table 12. Growth rate of GDP and major sectors, 1994-2003 (based on constant
prices with 1985 as the base year)
Industry
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Average
GDP
1. Agriculture, fishery and forestry
2. Industry sector
3. Services sector
Transport communication and storage
Trade
Finance
Ownership of dwellings and real estate
Government services
Private services
a. Educational
b. Medical and health
c. Business
d. Recreational
e. Personal
f. Hotel and restaurant
g. Others
4.39
2.60
5.77
4.23
4.25
3.95
5.47
2.92
5.46
4.27
3.99
3.55
5.96
3.69
2.53
7.33
2.61
4.68
0.85
6.72
5.02
5.81
5.57
7.31
3.04
3.74
4.33
4.08
4.72
5.62
3.79
3.13
5.69
3.12
5.85
3.82
6.44
6.37
7.41
5.52
13.77
4.14
5.90
4.99
4.91
5.07
5.51
4.92
4.42
5.76
3.59
5.19
3.09
6.14
5.42
8.23
3.90
12.97
3.78
2.54
4.82
6.63
4.19
6.40
4.78
4.03
4.69
3.47
(0.58)
(6.38)
(2.12)
3.47
6.49
2.45
4.45
1.62
2.27
4.66
6.86
6.31
4.49
3.52
4.23
3.47
4.89
3.40
6.50
0.88
4.02
5.26
4.88
1.91
0.59
3.09
5.79
5.11
5.27
6.11
7.40
5.83
5.16
6.12
5.97
4.33
8.97
4.42
10.45
5.16
0.88
(0.02)
1.69
4.84
4.18
8.10
6.94
3.78
5.16
1.69
4.04
2.96
3.69
0.91
4.25
8.81
5.61
1.23
(0.45)
0.94
4.40
4.22
5.70
7.73
2.93
4.91
1.72
3.56
3.12
3.80
0.15
5.10
8.93
5.76
3.44
1.72
1.46
5.49
4.14
7.54
8.14
3.98
5.54
4.09
3.31
4.70
3.80
3.78
5.76
8.59
5.66
7.10
4.00
2.89
5.13
4.19
6.58
8.18
5.34
6.19
1.56
3.87
3.97
2.61
3.76
4.81
7.42
4.85
5.85
2.13
3.00
4.87
4.83
5.70
6.51
4.41
4.60
4.12
3.86
Source: National Statistical Coordination Board.
Table 13. Percentage distribution of employees engaged in the AVS sector, 2003
Description
Number of
Employees
Motion picture and video production
Motion picture and video distribution
Motion picture projection
Radio broadcasting and relay station and studios
Television broadcasting and relay stations and studios
including closed circuit television services
Radio and television program production
Recording or taping of sounds
1,504
500
8,015
7,457
3,979
6.37
2.12
33.93
31.57
16.84
962
1,207
23,624
4.07
5.11
100
PSIC Code
92111
92112
92120
92131
92132
92133
92493
Total
Source: National Statistics Office.
Percentages
to Total
Table 14. Employed persons in major industry groups, 2003
Number
Share to Total
(in thousand) Employment (in %)
Philippines
31,524
11,675
1. Agriculture
4,941
2. Industry
3. Services sector
14,904
a. Wholesale and retail trade, repair of motor vehicles,
5,672
Motorcycles, and personal and household goods
786
b. Hotels and restaurants
2,363
c. Transport, storage and communication
d. Financial intermediation
332
720
e. Real estate, renting and business activities
f. Public administration and defense, compulsory social security 1,387
g. Education
906
366
h. Health and social work
856
i. Other community, social and personal service activities
24
Of which is AVS sector
1,514
j. Private households with employed persons
2
k. Extraterritorial organizations and bodies
100
37.04
15.67
47.28
17.99
2.49
7.50
1.05
2.28
4.40
2.87
1.16
2.72
0.08
4.80
0.01
Most of the AVS employees are based in the National Capital Region or
NCR (Table 15) since almost all of the establishments are instituted in this
region. The highest number of employees are engaged in the motion picture
projection services (PSIC 92120) employing 8,015 (33.93%). It is followed by
the radio broadcasting and relay station and studios (PSIC 92131) employing
7,457 (31.56%). Lastly, television broadcasting and relay stations and studios
including closed circuit television services (PSIC 92132) employ 3,979 (16.84%).
Industry Structure
The AVS sector has 2,810 establishments mostly concentrated in the NCR except
for the motion picture projection. Out of this, 76.09 percent is engaged in
motion picture projection service, followed by radio broadcasting and relay
station and studios with 16.01 percent. Lastly, the motion picture and video
production occupies the third spot with 3.17 percent (Table 16).
Even if there are many audiovisual services establishments, only a few
huge companies dominate the market. For instance, in the film industry, the top
income earners are Studio 23 Incorporated with a 43.30 percent total share,
followed by the Unitel International Picture with 16.1 percent total share, and the
Roadrunner Network, Incorporated with 12.99 percent total share (Table 17).
For the television industry, the top three companies have a market share
of 93.11 percent. The major companies that dominate the market are ABS-CBN
118
Table 15. Regional distribution of employees engaged in the AVS sector, 2003
Region
Philippines
National Capital Region
Cordillera Administrative
Region
Ilocos Region
Cagayan Valley
Central Luzon
CALABARZON
Bicol Region
Western Visayas
Central Visayas
Eastern Visayas
Zamboanga Peninsula
Northern Mindanao
Davao Region
SOCCSKSARGEN
Autonomous Region
in Muslim Mindanao
CARAGA
MIMAROPA
Motion
Motion
Motion Description Television Radio and Recording
picture
picture picture
Radio
broadcasting television or taping
of
and video and video projection broadcast- and relay program
production distribution
ing and
station production sounds
relay
studios
station and
studios
1,504
1,424
500
500
8,015
1,806
7,457
2,232
3,979
3,566
962
887
1,207
1,135
21
3
12
22
S
15
7
S
S
-
-
69
200
151
443
794
569
299
330
845
421
230
255
360
144
219
553
198
228
289
568
823
573
217
223
425
453
113
44
15
6
17
91
37
70
S
69
38
53
13
4
10
-
12
15
33
6
6
-
S
-
327
772
234
65
-
65
-
-
Note: “S” means suppressed due to confidentiality
Table 16. Percentage distribution of establishments engaged in the AVS sector, 2003
PSIC
Code
O92111
O92112
O92120
O92131
O92132
O92133
O92493
Total
Description
Motion picture and video production
Motion picture and video distribution
Motion picture projection
Radio broadcasting and relay station and studios
Television broadcasting and relay stations and
studios including closed circuit television services
Radio and television program production
Recording or taping of sounds
Number of
Establishments
89
2,138
450
58
42
33
2,810
Percentages
to Total
3.17
76.09
16.01
2.06
1.49
1.17
100
Table 17. Motion picture and video production gross revenue, 2001
Major industry players
2001
1. Studio 23, Incorporated
2. United International Pictures
3. Roadrunner Network, Incorporated
4. Philippine Animators Group, Incorporated
5. Film Experts, Incorporated
6. Star Cinema Productions, Incorporated
Class subtotals:
Gross revenue (PhP0000)
Percentage to class subtotal
613,945
228,225
184,101
97,554
89,679
87,854
1,417,744
43.30
16.10
12.99
6.88
6.33
6.20
100
Source: Top 7,000 and Next 5,000 Corporations (2002-2003).
Table 18. Television broadcasting and relay stations and studios including closed
circuit television services gross revenue, 2001
Major industry players
1. ABS-CBN Broadcasting Corporation
2. GMA Network, Incorporated
3. ABC Development Corporation
4. Television and Production Exponents,
Incorporated
5. Radio Mindanao Network, Incorporated
Class subtotals:
2001
Gross revenue (PhP0000)
Percentage to class subtotal
9,229,769
3,496,948
508,725
65.35
24.76
3.60
373,122
352,015
14,122,578
2.64
2.49
100
Source: Top 7,000 and Next 5,000 Corporations (2002-2003).
with a market share of 65.34 percent, followed by GMA Network with 24.76
percent market share, and ABC with 3.60 percent share (Table 18). How this
concentration affects market competition is discussed further below.
Regulatory Framework
Several government regulatory bodies facilitate the industry.
Depar tment of TTranspor
ranspor tation and Communications (DO
T C)
(DOT
As mandated by Executive Order 125 in 1987, DOTC is the main government
agency tasked with the supervision and regulation of the industry. This agency
formulates policies and plans for the industry’s development. In addition, the
power to grant all franchises, grants, licenses, permits, and certifications to
television or radio broadcast stations is conferred upon the commission and
the DOTC Secretary upon the approval of the president.
120
N ational TTelecommunications
elecommunications Commission (NT
C)
(NTC)
NTC is a DOTC-attached agency. It was created pursuant to Executive Order No. 546,
promulgated on July 23, 1979. Policy implementation is handled by the NTC.
The agency’s supervisory, regulatory, and control functions cover three broad
areas —telecommunications, broadcast undertakings, and radio spectrum. Within
the agency, the Broadcast Department is the unit directly responsible for the
development of the television and radio industries. The Broadcast Department
has several functions, which include the granting of permits for the use of
frequencies for radio and television stations and undertaking the registration of
transmitters; regulating ownership and operation of radio and television stations;
and supervising and inspecting the operation of radio and television stations,
including auxiliary stations.
Furthermore, the Broadcast Department is divided into two divisions—
Program Division and Technical Division. The Program Division is tasked with
the implementation of guidelines and directions enacted and instituted by
the NTC for purposes of regulating radio and television broadcasting
programs. Program development, market viability, and other related studies
with the end in view of promoting public interest and protecting public welfare
have also been entrusted to the division. On the other hand, the Technical
Division is responsible for the implementation of guidelines and directions
of the NTC related to the technical operations of radio and television
broadcasting station. Furthermore, it undertakes developmental and
improvement studies, recommend standards and rule setting as well as the
provision of services to enhance technical capabilities of radio and television
broadcasting stations.
Mo
vie and TTele
ele
vision R
e vie
w and Classif
ication Boar
d (MTR
CB)
Movie
elevision
Re
view
Classification
Board
(MTRCB)
The MTRCB was instituted through the implementation of Presidential Decree
No. 1986. The board has several functions that include the following: (1)
screen, review, and examine all motion pictures for theatrical or nontheatrical
distribution, television programs, including publicity materials such as
advertisements, trailers, and stills; (2) approve or disapprove, delete
objectionable portions from and/or prohibit the importation, exportation,
production, copying, distribution, sale, lease, exhibition and/or television
broadcast of the motion pictures, television programs and publicity materials
which are objectionable for being immoral and indecent; and (3) classify
motion pictures, television programs and similar shows into categories such
as “G” or “For General Patronage” (all ages admitted), “P” or “Parental
Guidance Suggested”, “R” or “Restricted” (for adults only), “X” or “Not for
Public Viewing.”
The proliferation and unregulated circulation of videograms have greatly
prejudiced the operations of movie houses and theaters. These have caused
a sharp decline in theatrical attendance by at least 40 percent and a
tremendous drop in the collection of sales, contractor’s specific, amusement
and other taxes consequently, resulting in substantial losses estimated at
PhP450 million annually in government revenues (Presidential Decree No.
1987). In order to combat the said problem, the government instituted the
Videogram Regulatory Board (VRB). The VRB is now called the Optical Media
Board (OMB). The main function of the Board is to supervise, regulate, grant,
deny, or cancel permits for the importation, exportation, production, copying,
sale, lease, exhibition, or showing of videograms. Also, the Board requires
the registration of all business establishments engaged in the importation,
exportation, production, reproduction, exhibition, showing, sale, lease, or
disposition of videograms in order to operate. For reproduction purposes, no
one is allowed to copy or reproduce any cinematographic art without the
written consent or approval of the producer, importer, or licensee of the
cinematographic art to be copied.
THE PHILIPPINE FILM INDUSTRY
Industry Definition and Contribution to the Economy
Based on the 1994 PSIC Code, the industry is classified under PSIC 92111 for
motion picture production; PSIC 92112 for motion picture distribution; and
PSIC 9120 for motion picture projection.
Based on the latest data (Table 19), the gross value added (GVA) or output
of the local film industry amounted to PhP8.7 billion in 1998 versus PhP7.3
billion in 1994. The industry’s percentage share on the gross domestic product
(GDP) is only 0.98 percent while its percentage share on the gross national
product (GNP) is 0.94 percent. These figures are negligible, which indicates that
the film industry has yet to contribute a significant share to the Philippine economy
based on absolute data. Its employment of 15,517 in 1994, excluding actors
and actresses, was only 0.06 percent of the total number of employment. On
the other hand, the industry’s GVA is growing much faster at 18.12 percent
compared to GDP growth of 15.99 percent. This suggests that the sector has
relatively better prospects than other economic sectors. The growth of total
employment of film personnel is at 13.81 percent.
Table 19. Film contribution to the Philippine economy
Economic indicators
Value
(in million
PhP)
GVA (Film industry)
GDP
GNP
Number of employees
7,390
766,368
786,136
15,517
Source: 1994 Census of Establishments.
1994
% Share of
film
industry
0.96
0.94
0.06
1998
Value
% Share of
(in million
film
PhP)
industry
8,729
888,875
931,127
-
0.98
0.94
-
Growth
18.12
15.99
18.44
122
Industry Associations
The movie industry is organized along sectoral and guild interests. There are
guilds for movie producers, artists, directors, and other creative talents and
craftsmen—all of which have federated under a self-policing organization called
the Film Academy of the Philippines (FAP) established through Presidential
Decree in 1982 in order for the government to have a closer supervision over,
and extend assistance to, the industry. Under its umbrella are the different
organizations and guilds of the industry’s working forces such as Katipunan ng
mga Artista ng Pelikulang Pilipino (KAPP), Kapisanan ng mga Director ng
Pelikulang Pilipino (KDPP), Philippine Motion Picture Producers Association
(PMPPA), Movie Producers and Distributors Association of the Philippines
(MPDAP), and others.
In addition to the FAP, there is a newly organized Film Development
Council of the Philippines (FDCP). FDCP has a major objective of uplifting
the art and craft of film making and encouraging the production of films for
commercial purposes that seek to enhance the quality of life, examine the
human and social conditions, and contribute to the dignity and nobility of the
human spirit. The council has the following functions as stated in Republic
Act 9167:
1. develop and implement an incentive and reward system for the
producers based on merit to encourage the production of quality
films;
2. establish, organize, operate and maintain local and international
film festivals, exhibitions and similar activities that will promote the
growth and development of the local film industry;
3. develop and promote programs to enhance the skills and expertise
of Filipino talents necessary for quality film production; and
4. ensure the establishment of a film archive in order to conserve and
protect film negatives and/or prints as part of the nation’s historical,
cultural, and artistic heritage.
The FDCP has the Cinema Evaluation Board that will evaluate and grade
films. The Board will also formulate and establish a set of standards, criteria,
and procedures for the Cinema Evaluation System, primarily based on, but not
limited to, direction, screenplay, cinematography, editing, production design,
music scoring, and acting performances. The grading of films by the Board is
subject to different criteria and the films can have a grade of either “A” or “B”
that will be entitled to privileges such as amusement tax13 rebates. Grade “A”
films will have 100 percent amusement tax rebate while Grade “B” films will
A 30 percent amusement tax on gross receipts for theters is imposed and collected by cities
and municipalities in Metro Manila and other highly urbanized and independent component
cities in the Philippines pursuant to Sections 140 and 151 of Republic Act No. 7160.
13
have 65 percent amusement tax rebate. The remaining 35 percent shall accrue
to the funds of the Council.14
Industry Players
The film industry is composed of three important business lines that are
interdependent with each other. These are the producers, distributors, and
exhibitors (Figure 4).
Figure 4. Flow of business in the film industry
Source: “How Movie Distribution Works” in http://entertainment.
howstuffworks.com/movie-distribution.htm
The flow of product in the film industry is as follows: a film property is
produced by the production company, which then sells the distribution rights to
the distributor. These rights are often bid for by distributors through film markets
or through sales agents. Often, the distributor will bid for the distribution rights
before production is finished and the distributor pays an advance to the
production company. The rights to show the film property are then bid for by
exhibitors. The types of agreements made between the producer, distributor,
The Cinema Evaluation Board differs from the MTRCB in that the former evaluates largely
on the basis of artistic and technical merit, while the MTRCB provides guidance on the
ethical/moral suitability of the film content for various groups of movie viewers.
14
124
and exhibitor, as well as the share of revenue allocated to the distributor will
vary, depending on the channel of distribution.
Producers
Producers are those who make the film by arranging for the finances, casting,
and technical production. They are responsible for creating varieties of films
that will suit people’s preferences and tastes, and sell the films to various
distributors. The Philippines used to be the third biggest producer of films in the
world, but this film production ability had since waned. In addition, during the
late 1980s to mid-1990s, there used to be 24 domestic film producers but this
was reduced to 14 producers in 1998. Furthermore, consolidation to four
production houses is widely expected. Some of the known local producers are
Regal Entertainment, Viva Films, Star Cinema, Seiko Films, Solar Films, OctoArts
Films, Neo Films, and Premier Entertainment.
Distributors
The film distributor is not merely a middleman, between the production company
and the exhibitor, limited only to buying and selling the product. Essentially, film
distribution is the marketing activity for films. In addition to formulating and
implementing promotional and advertising strategies, the distributor will liaise
with the media, produce all necessary promotional materials, provide advice on
all aspects of production, and provide financing for productions through advances
and buying of rights. Some distributors have even backward-integrated into
production to ensure a continuous stream of marketable product.
The major Filipino film distribution companies are also those of production
companies. These local production companies, more often than not, distribute
their own movies in the local market. Foreign films, on the other hand, use their
own distribution sytem network. These include Buena Vista Pictures Distribution,
Sony Pictures Entertainment Inc., Metro-Goldwyn-Mayer Studios Inc., Paramount
Pictures Corporation, Twentieth Century Fox Film Corporation, Universal City
Studios LLLP, and Warner Bros. Entertainment Inc.
The major distributors have several advantages compared to local competitors.
They have access to different markets worldwide most especially in the US. They
also enjoy economies of scale in access to financing capital. The capital will be used
in their extensive marketing and promotion of films. The reputation of a distributor
serves a competitive advantage. Since film producers are interested in maximizing
returns, they would seek to allocate distribution rights to a distributor with past
performance for successful promotion. Furthermore, some producers may be willing
to accept less favorable terms (i.e., lower percentage of the box office gross) from
an established distributor for the possibility of higher aggregate revenues. This
‘reputation’ also serves as a competitive advantage on the exhibitor side. Since
exhibitors want to fill seats, and bookings for theatres are usually made in advance
(especially during the busier summer and holiday seasons), exhibitors will rely on a
distributor’s reputation and presumed ability to market the film that maximizes box
office draw. Likewise, an exhibitor may give more favorable terms to an established
distributor with the expectation of higher aggregate earnings. Again, because of
their size and portfolio of film offerings, the major distributors dominate the majority
of screens in the country, leaving only a handful of screens available at any given
time for the local distributors to exhibit their product (Leong et al. 1996).
Exhibitors
Exhibitors are the last in line in the business flow of the film industry. These are
the firms responsible for showing featured films in theaters. Most of the cinemas
are located in Metro Manila. Out of the 373 screens in the country, 215 of 57.6
percent are found in Metro Manila and the rest are spread in areas outside the
capital region (Table 20).
The Production Process
The film production process is divided into two major parts—production and
distribution (Figure 5). The production aspect includes the studios or shooting
locations, work print,15 and the postproduction16. The studios or shooting locations
are composed of the taping of films. Sound tracking17, picture elements, and editing
Table 20. Number of movie theater houses and screens
Metro Manila
Cinemax
Ayala Cinemas
Robinsons Movieworld
SM
MMTAa
Power Plant
Theater Mall - Greenhills
Total
Movie Screens
theater
houses
5
7
10
13
1
1
37
23
45
76
63
6
2
215
Regional cinemasb
Ayala Cebu
Regional Cinemas – Robinsons
Cinema 2000 – Regional
SM Luzon
SM Visayas and Mindanao
Movie Screens
theater
houses
1
8
13
7
4
5
43
48
34
28
33
158
Source: Philippine Daily Inquirer Entertainment Section, September 11, 2004 pp. A-30 and A2-2.
Legend:
a
Metro Manila Theaters Association that includes Shangri-la Plaza, Isetann, Gotesco, Berma Cinema,
Lianas Cinema, Festival Cinema, Masagana Cinema, Market Place, Starmall Movies, Eastwood,
and Araneta Center (Ali Mall Cineplex).
b
Theaters outside Metro Manila.
Work print is any positive duplicate picture, sound track print, or magnetic duplicate
intended for use in the film editing process.
16
Postproduction is the period in a project’s development that takes place after the picture
is delivered, or “after the production.” This term might also be applied to video/film editing
or refer to audio postproduction.
17
Sound tracking generically refers to the music contained in a film, although it literally means
the entire audio portion of a film, video, or television production, including effects and dialogue.
15
126
Figure 5. The film production process
Source: McDaniel (2004)
are under the work print. Moreover, postproduction is concerned with editing
computer graphics, audio, and picture processing as well as the prescreening. The
processes in the work print and postproduction will continue until the film is finally
ready for storage. Thereafter, distribution and mass production come next.
In the distribution process, the film undergoes two processes—(1) film
production for the showing in the different cinemas and (2) VHS/VCD/DVD
production for the rental houses, retail stores, as well as for screening purposes.
Industry Performance: SWOT Analysis
Strengths
Some Filipino films are putting up a gallant performance at international film
festivals and even earning a few awards along the way. This is despite the fact
that the invasion of more Hollywood and Asian films, constantly escalating
production costs, widespread film piracy, general impression of hackneyed
plotlines, local audience’s colonial mentality and preference to foreign films,
lack of education on film appreciation, and exorbitant taxation, to name a few,
have slowed down the film industry.
Magnifico, a film directed by Maryo J. de los Reyes, appears to be leading
the charge for local productions in the international arena in 2003. Mitchiko
Yamamoto’s award-winning script tells an uplifting story of a young boy who
unexpectedly tries to help his family survive their hardships through his
compassion, conviction, and courage. After being included in the shortlist of five
nominees for the Golden Maile award for best feature film at the 2003 Hawaii
International Film Festival, the Violett Films production won the Crystal Bear/
Grand Prix for Best Feature Film and Children’s Jury awards at the 27 th
Kinderfilmfest of the 2003 Berlin Film Festival. Perhaps, the film’s worldwide
reception convinced the Filipino Academy for Movie Arts and Sciences (FAMAS)
and the Philippine Movie Press Club (PMPC) Star Awards to award it their Best
Picture trophies.
Aside from Berlin and Hawaii, Magnifico was also in the official selection
for the Crystal Globe Award at the 2003 Karlovy Vary International Film Festival,
“Window in Asian Cinema” at the 2003 Pusan Film Festival, “Focus on Asia”
section at the 2003 Fukuoka International Film Festival in Japan, and the
“Cinema of Asia” section at the 2003 Montreal World Film Festival in Canada.
The film was also invited to the 2004 Bangkok International Film Festival,
Kristians and Children’s International Film Festival in Norway, Istanbul Children’s
International Film Festival, Robert de Niro’s Tribecca Film Festival in New York,
Cinemasia Film Festival in Amsterdam, Tiburon International Film Festival, and
other festivals in Italy, Indonesia, UK, and Germany.
A flop at the local box office like Magnifico, director Mario O’Hara’s Babae
sa Breakwater pulls off another surprise when it earned rave reviews from
international critics after it was screened last month at the Cannes International
Film Festival Director’s Fortnight. Produced by new industry player Entertainment
Warehouse, the film has gained the nod of European viewers for its social
treatment of poverty-stricken Filipinos living around the breakwaters of Manila
Bay. The Young Critics Circle earlier cited it for Best Screenplay and Best Picture
during its 14th Annual Circle Citations for Distinguished Achievement in Film
2003. The film was also recently included in the French film festival line-up
along with Mariami Tanangco’s short film Binyag which competed at the
International Short Film Festival in Clermont-Ferrand, France.
Similarly, Unitel Pictures’ Crying Ladies also manages to perform well at
the tills and merit some good reviews from critics. Director Mark Meilly’s Palanca
award-winning script, which centers on mourners-for-hire serving traditional
Chinese families, emphasize the importance of the deceased when they were
still alive. Meilly’s innovative idea and the vast experience of his Unitel production
team greatly helped in securing the Best Director and Best Picture honors for his
debut feature at the Metro Manila Film Festival.
During the 32nd Brussels International Independent Film Festival,18 film
actor Cesar Montano bags the Grand Prix Special Du Jury in the Competition
International category, the third highest award. The award is in recognition of the
This was held from November 1-6, 2005 at the Centre Cultural Jacques Franck in Brussels,
Belgium.
18
128
overall performance of Mr. Montano as actor and director of the movie Panaghoy
sa Suba.
In addition to talented directors, actors, and scriptwriters, exhibitors are
also one of the strengths of the industry since a bulk of the revenues of the
producers comes from box office or from theatrical receipts. For instance, Star
Cinema, one of the major production studios, earns about 60 percent of its
revenue from cinema, 30 percent from video, and 10 percent from television.19
As discussed in the previous section, there are several cinemas in the country
and most of the cinemas are located in Metro Manila. These cinemas are a
great way for the producers to feature their films.
Weaknesses
Ironically, even with these strengths, the industry’s survival is in doubt due to
several problems. The industry’s problems can be divided into two major
divisions. First are the problems in production and second are the problems in
the distribution.
Problems in production
production. Filipino filmmakers labor under huge
production costs. To break even, a producer must gross PhP12 million from a
PhP4 million film budget. Two-thirds of the gross goes to the theater owners and
taxes, and the remaining one-third goes to the producer. However, with the
gloomy economic situation coupled with the continuous increase in prices, film
rolls and other materials, producers are facing difficulties in making films. The
star system is also plaguing the production process since some superstars
charge as much as PhP3-4 million in addition to ancillary rights and other fringe
benefits. These eat up a big chunk of an average production budget of PhP15
million. Furthermore, these superstars, more often than not, cause delays in
taping of the film, further jacking up production cost. In terms of the availability
of digital facilities such as laboratories for processing and synchronizing pictures
with sound and sound studio, the country has no such facilities; thus, local
companies have to do these processes in other countries.20
Problems in distribution
distribution. The number one problem in distribution is
film piracy. High-tech film pirates deprive legitimate producers of potential income.
Piracy forms include unauthorized airing, exhibition, and distribution of films in
CAT-TV networks, video theaters, buses, hotels, restaurants, ships, video
reproduction stores, and retail establishments. In addition to film piracy, local
movies are losing out to bigger budgeted foreign films. As presented below, the
local film industry is plagued by foreign films. These foreign films are mostly
produced by major producers in the US who have allocated huge amounts of
money for film advertisements. Usually, trailers and other advertisements for
foreign films are shown months before the showing date, thus creating greater
public awareness and curiosity about the film. However, for the local films,
19
20
Interview with Ms. Marizel Martinez, head of video production of Star Cinema.
Ibid.
trailers are shown only weeks before the showing date due to the delays in the
shooting of film.
The entertainment industry is also among the heavily taxed business in
Asia. 21 Amusement taxes are imposed by local governments to theater
owners. This tax amounts to 30 percent of the gross receipts from the ticket
sales. Aside from the amusement tax, there are also the 10 percent VAT on
film shares and postproduction costs, the PhP0.25 per ticket for cultural
tax, the PhP8,000 to 10,000 classification fee per film by the MTRCB, the
custom duty on imported unexposed films needed for filming and exhibition,
and the 32 percent corporate tax. In addition, there are also taxes for
importing equipment and machineries needed for shooting films and printing
the advertisements. On the average, importing these machineries is subject
to 6 percent tax rate but since these equipment cost thousands of pesos,
the import costs sum up to a significant amount. To be a certified box office
hit, a movie has to make more than PhP20 million in its Metro Manila run
alone. If a movie costs PhP20 million to produce, it has to gross PhP60
million for the producer to at least break even.
The skyrocketing production cost is one important cause for the decline in
the number of domestic film productions. The downward trend of the industry is
evident based on the statistics from MTRCB. In 2003, the country had only
produced 109 films compared to 266 foreign films that penetrated the local
market. More than half of the films reviewed were foreign-produced films. As
early as 1983, local films occupied only 30.3 percent of the total films reviewed
by the Board. The yearly average of local films is 157 while the yearly average of
foreign films is 442 (Table 21).
In addition to this downward trend in film production, the local industry
also experienced deterioration of film quality. Because of high production cost,
producers created low budget, low class, usually lewd films. Consequently,
MTRCB classified many local films into R (Restricted) category, which means
that the film is limited for adults’ viewing only. Table 22 shows that in 2003, out
of the 109 films, 42 (38.53%) were rated as R. This was followed by PG-13
rating with 31 films (28.44%).
Opportunities
Opportunities for the film industry lie on the moviegoers and potential markets
that can be divided into two—the local and the international viewers (overseas
Filipino contract workers and Filipino immigrants). Industry experts believe that
a way to increase the market is to export films. Production costs are escalating,
Philippines is next to India that imposes 14-167 percent amusement tax depending on
the location. Other Asian countries impose lower amusement tax: 3 percent in Japan and
Singapore; 0 percent in Hong Kong; 7 percent in Thailand; 8 percent in Taiwan; 17 percent
in Korea; and 25-30 percent in Indonesia.
21
130
Table 21. Statistics of theatrical films (prints) reviewed by the MTRCB, 1983-2003
Year
Total
Foreign
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Total
Average
465
402
428
408
426
442
427
377
358
415
425
454
456
443
456
425
565
591
520
429
375
9,287
442
324
250
270
228
259
288
285
233
226
294
293
317
299
269
236
234
379
411
374
253
266
5,988
285
Percentage to total
69.68
62.19
63.08
55.88
60.80
65.16
66.74
61.80
63.13
70.84
68.94
69.82
65.57
60.72
51.75
55.06
67.08
69.54
71.92
58.97
70.93
64.27
Local
Percentage to total
141
152
158
180
167
154
142
144
132
121
132
137
157
174
220
191
186
180
146
176
109
3,299
157
30.32
37.81
36.92
44.12
39.20
34.84
33.26
38.20
36.87
29.16
31.06
30.18
34.43
39.28
48.25
44.94
32.92
30.46
28.08
41.03
29.07
35.73
Source: Movie and Television Review and Classification Board (MTRCB).
Table 22. Statistical distribution of local films based on rating, 2003
Rating
G*
PG – 13
R – 13
R
X
Total
No. of films
Percentage to total
19
31
9
42
8
109
17.43
28.44
8.26
38.53
7.34
100.00
Source: Movie and Television Review and Classification Board (MTRCB).
* G = General Patronage; PG = Parental Guidance; Recommended; R = Restricted.
but the local market remains stagnant. In addition, film companies can also
grab the opportunity in increasing their revenues that can be brought about by
the breakthrough in the Internet connections as well as telephones.
Philippine demographic profile
profile. The domestic market has a large
consumer market based on the sheer size of its population, which stood around
76.5 million in 2000 with a growth rate of 2.36 percent. The country’s population
is predominantly young in which about 83.76 percent are below 45 years old.
Out of the 83.76 percent, 42.44 percent are males while 41.32 percent are
females. Producers target the young population who, more than other age groups,
are movie patrons.
International viewers
viewers. The international market can be the country’s
neighboring nations with similar culture and somehow can understand Asian
lifestyle. Some of these countries are Taiwan, Korea, Singapore, Malaysia, or
Hong Kong.
In addition, the overseas contract workers (OCW) can be considered as
viable target consumers of Filipino films, in the same way that overseas Indians
are the main buyers of Indian films. Based on the 2000 figures of the Philippine
Overseas Employment Administration (POEA), Asia has the highest number of
Filipino OCW with 292,296 or 45.4 percent followed by the Middle East with
283,291 or 44 percent. These two continents, including North America, can be
a feasible market for Filipino films.
Lastly, the Filipino immigrants in different countries mostly in North America
can also be viable viewers of Filipino films. The number of immigrants in North
America since 1820 until 2003 reached 1,673,400. Filipino immigrants to the
US are mostly located in California. In Canada, there are also Filipino immigrants
that are potential viewers. The latest statistics showed that there are around
232,670 Filipino immigrants in 2001. Europe, especially in Italy, is also home
to thousands of Filipinos.
Internet connections and cellular mobile telephone
telephone. Film
companies can also tap the local moviegoers through the Internet, either by
dial-up or broadband connections, as well as through mobile telephone. Through
Internet connections, online distribution of films is a cinch; the wireless technology
enables downloading of movie clips, movie-based wallpaper, and ring tones. In
these ways, film companies can have an additional income on top of the cinema
ticket sales.
These two connections have an increasing trend in terms of the number
of subscribers. As reported by National Telecommunications Commission (NTC),
the number of Internet providers reached 43 in 2004 with 1.2 million subscribers
(Table 23). Broadband connection is also on its way in providing services all over
the country. The increase in Internet users provides a potential upside for film
viewing via the Internet, too.
Threats
The general impression is that Filipino films are generally watched only by the
“baduy” or low-class viewers, except for a few films that get the attention of
132
Table 23. Number of NTC-registered Internet services providers and estimated
subscribers, 1996-2004
Year
Number of NTC-registered
Internet service providers
1996
1997
1998
1999
2000
2001
2002
2003
2004
Estimated number
of subscribers
Growth rate
(in %)
100,000
200,000
300,000
350,000
400,000
500,000
800,000
1,000,000
1,200,000
100
50
16.7
14.3
25
60
25
20
24
17
23
31
34
64
53
41
43
Source: www.ntc.gov.ph.
Class A and B viewers22. As discussed previously, many Filipino films shown in
cinemas are rated R, which already limits the number of potential viewers. Also,
they tend to have very similar themes, like love triangle relationships, povertystricken or martyr stories, etc. As such, an adage applies,”you see one, you see
them all.” As a consequence, foreign film penetration is considered one of the
threats facing the film industry, even though admittedly, it had been so, even in
the heydays of Philippine cinema.
Conclusion
How can the Philippine film industry be helped? There are several ways that can
be done in order to uplift the current situation of the country’s film industry. One
way is through the promotion of films in the global market: (1) having a Philippine
booth in major international film festivals, and (2) ensuring that high quality
Filipino films could participate in these film festivals. This way, global distributors
can view Filipino films and could be interested in buying and distributing them to
different countries.
Coproduction with international production companies can be another
option for the local industry. Coproduction will increase the investment and
capital that will be allotted in making films as well as in marketing them. Recently,
Sony Pictures Entertainment, a leader in coproduction of Chinese language
films, is extending its coproduction in India. The partnership offers Indian
producers a chance for greater exposure of their films outside the local market
and to a global audience. The same may be done for Philippine films, if these
sufficiently attract foreign distributors’ interest.
22
Generally, the high-income and educated class.
Trainings, seminars, and festivals for the people in the industry particularly
for directors, scriptwriters, production staff, and technical people are actually
being carried out. An example of these activities is the Cinemalaya Philippine
Independent Film Festival. This festival aims to discover, encourage, and honor
the cinematic works of Filipino filmmakers that boldly articulate and freely
interpret the Filipino experience with fresh insight and artistic integrity. It also
aims to invigorate the Philippine film industry by developing a new breed of
Filipino filmmakers. This and other contests that discover future directors as
well as scriptwriters and improve the quality of Filipino films in all cinematographic
aspects should be continuously supported by the government.
In addition to these options, digital technology can help solve the production
problems and distribution difficulties. In particular, cost can be trimmed down using
digital video than films. The raw video alone is extremely cheap. Conversion process
before the editing stage is already eliminated. As soon as a digital footage has been
captured, filmmakers can immediately play it back and start editing.
Moreover, filmmakers on a real shoestring budget can even reuse the
tape in multiple times. The flexibility of digital video is one of the benefits of the
technology. For filmmakers, the most exciting element of digital technology is
the ease in using it. Most filmmakers have already switched to digital editing
systems because it is so much simpler to put a movie together. Image quality is
maintained and cutting out some postproduction stages saves time. Likewise,
using the digital technology in film making helps a director and the production
crew to determine any shooting flaws and correct it right away.
The most compelling concern of digital technology is distribution. Production
companies spend a lot of money producing film prints of their movies. These
heavy reels of film are shipped to theaters all over the world requiring pricey
distribution rates. After the film’s run, these reels are shipped back to the
production companies.
Since distribution costs are so high, production companies have to be
extremely cautious about where they play their movies. Unless they have a sure
fire hit, they take a pretty big risk sending a film to a lot of theaters. If it does not
sell, they might not recover their money back. However, with digital technology,
distribution costs can be significantly reduced. Digital movies are basically big
computer files that can easily be transmitted through broadband cable or via
satellite. There are virtually no shipping costs, hence less cost in showing the
movie in a hundred theaters. This kind of distribution can easily open movies in
theaters all over the world on the same day. The technology does not only aid the
producers and distributors but also the individual theaters. If a movie sells out,
a theater could decide to show it on additional screens in the spur of the moment
by simply connecting to the digital signal.
To the audience, the most important aspect of digital technology is the
projection system. This is the final piece of technology that controls how the
movie actually looks at the end of the line. Everybody agrees that a good film
projector loaded with a pristine film print produces a fantastic, vibrant picture.
The problem is, every time the movie is played, the film quality drops a little.
134
When a movie has already been playing for weeks, a moviegoer will probably
see hundreds of scratches and bits of dirt on screen. Many critics considers the
projected digital movie as inferior to a pristine film print. However, they do
recognize that while a film print gradually deteriorates, a digital movie looks the
same every time it is shown.
Going digital requires a lot of investment in equipment and machineries as
well as the infrastructure that will house digital projectors. This is where
government participation is mostly needed. These machineries are being
imported, thus requires custom duties. The government can support the film
industry in terms of tax exemption or reduction in the purchase of equipments,
at least for a temporary period of time while the industry is still coping with
technological changes. The government can also provide tax incentives for
investors and theater owners upgrading their cinemas. The Indian government
implemented these measures to help its domestic industry. With the advent of
digital technology and the identification of Bollywood as a priority export sector,
the Indian government reduced the basic import duties on certain digital studio
equipment, benefiting the content producers and other media companies in
India. The Indian government also initiated various tax incentives to investors
investing in multiplexes in the rural areas. Bank and institutional funding was
made available to single screen owners to upgrade their existing theatres to
multiplexes. Over 100 cinema halls have been converted into digital theatres
over the past 2 years.23
Additional insights and observations on the Philippine film industry by
seasoned director and former FDCP chair, Ms. Laurice Guillen-Feleo, are given
in Appendix D.
THE TELEVISION BROADCASTING INDUSTRY
Industry Definition and Contribution to the Economy
Based on the 1994 PSIC Code, the television industry is classified under the
radio and television activities (PSIC 9213), which is further divided into television
broadcasting and relay stations and studios, including closed circuit television
services (PSIC 92132), and radio and television program production (PSIC
92133).
Based on Table 24, it can be observed that the television broadcasting
industry is contributing most of the gross value added, total revenue, and total
cost with 69, 64, and 58 percent share to radio and television broadcasting,
respectively. In terms of the number employees, the television industry
contributed 38 percent.
23
Entertainment and Media. Indian Brand Equity Foundation.
Table 24. Summary of statistics for radio and television broadcasting
(in thousand PhP)
Industry
Radio and television broadcasting
Radio broadcasting
Television broadcasting
Radio and television production
Number of Number of
establishments employees
300
220
62
18
Total
10,036
4,975
3,833
1,228
Gross value
added
Total
revenue
Total
cost
4,715,215
1,152,719
3,259,122
303,373
7,157,999
1,826,599
4,588,483
742,917
3,028,100
805,319
1,750,738
472,043
Paid
9,951
4,904
3,823
1,224
Source: 1994 Census of Establishments.
Note: This table only includes establishments with an average person of 10 and more.
Industry Participants and Competition
Tele
vision br
oadcas
ting ffirms
irms
elevision
broadcas
oadcasting
At present, there are 21 local television stations in Metro Manila and the five
pioneering broadcasting firms are: (1) Alto Broadcasting System-Chronicle
Broadcasting Network (ABS-CBN 2); (2) Associated Broadcasting Network (ABC
5); (3) Republic Broadcasting System, Inc. (GMA 7); (4) Radio Philippine Network
(RPN 9); and (5) Intercontinental Broadcasting Corporation, Inc. (IBC 13).
However, there are only two local television companies that are vigorously
competing and capturing most of the televiewers. These two companies are the
ABS-CBN 2 and GMA 7 with a combined market share of 90.1 percent; ABSCBN has a market share of 65.34 percent while GMA 7 has a market share of
24.76 percent.
Competition
Basically, the competition in the television industry lies in capturing the most
number of televiewers or the highest percentage of people watching the program.
Increased viewership is the intermediate goal of the broadcasting companies
because it is their way of strengthening viability as well as attracting advertising
agencies. These agencies place advertisements in programs that have a wide
base of viewers.
Aside from competing with each other, broadcasting companies also have
to compete with other means of advertising such as print media, radio
broadcasting, and the like. While television remained to be the dominant medium
of advertising, the threat of these substitutes is always imminent. FM stations
have been creating alternative way of relaying advertisements to particular
niches in the market and a number of magazines as well as newspapers continue
to be a viable alternative for advertisements.
There are four areas where television broadcasting firms compete among
themselves and with other advertising media or substitutes. These areas are:
(1) television programming and merchandising; (2) image building; (3)
technological innovations; and (4) pricing.
136
Tele
visio pr
ogramming and merc
handizing. Television stations
elevisio
programming
merchandizing.
develop television programs that will entice viewers in order to increase
viewership and market share. Some of these television programs are either
self-produced or purchased externally—local or foreign called “merchandized”
programs.
Self-produced programs are developed by the network itself. Producing
programs can also be done under joint ventures or coproduction. In here, there
is cost-sharing agreement between parties involved. Under this agreement, the
television company has either full or partial control in the production of particular
programs. With this type of source, the network may directly deal with the suppliers
as well as with the talents, performers, television rights, and others.
Programs may also be bought from three other sources, namely, local
distributors, foreign distributors, and independent producers. Some of the major
suppliers of local television programs are Viva Production, Inc., Viva Television
Corporation, Star Cinema Production, and Unitel Production. On the other hand,
foreign suppliers include Warner Brothers, Inc. and Twentieth Century-Fox
Philippines, Inc.
Television programs can be classified into four basic types based on content
and form. These are:
1. Foreign programs presented in their original complete form. These are
programs that are imported like C.S.I., Monk, Ed, and Sex in the City,
among others. These are mostly shown in foreign channels such as
Star World, Action Network (AXN), Home Box Office (HBO), and others.
2. Hybrid foreign-produced programs partly modified to enhance local
reception. Examples of this kind of program are the Mexican telenovelas
like Marimar and Chinovelas like Meteor Garden. These are dubbed in
Filipino so that the viewers can understand the story. (The success of
the hybrid foreign-produced programs is explained in Box 1.)
3. Hybrid locally produced programs largely imitative of foreign formats or
based on key foreign content or elements. An example of this is Tabing
Ilog, which somehow copied the concept of Dawson’s Creek. Tabing
Ilog is locally produced with local talents and performers but the format
and the story about friendship is based on the foreign television series
Dawson’s Creek.
4. Locally produced programs with local content or content espousing
local values. These are teleseries and television programs that feature
local talents with Filipino values.
Currently, ABS-CBN 2 is the leading television network in the country
although its position is being challenged by GMA 7, the second largest network
in the country. Channel 2 has captured most of the television viewers and it has
been occupying the highest television rankings. The station has also garnered
several awards and recently, the KBP acknowledged ABS-CBN as the best
television station for 2004.
Box 1. The success of the hybrid foreign-produced programs
The hybrid foreign-produced programs partly modified to enhance
local reception has been successfully penetrating the local market. One of
its archetypes is the Mexican telenovela as well as the Chinese and Korean
telenovelas dubbed in Tagalog. The success of this soap opera genre can
be attributed to four combined qualities of the series: (1) it is dubbed in
Filipino which can easily be understood by the masses; (2) it features
mestizo and mestiza actors and actresses, fulfilling the colonial fancy of
Filipino viewers; (3) it depicts premodern, folk themes, and settingsa; and
(4) for television companies, it costs lower to buy foreign productions than
to produce its own television series; it is only the dubbing to local language
that they have to shed resources into.
In contrast to the story on modern themes, the Mexican, Chinese,
and Korean telenovelas are attuned to the predominant Filipino folk psyche
precisely because of its premodern, largely folk character. Filipinos of
various classes can identify with the character of the poor peasant woman
who becomes a landlord-merchant or married a super rich man in the end.
Indeed, a fantasy and a happy ending in premodern social mobility and change.
There is also the Japanese anime dubbed in Filipino. This anime has
again captured the market in the 1990s even exceeding the 1970s’ charts.
Different quality combinations can be attributed for its success. The anime,
like the telenovelas, is dubbed in Filipino, facilitating audience
comprehension and acceptance. The program has rich, attractive, and
dynamic visuals made possible by advanced and expensive animation
technology. Similarly, animes have the evocation of folk, premodern themes.
These Japanese animated characters most popular among Filipino children,
such as Sailor Moon and Streetfighters, are not only technologically oriented,
but feature premodern themes endowed with supernatural and mystical
powers.
The first two types of programs imply no real competition or none at
all to the Philippine-based television productions. In the first type, Philippinebased productions, even if local producers wanted to, simply cannot
replicate the Caucasian actors and setting with credibility. The comparative
advantage of the Mexican telenovela over Philippine television drama is
the markedly mestizo features of its actors and actresses. In the case of
Japanese animation, the Philippine entertainment business is still too
socially underdeveloped—premodern and technologically backward—to
produce any local competition.
Programs with premodern, folk themes, and settings are those that are traditional
as well as conservative. For instance, these programs still uphold the importance of
family and the sanctity of marriage.
a
138
Premised on the fact that bulk of the viewers belong to the C and D income
classes, ABS-CBN developed as well as purchased programs that appeal to the
lower income class. Such strategy has effectively increased the viewership of
ABS-CBN. Consequently, the station’s evening programs have occupied most of
the top 10 programs for 2004. However, for the daytime programs, GMA has
captured most of the viewers.
Based on the telemonitor of AGB Nielsen Media Research, the top program
for 2004 is the television series “Marina” with an audience share of 51 percent,
followed closely by two more ABS-CBN telenovelas—Sana’y Wala Nang Wakas and
Basta’t Kasama Kita with an audience share of 51 percent and 50 percent, respectively
(Table 25).24 Out of the top 10 programs for 2004, 70 percent is produced and
aired in Channel 2 and the remaining 30 percent is aired in Channel 7.
By the end of 2004, on the average, ABS-CBN has captured 41 percent of
the market for its evening program followed by GMA that captured 39 percent.
Other networks are far behind from these two networks (Figure 6).
However, a different scenario is evident for daytime. If ABS-CBN has
captured most spectators for its evening program, GMA has captured most
viewers for its daytime program. On the average, GMA has captured 43 percent
Table 25. Top 20 television programs (Mega Manila)a
Rank
Programs
Channel
1
2
3
4
5
6
7
8
9
10
Marina (TV-Series)
Sana’y Wala Nang Wakas (TV-Series)
Basta’t Kasama Kita (TV-Series)
Mulawin
It Might be You
Hiram
Extra Challenge
Lovers in Paris
Bitoy’s Funniest Home Video
Imbestigador
2
2
2
7
2
2
7
2
7
7
Ratingsb
(in %)
38.6
37.4
36.7
34.1
32.7
31.8
31.8
30.0
29.5
29.0
Audience shareb
(in %)
51
51
50
45
49
45
45
45
47
45
Source: 2004 ABS-CBN Annual Report.
a
For Mega Manila only from January to December 2004 except Holy Week (April 4-10, 2004). This was
monitored by AGB Philippines Telemonitor for Mega Manila TV households.
b
Ratings are the viewing statistics. It is the average number of people watching the program at any given
minute. Also, ratings are the universal audience share, which is the number of people watching the program
at a specific time slot. It measures the competitiveness of the program against its rivals.
This is done through the Television Audience Monitor (TAM) methodology of AGB Nielsen
Media Research. For a more detailed discussion of this methodology, refer to Appendix B.
24
Figure 6. Average channel shares for evening programs, 2004
of the viewers and ABS-CBN has captured 35 percent (Figure 7). Again, other
television networks are left behind.
The strategy of ABS-CBN in programming is complemented by its new
approach in television merchandising. The station pioneered in advertising
television programs (both local and foreign) using Filipino as medium of
communication. This strategy of Channel 2 was followed by other stations like
ABC 5 and GMA 7. On the other hand, other television stations developed
programs in order to explore market niches.
Figure 7. Average channel shares for daytime programs, 2004
140
Image building
building. Image is vital for every network station. Image is what
the audience as well as the advertisers remembers about the station. Along
with the image, the broadcasting firms also develop slogans like “In the Service
of the Filipinos Worldwide” and “Kapamilya” for Channel 2 and “Where you
belong” and “Kapuso” for Channel 7.
Each broadcasting company tries to establish an identity by associating
themselves with the social classes or by featuring a particular kind of
entertainment. For instance, PTV 4 is often patronized by sports fanatics.
Furthermore, they also established their image through advertising their
technological capability. An example is the “Rainbow Network” of GMA 7 that
signifies the wide coverage of the network.
Tec
hnological inno
echnological
innovv ations. Coping with technological advancements
has been one of the major areas of competition in the television broadcasting
industry. RPN 9 started the technological race through its domestic satellite
broadcasting. This advancement was followed by GMA 7’s installation of a tower
that enabled it to have the widest broadcast reach. Meanwhile, ABS-CBN is
expanding its provincial facilities and has acquired satellite news gathering
facilities to maintain its dominance in news and public affairs.
At present, the competition is moving toward broadcasting of certain
programs to Filipino communities abroad. ABS-CBN has been successful in
reaching Filipino communities25 while GMA 7 is at the forefront in the exploration
of business opportunities in the international market.
Pricing. Television commercials are usually placed for 30 and 60 seconds.
The rate charged for a commercial varies depending on the time the commercial
is aired.
Advertising time slots are classified into two: (1) primetime and (2)
nonprimetime. Primetime slots are the most productive hours for advertisers
because these are the time slots when audience level is at its peak (usually
between 6:30 and 10:30 p.m.). Since viewership level is high, television stations
charge higher rates. Nonprimetime slots, on the other hand, refer to the hours
other than primetime. These time slots usually command a lower price because
of low viewership.
At present, ABS-CBN 2 and GMA 7 charge the highest ad placement rate
mainly because of the high television ratings of their programs. The ad placement
rate for a 30-second commercial in ABS-CBN is PhP150,000, and in GMA,
PhP120,000.
Apart from competing with each other in pricing, TV broadcasting firms
also compete with other advertising media, i.e., radio broadcasting and print
media. At present, the indicative advertising rates in these three media are as
follows: PhP100,000 to PhP150,000 for a 30-second commercial in television;
A more detailed discussion about the success of ABS-CBN’s “The Filipino Channel” is in
Industry’s Opportunities.
25
PhP4,000 to PhP5,000 for a 30-second commercial in radio; and PhP185 per
column centimeter in newspapers.
Industry Association
The major industry association is the Kapisanan ng mga Brodkaster ng Pilipinas
(KBP). The association was organized on April 27, 1973 by the country’s major
radio and television networks. The KBP was organized to unify broadcast
practitioners to achieve common goals in relation to allied industries and
government agencies. It serves as the formulator of broadcast policies and
standards. In addition, KBP is like any other association representing people
who engage in broadcasting on a national scale. It serves as a spokesman for
the broadcast industry in policy matters, government regulation, and
establishment of acceptable industry practices.
Ordinarily, government plays the role of watchdog over private enterprise.
However, in the case of the broadcast sector, regulations are from within, among
its own rank and file which has been proven to be more effective. This type of
self-regulation essentially involves a consultative process wherein the
broadcasters are asked about the practicality and applicability of proposed
rules and regulations. Self-regulation in KBP was reiterated by a Memorandum
of Agreement dated September 24, 1991 between the Secretar y of
Transportation and Communications, the National Telecommunications
Commissioner (NTC), and the KBP President. All three recognized “the selfregulatory principle of the KBP to police its members on matters relating to the
enforcement of broadcast rules and regulations, including the KBP radio and
television codes.”
In order to enforce the said code, the KBP has a Standards Authority (SA)
division that handles all complaints relating to violations of the Radio and
Television Codes as well as program and technical standards. It regularly monitors
broadcast activities and makes periodic inspection of radio and television
stations. The SA decisions are enforced through a system of fines and expulsions
of members as well as banning of delinquent advertising accounts. In addition,
the SA determines the capabilities and sense of responsibility of all on-air
personalities through an annual accreditation process, involving written
examinations and performance evaluation by the station management.
Advertising agencies also undergo yearly accreditation.
Industry’s Opportunities and Threats
Opportunities
Like the film industry, one of the opportunities in the television industry lies on
expanding their television viewers. The television viewers can be divided into
two: local viewers and international viewers most especially overseas Filipino
contract workers as well as Filipino immigrants. Another opportunity lies on
increasing revenues through short messaging service (SMS) or famously known
as “text messaging.”
142
T ele
w er s
elevv i e
ew
Philippine demographic profile
profile. As discussed in the previous section,
the huge Philippine population, which is composed of many young people,
provides a major opportunity for the film as well as the television industry. Aside
from these young people, those low-income class earners (Class C, D, and E) are
also viable target market.
International viewers
viewers. As was done by Korea with its “Hallyu”26 or “Korean
Fever,” capturing the Asian market, with its similar culture and traditions, also
provides another business opportunity. The same demographic features of the
Filipino overseas contract workers, as discussed earlier, also provide the same
opportunity for the television industry.
In tapping the Filipino viewers in North America, Middle East, Asia Pacific,
and Europe, ABS-CBN Global27 has been the most successful. The net sales of
ABS-CBN Global has been increasing since 2000; by 2003, it reached US$43
million (Figure 8).
The worldwide subscribers have also been increasing in different continents
and currently, the subscribers have reached 1.39 million in March 2004 from
550,000 in 1999. Most of the subscribers are from North America and the
Middle East. Furthermore, subscribers of The Filipino Channel (TFC) are also
Figure 8. Net sales of ABS-CBN global, 2000-2003
‘Hallyu’ refers to the phenomenon and the impact of popularity of Korean media and
cultural products—films, TV dramas, K-pop, fashion, cosmetics, accessories, electronic
appliances, mobile phones, and cars. While its popularity mainly concentrates in the Asian
and South East Asian region, some of the products reach as far as Europe and Latin
America.
27
This company is part of the ABS-CBN Broadcasting Corporation and handles the
international services of the mother company.
26
responsive to ABS-CBN’s interactive polls. ABS-CBN made history recently when
over a million television viewers sent text messages to influence the ending of
its hugely popular drama series, Sanay’ Wala Nang Wakas, a love rivalry involving
four popular TV and movie idols.
ABS-CBN Global offers a wide range of Filipino channels such as the 24hour ABS-CBN News Channel, Cinema One movie channel, and Pinoy Central
TV—the source of regional, travel, and sports programs. In addition to these
channels, the network also offers two radio stations: DZMM for AM news and
commentary, and DWRR for FM music. This bundle is known as the TFCDirect!—
a direct-to-home (DTH) satellite service delivering all six channels in digital
broadcast quality.
In terms of the net sales and services of ABS-CBN Broadcasting Company,
“ABS-CBN Global continued to be the biggest contributor having net revenues
accounting for 71% of total net sales and services. ABS-CBN GlobalTM net sales
and services increased by a vigorous 29 percent to PhP3,048 million from the
previous year. The bulk of ABS-CBN GlobalTM revenues came from subscription
revenues of its cable and direct-to-home service with an estimated viewership
base of 1.6 million worldwide by the end of 2004, up to 22 percent from a year
ago”(Lopez 2005).
Cellular mobile telephone. In addition to expanding televiewers,
broadcasting firms can also tap the millions of Filipinos who have subscribed to
different cellular mobile telephone companies. Television companies can make
promotional campaigns and programs involving short messaging service (SMS)
or “text messaging” provided by the mobile operators. Through this, firms can
increase their revenues.
Based on NTC data, there are 32.9 million Filipinos subscribed to the different
cellular network operators in 2004, a growth rate of 46.32 percent from the
previous year (Table 26). The Cellular Mobile Telephone System (CMTS) density
is 39.85, which showed a growth rate of 43.5 percent.
Again, ABS-CBN is successful in capturing the mobile users through its promos
and programs. ABS-CBN’s other broadcasting revenue comes from SMS amounting
to PhP224 million, 8 percent higher than last year.28 The growth in SMS revenues
arise from the popularity of ring tone downloads connected with the cable music
channel MYX and program promos on text votes for a favorite candidate like in Star
Circle Quest or a desired ending in the soap opera Sana’y Wala ng Wakas.29
Threats
Like the film industry, competition from foreign programs is plaguing the television
industry. Recently, more and more Mexican, Chinese, and Korean telenovelas
are occupying the primetime slots of ABS-CBN 2, GMA 7, and ABC 5. This kind of
2004 ABS-CBN’s Annual Report
Star Circle Quest was an ABS-CBN reality show while Sana’s Wala ng Wakas was the same
network’s soap opera.
28
29
144
Table 26. Number of cellular mobile telephone subscribers, 2003-2004
Operators
2003
2004
DIGITEL
EXTELCOMM
GLOBE
PILTEL
SMART
TOTAL
Population
Cellular Mobile Telephone System (CMTS) Density
732,467
29,896
8,800,000
2,867,085
10,080,112
22,509,560
81,054,329
27.77
1,200,000
13,670
12,513,973
4,612,450
14,595,782
32,935,875
82,652,033
39.85
Growth rate
(in %)
63.83
(54.27)
42.20
60.88
44.80
46.32
1.97
43.50
Source: www.ntc.gov.ph
programming may be based on the 1997 success of the Mexican hit Marimar.
Afterwards, viewers shifted to the so-called Chinovela, in which Meteor Garden
is the most popular. It featured the phenomenal Taiwanese boy group named
F4. As compared to producing local telenovelas or teleserye, airing foreign
programs involves a low budget for Tagalog translation and dubbing. For ABSCBN, foreign programs are shown 27-29 hours a week, which is about 19-21
percent of the total air time of the station. On the other hand, GMA 7 airs foreign
programs for 30-32 hours a week, which is about 25-27 percent of the station’s
total airtime. For ABC 5, less than 10 hours a week are allotted to foreign
programs but the station shows the popular American series Friends, Lizzie
McGuire, and the reality show Fear Factor. More often than not, these foreign
television shows are shown during primetime.30 Both ABS-CBN and GMA allot about
an hour of foreign television series during primetime from Mondays to Fridays.
Besides competition from foreign programs, there are also threats from
substitutes to television viewing. These substitutes include the following:
Home theaters and devices
devices. Through the video storage media,
information can now be found on videocassette recorders (VCRs) and
prerecorded video discs such as VCD or DVD. More often for upscale type of
viewers, television broadcasts are hardly watched except for news reporting
and sports coverage. They would rather watch movies in VCDs and DVDs. Through
these devices, consumers have the opportunity to self-program in their most
convenient time movies they want to watch, leaving out commercials and
advertisements.
Video games and other computerized entertainment software
offering
offering. These video games and other computer games have been diverting
the attention of televiewers from watching television programs. They rather play
30
Primetime is from 6 until 10 in the evening.
games than watch television since playing gives more satisfaction and
entertainment.
Cable television and other distribution media. Cable television is
another innovation for the industry. It is an alternative distribution system that
has the ability to carry over-the-air signals to customers on its own wires. Cable
companies import the television program in the form of a VHS tape or what they
call decoder, and feed the program to their subscribers via satellite. Currently,
there are 1,421 cable operators in the country where 5 percent or 69 cable
companies are located in Metro Manila.31
Foreign investors venturing into cable television is attracted to the
Philippines since the country is the third largest English speaking country in the
world. The Lopez family has once again taken the lead in investing and venturing
into cable television business and created the Sky Cable, the largest cable
company in Metro Manila. The company has captured 60,000 cable subscribers
in Metro Manila. The cable system offers more than 50 channels including the
five STAR TV channels, Asian Business News, Australian TV, several non-English
and non-Tagalog channels, and six local channels. This “basic package” costs
subscribers about PhP800 pesos per month. Sky Cable also offers a “premium
package” of channels, such as STAR Movie Channel, HBO Asia, ESPN Asia, and
the Discovery Channel. Although most of the cable channels appeal to upscale
market, the company also targets the middle-income group with their Tagalog
movies channel. This programming strategy is first done by its sister company,
ABS-CBN which has won the network a huge share of television audience.
With the broadening of the traditional definition of cable services, categories
of cable TV include: basic, pay, pay-per-view, and home shopping.
Basic cable channels earn income from advertising and subscriptions. On
the other hand, pay cable offers premium program services such as uncut
commercial-free movies, sports, made-for-cable music, and other special
features. Thus, pay cable services are more expensive than basic cable because
it carries no advertisements and solely relies on a portion of the monthly fees to
finance their programming.
In the pay-per-view category, subscribers pay for airing of individual programs
rather than a monthly subscription fee. For the home shopping channels, viewers
watch on product demonstrations and telephone numbers are flashed on screen
where orders can be placed.
In addition to these kinds of services, cable channels have developed the
so-called “narrowcasting” aimed for airing a particular type of entertainment
and targeting specific televiewers as well as advertisers. Examples are ESPN,
Star Sports, Solar Sports, and MTV. Other forms include the broadly based
programming.
31
For a regional distribution of cable television companies, please refer to Appendix C.
146
Conclusion
As discussed earlier, the Korean drama success is making waves in the
international market. This accomplishment was made possible by the
cooperation of the government and industry players.
This is evident in the Korean government’s sophisticated political setup
strengthening its cultural industries. The Ministry of Culture and Tourism’s
different divisions oversee the various aspects involved in the development of
media and culture. This covers policy, technology and technical logistics,
development of cultural contents, and strategic promotion. There is a special
section elaborating the intensity of government effort in fostering cultural
industries, specifically pledges to strengthen capacities for cultural creativity
and promotion of information and knowledge worldwide.
Also, the Korean National Tourism Organization (KNTO), in association with
the different travel agencies, offers tour packages that focus on soap opera
shooting locations. Travel agencies were successful in doing this strategy and
were able to attract tourists mainly from Taiwan, Hong Kong, and Singapore.
For the industry players, they make sure that television programs being
produced have both local and international appeal. Companies deliberately
develop good storylines, hire famous actors, and produce good-quality programs
through their high-technology cameras and other modern equipment.
Consequently, there are several factors why Korean dramas are successful
in the international market. Its urban appeal as seen in city location shots are
beautiful settings along with the soothing background music. For instance,
Endless Love was commended for the luscious or lavish use of music, including
Western classics such as Romance d’amour, which makes the drama even
more unforgettable. The more poetic and imaginative ways of expressing love
also makes Korean romance dramas outstand. Mostly, Korean romance stories
are circulated in the overseas market. Romance themes have been a universal
genre in TV dramas. The appeal of fantasized love relationship in everyday life
easily makes a connection to the viewers. This viewer preference sustains the
popularity of Korean dramas from other counterparts. The melodramatic effect
of the Korean dramas also captured the viewers. Whereas other romance
dramas tend to spoil the audience with happy ending, many Korean dramas are
infused with unrequited love, rivalries between families, and failed romance.
Tragedy seems to be a defining feature especially in Korean dramas, in which
the male and female leads often suffer from sickness and even death.
Taking into account the success of Koreans through the help of their
government, what effort can the Philippine government together with the network
companies offer? Considering that the main weakness of Philippine TV shows
is its lack of cultural content and taste, the government and concerned private
sector may provide incentives for good scripts, or sponsor trainings and
scriptwriting contests. This is vital in the development of creative programs and
sensible storylines that depict Filipino characteristics, culture, and daily realities.
This idea can project to other countries a more favorable impression about
Filipinos, just what few excellent Iranian films had done. By far, there are
scriptwriting contests for films. To conduct it annually will be of great help for the
television industry.
Continuous expansion and modernization of a television network is very
critical in the industry. Technology in broadcasting has been improving throughout
the years, and coping with this development is vital in light of regional dispersal
of economic growth. As advertisers penetrate regional markets, television
stations with a wider reach have an edge in attracting advertising agencies.
Also, as the television companies consider exporting their programs, these
programs should be at par with foreign programs in terms of graphics, sounds,
and visual effects. This entails a modern camera and other production
equipments.
Doing these suggestions requires a lot of investment where the intense
participation and support of the government is much needed. Upgrading
equipment means importation and custom duties. A government support through
tax reduction or exemption, for at least a short period of time while the industry
is adjusting with the developments, is surely a considerable assistance. The
government can also allow foreign investors to invest in the industry. In this way,
television companies will have additional capital for the modernization. Currently,
no foreign investors are allowed to invest in the mass media sector including
the television industry.
SUMMARY AND CONCLUSION
The paper discussed the AVS sector focusing on the film and television industries.
It presents the strengths and opportunities of Filipino creativity andthe continuing
Filipino diaspora abroad creating potential foreign markets for Philippine shows.
Weaknesses and threats are also discussed highlighting the poor storylines of
many shows, growing domestic penetration of US, Mexican, Korean, and Chinese
shows. In addition, there are technological changes, particularly the growing use
of digital products affecting changes in consumption pattern and production
process or filmmaking.
Considered an opportunity as it promises to make film production easier
and cheaper, the industry requires government help in the form of lower tariffs
for the importation of equipment. Other government support for this sector
could be in the form of more incentives to promote better storylines and scripts
that are artistic and rich with edifying contents. The Iran experience of producing
films that changed the perception of its own people and that of other countries
is a trail that can be followed by Philippine artists. These Iranian films are counter
stories to the bad newspaper publicities, a same general situation the Philippines
has been experiencing with the international media.
People in the industry are asking for protection so that the industry can
flourish. However, protecting the industry would be a useless effort considering
its minimal contribution to GDP and the lack of praiseworthy cultural content in
many of its output. Instead of protecting and restricting the industry, the
government could at least improve the institutional framework on incentives
and development of true creative talents. The paper had already mentioned
148
some of these in the previous sections. In addition, there are some lessons that
can be learned on how other governments nurtured the cultural sector.
European Union: Media Support
As illustrated in Figure 9, the European Union has the Media Plus Programme
(2001-2005) that aims at strengthening the competitiveness of the European
audiovisual industry through a series of support measures:
1. training of professionals;
2. financial support for development of production projects;
3. distribution support;
4. promotion of European cinematographic works and audiovisual
programs through participation in international events; and
5. support for cinematographic festivals.
Figure 9. The Media Plus Programme
Source: http://europa.eu.int/com/ avpolicy/media/ta_en.pdf
The whole idea is to boost the competence and competitiveness of
European audiovisual products in the global market.
India and Korea: Institutional Focus
The success of Hindi films in penetrating the international market can be
associated with the government support through its institutional framework. A
cabinet ministry is on top of the film industry—the Ministry of Information and
Broadcasting (MIB)—a proof of the importance the government gives for the
industry. The MIB is the apex body of the Indian government that formulates and
administers policies for the entertainment and media industry. It is also
responsible for international cooperation in the field of mass media, mainly on
interaction with its foreign counterparts on behalf of the Government of India.
Figure 10 shows that MIB is divided into three major wings: (1) films wing;
(2) broadcasting wing; and (3) information wing. The films wing is composed of
the Directorate of Film Festivals (DFF), National Film Development Corporation
(NFDC), and the Central Board of Film Certification (CBFC). The DFF was set up
by the Government of India to organize international and national film festivals
within the country. It facilitates India’s participation in festivals abroad, arranges
programs of foreign films in India or of Indian films abroad, and holds the National
Film Awards. On the other hand, the NFDC fosters excellence in cinema. Its
main activities include financing and producing films with socially relevant
themes and distributing and disseminating films through various channels. Lastly,
CBFC is responsible for certifying the films produced in India as well as outside
the country suitable for public exhibition. The last two are similar to the
Philippines’ MTRCB and Film Development Council, respectively. The difference
is that, by being put under the same government ministry, there is presumably
better coordination and focus in supporting the industry in India. In addition, by
being placed under a government ministry, its concerns would have easier
resonance in the highest policymaking levels. This setup would be an interesting
Figure 10. Institutional framework of India
Source: PricewaterhouseCooper for the India Brand Equity Foundation.
150
example to think about as the Philippines embarks on a spin-off Department of
Information and Communications Technology from the present DOTC structure.
Similarly, Korea’s efforts into strengthening its cultural industries can be
seen in the sophisticated setup of its political infrastructure. The Korean
government has the Ministry of Culture and Tourism to oversee the various
aspects involved in the development of media and culture. Under this ministry,
there is the cultural industry bureau that oversees the industry regarding policy,
technology and technical logistics, development of cultural contents, and strategic
promotions overseas.
Korea’s strategy is a combination of both the EU and India strategies. It
has a focused institutional structure and well-instituted ways of supporting their
culture industries. For instance, under the Ministry of Culture and Tourism, the
Cultural Industry Bureau32 concentrates on the implementation of policies aimed
at enhancing national competitiveness. It also supports efforts by cultural
industries to enter overseas markets, develops high value-added cultural
products, and fosters specialized human resources for the cultural industries.
Of these three models, the institutional focus appears a realistic and
advisable one to consider further. Subsidies like EU’s Media Programme may
not be very attractive nor realistic considering the current financial predicament
of the government and competing areas that call for attention. But providing
clear institutional focus that shows the government’s sincere intent on
transforming this sector into a dollar-earning one deserves consideration for
further studies.
This bureau is divided into six divisions and each division has its own duties and
responsibilities in making the cultural industries competitive in the international market.
First, the cultural industry policy division has the following responsibilities: (a) formulate
policies for the promotion of cultural industries; (b) support cultural industry projects, one
of which is the building of infrastructure; (c) conduct research for promotion; (d) development
and popularization of Korean cultural products; and lastly, (e) handle matters of coordination
and cooperation related to the cultural industry with international organizations and foreign
governments.
Second is the film, animation and video distribution. The division establishes and
implements comprehensive plans for the visual industry, including movies, animation, and
video articles. It also supports and improves production activities of visual industries and
related organizations as well as the distribution structure of visual works.
Third is the content promotion division. This division establishes and promotes a
master plan for promoting the industries of multimedia contents, digital culture contents,
characters, comics, and animation. It conducts research studies and develops new policies
in response to the current environmental changes. Furthermore, the division supports the
industries’ productions and related organization as well as trains the industry professionals.
It supports the affairs related to design, standardization, and active distribution of the
digital cultural contents; and affairs related to distribution structure improvement. Lastly, it
supports the contents sales promotions and the related international exchange activities,
and supervises the related cooperative activities with international commerce organizations,
foreign governments, and overseas organizations.
32
APPENDICES
Appendix A. Gross Revenue of AVS Sector
2001
A. Motion picture and video production
1. Studio 23, Incorporated
2. United International Pictures
3. Roadrunner Network, Incorporated
4. Philippine Animators Group, Incorporated
5. Film Experts, Incorporated
6. Star Cinema Productions, Incorporated
7. Optima Digital, Incorporated
8. Magnavision, Incorporated
Class Subtotal
Percentage to
Class Subtotal
613,945
228,225
184,101
97,554
89,679
87,854
70,234
46,152
1,417,744
43.30
16.10
12.99
6.88
6.33
6.20
4.95
3.26
100.00
B. Motion picture projection
1. SM Cinemas, Incorporated
2. Gotesco Investments, Incorporated
3. West Avenue Theaters Corporation
4. Mayfair Theater, Incorporated
5. Ayala Theaters Management, Incorporated
6. Imperial Cinema, Incorporated
7. Rajah Broadcasting Network, Incorporated
Class Subtotal
117,601
104,392
64,306
17,118
13,733
12,868
12,860
342,878
34.30
30.45
18.75
4.99
4.01
3.75
3.75
100.00
C. Radio and television program production
1. GMA Marketing and Productions, Incorporated
2. Unitel Productions, Incorporated
3. M-Zet TV Productions, Incorporated
4. FPJ Productions, Incorporated
5. GG Productions, Incorporated
6. Program Resources and International Markets Ent. Corp.
7. Interactive Broadcast Media, Incorporated
Class Subtotal
171,309
143,381
37,399
23,058
19,476
17,432
16,611
428,666
39.96
33.45
8.72
5.38
4.54
4.07
3.88
100.00
D. Radio broadcasting and relay station and studios
1. Consolidated Broadcasting System, Incorporated
2. Newsounds Broadcasting Network, Incorporated
3. Quest Broadcasting, Incorporated
4. Mareco Broadcasting Network, Incorporated
5. Audiovisual Communicators, Incorporated
6. HM Catv, Incorporated
7. Samson Enterprises, Incorporated
8. Radio Veritas Global Broadcasting System, Incorporated
9. Advanced Media Broadcasting System, Incorporated
206,290
90,806
88,577
81,825
64,176
62,904
50,166
44,653
39,962
26.21
11.54
11.25
10.40
8.15
7.99
6.37
5.67
5.08
152
Appendix A (continued)
2001
Percentage to
Class Subtotal
10. Supreme Broadcasting System, Incorporated
11. Cable Box Office Shows and Systems, Incorporated
Class Subtotal
31,368
26,415
787,142
3.99
3.36
100.00
E. Recording or taping of sound
1. Universal Records
2. Viva Records Corporation
3. Alta Productions Group, Incorporated
4. Alpha Records Corporation
5. Neo Records, Incorporated
6. Studio One, Incorporated
7. Matthew Film Distributor, Incorporated
8. Maximedia International, Incorporated
Class Subtotal
161,102
107,602
59,121
23,275
23,163
22,185
20,529
14,049
431,026
37.38
24.96
13.72
5.40
5.37
5.15
4.76
3.26
100.00
9,229,769
3,496,948
508,725
373,122
352,015
115,187
27,103
19,709
14,122,578
65.35
24.76
3.60
2.64
2.49
0.82
0.19
0.14
100.00
F. Television broadcasting and relay stations
and studios including closed circuit television services
1. ABS-CBN Broadcasting Corporation
2. GMA Network, Incorporated
3. ABC Development Corporation
4. Television and Production Exponents, Incorporated
5. Radio Mindanao Network, Incorporated
6. Amcar Broadcasting Network, Incorporated
7. Southern Broadcasting Network, Incorporated
8. RJ Music City, Incorporated
Class Subtotal
Appendix B. TTele
ele
vision A
udience Measurement Me
thodology a
elevision
Audience
Methodology
Step 1
Each AGB operation begins with a large-scale study to determine the vital
characteristics of the universe that affect viewing. Aptly called the Establishment
Survey (ES), the results of this study will establish the composition of the viewing
panel that will be eventually measured. The respondents of this study serve as
a pool of possible recruits for the panel. Conducted regularly, this study is used
to check the relevance of the existing panel against the universe through time.
Step 2
With the characteristics of the universe at hand, the next step is to build the panel
and recruit families that are willing to collaborate. AGB then installs peoplemeters
in these households and train the family members in its proper use.
Step 3
Each working TV set in a household is fixed with a peoplemeter and a remote
control. Only one peoplemeter is connected to the telephone line or Global
System for Mobile Communications (GSM) network for data downloading. This
is the “master” peoplemeter. The rest of the peoplemeters in the household
pass their data to the master, hence the name “slave” peoplemeter. AGB
Philippines uses the TVM 2 peoplemeter—a modular nature device that allows
for various data transmission techniques via stationary phones, radio waves,
and cellular phones.
a
www.agb.com.
154
Appendix B (continued)
Step 4
Each night, data for the day from the meters are downloaded via telephone
lines or GSM lines for households without landline connection, by the Pollux
located at the AGB Philippines offices.
Step 5
At the heart of the system is Pollux, AGB’s proprietary production software. Aside
from assisting in panel management, Pollux prompts the retrieval of viewing
data, which undergoes a series of fundamental processes of consolidating,
validating, and expanding the data, thus obtaining a viewing data of the highest
quality.
Step 6
The in-house TV events monitoring group takes care of this. This 24-hour operation
makes sure that every event that took place in the TV is logged in the TelePad,
another proprietary software for TV events monitoring. The events data are fed
to Pollux for consolidation with the viewing data for a complete TV viewing
behavior data.
Step 7
For viewing data analysis, a proprietary software was developed suited for users
to maximize data potentials. The AGB Work Station is composed of three analysis
tools: (1) TeleMonitor for viewing behavior analysis; (2) TeleSpot for Advertisement
campaign and expenditure analysis; and (3) AdPlan for Advertisement campaign
planning. It is supported by the expertise of AGB Media Services, the corporate
division of the group, and fueled by the feedback of thousands of users
worldwide.
Appendix C. List of Television Channels in Metro Manila
Company
Call sign
ABS-CBN Bctg. Corp.
DWWX
People’s TV Network
DWGT
ABC DEV. Corp.
DWET
Republic Bctg. System
DZBB
Radio Phil. Network
DZKB
Zoe Bctg. Network
DZOE
Intercontinental Bctg. Corp. DZTV
Southern Bctg. Network
DWCP
Amcara Bctg. Network
DWAC
Eagle Bctg. Corp.
DZEC
Republic Bctg. System
DWDB
Rajah Bctg. Network
DZRJ
Radio Mindanao Network
DWKC
Zoe Bctg. Network
DZOE
Delta Bctg. System
PA
Progressive Bctg.
DWAO
Masawa Bctg. Corp.
DWBP
Nation Bctg. Corp.
P/PU
Mareco Bctg.
DWBM
Gateway UHF Bctg.
DWVN
ABC Dev. Corp.
DWTE
Total no. of TV stations in NCR 21
Channel
2
4
5
7
9
11
13
21
23
25
27
29
31
33
35
37
39
41
43
45
47
Power
(ERP) kW
Location
60 (346.2)
Mother Ignacia, Q.C.
50 (968 PIA Bldg., Visayas Ave., Q.C.
40 (320) Brgy. San Bartolome, Nov.,QC
100 (1000)
Brgy. Culiat, T. Sora, Q.C.
50 (1000)
Panay Ave., Q.C.
60 (829.8)
Antipolo City
50 (973)
SFDM, Q.C.
20 (60)
Strata 200, Pasig
50 (1126)
Mo. Ignacia, Q.C.
50 (3948) Bo. Sta. Cruz,Antipolo, Rizal
30 (613.27)
Brgy. Culiat, Q.C.
25 (1354.7)
Antipolo, Rizal
50 (4050)
Antipolo, Rizal
10 (55)
Antipolo City
10 (100)
Mandaluyong City
25 (1029)
Antipolo, Rizal
100 (3000)
Mandaluyong City
60 (5000)
Antipolo City
10 (20)
Quezon City
5 (103)
Antipolo City
40 (1000) Brgy. Bartolome, Nov., Q.C.
156
Appendix D. Some Insights on the Philippine Film Industry *
Laurice Guillen-Feleo
Former Chairperson, Film Development Council of the Philippines
The Movie and Television Review and Classification Board (MTRCB) is only
regulatory. No agency besides the FDCP was ever created to help in the
development of the film industry.
In the 1960s, the Philippines was second to India in film output. Today,
India is still first, the United States is second, and the Philippines has slid down
to eighth place. The Film Development Council of the Philippines identified the
reasons for the drop, though not necessarily in the order of gravity:
• Piracy;
• Other entertainment options;
• Heavy taxation; and
• Low quality of films.
Apart from being a highly taxed industry in comparison to the rest of the the
film-producing world, the other factors are not necessarily problems inclusive to
the Philippines. Piracy affects the United States, India, Japan, China, and Hong
Kong. They seem to have anticipated these factors by as much as 15 years
compared to the Philippines, which has not acknowledged and addressed this
problem in time to reverse the decline. Hence, the Philippine film industry has
been overtaken by Japan, Korea, China and, in some aspects, Thailand.
Still dominating the market is the United States, which has aggressively
pushed its market worldwide. Although India exceeds US production output by
as much as 50 percent, the latter’s budget is 22 percent more than that of India.
Studies show that this budget goes to special effects, postproduction, and
marketing. Here is where their development strategy is directed. By raising the
bar on special effects and postproduction, the United States set the benchmark
for internationally accepted standards for film entertainment. Today, there is
hardly any theater in the world that does not exhibit Hollywood films. Through its
competitive advantage, film audiences worldwide, which have been steadily
exposed to American films, will accept only products that match Americanmade goods.
Asian-producing countries such as Japan, Korea, and China have
demonstrated, although they promote indigenous cultural content, how they try
to match Hollywood-set standards in order to compete. China has the most
success in penetrating the American market.
The statement on the decline of Filipino films always refers to the use of the
same storyline or plot. That is being addressed now.
Comments on the present paper presented during the Seminar on Services, 27-28
September 2005, Dusit Hotel Nikko, Makati City.
*
The FDCP’s predecessor, the Film Development Foundation of the
Philippines, conducted a scriptwriting workshop as well as a scriptwriting contest
yearly. Out of these contests came scripts like Magnifico, Santa Santita, and
many others.
Star Cinema and ABS-CBN have also conducted similar annual contests.
Even now, film producers look into the winners of Palanca Awards. They have
started to recognize that they need stronger content, short of accepting that we
should be making script-driven films.
Cinemalaya, a festival we started this year for scriptwriting and a finished
film competition, produced nine full-length features and six short films.
We also have script-driven films by independent filmmakers. An indication
that the content is being addressed is the renewed interest in Philippine films in
the international film festivals.
The budget for producing Philippine films is very, very low compared to our
Asian neighbors. As mainstream cinema still maintains the “star” system, the
bulk of the budget goes to the hiring of the stars and highly paid technical
people. The facilities for producing films are right here but they are not accessible
because they are rented out based on commercial rates. We cannot make a
film unless we import the materials. We have no sound studios, thus we cannot
shoot anytime at regular working hours. Films are mostly dubbed.
Postproduction is likewise low budgeted. The irony is that comparatively
little time is allotted to the postproduction of mainstream cinema than in
production, which stretches out, because production is dependent on the
availability of the stars and location. One month is not enough time to improve
and correct the film.
There are three film laboratories in the country. But for quality processing of
celluloid, producers go to Hong Kong, Thailand, or Australia. Thailand does not
produce films as much as the Philippines does but they have the infrastructure
and technology. They invested in sound studios and laboratories. They have the
advantage of imposing on foreign films to process films in their country before
these are shown in the Southeast Asian territory.
There are not enough accredited technicians. The guilds, which service
mainsteam cinema, have not initiated anything to upgrade the skills of their
technicians. Not one in the Kapisanan ng mga Direktor ng Pelikulang Pilipino
(KDPP) is acquainted with nonlinear and digital technology.
On theatrical projection (classified as movie projection in the paper), few
theaters, even in Metro Manila, have facilities for Dolby digital projection. Most
are in mono projection. Fewer theaters have the facilities for digital film
projection. Showing digital films in theaters entails renting digital projection
facilities on top of theater rentals. The SM chain of stores has announced fitting
seven of their cinemas with digital projection. (At the present time, the SM
Cinema chain of theaters already has 10.)
The promotion of Filipino films is directed at the domestic market only. Film
producers with television networks necessarily have the advantage. They tend
to promote in just two weeks before actual showing. Others cannot. However,
158
innovative producers tie up with Smart or Globe mobile communications. The
marketing budget for the local market is really not sufficient. The advertising
rate for television is prohibitive.
The demography of film audiences have also changed. Previously, the
audience for my drama films was predominantly female (and through them, you
reach the male). Now, the audience consists of young people in their 20s and
early 30s who regularly watch films. This is the new film audience comprising 99
percent. It is not that the quality of films declined but the audience has changed,
and along with that, their preferences.
Government and even private producers (except for a few with foresight)
do not seem to understand the importance of maintaining film archives. This is
the last in the mandate of the FDCP. The budget allocated to us is so small that
it goes to operations only. We are trying to save money from the income on
rebates to be able to address this problem.
Films are the preeminent instrument for transmitting culture and cultural
identity among Filipinos. Tagalog was rapidly learned through films. The
disadvantage of not having an archive is that our identity and culture is not
reinforced. People now have little or no appreciation for Filipino films.
Film schools cannot depend on critics and their articles alone. Actual films
are needed to train audience to be film literate.
Asian countries have anticipated the development of technology and
globalization in 15 years. What have they done?
They have promoted their films in the global market, which is what we
have not done. They have made sure that they have a presence in all the
important festivals and markets in the world. In a Cannes Film Festival, all the
film-producing countries in the world had a booth in the market except Vietnam
and the Philippines.
Korea does co-production, mostly with French producers, because they
are able to promote the country and culture, and widen the scope of appeal. The
tagline of the Korean Film Council says: “Promoting Korea by promoting Korean
films.” It makes sense. They also have sharing of artists, production crew, and
technology with French producers. They also have increased capital because of
the co-production, which they need, in turn, to be competitive in the world market.
They have human resource training to upgrade their skills in technology,
have acquired equipment, and built infrastructure. Before, we were the favorite
shooting site for American films because our crew was very good and conversant
in English; and it was generally cheaper to shoot here. Since then, we had
problems with peace and order, government bureaucracy, and local government
units. If we want them back, we should also think seriously about film production
infrastructure.
There are countries that do not charge amusement taxes at all, like Japan.
They all have archives. They store and restore their films. They have film
museums and watch films that they hear in conversations for a small fee. They
also acquire films of other countries and put these in their museums. Fukouka
has an annual festival, Focus on Asia, and their programmers go all around Asia
to bring films into Fukouka so people will see what Asian films are being produced
and what Asian films are saying. They buy the print they show there. [It was ironic
that when I got a request from the Cannes Film Festival to send them screeners
because they were inviting us to be in the Cinema du Monde as one of seven
countries to show films in one day, I had to request Fukouka and Singapore to
borrow our films. Our shortsightedness in this case is obvious now that there is
digital technology and renewed interest in Filipino films. We have nothing to
show. It’s as if we never had a history.]
The last strategy of other nations is the hosting of international film festivals
in their countries to promote their films in particular and the content industry in
general, as well as tourism. Tikoy Aguiluz has his CineManila International Film
Festival but he has difficulty getting it organized because it has a moving schedule.
Participants have difficulty scheduling the festival because they do not have it at
a particular time.
The predominant strength of the film industry you mentioned is its worldclass artists and the three films (Ang Lalaki sa Buhay ni Selya, Bata, Bata…Pano
Ka Ginawa? and Dekada ’70) that figured in film festivals during that time. Since
2003, we had over 20 films that have been showing in major film festivals. We
had Babae sa Breakwater at the Cannes Film Festival after 15 years. Not since
Mike de Leon and Lino Brocka did we have a film invited to be presented there.
We also got invited in 2004 and 2005. We had four full-length films and two
short films shown at the Cannes Film Festival. That is no mean achievement as
the Cannes Film Festival is the mother of all film festivals.
A large population of overseas Filipino audience that craves for Filipino
films is also a major strength. For example, American Adobo is a coproduction
shot in America and was done like any independent film. We had all the permits.
It was shown in New York, San Francisco, and Los Angeles. Twenty percent of the
audience were Americans who were either walk-ins or invited by Filipinos. Crying
Ladies produced by Unitel had the same demography. If we consider where the
Filipinos are, we already have a potential global market. They crave for Filipino
films. Their relatives buy tapes here but many of those tapes are pirated. That is
a market that has never been reached before.
One of the weaknesses listed is the inroads made by cable and television,
which has eroded the audience for theatrical exhibition. You are looking at the
film industry differently. These inroads by cable and television, what we call
other entertainment options, may not necessarily be a bad thing as far as the
film industry is concerned when you are thinking of productivity because the
content is still in demand for those who produce films.
It is interesting to note that the reverse is starting to be practiced regarding
pay-per-view. I don’t know if you are aware that the recent Manny Pacquiao
boxing bout was watched in two cinemas in Megamall. They have started to
experiment with the pay-per-view. At first they thought that they would need only
one cinema but later on, they had to open another because of the number of
people who came to watch the fight on the big screen. That is certainly a
development worth watching.
160
The biggest weaknesses to my mind are the anti-globalization attitude of many
mainstream industry players and, might I add, the lack of support from
government. There are people who have made it their mantra to say the film
industry is dead. They say the film industry is dead without really analyzing
why, much less acknowledge the real challenges that face us. They fight to
retain the star system, the formula films; they compete for the diminished
domestic audience, they resist technological development, and yet they wonder
why the film industry is dead.
If we were to catch up with our neighbors, the solution is staring at us right
in the face— the development of digital technology. Why is it important to go
digital? The technology is more accessible. You will not need to go to a laboratory
so you will not need PhP2 million to process the prints. Shipping, storing, and
subtitling are much easier. Going digital will bring down the production cost.
I would like to propose seriously that tax breaks or tax holidays be
considered for a given period so that theater owners and film producers would
be able to acquire the equipment they need in order to make this possible. Even
the Sundance, which was just doing festivals before, is now concentrating on
the development of cinemas with digital projection because that is the way to
the future. If we can do that, we have hope of catching up.
REFERENCES
ABS-CBN. 2004. Annual Report. Quezon City, Philippines: ABS-CBN.
ABN AMRO Bank. 2000. Filmspace: behind the scenes. Netherlands.
Andersen, B., Z. Wright and R. Wright. 2000. Copyrights, competition and development:
the case of the music industry. Discussion Paper No. 145. Geneva, Switzerland:
United Nations Conference on Trade and Development .
Australian Broadcasting Authority. 1999. Trade liberalisation in the audiovisual services
sector and safeguarding cultural diversity. A discussion paper commissioned by the
Asia-Pacific Broadcasting Union.
Digital Strategy Group of the European Broadcasting Union. n.d. Media with a purpose:
public service broadcasting in the digital era. Grand-Saconnex, Switzerland:
European Broadcasting Union.
European Audiovisual Observatory. Focus: World film market trends, various issues.
European Commission. 1994. Strategy options to strengthen the European programme
industry in the context of the audiovisual policy of the European Union. Green
Paper. COM(94)96.
Leong, A., L. Kalins, O. Levy, M. de Marcillac and A. Scholze. 1996. The film distribution
industry in Canada [online]. http://www.mediacircus.net/filmdis1.html#role.
Lopez, Antonio. 2005. 2004 airtime revenues up 2% to P11B; P10.13B or 93% came from
Channel 2. BizNews Asia. April 4-11. pp. 30-33.
Mukharjee, A. April 2002. India’s trade potential in audiovisual services and the GATS.
Working Paper No. 81. New Delhi, India: Indian Council for Research on International
Economic Relations.
Plate, T. 2002. Hollywood faces new competition: world film industry is globalization at its
best [online]. UCLA International Institute. http://www.international.ucla.edu/
article.asp?parentid=2059 [Accessed September 11, 2005].
Stephenson, S.M. 1999. Approaches to services liberalization by developing countries
[online]. Organization of American States (OAS) Trade Unit Studies. http://
www.sice.oas.org/tunit/studies/srv_lib/SRVINDX.asp#uptoabstract
Web Sites
National Telecommunications Commission (Philippines): http://www.ntc.gov.ph
EUROPA Gateway to the European Union: http://europa.eu
Institut de l’Audiovisuel et des Télécommunications en Europe (France): http://www.idate.fr
http://www.worldwideboxoffice.com
http://www.mapsofworld.com
http://www.idate.frhttp://entertainment.howstuffworks.com/movie-distribution.htm
Chapter 5: Information and Communication Technology
163
5
The Philippine Information and
Communication Technology Sector:
Evolving Structure and Emerging
Policy Issues1
Winston Conrad B. Padojinog
ABSTRACT
Narrowing the digital divide is an important goal of any information and
communication technology (ICT) policy. It must promote, on one hand, a high
degree of accessibility to the “infostructure” by promoting competition,
interconnection, and convergence in the ICT sector. On the other hand, policies
must also seek to increase the capabilities of the users to absorb or increase
their usage of ICT.
To respond to competitive forces and market preferences, and, at the same
time, reduce costs and increase margins, telecommunications companies have
adopted the twin strategies of achieving scale and scope. The pressure to forward
integrate and the availability of technology resulted in the convergence of
information technology and content in the Internet. If left unchecked, these
integration strategies of telecommunications companies could bring back ICT
into the hands of a few or into a monopoly structure.
The current regulatory environment in the country does not allow firms to
pursue their convergence strategies because of the limitations imposed by
Philippine laws. Also, there is no general framework or policy guidelines that
would help both the regulator and the industry players in addressing future issues
on spectrum usage, management, and ownership.
There is also a need to address the issue of users’ ability to absorb the
technology. Current ICT diffusion in critical sectors like education is very low.
Demand-side constraints to ICT absorption also need to be addressed.
The author acknowledges the comments of Mr. Jose Raul Saniel, Supervising
Communications Development Officer, Commission on Information and Communications
Technology. These were discussed in certain parts of the paper.
1
164
BA
CK
GR
OUND
BACK
CKGR
GROUND
Introduction
Information and communication technology (ICT) was coined to capture a
new set of services that emerged from the convergence of computer hardware,
software, and telecommunications, giving birth to what is popularly known as
Internet. In spite of its discovery and commercialization in 1995, Internet
technology can still be considered at its infancy stage because of the continuing
development of new and ever-expanding applications.
ICT is also commonly used as a collective term to describe the new
generation of information technology spawned by the Internet (Flor 2001).
However, because of its ever-expanding applications, ICT’s current definition
remains broad and finds difficulty in capturing its true essence. At present, the
Organisation for Economic Co-operation and Development (OECD) defines ICT
as a combination of manufacturing and service industries that electronically
capture, transmit, and display data and information (OECD 2002). This definition
distinguishes between the manufacturing and service aspects of ICT.
ICT manufacturers
•
office, accounting, and computing machinery
•
insulated wire cable
•
electronic valves and tubes and other electronic products
•
television, radio transmitters, and apparatus for line telephony and
line telegraphy
•
television and ratio receivers, sound or video recording, or reproducing
apparatus and associated goods
•
instruments and appliances for measuring, checking, testing, navigating,
and other purposes except industrial process equipment
•
industrial process equipment
ICT services
wholesale of machinery, equipment, and supplies
telecommunications
renting of office machinery and equipment
computer-related activities
•
•
•
•
The current definition of ICT is so broad that it even includes, to a large
extent, the electronics industry. At the rate in which the coverage and scope of
the ICT industry expands, ICT can be best classified not as an industry but as a
sector composed of clustered industries. The definition and coverage of ICT is
under periodic review by the Committee for Information, Computer and
Communications Policy of the OECD, in light of the emerging new applications
and experiences of countries adapting such definition.
165
The Philippines basically adopts the same definition with a slight
modification. Wholesale services are classified as an entirely separate
subindustry under ICT (NSO 2002). Overall, however, it retains the rest of the
OECD classification.
In the Philippines, ICT refers more to its service component rather than to
its manufacturing aspect. ICT in the Philippines broadly includes the following:
•
telecommunications industry, which includes fixed lines and wireless
services that cover fixed, mobile, and satellite applications
•
Internet service providers (ISPs)
•
e-commerce models
•
hardware and software application for communications technology
•
business process outsourcing (BPO) including both independent and
shared services: medical and legal transcription, finance and
accounting, data encoding, animation, design, market research, and
others
•
contact center operations also covering both independent and shared
services
•
multimedia applications
The services of these industries are different and distinct but closely
complement each other. To better understand the complementariness of each
of these industries within ICT, such industries can be classified according to the
roles played by each industry:
•
providers of connectivity, specifically telecommunications
encompassing fixed lines, fixed mobile, wireless mobile, and satellite
technologies.
•
ICT enablers that facilitate the electronic transmission of data. These
include ISPs, hardware and software services, and user interfacers,
among others.
•
providers of content like business process outsourcing, contact centers
and media, and e-commerce.
Main Issue of the Study
The ICT sector is considered as a sunrise industry and one of the fast-emerging
growth sectors of the Philippine economy. Its emergence as the new generator
of foreign exchange, investments, and jobs for the Philippine economy attests
to its competitive position in what is called the New Economy.
The global phenomenon that now brings economies and nations to what is
now being referred to as the Knowledge Age—also popularly known as Internet
Age, Information Age, or E-conomy—lends ICT an important role in improving the
plight of nations. Information has evolved into a “commodity” (Flor 1986) such
that a nation’s level of access to and the availability of this commodity can spell
its future prosperity or doom. Recent studies have shown that developed
economies that enjoy high levels of ICT adoption are better off than countries
that have low adoption rates (Figure 1) (Gray 2001).
166
Figure 1. Relationship between Internet penetration rate per 1000 and gross
national income
Sources: ITU (2000); Aldaba (2000).
Hence, in an information-driven economy, societies can either be classified
as information rich or information poor. Closing the digital divide—a term that
refers to the gap that separates the “haves” and the “have-nots”—can greatly
help in the alleviation of poverty, now considered as “the most pressing problem
confronting society, in general, and the international development assistance
community, in particular” (Flor 2001). This divide is apparent in the Philippines
as exhibited by the country’s low Internet penetration rate, which stands below
the median for Southeast Asia (Figure 2).
Such a divide is also manifested in the manner companies have invested
in the regions. Mr. Jose Raul Saniel of the Commission on Information and
Communications Technology (CICT) observed that private sector investments
are not evenly distributed and are concentrated mainly in urban areas. He noted
that as the National Telecommunications Commission (NTC) data reveal, only
54 percent of the cities/municipalities have access to basic telephone service,
Figure 2. Internet penetration rate in Southeast Asia
Source: ITU (2001).
167
and telephone dispersal is mainly focused in Metro Manila having an installed
telephone density of 29.07. This is three times larger than the second highest
region, Southern Tagalog (Region IV). On the other hand, the Autonomous Region
of Muslim Mindanao (ARMM) and Cagayan Valley (Region 2) have the lowest
installed telephone penetration rate.
Any policy or recommendation to promote competition through
deregulation, interconnection, and convergence in ICT must ultimately be
evaluated in light of its ability to narrow the digital divide.
Competition in the ICT industry induces efficiency among competing firms.
For consumers, this translates to prices that are not only generally competitive
but also reflective of the real opportunity cost of the resource. For producers,
available services and more access to ICT infrastructure imply the removal of
any entry barriers, the homogenization or standardization of the service, and
the availability of full information. Any threat to competition, inaccessibility to
connectivity, and convergence must be addressed. Using competition to promote
welfare is viable as proven by the recent experience of the country in its
telecommunications industry.
The birth of ICT in the Philippines is preceded in 1992 by the successful
implementation of liberalization, deregulation, and interconnection policies in
the telecommunications industry. The scope of the services and competition in
the telecommunications industry particularly in mobile wireless and fixed line
services increased. The heightened competition has induced firms to invest
heavily in capital expenditures to survive and meet their service commitments to
government (Feldbaum 2000). As a result of these massive capital expenditures,
the telecommunications industry was able to absorb new technologies
particularly in the area of connectivity and network-enabled content like media,
data, information, business processes, and contact centers. These businesses
have given birth to the service industries that now comprise the ICT sector.
The drastic changes within these industries and their relationships to each
other have resulted in new industry structures that continue to evolve until now.
However, company behavior, which can include vertical and horizontal integration
strategies under a converging environment, is a major driver behind the changes
in industry structures.2
The constant change that industry structures in the ICT undergo has welfare
and policy implications. Under a dynamic industry landscape, existing policies
intended to achieve certain welfare-enhancing goals or market-contestability
objectives may not be effective anymore. In fact, if regulators do not watch out,
the structure can revert back to market dominance. It is even worse when the
existing policy framework has run counter to these goals and objectives. In such
cases, new policy frameworks are needed to regulate possible abuses in these
new industry structures and behaviors. Because of firm behavior and strategies,
Horizontal integration happens when the merger or acquisition is made on companies
catering to the same market. Vertical integration happens when the merger or acquisition
is along the upstream or downstream sectors of the industry.
2
168
deregulation and liberalization alone do not guarantee effective competition.
According to the World Bank Institute (cited in Aldaba 2000), it is only by creating
a policy environment that encourages and sustains competition that a country
can maximize the benefits from liberalization and deregulation. However, the
promotion of competition alone is not sufficient to narrow the divide as this
covers mainly the supply side of the market.
Closing the divide also involves considering the ability of the users of ICT,
which is another policy consideration. According to Gray and Minges (2002),
skills are necessary for any nation to achieve high levels of ICT absorption.
These skills involve the three important Ls of the Internet Age: learning, language,
and literacy. Infrastructure access can be addressed by analyzing both the supply
side and the demand side (affordabilty and skills) of the divide.
ICT learning refers to the familiarity or ability of a country to use the
technology. As English is the predominant language of the Internet, a country’s
English proficiency determines its ability to absorb ICT. Likewise, countries with
high proficiency in mathematics and the sciences—important foundations of
ICT—are better disposed to absorb ICT. Thus, considering the capabilities of the
users to adopt and absorb ICT is important as ready accessibility of infrastructure
is not a guarantee of successful use and adoption of the technology. Finding
ways to improve a country’s capability to adopt and absorb ICT through literacy,
language, and learning is another area of concern for ICT-related policymaking.
Closing the digital divide thus involves dealing with both the supply-side
and the demand-side challenges of technology use and adoption.
Objectives of the Study
The objectives of the study are as follows:
•
provide an overview of the ICT sector and its economic contribution to
Philippine economy;
•
analyze the current and evolving industry structure of the ICT sector in
relation to competition issues and the existing policy framework;
•
analyze the users in terms of their ability to adopt and absorb ICT
services; and
•
identify policy issues and recommend policies to address them.
Methodology
How to narrow the digital divide must be the primary goal of any ICT policy.
Closing the gap between the information rich and the information poor involves
a two-pronged approach: on the supply side, it means paving the way for more
competition, easy access to the available infrastructure, and convergence3; on
the demand side, it means improving ICT absorption and adoption through
improved literacy, English language proficiency, and ICT learning.
Convergence refers to the close interface of the Internet and the content in the delivery of
a new set of IT-enabled services.
3
169
This study, on one hand, evaluates the state of competition, interconnection,
and convergence in the ICT sector. A high degree of competition, interconnection,
and convergence ensures that ICT remains available and accessible to the
market. On the other hand, the study looks into the capabilities of the country to
use and support the use of ICT. High degrees of competence as well as
affordability can lead to high levels of ICT penetration and utilization. Figure 3
summarizes the methodological framework of the study.
Figure 3. The methodological framework of the study
This study dwells on issues pertaining to the state of availability and
accessibility of ICT, and the affordability and ability to absorb and support it.
While equally critical, issues pertaining to the content providers like business
process outsourcing (BPO), contact centers, and the like are not discussed.
Issues involving content providers are only considered in so far as the degree of
their accessibility to the infrastructure is concerned.
Significance of the Study
The ICT sector is indispensable for any country that aims to benefit in the New
Economy. A vibrant and growing ICT can generate jobs, foreign capital, and
foreign exchange the Philippine economy badly needs. In the Information Age,
ICT is a critical link in alleviating poverty as poverty reduction must necessarily
consider the interventions that ICT can do.
While the economy continues to benefit from the successful liberalization
of the telecommunications sector over 12 years ago, new key issues have
emerged. ICT-specific issues such as interconnection and convergence and the
impact of vertical and horizontal integration strategies on competition have
also surfaced. These issues have cast serious doubts on the sustainability of
170
fostering a competitive environment for ICT. There is a need to appreciate the
evolving industry structure to sustain the regulatory reforms needed to promote
competition.
Numerous studies have provided overviews and independently analyzed issues
in each of the industries comprising ICT. This study has managed to gather a few of
them: overview of the Philippine IT market and its various industry components (ITU
2002; OPTEL 2002), studies on the deregulation of the Philippine
telecommunications industry (Feldbaum 2000), interconnection issues (Padojinog
and Nuguid 2000; Nuguid 2003), issues of competition in the cellular mobile
phone industry (Lim 2002), e-commerce (U and De Vera 2002), e-tailing models
(Castañeda 2003; Padojinog and Castañeda 2003), IT-enabled services (Padojinog
2002; Paulino 2002), Internet and Internet consumer protection (ITU 2002;
Padojinog 2003), and issues in telecommunications (Serafica 2000).
Nevertheless, a study that considers ICT as an intricate but interrelated
chain of industries is needed. Some studies have been conducted by institutions
like the Philippine APEC Study Center Network (Serafica 2000) and the World
Bank (Aldaba 2000) emphasizing the emerging issues within ICT. However,
there has been no study yet that directly dealt with these issues with indepth
analysis and understanding, nor analyzed the mutual interdependence between
industries, their vertical integration and convergence strategies, and their
implications to competition. The lack of appreciation of these issues is perhaps
the reason why no significant ICT-related policies and laws have been passed
except for some proposed government laws and office memoranda (like in the
Department of Transportation and Communications or DOTC). Besides, these
proposed laws on ICT, in order to become more effective in achieving their
goals, need to be backed up with studies for more indepth understanding of
issues and concerns affecting the ICT.
THE ICT SECT
OR AND ITS IMP
ACT ON THE PHILIPPINE
SECTOR
IMPA
ECONOMY
Providers of Connectivity
The most notable contribution of ICT to the Philippine economy comes from the
telecommunications sector. The successful deregulation and liberalization of
the industry in the early ‘90s paved the way for the entry of more
telecommunications services and companies and thus spawned greater
competition in the industry (Table 1). Under the Public Telecommunications Act
or Republic Act (RA) 7925, there are six general classifications of
telecommunications services that allow private sector involvement: (1) local
exchange carrier, (2) interexchange carrier, (3) international gateway facility, (4)
value-added services, (5) mobile radio operations, and (6) radio paging system.
The growing competition in the industry has induced massive capital
investments from telecommunications companies, with foreign investors
financing a sizable chunk of these investments. From 1996 to 2002, the
171
Table 1. Telecommunications industry’s range of services and number of players
Telecom service
Local exchange carrier
Service
Interexchange carrier
Service
International gateway facility
Radio mobile
Cellular mobile telephone
system
Public trunk repeater
service
Radio paging service
Value-added service
With networks
Coastal
Broadband
Without networks
Satelite operators
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
45
49
76
76
76
77
74
74
n.d. n.d. n.d. n.d. n.d. n.d.
3
5
9 9
9 11
n.d.
11
12
11
12
11
14
11
14
11
2
5
7
6
8
6
60
5
67
74
5
5
5
5
5
5
7
7
8 10
10 11
10
14
10
15
10
15
10
15
10
15
11
11
11
11
13 13 13 12 12 12
n.a. n.a. n.a. 1 27 47
12
n.d.
70
n.d.
12
10
106
18
12 12
18 19
156 186
18 19
12
19
156
19
Source: NTC (2005).
n.d. – No data available
n.a. – Not applicable
telecommunications industry has managed to attract 11 percent of the total
foreign equity direct investments and 13 percent of foreign portfolio investments
recorded by the Bangko Sentral ng Pilipinas (BSP) over this period (Figure 4).
During the period 2000-2003 alone, IT services, on the other hand, attracted a
total of US$13.89 million of foreign direct investments (FDIs) or 12 percent of
the total FDIs for the period. This sector had virtually nil contribution five years
ago.
The investments that deregulation and liberalization have brought about
increased the availability of telecommunications services and other value-added
services to users. The phone users density increased especially among mobile
users, who are projected to grow from 30 per 100 persons in 2004 to over 45
per 100 persons in 2010 (Figure 5). Filipinos have virtually ignored the ample
supply of fixed line phones by moving to the wireless mobile platform. This left
fixed line operators with only about 48 percent of their almost seven million
lines being subscribed.
Other downstream users like ISPs, IT- and network-enabled services are
expected to benefit from having these facilities available for connectivity.
Inf
ormation and Communication TTechnology
echnology Enabler
Information
Enablerss
Increased availability of telecommunications services and developments in
technology paved the way for the development of other Internet-based allied
industries of ICT, which in turn provided other value-added services. These
172
Figure 4. Share of foreign equity investments and portfolio investments in the
telecommunications industry to total foreign equity direct and
portfolio investments
Source: BSP (2003).
Note: Comm stands for communication and FDI for foreign direct investments. Units are in million US$.
Figure 5. Fixed and mobile wireless penetration rates, 1996-2010 (in percent)
Sources: Pyramid Research (2004); NTC (2005).
enablers facilitate the transport of content and data along the channels of
connectivity. These companies include the primary Internet-based data carriers
and the support hardware-software providers. The so-called primary “data
carriers” are necessary for content services like BPOs to utilize. These data
carriers include cable Internet, satellite-based Internet, broadband, ISPs, Internet
backbones, e-commerce, and Internet data centers (IDCs). The support
providers—software and hardware services—include suppliers of computers and
peripherals, computer software, and consultancy.
173
Cable Internet
The success of cable Internet in the United States (US) has led some of the
country’s largest cable TV providers to offer this service in the Philippines.
However, while the venture was a hit in the US, cable Internet performance in
the country was lackluster. This was largely caused by the inability of small cable
companies to expand into an ISP, which could be attributed to two reasons: (1)
cable Internet requires additional capital requirements that small operators
find too costly, and (2) small operators are constrained by the existing Cable TV
Law that limits cable Internet providers as value-added telecommunications
service similar to ISPs that are allowed to build their own networks.
Cable Internet providers in the Philippines include Destiny Cable, ZPDee.Net
(a sister company of Sky Cable), and Home Cable. Sky Internet—the Internet
service arm of Skycable—has only three percent of the market or about 15,000
subscribers in 2001.
Satellite Internet
The market for Internet over satellite (IOS) has increased through the years,
driven by the increasing demand for satellite facilities linking local ISPs to Internet
hubs mainly based in the US. In the Philippines, Panamsat’s geosynchronous
satellite or PAS-8 provides the primary IOS service. However, the launching of
Agila II in 1997 has increased the use of satellite-based communications services,
including IOS (OPTEL 2002). About 20 of the country’s ISPs use IOS facilities to
connect to the Internet, all of which are for linking with US-based ISP backbones
and hubs. The main users of IOS facilities in the country have been ISPs, of
which only the Philippine Long Distance Telephone Company (PLDT) has taken
initiatives to expand satellite-based Internet access. PLDT, particularly PLDTowned ISP companies Infocom and Now@Home, use Agila II IOS facilities. Table
2 shows the progression of IOS services in the Philippines.
Broadband Internet
Broadband Internet access has been available in the Philippines since the early
1990s. However, it was only in the late 1990s that service providers saw its
Table 2. Major market segments for IOS services
1998
1999
2000
2001
ISP Links to Backbone
Hybrid Access
Hybrid Access
Caching and Usenet
Feeds
Hybrid Access
Caching and Usenet
Feeds
2-way Access Service
Hybrid Access
Caching and Usenet
Feeds
2-way Access Service
Voice
Over
IP
(Trunking/VSAT)
Source: Satcom Insiders (2001) as cited in OPTEL (2002).
174
profit potential. Nonetheless, growth has not been as fast, and subscriber base
remains small, largely due to high subscription and lease fees. The fees could
be lowered, however, if the subscriber base is expanded.
There are many broadband technologies available (Table 3). The most
common is the digital subscriber line (DSL). This technology, however, is still
slower than the satellite-based Internet and other high-speed cable such as T1,
T3, or fiber optics, but it is much faster than the common dial-up access. There
are several telecommunications companies that offer this service but PLDT is
acknowledged to cater to over 90 percent of the subscribers.
Table 3. Broadband services in the Philippines, 2001
Broadband system
Service provider
Fixed wireless
•
•
•
•
•
Bell Telecom
Broadband Philippines
Meridian Telekoms
Nowires.Net (pre-operating)
Polaris Telecommunications (pre-operating)
Fixed wireline
•
•
•
•
•
•
Eastern Telecoms
Globenet
PLDT
Digitel
PT&T
BayanTel
Source: Collated by OPTEL (2002) from the Philippine Internet Directory and various industry sources.
Internet service providers (ISPs)
ISPs are considered by the NTC as part of the value-added sector of the
telecommunications industry. They also play an important role in the Internetaccess-delivery supply chain and considered the fastest growing in the industry
after its liberalization in 1994 (OPTEL 2002). There were only four ISPs in 1995
but a year after, NTC registered 24 ISPs with an estimated 100,000 subscribers.
By 2002, ISPs increased to 53, with about 800,000 subscribers. Recently,
because of the difficult operating environment, no more than 20 ISPs are believed
to be active.
Official statistics on the size of Internet subscribers are not available. The
NTC has estimates provided by ISPs willing to share their data (Table 4). From
the limited information available, PLDT-subsidiary Infocom, a company that
entered the ISP market in 1995, controlled 13 percent of the market by the end
of 2001 while Mozcom and Pacific Internet have the second largest market
share of five percent each (Figure 6).
However, the most significant subsegment of the ISP market is the prepaid
Internet access, estimated to account for more than 60 percent of all Internet
subscribers in 2001. However, this is still a conservative estimate—as the
175
Table 4. ISP subscription
Year
No. of NTC- Estimated
Registered
No. of
ISPs
Subscribers
1996
24
100,000
1997
17
200,000
1998
23
300,000
1999
31
350,000
2000
34
400,000
2001
64
500,000
2002
53
800,000*
Source: NTC (2005).
* Based on paying accounts, the number of dial-up subscribers is estimated at 675,000 and the number
of broadband subscribers is estimated at 125,000
Figure 6. Market share of ISPs (end of 2001 estimates)
Source: OPTEL (2002).
irregularity of subscription renewals for prepaid Internet subscribers made it
difficult to account for their actual number. This market niche proved to be
profitable as it allowed ISPs to reach market segments that could not afford
postpaid Internet access.
Internet backbones
An Internet backbone is “a group of communications networks managed by
several commercial companies that provide the major high speed links across
the country. ISPs are either connected directly to these backbones or to a larger
regional ISP that is connected to one.” These backbones, in turn, are
interconnected at network access points (NAPs), also known as Internet
176
exchanges or IXs. They are junction points where major ISPs interconnect with
one another. Connection with any of these NAPs requires Internet access (OPTEL
2002).
In the Philippines, there are four Internet backbones: (1) PHNet, (2)
Philippine Internet Exchange (PHIX), (3) Manila Internet Exchange (MIX), and (4)
I-Gate, a PLDT subsidiary. Only PLDT’s I-Gate has interconnection with Asian
Internet Exchanges, while the rest are connected to US-based backbones (OPTEL
2002). PHNet, which is managed by the Philippine Network Foundation, is a
free exchange, thus open to all registered ISPs. However, since PHNet does not
have a backbone, ISPs that interconnect with it must have their own gateways
and must provide their own links (at least 128kbit/s) to the exchange. Like IGate, PHIX is also operated by PLDT and has about eight ISPs using their exchange.
MIX is operated by Eastern Telecoms (ETPI) and has 13 ISPs hooked on to it. As
PHNet does not have its own backbone and telecommunications franchise, it is
interconnected with MIX.
Internet data centers (IDCs)
An IDC is a data center with “a centralized facility providing network, server, and
storage resources for one or more applications being utilized by one or more
‘users’” (Coughlan 2004). IDCs provide hosting services to companies that
want an online presence but do not have the capability to do so. There are about
10 companies providing this service (Table 5).
E-commerce
Internet’s increasing popularity and continuous innovations have led to the
phenomenon called e-commerce, or business transactions carried out over
Table 5. Initiatives of Internet data centers (IDCs), 2001
Company
PLDT
Status
Ayala Port Makati Inc.
Infocom and Vitro IDCs began
operating in 2001
Began operating in August 2001
CyberCity Data enter (Subic)
Operational since 2001
Iphil Communications Network, Inc.
Philweb
Reach Networks, Inc.
Broadband Philippines
Moscom
Impact Information System
DataOne Asia
Began operating in August 2000
Under development
Operational by the end of 2001
Under development
Began operating in July 2001
Began operating in 2000
Began operating in 2001
Sources: OPTEL (2002) and various industry sources.
Location
Metro Manila
Metro Manila
Subic Economic
Zone
Metro Manila
Metro Manila
Metro Manila
Metro Manila
Metro Manila
Metro Manila
Eastwood
Cyberpark
177
cyberspace. The emergence of e-commerce has led to the creation of many ecommerce models, normally defined by the transaction relationship between
two key agents: the consumer and the business venture. Currently, there are
four major types of e-commerce models: (1) business-to-consumer or B2C, (2)
consumer-to-consumer or C2C, (3) consumer-to-business or C2B, and (4)
business-to-business or B2B. The most common business models applied in
the Philippines are B2C and B2B (Table 6).
Table 6. Sample of e-commerce models in the Philippines
Consumer
Business
Business
Consumer
B2B
• Electronic data interchange
links
• IBM Philippines’ “supply
webs”
C2B
• Bayan Trade
•
•
•
•
•
•
B2C
Bidshot.com
eBili.com
PinoyAuctions.com
Divisoria.com
SureSeats.com
MyAyala.com
C2C
The difficulty in indentifying
distinctly clear revenue
streams in C2C business
models have kept Philippine
investors away from this
segment (OPTEL 2002).
In the Philippines, much potential is seen in the B2C and B2B segments. In
2002, online B2C transactions were estimated to reach US$390 million while
B2B transactions were likely to be US$36.8 million in the same year (OPTEL
2002).
Retail e-commerce is also known as e-tailing. Most e-tailers can be
characterized as either high touch or low touch. High-touch e-tailers sell their
products to consumers out of their own inventory, typically like Amazon.com. On
the other hand, low-touch e-tailers serve only as a venue for buyers and sellers
to initiate and fulfill transactions. Examples of this type of e-tailers would be
eBay.com or its Philippine counterpart, Bidshot.com (Castañeda 2003). E-tailers
can also be further classified into two dominant business models:
•
Bricks and mortars – These are normally established retailers with a
traditional physical presence, such as a store or branch. They also have
an online presence, which they use both as a marketing and as a
transactions venue. An example would be SM Supermarket Online.
•
E-commerce businesses - Also known as pure plays. These are e-tailers
that do not have a physical presence. An example would be
Divisoria.com.
178
Computers and peripherals
The absence of major computer manufacturing companies such as Apple and
Compaq in the Philippines has allowed other players to expand in the local
market (Figure 7). Meanwhile, the market segment for computer peripherals
and brand name companies dominate data storage devices (Figure 8). Most of
the locally manufactured computer peripherals are imported, while data storage
devices such as hard disk drives and CD ROM drives are exported. Among the
computer platform manufacturers, IBM Philippines controls close to half of the
market, followed by Fujitsu Philippines with a 19.6 percent share. For data
storage devices, Fujitsu dominates 38.7 percent of the market, followed by
Toshiba Information Equipment, Inc. with 22.2 percent (OPTEL 2002).
Figure 7. Market share of computer platform companies in the Philippines
Source: ComputerWorld Philippines 1999 as cited by OPTEL (2002).
Figure 8. Market share of Philippine-based manufacturers of data
storage devices
179
Computer software
The packaged computer software market in the Philippines earned US$44
million in gross revenues in 1999. The segment is dominated by US-based
companies such as Oracle (38.6 percent) and Microsoft (6.8 percent), which all
belong to the top players in the world market (Figure 9).
Figure 9. Market share of packaged software companies in the Philippines
On the other hand, the customized software segment earned US$74 million
in 1999. The dominant player is the Philippine-based Software Ventures
International, which controls 29.7 percent of the market, or revenues equal to
US$22 million (Figure 10).
Computer consultancy
In 1999, the IT consultancy market earned US$66.7 million worth of revenues.
Accenture currently dominates this segment in the Philippines, with a 52.5
percent share (Figure 11).
Content Providers
The availability of these “infostructures” (e.g. connectivity and ICT enablers) in
the country has paved the way for the Philippines to emerge as a major contender
in the global BPO market. The study does not dwell in detail on BPOs but discusses
them in broad terms.
The emergence of globalization and the continuing need of many
companies to lower operations costs have led to the growth of the networkenabled services (NES) or IT-enabled services (ITES). These activities are based
on the principle of BPO, a strategy of contracting out a service, a function, or a
part of the company’s operations to an organization, a company, or a country to
achieve better performance and lower down costs.
NES activities include, but are not limited to, customer contact centers
(also known as call centers), medical transcription, animation, and distance
180
Figure 10. Market share of customized software companies in the Philippines
Figure 11. Market share of IT consultancy companies in the Philippines
Source: ComputerWorld Philippines 1999 as cited by (OPTEL) 2002.
education. In the Philippines, the NES industry is considered one of the top
potential growth drivers. In addition, the US-based McKinsey and Co. (2002)
predicts that the demand for outsourcing services will reach US$180 billion by
2010 (Figure 12).
According to the Department of Trade and Industry (DTI), the country is
currently involved in the following outsourced operations:
1. customer contact centers
2. content development
a. animation
b. transcription, conversion, and localization
c. data search, integration, and analysis
d. distance education
e. engineering and design services
181
Figure 12. Global BPO market by 2010
Sources: NASSCOM and McKinsey and Co (2002); www.dti.gov.ph.
3.
4.
backroom operations
a. finance and accounting services
b. human resource services
core IT services
a. Web site services
b. software/applications development
c. systems design
The most popular NES in the country is the customer contact center, which
generated an estimated US$180 million in 2003. Moreover, the DTI estimates
the sector to earn US$864 in revenues by the end of 2004, while the whole BPO
sector is expected to grow by 68 percent and earn US$1.6 billion in revenues by
the end of the year.
The country is emerging as an alternative destination to India. Its attraction
lies in the quality of the labor force—highly skilled, very proficient in English, and
maintains a high affinity with the Western culture, particularly the US. In addition,
the country’s infrastructure is reliable, efficient, and cost competitive (San Agustin
2004).
Economic Impact
Current methods of measuring the economic impact of ICT are limited solely to
the employment, investments, and exports generated by the sector. At present,
the BSP and the National Statistics Office (NSO) lump ICT exports under the
heading “telecommunications services not elsewhere classified.” It is equally
difficult to appreciate the investments in ICT as these are likewise recorded by
the BSP as investments under telecommunications and IT services. Relying on
the national income accounts does not help either because the gross value
182
added for telecommunications is quantified together with storage and
transportation.
The most accurate data on ICT are those recorded by the Philippine Export
Processing Zone (PEZA), the government office tasked to provide incentives to
the ICT sector and other sectors that enjoy special fiscal and nonfiscal incentives
from government. Since its establishment in 1992, PEZA has managed to attract
some 60 ICT companies to locate and operate in the Philippines (Table 7). Call
or contact centers and software applications are the major areas in ICT that
have attracted the most investors.
Table 7. PEZA-registered companies in ICT services, as of 2002
Area
Allowed ICT Services Area
1
Software Applications and Development, E Commerce
Education, Media and Entertainment
Multimedia Graphics, Animation, Printing and Other
Services
Engineering, Architectural and other Design Services
Call Centers
IT Research and Development
Data Encoding, Transcribing and Related Services
Other IT Services
Total
2
3
4
5
6
7
No.
23
3
4
13
2
4
11
60
Source: PEZA (2003).
Investments
Recent records have shown that PEZA has attracted close to PhP25 billion of
investments in 2003. This has already surpassed the total investments of almost
PhP23 billion generated in the previous year (Table 8).
The role of ICT as an important generator of investments is getting bigger.
According to recent statistics from the DTI, more than a third of the investments
are accounted for by ICT, with 45 percent in 2002 and 37 percent in 2003.
Table 8. Total approved foreign direct investment (in million PhP)
Total FDI
2002
FDI in ICT
8,815
22,796
747
13,691
46,049
2,532
6,969
238
11,185
20,924
BOI
PEZA
SBMA
CDC
Total
Source: DTI (2003).
% Share
29
31
32
82
45
Total FDI
2003
FDI in ICT
8,349
24,923
365
374
34,010
590
11,850
26
5
12,471
% Share
7
48
7
1
37
183
A historical review of the data from the Board of Investments (BOI) clearly
shows the climb of combined investments in ICT from a measly US$60 million
in 1993 to over US$2.5 billion in 2002 (Figure 13).
Figure 13. Board of Investments-approved ICT investments (in million US$)
Sources: www.boi.gov.ph; www.bsp.gov.ph.
Employment
Investments in ICT that went into the export processing zones alone have
generated over 11,000 jobs during the first three quarters of 2004 (Figure 14).
It is estimated that the figure would be higher if ICT locators outside the designated
ICT zones are also included. According to the latest estimates of the DTI, the
contact centers alone have employed over 60,000 agents in 2004. An additional
20,000 more were expected to be employed by the end of 2005 by contact
centers. These figures exclude those employed by the telecommunications
industry and other BPOs and IT-enabled industries. For example, the
telecommunications industry in 2003 already employed close to 30,000.
Foreign exchange
Exports and export earnings of ICT locators in the export processing zones are
on an uptrend. For example, in 2002, export levels were only about US$52
million but jumped more than two folds in 2003 to US$130 million. These
figures are even underestimated because they only account for exports of
locators inside the PEZA zones (Figure 15) and do not consider the additional
dollar earnings of telecommunications and ICT companies outside the PEZA
zones.
Areas for Further Liberalization
Liberalization in ICT is viewed in terms of access to foreign capital, link with the
global networks, and trade in services. As discussed in the previous sections,
the first two are basically in place. Foreign capital has found its way into ICT. A
184
Figure 14. ICT employment in export processing zones
Source: www.peza.gov.ph.
Figure 15. ICT exports of locators in processing zones
Source: www.peza.gov.ph.
large chunk of the investments in ICT, particularly in telecommunications, come
mostly from foreign capital in the form of debt and equity. For example, close to
60 percent or PhP149 billion of PLDT’s 2004 capital base of PhP265.5 billion
was financed by foreign debt floatation, and 40 percent or PhP20 billion of its
equity base close to PhP48 billion represents foreign equity. Another example is
Digital Telecom’s 2004 asset base of PhP52 billion, which is 10 percent financed
by foreign loans. There are already a number of foreign IT service companies in
the Philippines involved in customized and packaged software, IT consultancy
services, computer platforms, and data storage services.
The link that the present ICT infostructure enjoys with global networks
through submarine cables and wireless modes like satellite and spectrums
gives the sector relative ease in the flow of information, communication, and
transactions.
185
If there is an issue on liberalization that has to be considered, it centers on
the limits imposed on foreign ownership of domestically oriented companies
specifically utilities and the providers of content like media, and the implications
of these limits on convergence. 4 A provision in the E-Commerce Act was
supposed to circumvent foreign equity limits especially on mass media but a
single company has yet to use such provision.5
Another issue related to liberalization deals with the purchase
arrangements of licensed software and hardware. Many companies purchasing
or importing their hardware and software requirements are constrained to buy
only from authorized distributors in the country to avail of the needed technical
support. Acquiring the same software in another country or even through the
Internet, even though it is less expensive, forfeits companies access to technical
support and other warranties.
Summary of Impact
The impact of ICT on the Philippines is both qualitative and quantitative. The
qualitative dimensions come in the form of more available services and choices,
easy accessibility, and ready availability of ICT services to users. No doubt, the
state of connectivity and Internet-related services have made the Philippines
interconnected with the emerging knowledge economy. The quantitative impact
is demonstrated by the jobs, investments, and foreign exchange earnings and
funds generated for the Philippine economy.
The role of ICT in improving the quality of life in the Philippines is becoming
more prominent. The continuing development as well as competitiveness of ICT
will play a pivotal role in determining the future participation and role of the
Philippines in the Information Age. Making sure the sector stays on its path
4
A 60-40 local-foreign proportion is imposed by the Philippine Constitution for foreign
ownership of public utilities and mass media. Article XII Section 11 of the Constitution
mandates that the operation of a public utility shall be at least 60-percent Filipino owned.
In addition, Article XVI, Section 11 states that the ownership of mass media is limited to
citizens of the Philippines or to corporations, cooperatives or associations wholly owned
and managed by Filipino citizens.
5
Section 28 of the E-Commerce Act seemed to have redefined certain terms and made
them conform to the needs of the local IT industry. For instance, the last paragraph of said
section states: “The physical infrastructure of cable and wireless systems for cable TV and
broadcast excluding programming and content and the management thereof shall be
considered as within the activity of telecommunications for the purpose of electronic
commerce and to maximize the convergence of ICT in the installation of the GII (government
information infrastructure).” With this, it now appears that the physical infrastructure of
mass media can be considered as “within the activity of telecommunications (public utility).”
This, in effect, provided the possibility of telecom companies for “infrastructure convergence,”
which is actually a vague concept. Strictly speaking, true convergence must also include
ownership of content as well, which largely includes mass media. In fact, PLDT tried to
purchase GMA Channel 7 indirectly through the purchase of GMA’s pension fund, which in
turn would have PLDT own the channel.
186
toward competitiveness will largely depend on how competitive forces in the
Philippines emerge in the future. Technical competence and knowledge, as well
as user accessibility to ICT, will ensure that the nation fully participates in the
prosperity and development brought about by being part of the Information Age.
EV
OL
VING S
TR
UCTURE AND BEHA
VIOR
EVOL
OLVING
STR
TRUCTURE
BEHAVIOR
To understand the shifts in industry structure particularly along the ICT value
chain6, it is important to know the drivers of these structural changes. Figure 16
broadly shows the value chain of ICT.
The ICT Value Chain
The ICT sector is broadly composed of the providers of connectivity (e.g.,
telecommunications), content creators or providers (e.g., BPOs, contact centers),
and the ICT enablers (hardware and software, Internet-based data carriers). All
three have to be intricately linked to each other in ICT (Figure 16).
Telecommunications is a vital component in providing connectivity.
Figure 16. Broad ICT value chain
An industry value chain refers to the separate activities that link industries to each other
either as suppliers (upstream activities) or as distributors and sellers (downstream activities).
Activities can either be vertical (i.e., involved in the transformation of inputs and interface
with customers, or horizontal (i.e., involved in providing the hard and soft infrastructure in
which the primary activities depend on). These are intricately linked to each other in two
ways: (a) through the Internet using hardware and software capabilities to incorporate and
deliver content into and through connectivity structures, and (b) through convergence of
different types of contents in the Internet.
6
187
Connectivity
Telecommunications infrastructure is indispensable in ICT. The
telecommunications industry provides connectivity or the backbone in which
content and data are transported. Connectivity is established either through
wireline or wireless means. Wires transmit the content through fixed
infostructures like underground or underwater cables and optic wires.
Telecommunications establish all forms of access points for a community and
support the deployment of powerful broadband networks. Another possible
provider of connectivity but less popular in the Philippines are the cable-TV
companies that use their cable connections as access points to provide Internet
services to their subscribers.
Meanwhile, wireless connectivity can be established from a fixed point
like an antenna or a disc (.e.g, fixed wireless), from a cellular site (wireless
mobile), or through satellite (e.g., international satellites or VSATs).
Practically the two other components—content and ICT enablers—totally
depend on telecommunications to deliver their ICT services. Thus, accessibility
to the telecommunications infrastructure is of vital importance to ICT as a whole.
It is a vital part of the Internet backbone, a communication network that provides
the major high-speed links across the country and the globe. Entry barriers can
undermine the easy access of nontelecommunications company providers of
ICT services.
ICT enablers
Internet is an enabling technology that electronically captures, transmits, and
displays data and information. However, it needs both the providers of software
and hardware, and other user interfacers.
Internet use continues to evolve and expand. One of its radical and recent
applications is the IP telephony, an important area in which this study would dwell
on later. IP-telephony has the ability to bypass some traditional infrastructure facilities
like public switches and local exchanges provided by telecommunications
companies. As Figure 17 illustrates, IP telephony, more popularly known as voiceover-Internet protocol (VOIP) can, with its Web servers and gateway computers,
bypass the public switches and local exchanges using the Internet. Thus, calls and
even video streams, especially in voice/Web integration protocols, can be transmitted
between parties without having to go through the public switches.
IP telephony or VOIP as a term can be misleading because VOIP does not
only imply the transmission of voice over the Internet. It also has capabilities to
transmit data electronically through fax and even video through a computer and
other Internet-ready hardware. IP telephony has led to cuts in the cost of calls
especially for those that have been routed over the public Internet.
Telecommunications companies have started switching from having separate
voice and data networks to converged Web-based networks. Now, calls to Web
sites and those made especially in contact centers use VOIP technologies. In
fact, voice-Web integration is found to be ideal for contact centers because of
its integrated messaging capabilities for video, fax, e-mail, and voice.
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Figure 17. Voice/Web integration
An ISP is a fundamental component of the distribution channel in the
delivery of content and other value-added services making it a vital part of ICT.
It is in the Internet that convergence occurs. This convergence has also fueled a
lot of policy implications on government regulators as well as competition issues
between companies. ISPs have to be interconnected at an Internet exchange
(IX), an access point where all major ISPs are globally interconnected with each
other. It is only by having this access to the IX can a party really be considered as
“connected.”
Some of the value-added services that ISPs can provide besides the
traditional e-mails, chats, and the like are the following:
•
IDCs provide outsourced hosting services to companies planning to
have their own Web presence but do not have the resources nor the
expertise to put up one.
•
E-commerce (or e-tailing services) is a specific term for “business
models” used by various companies to create value, generate revenues,
and compete using the Internet as medium, and includes mobile and
online services, mobile commerce, and the like.
Content providers
This refers to services or solutions that are transmitted through the Internet.
This is primarily composed of IT-enabled activities like BPO. BPO activities in the
Philippines include, among others, contact centers, medical and legal
transcription, backroom accounting and finance, design, publishing, and
animation. However, as discussed earlier, analyzing content providers are outside
the scope of this study.
Structural Changes in the TTelecommunications
elecommunications Sect
or
Sector
Government policy played a significant role in the structural changes in the
telecommunications sector. The passage of RA 7925 in 1995, otherwise known
189
as the Public Telecommunications Act, provided the administrative and regulatory
framework for the development not only of the telecommunications industry
but also of other value-added services. Numerous studies have heralded the
benefits of this law as exhibited by the entry of more industry players and the
provision of additional services. Even prior to the promulgation of RA 7925, the
executive department and the Department of Transportation and Communication
(DOTC) have already passed laws that caused the structural shifts in the sector.7
As of a result of the deregulation and the liberalization of the
telecommunications industry, the penetration rates for fixed line and wireless
mobile services have increased. Fixed line teledensity jumped fivefold from
1.17 percent in 1992 to 8.7 percent in 2002. In the same period, wireless
mobile subscribers increased more than 536 times from 56,000 subscribers in
1992 to over 30 million in 2004 or 35 percent of the population. The expected
improvements of teledensity in the Philippines in 2003 have surpassed the
achievements of Thailand but have yet to match those of Malaysia (Figure 18).
Figure 18. Number of fixed and wireless mobile subscribers in Southeast Asia
Sources: APT (2003); NTC (2003).
Among the relevant policies prior to RA 7925 that have initiated major structural changes
are the following: DOTC 92-260, which created an open and competitive environment in the
cellular phone market; DOTC 93-273 and 94-277, which led to the development of the
domestic satellite services; and Executive Orders 59 and 109 of 1993, which compelled
interconnection between company telecom networks and imposed the universal telephone
service policy, respectively, on companies that would provide international gateway facilities
(IGF) and celluar mobile services. After RA 7925, other laws followed like EO 467 of 1998,
which allowed domestic carriers direct access to international fixed and mobile satelitebased technologies.
7
190
Drivers of Deeper Structural Changes
Structural changes went beyond just an increase in the number of
telecommunications players (refer to Table 1) and their available services.
Market-driven and competitive forces are shaping the scope and degree of
integration within the industry. Companies respond to these forces depending
on the financial and technological resources available to them through strategies
that seek to enhance their competitiveness. Unfortunately, if these strategic
responses are left unchecked, it can diminish competition in the market or give
rise to market dominance. These forces or drivers of structural change and their
impact are the following:
Growing popularity of short message services (SMS)
The Filipinos’ love affair with the SMS technology (also called “texting”) has
earned for the Philippines the distinction of “texting capital of the world” (The
Straight Times 2002), with over 250 million to as high as 300 million text
messages sent daily. The high adoption rate of cellular mobile telephone system
(CMTS) among Filipinos is the combined results of massive capital investments
in technology and the advertising intensity of telecommunications companies
(Lim 2002). As the study of Lim has shown, maintaining a huge market share to
attain economies of scale is necessary to sustain the profit margins.
The intense competition in the wireless mobile industry has triggered shifts
to new technologies. Cellular phone operators have heavily promoted SMS with
low rates that can be matched only by countries with large economies of scale
like China. The market preference for SMS, which has become a substitute for
voice communications, has triggered the adoption of GSM digital-based
technologies and the death of the analog system, a dead-end technology (Figure
19).
Figure 19. Market share of digital and analog users of CMTS
Source: Various company reports.
191
The shift to digital systems is significant because it brings companies to
launch general packet ratio service (GPRS)-based wireless access protocol (WAP)
and multimedia services (MMS). Intense competition has forced the industry to
be creative in wireless programming such that the 2G SMS-driven application
has evolved to be a viable option to 2.5G or even the enhanced data rates for
GSM revolution (EDGE). This makes wireless mobile communications an
important platform in which a large subscriber base of over 30 million Filipinos
in 2004 alone can access the Internet and other ICT services. GPRS, for one,
allows for IP-based communication, making it capable for mobile Internet
applications.
The impacts of the growing popularity of SMS include: (1) migration of
telecommunications usage from landlines to cellular-based communications;
(2) widening of the addressable market as a result of the emergence of prepaid
cards that reduced the average rate per user, which in turn, increased the pressure
on telecommunications companies to achieve economies of scale; and (3) the
lack of incentives to migrate to more powerful 2.5G and 3G applications because
of the successful adoption of 2G applications for GPRS-based WAP and MMS.
It is expected, however, that in the near future, telecommunications
companies will be forced to adopt the 3G platform because of the need to be
ahead of the competition. The 3G platform can deliver more and sophisticated
content than the 2G platform. For instance, 3G handsets are capable of providing
“voice messaging” and video stream services unlike 2G handsets that are limited
to SMS and MMS.
Excess capacity in fixed lines
RA 7925 mandated the service area scheme (SAS) in which newly licensed
international gateway facilities (IGFs) were required to install 300,000 land
lines, and CMTS providers, 400,000 lines in designated areas in the Philippines.
This “missionary” move is similar to the concept of universal service fund (USF)
of the Federal Communications Commission wherein telecommunications
companies are required “to promote the availability of quality services at just,
reasonable and affordable rates; increase access to advanced
telecommunications services throughout the nation; [and] advance the
availability of such services to all consumers including those in low income,
rural, insular, and high cost areas at rates that are reasonably comparable to
those charged in urban areas.”
As a result of the boom in CMTS, the demand for fixed lines has remained
sluggish. The cellular mobile market has grown at a spectacular rate over the
years from a very low base in 1991 of 33,800 subscribers to approximately 33
million subscribers as of the end of 2004, representing a mobile density of 36
per 100 people. The country is now experiencing a decline in fixed line
teledensities: 9.12 for every 100 people in 1999; 9.05 in 2000; and 7.83 in
2004. Because of the increasing popularity of cellular phones,
telecommunications carriers cut back their infrastructure investments in fixed
line services.
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Varied broadband choices but low market adoption
Broadband technologies began in the Philippines in the early 1990s in the form
of DSL and fixed wireless systems. There are about 10 operators providing the
service but all have been experiencing difficulty in expanding their customer
base. Broadband subscription level is still low but trends point to a steady
increase. For example, PLDT had 50,000 subscribers in 2004 from 25,000 in
2003 and 9,000 in 2002. Meanwhile, Globe’s broadband subscribers increased
by 539 percent from 2,231 in 2004 to 14,258 in the first half of 2005. This low
subscription level can be attributed to a number of factors:
• The wide array of available broadband technologies left the market
confused which systems would best meet their requirements (ITU 2002).
• Broadband pricing in the Philippines is twice as high as in Hong Kong
(Pyramid Research 2004) making it beyond the reach of average Filipino
households. It is more intended for the corporate and high-end
residential users.
• The industry appears to be unwilling to push for a single broadband
standard because the much-heralded DSL, though slow in terms of
speed by international standards, makes use of the existing copper
wire infrastructure. Mr. Saniel pointed out the possible reasons for this:
(i) the bandwidth bottleneck that limits access to the “last mile”; (ii)
large capital exposure in copper loops such that replacing them with a
broadband optic fiber network would be very expensive. The long
economic life of these cables is a financial burden to the company that
lasts for many years. Even though this may be replaced by fiber optics,
the copper depreciation charges would continue until it is fully amortized,
unless a massive write-off is done; and (iii) a number of technological
developments have emerged like DSL that, in fact, maximizes the
utilization of the existing local (copper) loop.
Overcapacity of bandwidth and cost-cutting technology
The rapid increase in bandwidth capacity has led to a reduction in the cost of
bandwidth (Figure 20). Thus, margins from international calls have slid down
due to pressures from US companies to reduce settlement rates, the growing
popularity of IP telephony, and the alternate routing of calls. In fact, domestic
carriers have reduced their settlement rates to stem the rise in illegal accounting
rate bypass traffic. This reduction may have increased the volume of call minutes
by over 100 percent for PLDT in 2000, but revenues from international long
distance calls (ILDCs) as a percent of total revenues have significantly declined
from 51 percent in 1996 to just 21 percent in 2000.
These factors have led to cuts in margins from international calls,
increased the attractiveness of VOIP, and further encouraged the routing of
calls.
193
Figure 20. Global circuit capacity
Source: Kelly (2000).
The popularity of prepaid cards and Internet café services
Over 97 percent of CMTS subscribers are prepaid users and a majority of Internet
users also either use dial-up prepaid Internet cards or access the Web through
Internet cafes8. The margins from prepaid services are attractive such that
telecommunications companies would not shift away from this strategy. For CMTS,
the use of prepaid cards deepens the addressable market to the lower income
classes. For landlines, this encourages additional subscribers to tap into the excess
landline capacity of the carriers. For broadband services, prepaid dial-up cards are
more attractive, leaving little incentive for the telecommunications carriers to pursue
more aggressive price cuts and marketing strategies. This also further cuts into the
average revenue per user and increases the churn rate of CMTS.
Large overseas Filipino workers (OFWs) market and reactions
of foreign carriers
The over seven million OFWs create a unique market for the domestic
telecommunications carriers because of the overly lopsided traffic volumes
between inbound and outbound calls. For instance, of the average 2.2. billion
minutes of calls handled by PLDT, close to two billion are incoming calls. This
unique feature of international traffic is largely residential rather than business.
Internet cafes can also be considered as an important access channel for the users. For
instance, Netopia, an Internet café owned by Digital Paradise (a subsidiary of ePLDT)
reported that it serves over two million people a month. Users normally come to play online
games, chat, apply for jobs, do research, and others. Netopia has 6,000 workstations and
over 100 outlets nationwide.
8
194
Mr. Saniel commented that the incoming calls are mostly paid by customers
overseas rather than by customers in the Philippines. The large number of
Philippine expatriate communities and OFWs living and working abroad explains
why most of the international traffic is residential rather than business. For the
sheer cost of it, making international long distance calls to relatives abroad is
something that Filipinos are not too eager to do. They would rather wait for their
relatives abroad to call them. This may provide a high degree of market power to
the domestic carriers vis-à-vis their foreign counterparts.
Mr. Saniel, however, commented rather the opposite: “The exercise of
market power by domestic carriers over foreign carriers seemed to have ended
as detrimental to domestic carriers. One such case happened on February 7,
2003 when AT&T and MCI WorldCom filed a petition against some Philippine
telecommunications companies with the Federal Communications Commission
(FCC), seeking a stop payment on settlements to some Philippine carriers for
the reason that Philippine carriers were “whipsawing” AT&T and MCI into agreeing
to an increase in termination rate to the Philippines.9 The US FCC issued an
order stopping US-based carriers from paying settlement payments to some
Philippine carriers. As a result of FCC’s order, US-based carriers were prohibited
from compensating the affected Philippine carriers for switched services, whether
rendered before or after the date of the order.”
Mr. Saniel also specified that although Philippine carriers are benefiting from
the imbalanced traffic, international simple resale (ISR) operations have significantly
impinged on their revenues. ISR is the routing of inbound international calls through
private leased lines or IP data lines, and then terminated to a called party through a
local cellular or fixed line number. As the ISR operators terminate an inbound IDD
call as a local call, they are able to offer at much lower rates to foreign carriers than
at current termination rates. Thus, Philippine carriers are not able to fully realize the
full inbound revenues from foreign carriers.
Firm Behavior and Strategy
There are various strategic responses available for companies to deal with the
environment and their competitors—whether existing or potential.
Pursuit of scale and scope economies through vertical
and horizontal integration strategies
In response to competitive forces and market preferences, telecommunications
companies have adopted the twin strategies of achieving scale and scope to
reduce costs and increase margins.10
“Whipsawing” happens when a foreign monopoly supplier uses its market power to
negotiate a more favorable agreement from one buyer and obtain the same conditions
from another.
10
Economies of scale occur when, in the long run, unit cost falls as a company’s output
increases. Economies of scope, on the other hand, occur when unit cost falls as a company
produces two or more services using shared resources or a similar platform.
9
195
Achieving economies of scale and scope are natural strategies especially
given the close synergy between long-haul and Internet exchange backbones,
and the applications and content that use them. According to Mr. Saniel, “one
consequence of convergence is that it is becoming unsustainable to maintain
separate networks and business strategies for voice and data networks or for
fixed and wireless networks. In the future, the same networks would carry digital
bit streams between and among users and suppliers.”
Forward vertical integration or getting more control of the downstream
industry linkages that are part of the primary support activities provided by
telecommunications companies is relatively easy as these would merely
comprise putting up, acquiring, or merging with downstream industries. These
downstream industries would include ISPs, Internet exchanges, IDCs, broadband
wire and wireless Internet, and even content like contact centers and BPOs.
For example, PLDT is now virtually present in the entire value chain of ICT
through its exposure in different but complementary markets, such as:
•
long haul transport services by controlling one of the two major
backbones that can provide local and long distance services;
•
mobile services through its presence in cellular mobile (Smart-Piltel
that now controls over 50 percent of the mobile market), satellite
services (Agila II), and fixed wireless (Netopia);
•
more downstream industries like ISPs (Infocom), IDCs, and Internet
backbones (PHIX and I-Gate); and
•
content providers like wireless programming (Wolfpac
Communications), contact centers (Vocativ, Parlace, ContactWorld),
and other data storage and communication services (e-PLDT).
The next battleground of the industry is the 3G mobile market. The need to
remain competitive and provide more services to a demanding consumer market
will eventually force companies to horizontally migrate to the 3G platform. More
investments on equipment, handsets, and content creation will be required.
Forward integration strategies by telecommunications companies in the
Philippines are a norm rather than an exception. Like PLDT, active companies in
the telecommunications industry, which are actually at the most upstream
portion of the ICT value chain, have no other option to generate more value but
to go downstream. Table 9 shows how conglomerate companies have marked
their presence in different ICT markets.
More pressure to increase content through
convergence strategies
As competition becomes more intense, the pressure of telecommunications and
other companies in the ICT sector to go further downstream to extract more value
also increases. This pressure, coupled with the availability of the technology, actually
resulted in the convergence of IT and content in the Internet. Virtually anything that
can be digitized can be stored, retrieved, and transmitted electronically through the
Internet. Besides data, other digitized information like voice, video, print, and still
196
Table 9. Presence of telecommunications companies in the value chain of ICT
Connectivity
Fixed line
Wireless (Fixed and Mobile)
Cable
Satellite
ICT enablers
Internet
Broadband
Internet exchange
Hardware and software
Content
Contact center
Video/VOIP
Data storage
E-commerce
Wireless programming
PLDT
Globe
Benpres
Digital
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Belltel
x
x
x
PT&T
x
x
x
images can be electronically transmitted in real time through the Internet. Thus,
many ICT companies, including vertically integrated telecommunications companies,
are “converging,” making the Internet another form of media to transmit, transact,
and interact with data and information in real time. For instance, to have presence
in the Net and to reach a wide market base as possible, broadsheet print media like
the Philippine Daily Inquirer, Manila Bulletin, and Philippine Star have Web sites
where these newspapers can be accessed. Another example is the desire of
independent ISPs to offer VOIP or get interconnected to DSL or more powerful
broadband Internet services.
Emerging market power
The vertical integration strategies along the primary activities of the ICT value chain,
particularly by telecommunications companies, have began to increase the
concentration ratios of the industries within the sector. The strategic behavior of
controlling the “access channels” while expanding the value chain has increased
the market power of companies mainly that of the telecommunications industry.
Except for the support activities and fixed wireless segments, the mainstream
value chain activities are already showing high levels of market concentration.
Activities that have high market concentration ratios include the long-haul and
backbones (0.58), mobile wireless services (0.51), Internet exchanges (0.75), fixed
wireless (close to 1.0), and ISPs (0.50) (Table 10).
There are clear indications that the industry structure, now built along vertical
integration strategies, is threatening to bring back the ICT into the hands of a
few or into a monopoly structure.
Table 10. Mainstream value chain activities showing high levels of market concentration
2
3
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ComputerWorld (1999) as collated by OPTEL (2002).
Based on 2002 NTC data.
Estimate as of 2002.
4
Based on 2002 NTC data but market share sourced from OPTEL (2002).
5
OPTEL (2002). Data on ISPs interconnected come from ITU (2002) and OPTEL (2002).
6
OPTEL (2002).
7
PLDT controls about 70% and Telecphil the balance.
8
Based on 2002 market share of fixed line subscribers.
9
Based on 2002 NTC data.
1
198
Competition along the support activities of the value chain comprised mainly
by hardware and software activities remains intense. Most of the companies
that compete in this segment are multinational companies that also intensely
compete in the global markets.
Implications of Increasing Market Dominance
Possible price discrimination
The growing importance of wireless mobile communication gives
disproportionate market power to the providers of these services. Fixed line
operators either lose a large chunk of incoming ILD traffic to CMTS providers
that have already began operating their own international gateways or pay more
to reach a large proportion of the population. Also, international carriers have to
contend with the growing market power of the CMTS providers. This market
power is already evident in the large disparity between the rates of fixed-tomobile services and mobile-to-fixed services.
In the Philippines, call charges from fixed-to-mobile is four times more
expensive than mobile-to-fixed calls. Such large disparities are not seen in
countries like Malaysia, Costa Rica, or Guatemala (Figure 21).
Figure 21. Mobile-to-fixed and fixed-to-mobile interconnection rates
(in US$ per minute)
Source: ITU (2002).
Indications of strategic entry deterrence and predatory
pricing strategies
Highly integrated telecommunications and ICT companies with market dominance
can easily employ entry deterrence strategies against new entrants or their existing
rivals. Entry barriers can be put up using economies of scope and scale strategies
against new entrants who will be forced to enter the market either on a large scale
or be compelled to launch a broad range of product lines to keep costs lower or
similar to those of the larger firms already operating in the market.
199
Also, the first mover advantage, Mr. Saniel pointed out, is also employed.
“New entrants are at a disadvantage considering that they still have to construct
their own network infrastructure and identify target markets while the wellentrenched market players have already created market niches and are only
working on further broadening their already large subscriber bases. The huge
capital requirements involved in constructing the network, building up the
subscriber base, and meeting the congressional franchise requirement are very
costly.11 Apart from these factors, an investor intending to provide cellular mobile
service is faced with the need to secure frequencies, which at the moment is
either scarce and/or unavailable, especially for GSM. New entrants will need,
therefore, to have the financial resources and to be highly innovative in terms of
product/service offerings, technology, and organizational efficiency to be able
to effectively compete with incumbent operators.”
Lastly, the control of the critical backbones by vertically integrated
telecommunications companies is almost tantamount to the control of the
distribution channels needed by any content or application provider. Such is the
problem currently faced by the independent ISPs that lodged a complaint against
PLDT. Represented by their association, the Philippine Internet Services
Organization (PISO), the ISPs complained to the NTC about the anticompetitive
practices of the dominant telecommunications companies like PLDT (see
www.piso.org.ph).
PISO observed that the “Internet strategy” of telecommunications
companies has made them their direct competitors in the market. According to
PISO, they resort to predatory pricing by setting “prices that no independent ISP
can possibly compete with.” To top it off, telecommunications-based services
(e.g., DSL and ISDN) remain only available to these companies’ affiliated ISPs.
The pursuit of economies of scale and scope can make incumbents erect
entry deterrence strategies against new players. A clear example, PISO said, is
the higher rates of the E1/R2—a signaling standard that allows a single cable to
have 30 channels—that these companies charge to nonaffiliates. Their rates to
nonaffiliates is 20-45 percent higher than what they would normally charge
their affiliated companies. Another strategy is by introducing new services at
way below market prices. Connectivity services are also not made available to
independent ISPs, only to their own sister-companies.12
RA 7925 requires a congressional franchise to all entities wishing to operate a
telecommunications network in the country. Securing a congressional franchise is tedious,
costly, and normally takes years before it can be granted.
12
A case in point is the DSL service priced at PhP2,500 for the entry level, and only
available through a telecom’s own brand or its affiliated ISP. This service is a clear sign of
monopolistic tendencies. What independent ISPs would like to know is how
telecommunications companies can afford to resell its DSL services complete with bandwidth,
support, and other services for only PhP2,500 a month when in fact they are re-selling raw
(i.e., the ISPs has to provide the bandwidth plus other costs) E1R2 to ISPs at an average of
PhP2,700 per channel! (www.piso.org).
11
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The other litany of complaints PISO filed against PLDT includes the following:
Delay in processing request of PISO members for access to its DSL
infrastructure. This delay is tantamount to denial of access.
•
Delay in processing request of PISO members for access to its VIBE
service or domestic dial-up Internet service. This delay is also
tantamount to denial of access.
•
Emerging Competition Policy Issues
Unchecked industry behavior and spectrum management
While it is justifiable to pursue economies of scale and scope, unchecked
antimarket behavior by incumbent telecommunications players can make the
market less competitive in the long run.
No inquiries have ever been made on the growing vertical and even
horizontal integration strategies of telecommunications companies. Neither
are there any inquiries on the extent firms can pursue such strategies. The
strategic decision to integrate is obviously intended to achieve certain degrees
of efficiency for the company, but the implications on competition and social
welfare are not taken into account by the regulator (NTC). Meanwhile, the
absence of clear guidelines on such strategies is paving the way for market
dominance and monopolies to emerge. Another potential flashpoint is the
emerging use of spectrums for connectivity. The absence of a regulatory
framework on spectrum standards, ownership, and management in an industry
that is beginning to use spectrums more and more can undermine the
development of and the competition in the industry. Mr. Saniel made the following
comments:
“Though competition has been introduced into the market, there is an absence
of robust procompetition policy objectives and commitments of the government.
Despite the comprehensive policy coverage of RA 7925, there is no specific
policy objective to establish, promote, or encourage competition in the
communications sector per se. The Philippines does not have a legacy trade
practices framework as a basis for the introduction of competition. Such a
framework should establish fair trading principles and provisions to govern the
relationships between competitors as well as between competitors and
consumers. Typically, this would involve prohibitions on certain activities such
as collusion, unfair or misleading advertising, price fixing, discriminatory
supply, and pricing behavior. Without a trade practices framework, new entrants
have little or no protection from abuses of market power or other anticompetitive
behavior.”
Regulator capabilities to deal with emerging ICT trends
The NTC must act objectively in deciding issues affecting the industry. To some
extent, this can create problems in the future if the regulator does not have the
competence as well as the familiarity with industry structures and behaviors,
and the evolving technical aspects of the technologies. Mr. Saniel observed that
the NTC has gained competence and familiarity with technological trends,
201
industry structures, and industry behaviors. Established in 1979 through Executive
Order 546, the NTC is one of the oldest regulatory bodies in Asia. Mr. Saniel
explained, however, “that NTC’s powers and capabilities need to be strengthened.
As a regulatory body, it needs to have effective enforcement powers. The NTC
also needs to enhance its technical and commercial expertise and be given
sufficient budgetary resources, among others.”
The objective of NTC’s competition policy must be to promote social welfare
by ensuring that industries operate efficiently in allowing consumers to decide
and communicate their preferences, and in allowing producers to respond to
these in a complete and price-efficient manner. However, a deregulated and
liberalized market’s greatest obstacle to promoting this goal is market
dominance and lack of understanding of ICT issues.
Bundled services
The vertical and horizontal integration strategies of the telecommunications
industry have led to the bundling of services that allow for cross-subsidies, and
scale and scope economies that can serve as entry barriers. This practice of
).
cross subsidies is actually prohibited by RA 7925 (Sections 11a and 11b).
However, there is no way the regulator can prove that these cross-subsidies
exist unless the services are unbundled. The NTC has actually issued rules on
co-location but still has not successfully forced the large carriers to unbundle
their networks.
What is clear is that this lack of unbundling translates to higher Internet
user charges (Figure 22). According to the International Telecommunications
Union (ITU), the Philippines is the only country in Southeast Asia that provides
local calls for free such that dial-up Internet subscribers would only pay for the
ISP charge. Thus, despite of the low ISP charges, the overall cost of Internet
access remains high when the monthly subscription telephone charges, one of
Figure 22. Dial-up Internet prices in Southeast Asia (30 hours of use per
month in US$, October 2001)
Source: ITU (2001) adapted from ISP and PTO data.
202
the highest in the region, are inputted (ITU 2002). Call metering was proposed
to rebalance the tariffs and remove this implied subsidy. However, the effort has
met stiff opposition and was abandoned altogether.
Mr. Saniel pointed out his comments on this issue. “A number of countries
have opted for bundling of services and offering of flat rates, such as the US, UK,
and other countries in Europe. The old saying, ‘the customer is king,’ has never
been true today. Customers expect or demand from operators to offer full range
of services to cater to their communications needs, including international links,
high-speed Internet access, and full multimedia capacity. This is one of the
reasons why operators abandoned their old business models and switched to
the bundling of services and rates. There are advantages in offering flat rates,
namely: (i) consumers like them; (ii) consumers tend to stay online for as long as
they want; (iii) it boosts penetration; (iv) less costlier as heavier users migrate to
broadband; (v) it promotes e-commerce; and (vi) it promotes content creation.”
Barriers to convergence
The traditional boundaries that separated users and suppliers are vanishing.
With more powerful computers and advanced software technologies, the Internet
transmission of TV, video, images, data, and cable services, among others, have
forced the convergence of content and the Internet. The current regulatory
environment does not allow firms to pursue their convergence strategies in
response to market demand because of the limitations imposed by certain
laws. Convergence is constrained by specific provisions in the Philippine
Constitution, RA 7925, and EO 346. These constraints relate to foreign ownership
and management of communications entities and media cross-ownership. These
laws, as pointed out by Mr. Saniel include the following:
• Section 11 of Article XVI (General Provisions) of the Constitution
prohibits foreign participation in the ownership and management of
mass media. This prohibition denies the broadcasting and cable
television sectors access to foreign capital and management expertise.
It effectively constraints convergence of telecommunications and
broadcasting as existing entities feature foreign equity participation.
Thus, this constraints effective and efficient use of network
infrastructure and delivery of emerging applications such as interactive
television.
• Section 4 (j) of RA 7925 stipulates that “no single franchise shall
authorize an entity to engage in both telecommunications and
broadcasting, either through the airwaves or by cable.” Though one
entity is not prohibited from obtaining separate franchises each for
telecommunications and broadcasting, this remains a practical
constraint on convergence.
• EO 436 establishes that the operation of cable television systems is
separate and distinct from telecommunications and broadcast services.
203
These limitations, however, did not prevent Philippine telecommunications
operators to pursue convergence strategies. Some entities sought to overcome
them by adopting complicated organization and ownership structures.13
Nevertheless, these provisions have placed such companies in untenable footing
when it comes to protection under the law and the exercise of commercial
activities.
Scope of value-added services and access
The NTC has classified ISPs as value-added service providers as defined by RA
7925 and therefore a deregulated activity that does not require a legislative
franchise. All value-added service providers depend on the telecommunications
companies for connectivity.
However, it is worth noting that trying to make a distinction between basic
services and value-added services in a converging environment could undermine
any regulatory body especially with the rise of VOIP. Making the distinction between
the two services and separating private and public networks is “difficult to
sustain” (Feldbaum 2000). According to Feldbaum, “as value is constantly added
to the telecommunications network, value-added services rapidly become
standard features expected in the provision of basic telephony. The value-added
characteristics of ISPs are becoming less distinct as the Internet becomes viewed
as a standard offering.” Mr. Saniel adds that “in the near future, the likely situation
is that IP-based traffic is indistinguishable from public switched telephone
network (PSTN). It should be noted, however, that when RA 7925 was enacted
in 1995, VOIP was unknown. Nobody expected that technological developments
will give rise to VOIP.”
After long deliberations, the NTC issued Memorandum Circular No. 05-082005, recognizing that new technologies such as VOIP are blurring the traditional
boundaries between computers, telecommunications, and broadcasting; and
continue to disrupt structure, economics, and nature of competition. The same
circular highlighted that VOIP’s widespread use and deployment is hampered by
the absence of formal rules or guidelines that will clarify the legal and regulatory
rules for VOIP, and govern the provision and use of VOIP by the public. Section 1
of the circular classified VOIP as a value-added service 14 and therefore a
deregulated service.
For instance, PLDT’s acquisition of Home Cable through legal structure would be unlikely
to be used if the constitutional and legislative prohibitions on foreign and cross-media were
not in place.
14
Value-added services refer to enhanced services beyond those ordinarily provided for by
local exchange and interexchange operators, and overseas carriers through circuit switched
networks. Enhanced services refer to those services that improve upon the quality and/or
functionality of services ordinarily offered by local exchange and interexchange operators
and overseas carriers. VOIP service is the provision of voice communication using Internet
protocol technology, instead of traditional circuit switched technology.
13
204
Free rider problem in interconnection
“Interconnecting” independent ISPs and other players to offer voice services
with the massive and costly networks of telecommunications involves the issue
of equity or “the free rider problem.” For instance, Nuguid (2000), in her study of
interconnection agreements between a dominant and a small telephone firm,
showed that “interconnection allows entrants to position itself (sic) at a cost
advantage against the leading network. This is so because entrants are given
the opportunity to reap benefits from the economies of scale and scope that
have already been established by the incumbents. The incumbents, however,
are at a cost disadvantage and would perform better if they operate their own
retail services rather than servicing interconnection to competitors (Nuguid
2000).” Thus, any deliberate effort of ISPs to interconnect with the incumbents
would have to consider equity issues as well. However, Mr. Saniel noted that in
mature markets (the Philippine telecommunications industry may be considered
a mature market), interconnection is viewed as a way of generating business
(commercial strategy), and experience shows that it has really significantly
contributed to the revenue cash flows of Philippine telecommunications carriers.
ICT ABSORPTION AND PENETRA
TION
PENETRATION
Increasing the usage and penetration of ICT is the other side of the digital divide
issue. Focusing on the ability of users to absorb the technology and support its
use is equally critical and affected by the following factors: (a) affordability and
accessibility, as well as skills, including (b) English proficiency, ICT literacy, and
learning.
Addressing ICT absorption and penetration barriers requires distinct yet
complementary efforts to enhance competition, interconnection, and
convergence in ICT. This section will look first on the state of absorption and
penetration, and then on affordability and accessibility. Later, it will also discuss
the degree of ICT literacy, language proficiency, and learning.
State of ICT Penetration and Absorption
The intensity of ICT usage can be best gauged by measuring the degree of ICT
penetration in individuals, households, businesses, and institutions.
Population and household penetration rates
Official figures on Internet usage are not available, and estimates vary depending
on the source (Table 11). The difficulty starts with the official number of operating
ISPs. NTC data in 2002 indicated 53 registered ISPs, while the PISO counted 48
active ISPs. Many are presumed to have shut down and not all ISPs furnish
information about the size of their subscriber bases.
Despite the differing estimates, it is believed that the Internet penetration rate
among individuals in the Philippines is low. The mobile wireless phone is the more
popular platform of communication and access to ICT. If this can be considered as
an indicator of ICT usage, then a large portion of the population has access to ICT.
However, the present technological capabilities of the mobile wireless Internet in
205
Table 11. Estimated individual users of ICT
Internet users
Mobile and Fixed
line subscribers
Broadband users
No.
Penetration rates per
100 persons
4.2 million
800,000
1.54 million
18.6 million
5.25
1.01
2.00
23.34
APT (2003)
NTC (2002)
ITU (2000)
NTC (2002)
10,000
Nil
ITU (2001)
Source
the Philippines remain limited and cannot be compared with the volume and speed
of data that a PC attached to the Internet can provide.
ICT penetration rates in busines
businesss
An ICT survey was undertaken by the NSO in 2002 to fill the dearth of information
on the size and quality of ICT workers in the Philippines. A total of 3,579
establishments from various industries with employment size of 20 or more per
establishment were surveyed. The highlights of this survey can provide insights
on the degree of ICT penetration in Philippine businesses and industries.
The percentage of ICT users was measured by the NSO as the proportion of
the total number of establishments using any or all types of ICT resources to the
total number of responding establishments. Overall, ICT user penetration among
businesses based on the survey was over 88 percent (Table 12). However, the
diffusion of ICT in businesses varied from industry to industry. The highlights of
the study are as follows:
•
In 2001, the proportion of ICT users was highest in sectors with ICT
industries, ranging from nearly 90 percent to as high as 100 percent.
These were the ICT sectors of telecommunications, computer and
related services, and motion picture, radio and TV, 100 percent usage;
ICT wholesale and retail trade, 96.6 percent; ICT education, 93.7
percent; and ICT manufacturing, 88.6 percent.
•
The proportion of ICT users in non-ICT industries in these same sectors
was also high, from nearly 80 percent to about 90 percent.
•
There were also non-ICT sectors that exhibited high usage of ICT
resources: financial intermediation, 96.6 percent; construction, 94.8
percent; electricity, gas and water, 93.2 percent; and health and social
work, 92 percent.
•
The proportion of ICT users was lowest in the primary sectors: agriculture,
fishing, and mining and quarrying (NSO 2002).
The same survey also included the rate of Internet access of ICT users,
which “is measured as the proportion of number of Internet users to the total
number of PC users. Internet users are those establishments that have Internet
206
Table 12. Number of respondents and ICT users by major industry group, 2001
Industry
Total respondents
ICT industries
Producer (Manufacturing)
Distribution (Wholesale and retail trade)
Services
Telecommunications
Computer and related services
Education
Motion picture, radio and TV
Non-ICT Industries
Agriculture, fishery and forestry
Mining and quarrying
Manufacturing
Electricity, gas and water
Construction
Wholesale and retail trade
Hotels and restaurants
Transport, storage and communication
Financial intermediation
Real estate, renting and business activities
Education
Health and social work
Other community, social and personal services
No. of respondents
% of users
3,579
1,699
421
116
88.1
93.5
88.6
96.9
129
84
923
26
1,880
177
15
755
59
77
224
60
132
87
138
48
50
57
100.0
100.0
93.7
100.0
83.1
58.2
60.0
86.3
96.2
94.8
79.9
80.3
81.1
96.5
87.7
89.6
92.0
75.4
access while PC users are those establishments that reported to be using PCs,
the main equipment used to access the Internet” (NSO 2002). The Internet
access rate of users was 88 percent, almost similar to the rate of ICT usage in
each company. The survey revealed the following:
•
ICT industries, except those in manufacturing, had relatively higher
Internet access rates compared to non-ICT industries of the same sector.
•
Internet access rate was highest in the ICT sector of motion picture,
radio, and TV at 100 percent. This was followed by computer and related
services at 95 percent. Internet access rate of wholesale and retail
trade was 88 percent, while that of ICT manufacturing,
telecommunications, and ICT education was slightly higher than 70
percent.
•
Only three non-ICT sectors had high Internet access rates: hotels and
restaurants, nearly 88 percent; other personal, community and social
services, 81 percent; and financial intermediation, 76 percent. The
rest of the non-ICT sectors had Internet access rates ranging from 22
percent to 72.4 percent (NSO 2002).
207
The survey indicated that a significant portion of large-scale establishments
have high levels of ICT diffusion. This is perhaps an alternative venue wherein
the population, especially the labor force, can gain access to ICT. However, largescale establishments are not good representatives of the total establishments
in the country. Small- and medium-scale establishments represent over 90
percent of total establishments in the country and may exhibit a different
landscape in terms of ICT usage or diffusion than large-scale establishments
(Figure 23).
Figure 23. Internet access rate per sector, 2002
Source: NSO (2002).
ICT penetration rates in institutions
High Internet usage or ICT diffusion at the level of large industries or
establishments like schools and government does not necessarily translate to
high levels of ICT utilization among smaller establishments or ICT utilization
rates among the people within these institutions. For instance, the NSO survey
may have indicated a 90 percent ICT usage rate by non-ICT educational
establishments, but other surveys have shown that this does not necessarily
mean a high level of ICT literacy and availability among students and teachers.
A survey of 36,368 schools (78 percent of the total respondents) conducted
by SEAMEO-INNOTECH in both public and private primary and secondary schools
concluded that only 18 percent of schools have teachers who are computer
literate and only seven percent of primary and secondary schools offer ICTrelated instruction. In addition, a survey was conducted in 2001-2002 by the
Foundation for IT Education and Development among 100 schools randomly
chosen from 661 public secondary schools that received computer assistance
packages from the Department of Education, Culture and Sports (DECS, now
Department of Education or DepEd) between 1996 and 1998. The study aimed
to determine the levels of and the factors that affect ICT utilization. The survey
208
revealed that the student-computer ratios were low, ranging from 12:1 to
1,098:1, and only 15 percent of the teachers claimed to have used computers.
The study also revealed the underutilization of the capabilities of computers.
Based on the latest estimates of the ITU, only 31 percent of public schools have
access to computers and only two percent have Internet access (ITU 2002).
The government has started providing information and services online
through the official government portal, http://www.gov.ph. Based on the latest
inventory by the ITU of government owned and controlled corporations (GOCCs),
232 out of 415 have Internet connection and 115 have their own Web sites. It
has also successfully relegated to the private sector the task of digitizing civil
registries like birth, marriage, and death certificates. This is the result of efforts
of the present administration to actively work on the e-services framework,
which is focused on pushing for reforms on IT policies and promoting IT initiatives.
Such framework has become the basis for the development plans and programs
of the country and has served as the guiding light of the Information Technology
and Electronic Commerce Council (ITECC) formed by virtue of EO 264 dated July
13, 2000. Another executive order paved the way for the creation of the CICT in
2003. Unlike ITECC, the CICT is tasked to implement both ICT projects along
with crafting policy and also serves as the precursor to the future Department of
Information and Communications Technology (DICT) of which the bill for its
creation is now in Congress awaiting formal legislation.
IT21 or the National IT Program (NITP) contains the strategy for promoting and
developing the country’s IT industry. EO 469 dated February 23, 1998 put into
action the IT21 Agenda, whose implementation is divided into three strategic stages:
•
consolidation period and providing an impetus for further development
(1998 to 2000);
•
building up the momentum period based on what has been
accomplished in the previous phase (2001 to 2005); and
•
transformation of the Philippines into a Knowledge Center of Asia.
The Philippines is currently at the first stage (consolidation). Though briefly
delayed because of the abrupt change of administration in 1999, it was put
back on track by the Arroyo administration. It is composed of the following
strategic programs:
•
creating a policy environment favorable to increase investments in IT
through the adoption of specific policies;
•
enhancing universal access to the Philippine information infrastructure;
•
developing the human capital base primarily composed of IT literate
professionals;
•
installing a government organization highly responsive to the
requirements of the local business and supporting IT and other
technology-based industries;
•
enhancing the role and influence of ITECC to institute the IT agenda;
and
•
disseminating the IT21 Agenda to the private and public sectors.
209
Affordability and accessibility
The findings of the study indicate that availability and affordability are major
considerations before users can “hook up” to the Internet. If the cost of Internet
service to the overall purchasing power of the nation is low, the higher the
penetration rates will be. This means that the household’s cost of connecting to
the Internet must not take a substantial dent on its incomes (Figure 24).
Figure 24. Relationship between Internet penetration and Internet monthly price
Internet users
(per 1,000
people in 2003
APT survey,
population in 2002
World Bank data)
Internet total monthly price
(% of monthly GNI per capita in 2003,
World Development Indicators Online, World Bank)
Source: APT (2003).
In the Philippines, it is difficult to distinguish between individuals and
households especially in the usage of the PC and the Internet. Because of the
prohibitive costs, a household of about five individuals may actually share one
PC, according to the 2000 census. Thus, the number of PCs especially with
Internet access may appear small, but the rest of the households have access
to it. Individual penetration rates may appear less but the household penetration
rates will be definitely higher.
Only 3.3 million fixed lines are actually subscribed to due in part to the high
upfront costs and to the growing popularity of mobile communications. Telephone
distribution remains uneven and highly skewed to metropolitan areas. Access
to fixed line, which is important for dial-up users, is concentrated in highly
urbanized regions like the National Capital Region (NCR), Region IV, and Region
VII (Table 13).
This skewed concentration of landlines has implications on the accessibility
and affordability of ICT. According to a 2001 study by the SEAMEO-INNOTECH
entitled “Profile on Information and Communication Technology Capabilities of
Elementary and Secondary Schools in the Philippines, 2000-2001,” only 13
percent of primary and secondary schools have landlines. Moreover, because
210
Table 13. Regional distribution of telephone lines
Region
CAR
NCR
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
XIII
ARMM
Total
Population
Installed
capacity
1,461,529
10,758,840
4,276,974
2,922,220
7,982,573
11,904,461
4,919,499
6,548,108
5,750,685
3,899,553
3,300,211
2,984,121
5,523,366
2,784,797
2,171,985
2,287,349
79,476,271
94,144
2,847,516
182,076
39,602
406,583
1,118,707
135,422
443,763
457,709
165,035
166,000
199,566
431,541
84,744
100,648
41,179
6,914,235
Subscribed
lines
35,503
1,698,365
108,760
30,667
236,490
513,907
66,701
112,023
173,355
43,352
29,740
51,529
133,497
32,876
36,153
8,015
3,310,933
Teledensity
Telelines Subscribed
6.44
26.47
4.26
1.36
5.09
9.40
2.75
6.78
7.96
4.23
5.03
6.69
7.81
3.04
4.63
1.80
8.70
2.43
15.79
2.54
1.05
2.96
4.32
1.36
1.71
3.01
1.11
0.90
1.73
2.42
1.18
1.66
0.35
4.17
Source: NTC (2005).
most ISPs are found in urban centers, those schools and other parties that have
to connect to the Internet via dial-up services have to incur long distance costs.
Taking the option of satellite or VSATs to interconnect is out of the question. The
cost is simply too prohibitive because of the cost of installation and the service
itself (ITU 2002).
Compared to other countries, broadband penetration is also negligible in
the Philippines (Figure 25). Broadband is too expensive and the providers employ
price discrimination. According to a recent analysis on the Philippine fixed
communications market by the Pyramid Research, broadband pricing in the
Philippines “is nearly twice as high as in Hong Kong” (Pyramid Research 2004).
As such, the identified market has been confined to corporate customers and
high-end residential households.
In spite of the low penetration rates, broadband providers offer services at
exorbitant levels. As observed by the ITU, “… prices are around US$50 per
month for residential subscribers and US$200 for business users” (ITU 2002).
Major reasons why broadband services have not reached a critical mass
include the prohibitive pricing, the limited broadband business applications
required by SMEs, and the cash flow potentials from prepaid dial-up Internet
accounts. Other reasons are the reluctance of telecommunications carriers to
price ADSL below leased line and ISDN services for which they already have
many customers, the absence of a regulatory requirement that forces fixed line
operators to unbundle their local loop lines allowing other operators or ISPs to
211
Figure 25. Internet and broadband penetration rates in selected countries
Myanmar
Bangladesh
Bhutan
Maldives
Sri Lanka
Nepal
Viet Nam
Pakistan
Micronesia
Samoa
Mongolia
Indonesia
Philippines
Palau
China
Iran
Thailand
Malaysia
Macao
New Zealand
Brunei
Australia
Hong Kong
Singapore
Korea, Rep.
Japan
Internet users per 100 persons
Source: APT (2003).
provide ADSL services, and the charging of flat monthly telephone rate that
translates to no additional costs for dial-up users, mitigating the cost savings of
changing to broadband (ITU 2002).
ICT literacy
Dealing with the digital divide does not purely rely on affordability and accessibility
as these do not guarantee high ICT penetration and utilization rates. Literacy,
specifically on ICT skills and knowledge, is also an important factor. A high
national level of “simple or functional literacy,” or the ability to read and write, is
not enough to increase Internet use or penetration. In fact, ITU (2002) indicated
that the number of newspaper circulation is a good indicator of Internet
penetration rates in different countries than literacy (Figure 26). Perhaps, it is
because readers of newspapers have the necessary skills and knowledge that
go beyond functional or simple literacy.
Education is the key to improving Internet use and ICT utilization among
functionally literate people. Numerous studies on the Philippine educational
system have been conducted. Some of them are the following:
•
Congressional Commission on Education in 1991-1992
•
Profile on Information and Communication Technology Capabilities of
Elementary and Secondary Schools in the Philippines, 2000-2001, by
SEAMEO-INNOTECH
212
Figure 26. Comparison among simple literacy, newspaper readership, and
Internet penetration rates
Note: Logarithmic scale.
Source: ITU (2003) adapted from national statistical agencies.
•
•
•
•
Philippine Education Sector Study conducted jointly by the World Bank
and the Asian Development Bank in 1998
Presidential Commission of Educational Reform in 2001
Survey of Secondary Schools: General Information/School Profile, Profile
of Science and Mathematics Teachers, and Information Technology
Capabilities by the Department of Science and Technology in 2001
Preliminary findings on a Survey of ICT Utilization in Philippine Public
High School by Victoria Tinio in 2002
All these studies are unanimous in pointing out the dismal state of the
Philippine educational system.
ICT learning
Victoria Tinio, Director for E-Learning of the Foundation for Information Technology
Education and Development (FIT-ED), a nonprofit organization based in Metro
Manila, summarized the recurring themes of woe of Philippine basic education,
as follows (Tinio 2002):
•
inadequacy of the national budgetary allocation for education
•
inefficient management of the educational system
•
poor infrastructure—lack of school buildings, laboratory facilities,
libraries, etc.
•
lack of qualified teachers, coupled with the lack of classrooms, that
results in class sizes of up to 110, with 60 being the norm
•
deteriorating student performance, most significantly in Science, Math,
and English
•
need for quality assurance in teacher education institutions and
improved in-service training
213
This crisis in Philippine education is reflected in the poor performance of
students in national admission tests. For instance, the National Secondary
Achievement Test (NSAT) administered to incoming college students showed
very poor scores in Math, Science, and English—important basic foundations
required in building a pool of ICT-literate population (Figure 27).
This situation is not good news for a population preparing for the Information
Age. Skills and knowledge in both basic and advanced ICT are necessary to
maximize the benefits of integrating into the knowledge economy. But such
knowledge and competencies must also meet the standards required by the
job whether in ICT or non-ICT related industries.
Figure 27. NSAT mean scores in the Philippines, 1997-2000
Sources: Commission on Higher Education; Department of Education, Culture and Sports (now
Department of Education or DepEd).
English language
A joint survey conducted in 2004 by the Makati Business Club, the American
Chamber of Commerce, and the Educational Testing Service on the Test of
English for International Communication (TOEIC) showed how current
professionals and universities score in English communication. The TOEIC
standards are indicated in Table 14.
Based on the average scores, the highest average level for the country was
948, classified under general professional proficiency, while the lowest average
score was 778 or basic working proficiency (Table 15). The highest average
score was found among international contact center agents while the lowest
average score was found among technical and operations people. The lowest
score range was likewise registered by the technical and operations personnel
214
Table 14. Interpretation of Test of English for International Communication
(TOEIC) scores
> 960
905 – 960
785 – 900
605 – 780
405 – 600
255 – 400
10 – 250
Advanced General Professional
General Professional Proficiency
Advanced Working Proficiency
Basic Working Proficiency
Intermediate
Elementary
Novice
Source: Educational Testing Service.
Table 15. Average TOEIC scores by job category, 2004
Category
General Office
Technical and Operations
Int’l Contact Center Agents
Sales and Marketing
Human Resources
Managerial
Score range
465-965
275-975
780-985
770-975
805-975
700-985
Average score
838
778
948
894
916
899
Source: TOEIC Survey 2004.
at 275 while the highest minimum score range was registered by the human
resource personnel at 805.
The survey results have several implications on ICT. First, the low scores in
English communication among the general office and technical and operations
personnel—who normally constitute a large chunk of the urban-based labor
force—reflects that a sizable portion of the existing labor pool may not be equipped
to meet the global standards for communication skills. Second, this situation
can affect even the providers of technical user support for ICT as the scores
indicate the country’s limited pool of technical personnel equipped with the
English communication skills necessary to provide technical user support. And
third, the results reflect the poor education of the existing labor pool to prepare
them for ICT. This last observation is further supported by the same survey
conducted on graduating students of selected universities (Table 16).
The highest average score registered by the universities surveyed was 746
(rated as having the basic working proficiency) and the lowest was 482 (rated
as just intermediate). While the range can hit as high as general professional or
advanced general professional, the lowest mark was 235 (rated as novice). For
a nation that uses English as medium of instruction, the poor results registered
by graduating university students indicate a general malaise affecting the
education sector. These graduating students may be equipped with the technical
or working skills but do not have the English proficiency necessary to meet the
215
Table 16. Average TOEIC scores of graduating college students of selected universities
Category
Score range
University A
University B
University C
University D
University E
University F
AMCHAM Scholars
300-895
560-905
265-710
235-815
505-845
405-870
670-985
Average score
605
746
482
546
699
665
868
Source: TOEIC Survey 2004
standards required by ICT. The same pool of graduates may be seriously impaired
to qualify for jobs in ICT services that provide close support to customers in
English-speaking countries.
This brings into fore the importance of certification as a tool to measure
and evaluate the level of knowledge and competencies of ICT practitioners.
Certifications establish the professional standards needed in the practice of ICT
and determines the real level of knowledge and skills of practitioners in various
levels. While certification centers accredited by the Technical Education and
Skills Development Authority (TESDA) abound, accreditation is not yet an
institutionalized practice or a job requirement tool in the country.
According to recent TESDA statistics, the ICT sector is one of the sectors
that demonstrates the lowest certification rates among the other priority sectors
(Table 17). From 2002 to 2003, the successful certification rate in ICT was 18
percent, which was way below the 53 percent certification rates registered by
the other TESDA-designated priority sectors. While the practice of certification is
not yet widespread, the fact that the certification results show poor ratings is
Table 17. Number of persons assessed and certified by priority sector
Priority
sector
Agri-Fishery
ICT
Tourism
Health
Maritime
Others
OPAs
Total
Source: TESDA (2004).
Persons assessed
(No.)
Sep
Sep
2002
2003
957
2,033
29,719
29,778
6,268
8,396
3,310
6,372
58,221
20,032
54,882
68,164
31,828
20,807
185,185
155,582
Persons certified
(No.)
Sep
Sep
2002
2003
511
964
5,217
5,398
2,793
4,051
647
3,386
53,171
18,634
19,763
28,598
16,947
12,129
99,049
73,160
Certification rate
(%)
Sep
Sep
2002
2003
53
47
18
18
45
48
20
53
91
93
36
42
53
58
53
47
216
another reflection of the level of skills and proficiency of the present pool of
Filipino ICT users.
Emerging Policy Issues on User Absorption and Penetration
Gaping misalignment of the current universal service scheme
The goal of the universal service is noble—to promote the availability and
affordability of and access to quality and modern telecommunications services.
It was designed to accelerate the provision of telecommunications services
while preventing “cream-skimming” or focusing on more lucrative centers where
market demand is strong. Most carriers have met their obligations but the
scheme of installing fixed lines in “missionary” areas has failed to increase the
level of accessibility. Many carriers were caught with excess line capacities. The
low market absorption can be attributed to two major factors: (a) the high frontend cost of subscribing to fixed lines, and (b) the growing popularity of mobile
communications.
Dubbed as an asymmetry in regulation, Serafica (2000) observed the
potential diseconomies caused by assigning service areas to one carrier and
the entry barriers built by this scheme within the industry. The lack of scale and
scope, the absence of market contestability, and the low market absorption
have translated into high upfront and monthly subscription costs. These have
led to a vicious cycle of low market absorption and high service costs.
As only urban centers can afford the service, ISPs are concentrated only in
these areas, which is detrimental to a market oriented toward dial-up Internet
access. Not only have they to contend with high subscription costs, they also
have to pay long distance rates. The rural sector suffered the most from this
mechanism as its population exhibited low Internet penetration rates (Figure
28). Making ICT not available to the rural sector, which comprises a sizeable
chunk of the poor population especially in developing countries, inevitably pushes
the poor into deeper poverty.
Meanwhile, there are already available wireless broadband technologies
that can be used for voice and Internet services. Without the use of satellites,
these technologies are easily installed and distributed at much lower costs
using repeater networks. The fact that carriers have no incentive mechanisms
to provide the service to missionary areas is important for future policy
considerations.
Importance of education in closing the divide
Education is a critical complementing strategy in narrowing the digital divide.
Efforts by various government agencies particularly the DepEd are underway to
implement an ICT strategy in education (Tinio 2002). These efforts must go
beyond the provision of infrastructure and technical support. It must also include
comprehensive skills and knowledge training on ICT for teachers and students.
Moreover, IT must be integrated in the education curriculum at all levels.
217
Figure 28. Relationship between the size of the rural population and Internet
penetration rates, 2002
Internet user
(per 1,000
people in 2004,
APT
Rural Population (% of total population in 2002,
World Development Indicators Online, World Bank)
Source: APT (2003).
IT certification
There is a need to professionalize the ICT profession. The lack of a system to
certify and accredit skills and knowledge would also cast doubts on the level
of proficiency and skill competencies of the ICT users and providers.
Meanwhile, the proliferation of certification bodies in the Philippines has
created a lot of confusion. An overarching framework for a certification
program and institutionalization of certification bodies is inconspicuously
absent. Potential applicants of IT certifications do not know the “certification
path” to take and even the future job potentials that these certifications
would bring them.
POLICY FRAMEWORK TO CLOSE THE DIVIDE
General ICT Policy Framework
The Department of ICT
The government has already acknowledged the necessity of separating the
regulatory functions of “Communications” from the present Department of
Transportation and Communications given the growing demands of information
technology. A bill was filed last July 2001 creating the Department of Information
and Communications Technology (DICT). However, it remains pending in the
Committee on Government Reorganization of Congress since July 2004.
218
The DICT Bill 15
This bill seeks to establish a Department of Information and Communications
Technology (DICT) that will ensure the “focused execution” of a program to
develop the sector and facilitate the entry of more ICT projects. Under the
proposed bill, the Telecommunications Office (TELOF), the DOTC divisions dealing
with communications, and the National Computer Center (NCC) will be merged.
The regulatory body (NTC) will be an attached agency of the proposed DICT, thus
retaining its independence. The DICT will administer all laws in the field of ICT
and prescribe regulations for the operation and maintenance of ICT facilities in
areas not adequately served by the private sector. It will likewise direct
government research and development programs in ICT, draw up measures to
promote the sector, including universal access to telecommunications and wider
use of the Internet. It will also set and execute integrated and comprehensive
ICT systems at the national, regional, and provincial levels.
Nature of the regulation
There are two approaches to regulation: prudential approach or prescriptive
approach. Prudential regulation provides standards that may be followed by the
industry or the company while allowing both the regulator and the industry to
exercise their judgment as to how to meet these standards depending on the
situation or circumstance.
In contrast, a prescriptive approach involves very detailed controls, which
the regulator, the user, and the providers of ICT should use as the basis of their
decisions. This includes detailed statutory provisions and regulations and close
monitoring of compliance. This approach ensures a stable regulatory environment
with the aim of pressuring stakeholders to exhibit high levels of conformity to
set practices and standards.
Many Philippine laws suffer from being overly prescriptive. Detailing the
standards and code of conduct in a national law may limit constant policy shifts,
and prescriptive laws may prove inflexible in dealing with the changes in the
operating environment like that of ICT. This is practically true for RA 7925. For
instance, the definition of value-added services or the service area schemes
which are overly prescriptive have, to some extent, been rendered ineffective in
the environment of convergence and industry integrations.
To avoid a similar mistake and take into account the evolving nature of ICT,
any national law creating policies and bodies governing the ICT must take a
prudential approach, where general standards and principles can be set. An
example would be on general policy declarations like avoiding antimarket
On 12 January 2004, President Gloria Macapagal-Arroyo signed Executive Order 269,
which created the “Commission on Information and Communications Technology (CICT)” as
a transitory measure for the establishment of a national body, that is, the Department of
Information and Communications Technology (DICT). The CICT is the primary policy, planning,
and coordinating agency of the government on ICT-related matters.
15
219
behavior or interference, or ensuring security and privacy. The implementing
rules will then describe the details like avoiding cross-subsidies, ownership of
certain downstream activities, standards on equipment, or frequencies.
To limit the policy drifts or shifts emanating from the lack of specific and
detailed prescriptions in this type of regulation, the implementing rules and
regulations can set the prescriptive requirements. In this structure, the
overarching ICT law will not be subjected to periodic reviews to accommodate
the changing phenomenon of ICT, and thus can avoid going through the legislative
mill with its seeming endless myriad of committees and consultations. Provided
that ample consultations have been made, only the implementing rules and
regulations will have to be revised to accommodate the nuances of ICT and its
applications.
Equity issue of ISPs offering VOIP
In a liberalized and deregulated market, ISPs are allowed to put up their own
networks or provide VOIP services provided they contribute to meeting universal
service access goals. The “free-rider problem” that results from the ISPs being
interconnected with the networks and infrastructure of the large carriers can be
resolved by this contribution to universal service.
Improving universal service
The universal service scheme for the Philippines can be patterned after the
1996 ACT of the US, which states that all providers of telecommunications and
ICT services “should contribute to the universal service in some equitable and
nondiscriminatory manner” and wherein the state can institute “mechanisms
to preserve and advance universal service” and that “all classrooms, health
care providers, and libraries should generally have access to advanced
telecommunications” and ICT services.
The universal service scheme of the US is a good model for the Philippines.
The US has already provided computers in schools and connected them to the
Internet. In 2000, public schools have roughly one computer for every four
students. There could be other universal service models that the Philippines
can look at.
It is a fact that there will be a large segment of the population, especially in
the rural areas, that may not be able to afford access to ICT. Such universal
schemes can make ICT accessible to the less privileged sectors of society through
institutional mechanisms like public universities and libraries, and town centers.
For a universal service scheme to be successful, the government must
first determine a coherent and measurable plan to provide access and increase
Internet usage and penetration in “unserved” and underserved areas and
institutions particularly in educational establishments and rural areas. From
here, the government can set clear “contributions” and timetables from the ICT
sector.
220
Education and skills training
Availability and access cannot fully address the problem of low ICT penetration
and usage. A large part of the population is not computer literate. Tinio (2002)
made a comprehensive analysis of the importance of diffusing ICT in the
educational policy and system, and discussed the ICT Plan for Basic Education
drafted by the DECS (now DepEd). At present, this plan serves as the guiding
document for programs and projects being initiated by the education department.
The plan focuses on the following key areas: (a) infrastructure development;
(b) technical support; (c) teacher training on the design, production, and use of
ICT-based instructional materials; (d) research and development; (e) technology
integration in the curriculum; (f) use of innovative technologies in education and
training; and (g) fund generation, particularly through nontraditional financing
schemes. Operational targets by 2009 include the following: (a) provision of
appropriate educational technologies to all public secondary schools; (b)
provision of a computer laboratory with basic multimedia equipment to 75
percent of public secondary schools; (c) provision of electronic library systems
to all public science-oriented secondary schools; (d) training of 75 percent of
public secondary school teachers in basic computing and Internet skills as well
as in computer-aided instruction; and (e) integration of ICT in all learning areas,
when appropriate.
Tinio further pointed out that “there is a need to have an institutionalized
ICT Plan for Education for national circulation and implementation at all levels
of DepEd. It must provide the policies and plans and other initiatives that must
be implemented and achieved over a period of time.” Tinio has proposed
implementing guidelines for the schools “as to what is expected of them both in
relation to the curriculum and in the management of their ICT resources” (Tinio
2002).
The government must expand ICT courses beyond the classrooms and
must reach a broader segment of the population. In the short term, the
government may have to put up subsidized basic training courses on the use of
ICT not only to teach but also to broaden awareness on the importance of ICT. In
the long term, the government must consider instituting and promoting IT
certifications among professionals working in various ICT and non-ICT
establishments.
Guidelines for horizontal and vertical mergers and acquisitions
Guidelines must be put in place by the NTC before any merger and acquisition in
the ICT sector is approved. The sector has enough powers under RA 7925 to
exercise these prerogatives. These guidelines must ensure that the strategies
do not lead to market dominance or market power. The main objective of these
guidelines should be to provide the safeguards that would promote contestability
and facilitate regulation of antimarket behavior. RA 7925 has explicitly spelled
out provisions on anticompetitive behavior but the current implementing rules
and regulations do not have any clear-cut policy guidelines for mergers and
acquisitions.
221
Policy framework for spectrum regulation
With spectrum usage and coverage expected to drastically increase in the near
future, new issues like spectrum ownership, interference, and security will arise.
A regulatory framework and policy guidelines for spectrum standards, ownership,
and management are direly needed soon.
System of measurement for ICT
The present practice of making ICT part of telecommunications- or
communications-related statistics can lead to inaccurate measurements,
assuming that ICT transactions are actually covered in the statistics. Reliable
data and information on ICT are lacking, and the current system of measurement
can even make what is scarcely available even incomplete or misleading.
The NSO and the NTC (and perhaps the future DICT) can coordinate to
generate the kind of data and information required to accurately measure the
ICT sector’s economic contribution and performance.
Conclusions and Recommendations
Any policy tool or recommendation dwelling on the promotion of competition
through deregulation, liberalization, interconnection, and convergence in ICT
must ultimately be evaluated in light of its ability to close or narrow the digital
divide. This consideration involves looking at the users of ICT and their capacity
to access and use ICT.
Policies must promote, on one hand, a high degree of accessibility to the
infostructure by promoting competition, interconnection, and convergence.
Unchecked behavior of ICT firms can diminish market contestability and
consequenly, competition. On the other hand, policies must also seek to increase
the capabilities of the users to absorb or increase their usage of ICT. Promoting
skills on language, literacy, and learning as well as improving access and
affordability can lead to high levels of ICT penetration and utilization.
The study was quite exhaustive in its analysis of the supply-side constraints.
However,it did not delve deeper into the demand-side issues and the strategies
to address them. These are points for future studies to look into, including the
programs to improve user knowledge and accessibility to ICT.
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Castañeda, M. C. 2003. An analysis of the e-tailing market in the Philippines: implications
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Feldbaum, D. 2000. Assessment of the Philippine telecommunications industry deregulation.
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Flor, A. 2001. ICT and poverty: the indisputable link. Paper presented at the Third Asia
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Gray, V. 2001. The internet in South East Asia: economic and social influences. Geneva,
Switzerland: International Telecommunications Union.
Gray, V. and M. Minges. 2002. It is not just infrastructure: the 3Ls and the internet in South
East Asia. Geneva, Switzerland: International Telecommunications Union.
Huang, F. L. 2003. The Philippines answers the call: contact center industry. The SGV
Review 1(4)[online] http://www.ey.com/global/download.nsf/Philippines/
SGV_Review_No_4/$file/SGV%20Review%20Issue%204.pdf.
International Telecommunications Union (ITU). 2002. Pinoy internet: Philippines case study.
Geneva, Switzerland: International Telecommunications Union.
Kelly, T. 2000. FCC: IT telephony: substitute or supplement? Presentation at the
Telecoms@The Internet VI, IIR, Geneva, 12 June 2000.
Lim, M.J. S. 2002. Empirical investigation of possible collusion in the cellular mobile telephone
system (CMTS) industry. Graduate studies thesis. Pasig City, Philippines: University
of Asia and the Pacific.
NASSCOM and McKinsey & Co. 2002. NASSCOM-McKinsey Report 2002: strategies to
achieve the Indian IT industry’s aspiration. India.
National Statistics Office (NSO). 2002. Survey of information and communication technology.
Manila, Philippines: National Statistics Office.
National Telecommunications Commission (NTC). 2005. Consumer information [online]. http:/
/www.ntc.gov.ph/consumer_info/consumer_info1.htm
———. 2003. Consumer information [online]. http://www.ntc.gov.ph/consumer_info/
consumer_info1.htm.
Nuguid, M. K. L. 2003. An economic welfare analysis of the interconnection arrangements
of the telecommunications industry. Graduate studies thesis. Pasig City, Philippines:
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ICT sector definition: issues for discussion [online]. http://www.voorburg.scb.se/
ICTsector_voorburg.pdf.
OPTEL. 2002. Philippine information technology perspective. Manila, Philippines: OPTEL.
Paulino, T. 2002. Entry strategy for a highly diversified company into IT-enabled services
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into opportunities and threats. Industry Monitor January. Pasig City, Philippines:
Padojinog, W.C. and M.L.C. Castañeda. 2003b. E-tailing industry (second of two parts):
What business model is best for the Philippines. Industry Monitor January. Pasig
City, Philippines: University of Asia and the Pacific.
Padojinog, W.C. and M.K.L. Nuguid. 2003. The Philippine telecommunications industry: Who
gains from interconnections?” Staff memos. Pasig City, Philippines: University of
Asia and the Pacific.
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Pyramid Research. 2004. Communications markets in the Philippines [online]. http:
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issues. PASCN Discussion Paper No. 2000-15. Makati City, Philippines: Philippine
APEC Study Center Network.
Tinio, V. L. 2002. Survey of ICT utilization in Philippine high schools: preliminary findings
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papers%20&%20Publications/educationSurvey%20of% 20ICT%20in%
20Public%20High%20Schools.pdf
U, M.L. and R. de Vera. 2001. Information technology: gearing for the take-off. Industry
Monitor January. Pasig City, Philippines: University of Asia and the Pacific.
Zimmerman, J. 2004. IT spending predictions roundup. Bitpipe Analyst Views [online]. http:/
/wp.bitpipe.com/resource/org_973204426_74/Analyst_Views_Roundup_bitpipe.pdf.
Padojinog, W.C. 2003. Consumer protection in the Internet: The Internet’s social and moral
dimensions. Staff memo. Pasig City, Philippines: University of Asia and the Pacific.
San Agustin, K. 2004. Business process outsourcing: A Blunted Advantage. Staff memo.
Pasig City, Philippines: University of Asia and the Pacific.
SEAMEO-INNOTECH. 2001. Profile on information and communication technology Capabilities
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Philippines: SEAMEO-INNOTECH.
Institutions’ Web sites
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Congress of the Philippines: http://www.congress.gov.ph
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Philippine Economic Zone Authority: http://www.peza.gov.ph
Phlippine Internet Services Organization: http://www.piso.org.ph
Chapter 6: Business Process Outsourcing
225
6
Sustaining Philippine Advantage
in Business Process Outsourcing
Ceferino S. Rodolfo
ABSTRACT
This study looked at the sustainability of the growth and development of business
process outsourcing (BPO) in the Philippines. It was prompted by the sector’s
spectacular growth in several of its subsectors, mainly contact call centers,
medical transcription, animation, and software development. Doubts about
the sustainability of this hypergrowth situation are increasingly being felt, as
the industry experiences difficulties in meeting the demands of the markets,
specifically the country’s ability to supply the skilled workforce. In addressing
sustainability, the government will have to grapple with several important
issues—the main drivers of the BPO phenomenon, the size of the global BPO
market, and the competiveness of the Philippines as a BPO location. These
questions were directly addressed by the study. Only after these issues have
been addressed can policymakers provide broader and longer term directions
for the industry, specifically: (1) whether the present level of priority given to
BPOs is appropriate and consistent with national economic goals or should
the government prioritize other sectors instead, and (2) whether the country’s
educational system should be aligned with the goals of enhancing the
competitiveness of the BPO industry, and the consequences of this educational
thrust on other strategic sectors of the economy.
INTRODUCTION
The lowering of tariff barriers, together with rapid technological developments, has
been continuously pushing the world to become a single marketplace. As a result,
domestic companies are subjected to ever-increasing levels of competition. This
has prompted organizations to look for various ways to enhance their
competitiveness—in terms of lower costs or improved service and product quality.
Outsourcing
In this context, outsourcing has been one of the most publicized responses of
organizations. Initially, firms looked at outsourcing exclusively from the
perspective of cost reduction. The United Nations Conference on Trade and
226
Development (UNCTAD) defines outsourcing as “contracting a service provider
to completely manage, deliver and operate one or more of a client’s functions
(e.g., data centers, networks, desktop computing, and software applications)”
(UNCTAD 2003). Other definitions of outsourcing are given in Box 1.
Outsourcing is discussed in economic literature under the concept of vertical
integration—or more popularly, “make or buy” decisions. In delivering a product
or a service, a firm actually has a choice of which portion(s) of its value chain of
activities (i.e., raw material sourcing, transformation or production, marketing
and delivery, after-sales service, and support activities such as logistics, business
administration, etc.) it will perform internally—make—or source from the market—
buy.
The choice of whether to “make” or to “buy” depends on the firm’s
appreciation of the benefits and the costs involved. Based on economic theory,
the arguments for “internally undertaking” an activity (make) are the following
(Besanko et al. 2003):
• Coordination of production flows through the vertical chain may be
compromised when an activity is purchased from an independent
market rather than performed inhouse.
• Private information may be leaked when an activity is performed by an
independent market firm.
• There may be costs of transacting with independent firms that can be
avoided by performing the activity inhouse.
On the other hand, the arguments for outsourcing an activity (buy) are the
following:
• Market firms can achieve economies of scale that in-house departments
producing for only their needs cannot attain.
• Market firms are subject to the discipline of the market and must be
efficient and innovative to survive. Overall corporate success may hide
the inefficiencies and lack of innovativeness of inhouse departments.
Box 1. Sample definitions of outsourcing
•
Accenture - “contracting with an external organization to take primary responsibility
for providing a business process or function” (Linder and Cantrells 2002).
•
PricewaterhouseCoopers - “the long-term contracting out of non-core business
processes to an outside provider to help achieve increased shareholder value.”
•
Gartner - “the delegation of one or more IT-intensive business processes to an
external provider that, in turn, owns, administrates and manages the selected
processes based on defined and measurable performance metrics.”
227
Outsourcing—as a business strategy—is not actually new. Especially in the
manufacturing sector, companies have long practiced “subcontracting.” In fact,
starting from domestic subcontracting, complex international supply chains are
now driving highly globalized industries such as garments, electronics, and
automotive parts and components. Production activities are routinely outsourced
to least-cost country locations.
However, it must be noted that migration of production activities to other
countries, primarily developing countries, does not come in the form exclusively
of “outsourcing.” Foreign direct investments (FDIs) undertaken for cost and
market access considerations—to get around tariff barriers—is also a common
business strategy.
As shown in Figure 1, however, outsourcing has evolved beyond production
and now includes virtually all activities not considered as part of a firm’s core
operations.
N uances of Ser vice TTransactions
ransactions
Until recently, unlike in the goods sector, outsourcing of services has been quite
limited. This was due to the very nature of services and service transactions.
Services are “economic output of intangible commodities that may be produced,
transferred, and consumed at the same time.”1 They cover major industries
such as transport, travel, communications, construction, financial, and insurance
services. Unlike goods, and largely because of their intangible nature, it is hard
Figure 1. Outsourcing as a business model
1
Definition based on the Balance of Payments Manual of the International Monetary Fund
(IMF).
228
to disassociate the production and consumption of services. Thus, most service
transactions require the physical proximity of both the provider and the buyer of
services. For example, a patient will have to “see” a doctor for the diagnosis of
his/her medical condition (i.e., health service).
However, the information and communication technology (ICT) revolution
has made it physically possible for certain service transactions to overcome
space and time limitations. Activities and services that can be digitized and
transmitted over the Internet became technically feasible to be outsourced. The
phenomenon is clearly explained by the UNCTAD:
“The use of ICT allows knowledge to be codified, standardized, and digitized,
which in turn allows the production of more services to be split up, or
“fragmented”, into smaller components that can be located elsewhere to take
advantage of cost, quality, economies of scale, or other factors. This makes it
possible to produce certain services in one location and consume them (or
use them in further production) in another—either simultaneously (e.g.,
information provided via call centers) or at a different time (e.g., data entry,
software development).” (UNCTAD 2004)
Offshore Outsourcing
Starting initially as a domestic phenomenon, services outsourcing rapidly evolved
into offshore outsourcing. Developments in ICT made services more transportable
and fragmented, and simplified the tasks, thereby allowing them to be relocated
more easily (UNCTAD 2004).
A variety of service products were affected by this trend, from simple lowvalue data encoding to high-value processes such as architectural design,
analysis of x-ray films, and software development. Initially, lower-cost “in-shore”
or domestic locations were explored, followed by “near-shore” countries (e.g.,
Ireland, in the case of the United States).
However, outsourcing eventually took the path of “offshoring”—or locating
to low-wage countries. Typically, these countries are less developed economies
with a large base of educated workforce. Low-wage skilled workers and
professionals, coupled with efficient and cost-effective telecommunications
infrastructure, were the main value proposition of lower income countries.
International telecommunications costs declined in a number of developing
countries as they liberalized their telecommunications sectors and consciously
offered incentives to attract outsourced service activities.
Shif ts in Cr
oss-bor
der Ser vice TTransactions
ransactions
Cross-bor
oss-border
The emerging trend in offshore services outsourcing resulted in a noticeable
shift in the structure of cross-border services transactions. This shift can be
understood more clearly if framed within the different modes of the General
Agreement on Trade in Services (GATS) by which services are supplied in crossborder transactions. These modes are commonly referred to as:
Mode
Mode
Mode
Mode
1:
2:
3:
4:
229
Cross-border supply
Consumption abroad
Commercial presence
Movement of natural persons
Figure 2 and Table 1 provide illustration of these different modes of
supplying services.
In the past, because of physical constraints on the manner by which services
can be supplied, trade in services typically involved the cross-border movement
of either the buyer or the provider of the service. For example, a tourist travels to
the country of destination (Mode 2) or a professional service organization (e.g.,
an accounting firm) establishes an affiliate office in another country (Mode 3),
or an engineer goes abroad to work on a construction project (Mode 4).
Figure 2. Modes of supply under the GATS
Source: Measuring trade in services (WTO training manual).
230
Table 1. Modes of supplying services for cross-border transactions
Modes of
Supply
Description
Illustration
Mode 1
Cross-border
supply
Mode 2
Consumption
abroad
Digitized and processed information crosses the border through
telecomunications or postal infrastructure (e.g., consulting or market research reports, telemedicine, and distance learning).
Consumer crosses the border to consume the service (e.g., travel, hotel,
health, or training services given to nonresidents)
Mode 3
Commercial
presence
Supplier of the service is a locally established affiliate, subsidiary or representative office of a nonresident supplier (e.g., foreign direct investments).
Mode 4
Movement of
natural persons
Supplier of the service is in the country on a temporary basis and remains
a nonresident (e.g., service suppliers, health workers, consultants).
Source: www.wto.org.
As mentioned earlier, the ICT revolution and declining telecommunications
costs have drastically improved the viability of supplying services across borders
(Mode 1). Thus, whereas trade in services was mostly carried out under Modes
2, 3, and 4, ICT revolution had increasingly made Mode 1 transactions both
more technically feasible and financially viable. With ICT providing a real-time
link, service providers and buyers, for certain transactions, no longer needed to
be physically proximate to each other.
As a result, the structure of services trade shifted (Figure 3). “Other
commercial services,” provided mainly under Mode 1, increased its share of the
total value of trade in services. It increased from 38 percent (of total value of
services trade) in 1990 to about 45 percent a decade later.
Figure 3. Shift in services trade structure (in percent share)
Source of basic data: WTO website.
231
The extent of offshore outsourcing can be gleaned more clearly from the
large share of “other business services” in the total value of “other commercial
services” exports (Figure 4). The “other business services” category covers
service processes that are typically outsourced (e.g., legal services, accounting,
auditing, business and management consulting, etc.)
This trend started with the outsourcing of lower value-adding service
activities, such as data encoding and processing, jumping to marketing support
activities (call centers), and, at present, encompassing even strategic activities
such as research and development.
For instance, in health services, outsourcing began with medical transcription
but now covers routine medical diagnosis (e.g., analysis of digital X-ray plates).
Figure 4. Structure of other commercial services exports (based on 1998 data)
Source of basic data: www.wto.org.
Trends in FForeign
oreign In
Invv estments in Ser vices
The same structural shift in services trade can be seen in FDIs. The share of
services to inward FDI stock increased relative to the share of the primary and
manufacturing sectors. From less than half of inward FDI stock in 1990, the
share of services increased to 60 percent in 2002 (Figure 5).
The shift is more pronounced in certain services sectors like business
activities (e.g., legal services, accounting and auditing, business and management
consulting, etc.). As Table 2 shows, in 1990, the share of business activities to
total inward FDI stock stood only at 13 percent. By 2002, its share doubled to
26 percent. More importantly, the structure of FDI flows to developing countries
shifted. In 1990, financial services accounted for more than half of the total FDIs.
By 2002, business activities attracted the largest share of FDI inflows (40%).
232
Figure 5. Shift in the structure of inward FDI stock (in percent share)
Table 2. Distribution of inward FDI stock in services (in percent share)
1990
2002
Developed Developing World Developed Developing Central and World
Countries Economies
Countries Economies
Eastern
Europe
Electricity, gas and water 1
Construction
2
Trade
27
Hotels, restaurants
3
Transportation
2
Finance
37
Business activities
15
Others
13
Total
100
2
3
15
2
8
57
5
8
100
1
2
25
3
3
40
13
13
100
3
1
20
2
11
31
23
9
100
4
3
14
2
10
22
40
5
100
6
5
21
2
24
29
10
3
100
3
2
18
2
11
29
26
9
100
Likewise, the greater importance of service industries is evident in the
changing profile of the biggest transnational companies (TNCs) in the world. In
1995, only 12 of the 100 largest TNCs in the world were in the services sector;
in 2002, TNCs in the services sector totaled 31.
BUSINESS PROCESS OUTSOURCING
The previous chapter highlighted the need to precisely define the scope of any
study on BPO. As illustrated in Table 3, outsourcing can cover the whole spectrum
of a firm’s value chain: from logistics, to manufacturing, to marketing, and to
after-sales service. Moreover, there has been some confusion between two
overlapping terms: outsourcing and offshoring
offshoring.
233
Table 3. List of typical BPO services
Banking services
Account opening services
Account information capture
Customer queries
Check clearing
Check payment
reconciliation
Statement processing
ATM reconciliation
Investment account
management
Management reporting
Loan administration
Credit debits card services
Check processing
Collections
Customer account
management
Mortgage services
Application verification and
processing
Disbursals and collections
Payment reconciliation
Account information updates
Mortgage loan servicing
Finance services
Document management
Billing
Shareholder services
Claims processing
Accounts receivable
Accounts payable
General ledger
Accounting services
Treasury operations
management
Credit card services
Applications screening and
card issuance
Customer account
management
Collections and customer
follow-up

Account queries and limit
enhancements
Accounting and payment
reconciliation

Retirement investment and
benefits
management
Hiring and staffing
Recruitment screening
Administration and relocation
services
Payroll processing
Compensation administration
Benefits planning
Administration and regulating
compliance

Insurance Services
Policy owner services
Claims processing

Transaction and re-insurance
accounting

Statutory reporting

Annuities processing
Benefit administration
Sales and marketing services
Customer information
capture
Telemarketing services
Risk assessment and
Direct marketing and sales
premium computation
campaigns
Policy processing and
Web-related services
account monitoring
Claims management
Web site designing
Payment reconciliation
Web site management
Site personalization
Asset management services Site marketing
Account creation
Search engine, directory
Account maintenance
optimization
Transfers and additions
Positioning services
Dividend payments
Catalog / content
Brokerage payment
management
MIS reporting
Web analytics
Customer service
Database design
Web security services and
Health care
integration with CRM
Back-office systems for
inventory management
Customer care
Web enablement of legacy
Customer service
applications
Customer analysis
Electronic bill presentment
Call centers
and payment services
Consumer information
Graphics/Animation
services
Web-based email processing
Customer relationship mgt
Web-based help desk
Web-based chat support
Human resources services e-Learning :Web-based online
Payroll and benefits
education services
processing
e-publishing
Training and development
234
BPO Definition
This study will look at BPOs, as defined by the ICT Division of the Board of
Investments (BOI), Department of Trade and Industry (DTI). The DTI is the lead
agency charged with promoting BPOs in the country.
The DTI defines BPOs as: “the delegation of service-type business processes
to a third-party service provider.” (DTI 2003b). This was derived from Gartner
Dataquest’ definition of BPOs as:
“the delegation of one or more IT-intensive business processes to an external
provider that, in turn, owns, administrates and manages the selected process
or processes based on defined and measurable performance metrics.” (DTI
2003a)
Accordingly, BPO service offerings are categorized into four:
• Supply chain management - includes activities such as
transportation and logistics, direct procurement, and warehouse and
inventory management.
• Operations - include activities such as research and development
and contract manufacturing, which accounts for over 50 percent of the
BPO market today.
• Business administration - includes activities such as finance and
accounting, human resource, billing and payment services, indirect
procurement, and administration services such as claims and policy
processing.
• Sales, marketing, and customer care - includes activities such as
customer selection, acquisition, retention, and extension.
Figure 6. Gartner’s BPO model
Source: www.outsourcingproject.com as cited by DTI (2003b).
235
Of these four, the last two (business administration; sales, marketing, and
customer care) follow more closely the DTI’s definition of BPO activities (Figure
7). There are three key elements of this BPO definition:
1. It is limited to service-type activities, specifically business support
services and sales-related functions.
2. These activities should be IT intensive.
3. These activities should be outsourced.
Figure 7. Limiting BPO definitions: services-oriented and IT-enabled
Source: www.outsourcingproject.com as cited by DTI (2003b).
Specifically, BPOs, as defined by the DTI, includes the outsourcing of the
following IT-intensive activities:
• business administration (e.g., administration, finance, HR, billing,
indirect procurement, and payment services)
• sales, marketing, and customer care (e.g., contact centers, customer
selection, acquisition, retention, and extension).
Outsourcing and Offshoring
As domestic outsourcing developed into offshoring, the overlap has created
confusion—especially with their many derivative terms (e.g., insourcing, rightsourcing,
nearshoring, etc.). A large reason for the confusion can be traced to the observation
that domestic outsourcing eventually also leads to offshore outsourcing.
On the other hand, in the search for cost savings, not all business processes
that migrate to least-cost countries are outsourced. Companies can choose to
still do these service activities internally (i.e., assign these to an affiliate). This is
variously referred to as offshoring, intrafirm (captive) offshoring, or captive shared
service centers.
236
What is emerging, therefore, is a mix of choices open to companies—to
outsource or to perform the activities internally, do them in their home countries,
or locate these activities abroad.
The UNCTAD illustrates these options clearly in Table 4. The Philippine
Government is promoting the country as a destination not just for outsourced or
third-party BPOs, but also for captive shared service companies. Examples of
internalized offshoring in the country include the shared service centers or the
regional headquarters of Proctor & Gamble, Maersk, and Flour Daniels (its design
and engineering center). On the other hand, a primary example for outsourced
offshore operations is generally the call center.
Table 4. Offshoring and outsourcing: some definitions
Internalized or Externalized Service Production
Home
Country
Externalized (Outsourced)
Production kept in-house at home
A computer company contracts a call
center company to handle its technical
support. Call center is located in
Minnesota.
Foreign Country
(Offshore)
Location of Service Production
Internalized
Company consolidates all HRrelated data encoding functions of
affiliates worldwide in the
Philippines. Example: P&G and
Maersk shared service centers in
Manila
Emerson (a US industrial company)
contracts SYKES (a call center firm) to
handle its technical support. Call center
is based in Pasig City, Philippines.
Source: Adapted from UNCTAD (2004).
GROWTH OF BPO WORLDWIDE
Figure 8 illustrates the definitional problems discussed in the previous sections,
as they apply to estimating market size. Outsourced activities cover not only
services. As mentioned earlier, outsourcing started in the manufacturing sector.
Moreover, another problem is that not all service activities are outsourced; as
discussed earlier, service activities can be done inhouse—right in the domestic
premises of a particular company or in the facilities of an overseas affiliate (e.g.,
under the captured concept or shared services concept).
As result of this definitional problem, 2 it is difficult to pinpoint exactly the
actual size of the global (or even domestic) BPO market. Several other reasons
account for this, including:
2
For a full discussion of these issues, please see the Manual on Statistics of International
Trade in Services, prepared by the Department of Economic and Social Affairs, Statistics
Division of the United Nations, Statistical Papers Series M No. 86 (2002).
237
Figure 8. Locating BPO
•
•
•
Service activities—being generally intangible products—are difficult to
track (compared with goods).
There is still no central source of information for services trade.
Especially for global BPOs, services can be delivered through various
modes—cross-border supply, consumption abroad, investments, or
movement of natural persons.
Moreover, it must be noted that available estimates of BPO market size
and growth currently originate from consultancy firms with specialty IT-related
research product offerings. These include Gartner Dataquest, International Data
Corporation (IDC), and McKinsey. IT-related magazines and publications, such
as ComputerWorld, also monitor BPOs. In the absence of centrally reported
secondary information and given the ambiguity that still surrounds BPO definition,
available numbers on BPOs are generated mainly through surveys. Since most
reports of consultancy companies are proprietary in nature, these reports—
including sections detailing methodology—are not fully available for public
scrutiny. Thus, in using currently available estimates, readers should be conscious
that these generally originated from consultancy companies with products and
services that also promote BPOs.
Moreover, these monitoring activities follow a demand-driven calendar.
These are rather expensive exercises, and sponsoring institutions recover their
investments by market-based mechanisms.
238
Market Size and Projected Growth
Market for outsourcing
Gartner Dataquest—as cited by the Information Technology and Electronic
Commerce Council (ITECC)—estimated the global market for outsourcing at
around US$495 billion. This figure includes both manufacturing and service
activities—those that are IT-enabled and those that are not.
Those that are generally considered excluded from IT-enabled services are
manufacturing services (US$495 billion) and distribution and logistics (US$60
billion) (Table 5). On the other hand, service activities that can be fully enabled
by IT are about US$200 billion, which include: (a) administration, finance,
accounting, and human resource; (b) payment services; (c) manufacturing
services; (d) distribution and logistics; and (e) sales, marketing, and customer care.
The same report further highlighted the following:
• Demand for outsourced services would have more than doubled, from
US$208 billion in 1999 to US$543 billion in 2004.
• The biggest markets are the United States (US), followed by Europe, the
Asia-Pacific region, and Japan.
Table 5. Estimated market for BPOs
Service line
Administration/Finance/Accounting/HR
Payment services
Manufacturing services
Distribution/Logistics
Sales/Marketing/Customer Care
Total
Estimated market (US$ billion)
130
40
235
60
30
495
Source: Author’s estimates based on graphs cited by the ITECC from the Gartner Dataquest research.
Market for IT-enabled services
Expectedly, to date, the Indian umbrella organization of IT and IT-related
industries—the National Association of Software and Service Companies
(NASSCOM)—has been the most active source information on IT-enabled
services, including BPOs. NASSCOM has conducted major studies on IT and ITenabled services with a number of consulting organizations, most notably
McKinsey. Two of these studies are among the most commonly quoted in
literatures about BPOs: the 1999 study “The Indian IT Industry” and the 2003
follow-up study “India IT Strategies.”
Citing the 1999 NASSCOM-McKinsey study, the DTI placed the global market
for IT-enabled services at around US$141.2 billion (Table 6).3 Data search,
3
2002 market size, as projected by the 1999 McKinsey Study.
239
Table 6. Global market for IT-enabled services (2002 estimates)
Service line
Customer interaction services
Finance and accounting services
Translation, transcription, and localization
Engineering and design
Human resource services
Data search, integration and management
Remote education
Networking consulting and management
Website services
Market research
Total
Estimated global market (US$ billion)
33.0
15.0
2.0
1.2
5.0
44.0
18.0
15.0
5.0
3.0
141.2
Source: NASSCOM McKinsey study, The Indian IT Industry, as cited by DTI (2003a).
Table 7. Projected 2005 market of IT-enabled services (in billion US$)
Service line
Inbound call centers
Engineering and design
Credit/debit card services
Payroll services
Web sales and marketing
Benefits administration
Telesales/telemarketing
Billing services
Database marketing / customer analysis
Claims processing
Total
Low
High
70
65
45
30
30
25
20
15
15
10
325
75
70
50
35
35
30
25
20
20
15
375
Source: NASSCOM-McKinsey follow-up study, Indian IT Strategies, as cited by DTI (2003a).
integration, and management is the biggest segment followed by customer
interaction services, remote education, network consulting and management,
and finance and accounting services.
However, in the follow-up report of NASSCOM-McKinsey, the global market
for IT-enabled services was projected to reach between US$325 billion and
US$375 billion by 2005 (Table 7).
In its studies, McKinsey (2002) follows industry convention and defines
the segments of BPOs or IT-enabled services as:
• HR – human resource services, payroll
• customer care – call centers, remote maintenance, support centers
• payment services – back-office operations
240
•
•
•
content development and others – digital content development,
engineering and design, geographic information system (GIS), Web site
services
administration – data processing, medical transcription, insurance
claims processing
finance – revenue accounting
Market for BPOs
BPOs are, strictly speaking, that subset of IT-enabled services that are outsourced
(i.e., as compared to captive IT-enabled services or shared services). McKinsey
& Co. projects that the global BPO market will reach US$180 billion by 2010
(DTI 2003a).
Summary of global market sizes
Regardless of how BPOs are defined or how the size of the market is estimated,
all the reports consistently point to the growing market for BPOs. Thus, from a
policy perspective, assuming there are no regulatory changes in other countries,4
the Philippines can expect a continually growing global demand for BPOs. This is
true considering that even at the low-side estimate of a US$180 billion global
BPO market by 2010, the country’s present BPO size of about US$1.7 billion5 is
still less than a percent of this projected market size.
Based on publicly available information, Table 8 presents a summary of
the market size of outsourcing, IT-enabled services, and BPOs as reported by
various consulting companies.
Figure 9. Global BPO market by 2010
Source: McKInsey & Co., as cited by DTI (2003a) and San Agustin (2004).
For example, in the US, legislative bills have already been filed against outsourcing of
federally funded projects.
5
Excludes accounting, finance and administration (including HR), and shared services.
4
241
Table 8. Market size of outsourcing, IT-enabled services, and BPO
Garner Dataquest*
Outsourcing
US$208 billion in 1999;
US$495 billion in 2004
IT-enabled services
US$200 billion in 2004***
BPOs (outsourced ITenabled services)
*
**
***
McKinsey**
US$141.2 billion in 2002;
US$325 billion to US$375
billion by 2005
US$180 billion by 2010
As cited in various reports of the DTI and ITECC.
Based on original reports and as cited by the DTI and ITECC.
Includes the following: (a) administration, finance, accouting, and HR; (b) payment services; and
(c) sales, marketing, and customer care.
Market for offshored BPO
It is important to note, however, that while the total global demand for
outsourcing, IT-enabled services, and BPOs is undoubtedly large, only a portion
of this is offshored. As reported in the 2003 E-commerce Development Report
of the United Nations, the following are some estimates of BPO offshoring:
• Only 1-2 percent of all BPOs were offshored in 2001.
• Global service exports totaled US$32 billion in 2001, with Ireland
accounting for over one-fourth of the total.
In terms of FDI projects in 2002-2003 on export-oriented services, 90
percent originated from developed countries.6 However, more than half of these
investments went also to developed countries, with Ireland and Canada as
primary destinations.
All these indicate that there is still room for growth in international
offshoring in services, especially to less developed countries. For example,
even among the 1,000 largest firms in the world, only 30 percent have so far
offshored service activities to low-cost countries. Many of the remaining 70
percent, however, have plans to follow suit.
Those that took advantage of cost savings from offshoring are mainly USbased companies. However, European companies—especially those from the
United Kingdom (UK)—are starting to be receptive to the idea. In a 2004 study
jointly undertaken by the UNCTAD and the Roland Berger Strategy Consultants,
about 83 percent of large European companies with offshoring activities were
found to have been satisfied with the experience. Only 3 percent were dissatisfied
6
Firms from the US dominated, with two-thirds of all export-oriented information and
telecommunication service projects, 60 percent of call center projects, and 55 percent of
shared-services projects.
242
while 44 percent of the companies interviewed planned further offshoring in
the coming years. This will most likely push other firms to look into offshoring as
a competitive strategy.
UNCTAD expects fastest growth in offshoring IT-enabled services. It is
forecasted to expand from US$1 billion in 2002 to US$24 billion in 2007
(UNCTAD 2003).
The overall general conclusion is that offshoring is still far from its mature
stage, thus it is still too early to predict its pattern of growth and favored country
locations. One of the earliest studies on offshoring was undertaken by the World
Bank in mid-1990s. The research suggested that between 1 percent and 5
percent of total jobs in G-7 countries could be affected by offshoring.7 In more
recent estimates done by business research groups, the following points were
arrived at (UNCTAD 2003):
• About 3.4 million service jobs may shift from the US to low-income
countries by 2015.
• Another study said that 2 million offshored jobs could be created in the
financial services industry alone, and that the total number of jobs
affected for all industries could be in the area of 4 million.8
Main Drivers for Growth
Many companies have decided to outsource for a number of reasons (DTI 2003b):
• to improve speed-to-market and competitiveness;
• to focus on core competencies;
• to access intellectual capital, scarce skills, and resources with no longterm investment; and
• to have more disciplined processes, shared risks, and partnerships in
the transformation to e-business.
However, the main driver for offshore outsourcing remains to be related to
cost considerations. In a survey done in the US by Computerworld, the following
are the reasons why companies outsource to non-US locations9: (1) reduce/
control costs (44%); (2) free up internal resources (20%); (3) gain access to
world-class capabilities (13%); (4) increase revenue potential (13%); (5) reduce
time to market (11%); (6) increase process efficiencies (11%); (7) follow company
philosophy of outsourcing noncore activities (11%); and (8) compensate for
lack of appropriate skills (8%).
They defined such activities where long-distance provision is technically feasible and cost
savings of up to 30-40 percent is possible.
8
While this figure may seem large, it should be compared with an average turnover of 4
million jobs every month in the US.
9
Based on a survey of 252 corporate IT managers in the US, respondents were asked to
select the three most important reasons. Source: Computerworld and InterUnity Group Inc.
(April and May 2003).
7
243
Analysts’ (e.g., Neo IT) estimates, as well as the 2003 UN E-commerce
Development Report, determined a cost savings of up to 40 percent for offshoring
service activities. However, not all service activities can be offshored. There are
several reasons cited by the report for this, including the following:
• For certain services, proximity to markets, interaction with customers,
and trust and confidence outweigh the possible benefits of an
international division of labor.
• Technological limitations cannot be discounted as it is not possible for
all service functions to be digitized and/or separated from related
activities.
• Some businesses will continue to need localized services or person-toperson contact for exchanging highly confidential information or for
adapting to rapidly changing customer needs.
• Regulations and legal requirements (e.g., regarding privacy) may also
raise transactions costs and limit international trade in services. Certain
services, such as insurance and banking, are required by law in some
countries to be provided by companies established locally.
• The lack of international recognition of professional qualifications is
another obstacle, as is the lack of globally agreed privacy rules.
• Some international locations also lack the capacity to host offshored
service activities. These include the supply of reliable
telecommunications infrastructure, appropriately educated workers,
rising wage costs, and high levels of attrition in the fastest growing
destinations, all giving rise to shortage risks, at least in the short run.
• TNCs, too, have different perceptions of the risks and benefits of
offshoring services and some are reluctant to do so.
THE PHILIPPINE BPO INDUSTRY
Main Segments
The Philippine Government has identified 10 export-oriented product groups
that it will actively promote and assist—dubbed as “10 Priority Revenue Streams.”
BPOs are lumped together under the IT-enabled services sector. Through the
DTI, the government is actively pushing for the following specific subsectors:
• Contact centers - A physical location where calls are placed or received
in high volume for purposes of sales, customer service, technical
support, research, and others.
• Medical transcription - Process of interpreting/encoding electronically
the oral dictation of health professionals regarding patient assessment,
therapeutic procedures, diagnosis, and so forth.
• Animation - The process of giving the illusion of movement to
cinematographic drawings, models or inanimate objects thru 2D, 3D,
etc.
244
•
•
Shared financial and accounting services - System of centralization/
distribution where an independent business unit is dedicated to
providing process- or knowledge-based financial services to other
business units.
Software development services - Analysis and design, prototyping,
programming and testing, customization, reengineering and conversion,
installation and maintenance, education and training of systems
software, and middleware and application software10.
In as much as these IT-enabled services can also be outsourced, these
coincide with the sectors promoted under BPOs. For the Philippines, what is
critical is that these are offshored service activities, regardless of whether these
are captive (insourced or shared services) or the third-party (outsourced) type.
The distinction may, however, be critical in certain policy decisions (i.e., the
policy instruments used to attract shared service BPOs may be different from
third-party BPOs). Captive offshore service activities can be attracted to the
Philippines through investment policies (Mode 3: Commercial Supply), while
promoting third-party offshore outsourcing will be through service export policies
(Mode 1: Cross-border Supply).
Market Size and Structure
According to the DTI, the Philippine BPO sector reached a size of about US$1.655
billion in 2004, up from just about US$350 million in 2001 (Figure 10). It grew
Figure 10. BPO industry structure in the Philippines
In recognition of the country’s advantage, the DTI is also keenly promoting the engineering
design services sector (i.e., separately from software development and shared services).
10
245
by an annual average of about 160 percent. The biggest subsector is customer
care (call centers) at US$864 million in 2004, followed by medical transcription
at US$483 million, software development at US$268 million, and animation
at US$40 million (Table 9).
All of the BPO sectors registered cumulative growth rates of over 25 percent
from 2001 to 2004, with medical transcription growing fastest at 130 percent,
followed by call centers at 50 percent, software development services at 30
percent, and animation at 25 percent.
‘01
‘04
Growth
Contact
Centers
Medical
transcription
Animation
US$173 million
US$864 million
50% (CAGR)
US$40 million
US$483 million
13%
US$21 million
US$40 million
25%
“The Philippines
is set to be
among markets
for contact
centers in Asia
Pacific in the
next 5-7 years.”
$10-$16 billion
industry,
growing at a
cumulative
annual average
of 20 percent. In
the US, only 47
percent of the
market is
outsourced, the
rest is in-house.
Anticipated
surge as there
are hospitals that
have yet to
convert their
records as
required by law.
Global animation
revenues
projected from
US$16 billion to
US$50 billion
by 2004-2005
(~25 percent
p.a); new China
market for
education,
design, and
marketing
services.
Consolidation of
backroom
operations on a
regional level.
India moving out
of legacy
systems; ebusiness,
mobile
applications.
37 firms
Approximately
16 firms
Approximately
22 fims,
including 11
direct exporters
Approximately
5-6 Finance &
Administration
centers today +
other backroom
operations
Approximately
52 BOIregistered firms
and 24 PEZAregistered firms
Current Players
Trends
Philippines
Table 9. Summary of Philippine BPO segments
Shared financial
Software
and accounting development
services
services
No data
US$115 million
US$268 million
30%
246
Services ethic/
attitude (vis
India); cost,
turnover (vis
Australia);
language (vis
China).
Familiarity with
medical
standards,
terminology and
practices of the
US; pool of
health-related
skilled workers.
We are
considered a
competency
center for
intangibles such
as artistry,
creativity (vis
India), ability to
interpret cultural
nuances (vis
China, Korea,
Taiwan).
US, UK
US
a. Entertainment
– US, Japan
and Australia/
Canada/
France
b. Education/
business;
Malaysia,
China, Korea,
Thailand
Existing market
The Philippines’ value proposition
Regional HQs–
in HK/
Singapore;
Financial
Community
(East Coast,
Brussels)
US/India (as
locators/sellers),
Corporate US
(as buyers),
Singapore (as
partner for India/
China and the
US)
Source: DTI (2003a).
Call centers
The Philippines is widely recognized as the emerging best location for call centers,
serving as a credible challenge to India and Australia. Its call center industry
size, measured in terms of number of seats, is projected to have jumped by 100
percent from 20,000 in 2003 to about 40,000 in 2004. This placed the
Philippines directly behind Australia, India, and China.
The external market opportunities for the country, in terms of the call center
industry, remains strong as offshoring gains momentum and as off-shored call
centers from more costly countries, such as Ireland and Canada, are attracted
to the Philippines.
247
Table 10. Comparative call center industry sizes in Asia (in number of seats)
Country
Australia
India
China
Philippines
New Zealand
Thailand
Singapore
Hong Kong
Total
2003
2004
Growth (%)
135,000
96,000
38,000
20,000
12,000
11,000
10,000
10,000
332,000
146,000
158,000
54,000
40,000
13,5000
13,000
10,100
10,700
445,300
8
65
42
100
13
18
1
7
34
Source: www.callcenter.com as cited by San Agustin (2004).
The surge in the growth of medical transcription is, however, mainly due to a
unique opportunity offered by federal regulation in the US that required hospitals
to store digital copies of patients’ records. While demand will stabilize in the
medium term, the Philippines’ share of about US$483 million is still very small
compared with the potential market size estimated by the DTI at about US$10
billion to US$16 billion. Moreover, as the US health care system further discovers
the benefits of offshoring, which will result in outsourcing other administrative
aspects of their operations aside from patients’ records, it is expected that the
potential market will expand.
The main advantage of the Philippines is again its telecommunications
infrastructure, labor, and reasonable office rental fees. For labor, the Philippines
is an attractive location because of its global reputation for health professionals.
A basic knowledge of medical terms is critical for medical transcription.
On the downside, the technological trend is toward the development of
automatic voice recording systems that could make human intervention in
certain portions of the transcription process unnecessary. However, these
technologies may still take several years before they can be fully applied in the
context of medical transcription.
Animation, shared services, and software development
Call centers and medical transcription alone account for more than 80 percent
of total IT-enabled services/BPO revenues. The other 20 percent is shared by
animation, shared services, and software development.
The country’s creative talents are recognized globally and are well suited
for computer animation. But the industry is still at the level of 2D computer
animation while India is already at the 3D level. The biggest stumbling block is
the high cost of computer hardware and software. It is estimated that a computer
seat—hardware plus software—for 3D animation will cost from US$3,000 to
US$6,000. Aside from India, Canada is also a major player in computer animation.
248
However, the country can exploit a particular niche in computer animation—
content development for educational purposes. There is a growing market for
English-based educational content materials for Asian countries such as China,
Taiwan, and Korea.
The Philippines has tremendous potential as a location for shared service
operations in the area of finance and administration. A key reason is the educated
workforce. For example, in accounting, the Philippines has been a constant
source of accountants for overseas assignments.
It is already host to certain shared services functions for such companies
as Citibank (call center operation, systems development and support), Procter
and Gamble (finance and administration, IT), Maersk (finance and
administration), Caltex (finance and accounting), and Fluor Corporation
(engineering design), among others. Table 11 lists all the foreign companies
with shared service operations in the Philippines.
Table 11. Representative foreign companies with IT-enabled activities in the
Philippines
Company
Activity
Market
US Companies
America Online (AOL)
Customer relationship management/
Customer contact center
North America
Accenture
Management consultancy, market
technology solutions
Worldwide
Barnes and Noble
Inventory management; online
purchasing
North America,
France
Caltex
Finance and accounting shared
services
Southeast Asia
Citibank
Systems development and support
Fluor Corporation
(Fluor Daniel Philippines)
Regional engineering design work for
engineering, procurement, and
construction (EPC)
Global research and applications
development center (finance, supply
chain management, etc.)
Customer contact center
Asia-Pacific and
Asia Eastern Block
100 percent export to
Japan
James Martin
(Headstrong Philippines)
SYKES
European firms
Alitalia
Business process outsourcing
International Red Cross
80 percent exported
Worldwide
North America and
Asia-Pacific
Asia, Middle East,
Nort and South
America
Worldwide
249
Company
Activity
Market
Japanese Firms
Sumitomo Group
Machinery design and software for Sumitomo Heavy Industries
Mitsubishi Heavy
Industries
Power plant and shipbuilding design (MHI Technical Services
Corporation)
JGC Philippines, Inc.
EPC (engineering, procurement and construction)
NEC Telecom
Fujitsu (Software)
Network software and telecom management systems development
Application software and middleware; microcoding for ICs
Tsukiden Group
Computer software development, LSI design, R&D
RP’S A
TTRA
CTIVENESS AS A BPO LLOCA
OCA
TION: INDUS
TR
Y
ATTRA
TTRACTIVENESS
OCATION:
INDUSTR
TRY
VAL
UE CHAIN
ALUE
Basic Value Chain Blocks
Based on interviews and past studies done on BPOs, the starting point of any
viable BPO industry chain, from a national perspective, include:
• a sizeable pool of qualified human resource;
• an efficient and cost-effective telecommunications infrastructure; and
• an adequate supply of building space equipped with the required IT,
telecommunications, and power infrastructure (Figure 11).
In selecting a BPO location, prospective investors place paramount
importance in these industry value blocks, which represent the three biggest
cost items of any BPO operation.
DTI reports a similar cost structure: salaries and benefits, 50 percent;
building and infrastructure, about 20 percent; and utilities and communications,
10 percent (Figure 12). Training and business trips were also cited as significant
cost items for BPOs.
In addition to these industry building blocks, the general environment must
likewise be conducive to the operation of BPO companies (i.e., to foster the
development of the needed building blocks). Critical considerations are:
• cultural affinity with the target market;
• continually growing educated workforce;
• geographic location yielding advantages to client company operations
(e.g., different and complementary time zones); and
• stable political and social conditions (e.g., political stability and physical
security).
250
Figure 11. BPO industry value blocks
Cultural, Demographic and Locational Factors
Qualified
Human
Resource Pool
Reputation
Utilities and
Appropriate
Office Space
Expertise
Financing
Technology
Infrastructure
Marketing and Promotion
BPO Service
Business and Political Environment
Figure 12. Structure of BPO costs
Others
Utility and
5%
Communication
10%
Training and
Business Trip
15%
Salaries and
Benefits
50%
Building/ Facility/ IT
Infrastructure Cost
20%
Source: DTI (2003b).
Lastly, as demonstrated by the Indian experience (i.e., through NASSCOM),
a strong and well-communicated country-positioning strategy is essential in
capturing international BPO projects.
These industry prerequisites (human resource pool, telecommunications
infrastructure, and utilities) and enabling environmental conditions
(socioeconomic and political environment) attract locators to consider a country
as a BPO site.
251
Table 12. Structure of BPO costs
Cost items
Share to total costs
(%)
Salaries and wages
Rent
Telecommunications
40-60
10-18
10-25
Sources: Selected financial statements from the Securities and Exchange Commission; interviews with the
following all in 2004: Mr. Cesar Tolentino, Research Analyst, XMG Asia Pacific; Mr. Raffy David, Director,
Pilipinas Teleserv, Inc. and Director, Contact Center Association of the Philippines (CCAP); and Mr. Jesus
M. Zulueta, Jr., Chairman, ZMG Signium Ward Howell.
In turn, the success of any BPO company, as an individual organization,
depends on the presence of critical entrepreneurial resources. Most critical
among these are access to financing, industry expertise, and proven track record
(i.e., a good reputation among client companies).
The Philippine Advantage
The sustainability of BPO growth in the Philippines can thus be looked at in three
levels:
1. Broad environment. The environmental conditions that will enable the
enhanced development of the industry.
2. Support industries. The presence of key industries and infrastructure
that will support the BPO industry.
3. Organizational resources. A specific BPO company’s access to
entrepreneurial resources that will allow it to succeed.
It must be emphasized that these three levels are dynamically interacting
with each other. For instance, the ability of BPO companies to access
entrepreneurial resources will be a function of the enabling conditions that
foster the development of the industry.
Broad environmental conditions
The broad environmental conditions facing any organization may be generalized
into two aspects—social and political. While the Philippines enjoys advantage in
the social aspect, it is least attractive in the political perspective.
Social environment
environment. The key advantages of the Philippines are its
cultural affinity with the major market (US) and its large population base and
healthy demographic structure. The country’s public education system can be
considered as the most significant legacy of the US, contributing to the historically
higher literacy rate in the Philippines compared to its neighbors. Most Filipinos
also have a functional level of English-speaking skill and are familiar with the
Western culture.
Based on the 2002 estimates of the World Bank, the illiteracy rate in the
Philippines is about 5 percent of the population above 15 years of age. This is
252
significantly lower than the average for all economies in East Asia and the Pacific
(13%) and for all lower-middle income countries (13%). The country is also the third
largest English-speaking population in the world, next to the US and UK.
The most important asset in any service-related industry is “people.” In this
context, the emerging major BPO locations are those countries with a large
population base—India, Philippines, and China. Should Indonesia and Vietnam
eventually pursue focused programs to promote the use of English, these two
countries can also attract serious attention as BPO locations.
Not only is the Philippines enjoying a robust population growth and level,
its demographic structure also ensures the continued flow of workers into the
labor force pool. For instance, while only 4 percent of Filipinos are above 65
years old, roughly 7 percent of the total global population is at this age range
(Figure 13). The situation is far worse for high-income countries, typically the
source of BPO projects, where about 14 percent of their population belongs to
the age group 65 years and above.
A large population base, while a necessary condition for BPO development,
should be complemented by a strong educational system. The Philippine public
and private university systems combined produces about 360,000 graduates
per year (Figure 14).
Among these graduates, an estimated 30,000 to 50,000 are technically
proficient workers (i.e., graduates of computer science and programming).
Another 50 percent of the total graduates are knowledgeable in fields commonly
required in BPO operations such as business administration, mass
communication, and other related courses (Figure 15).
Figure 13. Population structure by age
Source of basic data: World Bank Development Data Group.
253
Figure 14. Annual population of college students
Source: wwww.ched.gov.ph.
Figure 15. Graduates by discipline
Source: www.ched.gov.ph.
While the pool of university graduates remains stable, there are alarming
indications that the quality of graduates has been declining. This, as will be
discussed later, has already been affecting BPO companies in terms of the
difficulty in getting qualified applicants. What is more worrisome is that the
254
Table 13. Philippine labor pool statistics
Total number of graduates, 2002-2003
(approximate)
363,640 university graduates per year
Business Administration and Related Courses
Engineering and Technology
Math and Computer Science
Mass Communication and Documentation
106,559
45,041
33,059
5,140
Source: www.ched.gov.ph.
declining trend will most likely persist, which will further erode the competitive
advantage of the Philippines.
For instance, in key disciplines such as math and science, the Philippines
has been consistently placing near the bottom of international benchmark
studies. Math and science subjects help prepare students for employment in
higher value-added and more knowledge-based segments of IT-enabled service
industries. The results of the Trends in International Mathematics and Science
Study (TIMSS) of the Boston College serve as a good indicator. The TIMSS is a
competitive examination to test the general level of math and science
knowledge of specific grade levels of students. In the test for eighth grade
students, for example, the benchmark indicators show the Philippines near the
bottom (Table 14).
For instance, in 1999, the country ranked 36th out of 38 countries for both
math and science. In the latest study conducted in 2003 and released in
Table 14. Trends in the International Mathematics and Science Study, 1999 and
2003)
Philippines
Singapore
Korea
Taiwan
Hong Kong
Japan
Malaysia
Russia
United States
Phlippines’ score
International average
Source: Boston College (2004).
1999
Math Science
Rank out of
38 Countries
36
36
2
1
2
5
3
1
4
15
5
4
16
22
12
16
19
18
345
345
487
488
2003
Math Science
Rank out of
45 Countries
42
41
1
1
2
3
4
2
3
4
5
6
10
20
12
17
15
9
378
377
467
474
255
December 2004, out of 45 countries, the Philippines placed 41st for math and
42nd for science. On the other hand, neighbors like Taiwan, Korea, Singapore,
and Japan have consistently topped the TIMSS.
It is also interesting to note that Eastern European countries, in addition to
Russia (ranked 12th for math and 17th for science), are also getting high scores.
For example, in 2003, for achievement in math: Belgium placed 6th; Estonia,
8th; Hungary, 9th; Latvia, 11th; Slovak Republic 13th; and Lithuania, 16th, to name
a few. The same can be said of the science exams: Estonia placed 5th; Hungary,
7th; Slovenia, 12th; Lithuania, 14th; Slovak Republic, 15th; Belgium, 16th; and
Latvia, 18th.
These Eastern European countries will provide competition to the
Philippines, especially in the higher-end BPO segments, considering that the
next wave of BPO growth will most likely come from Western European countries.
Eastern Europe will surely take advantage of its increasing integration into the
European Community.
Political environment
environment. While the Philippines can still cope with the
negative outcomes of its deteriorating educational system, the impact of its
very fluid political environment is more immediate. Potential investors in BPO
services are worried about the political problems in the country, such as graft
and corruption, criminality, and threats to physical security.
For instance, again drawing on the Global Competitiveness Report 20042005 (Porter et al. 2004), the Philippines ranked 102nd for business cost of
terrorism (out of 104 countries), 83rd for business cost of crime and violence,
and 96th for business cost of corruption (Table 15).
Support industries
As mentioned, the key support industries for BPO services are
telecommunications, office space development, and utilities.
Telecommunications11. The Philippines is considered to have a relatively
good telecommunications infrastructure, both voice and data, as compared to
other countries in the Asia-Pacific region. There is redundant international connectivity,
including fiber optic cable and satellite communication. As a result, a significant
amount of trans-Pacific data communication bandwidth is easily available.
There is high-quality, low-cost bandwidth that is expanding the domestic
telecommunications network. Currently available are six platforms, consisting
of fixed line, cellular, cable TV, over-the-air TV, radio, and the very small aperture
terminal (VSAT) system.
During the past four years, the bandwidth cost has declined by 70 percent,
according to local IT service and contact center providers (DTI 2003a). In
addition, there are a number of international carriers for telecommunications
services, a solid competitive landscape for buyers.
Discussions on telecommunications and real estate were adapted primarily from DTI
documents.
11
256
Table 15. Ranking of the Philippines in political factors
Business cost
of tourism
United States
China
Canada
India
Australia
Russia
Indonesia
Hong Kong
Ireland
Thailand
Israel
Malaysia
Singapore
Czech Republic
Hungary
Philippines
New Zealand
Romania
Vietnam
97
45
68
71
55
92
88
20
13
85
103
73
76
43
14
102
16
38
58
Business cost
Business cost
of crime and
of corruption
violence
(Ranking out of 104 countries)
21
18
51
66
27
20
22
54
19
4
70
100
65
72
4
11
40
17
33
48
13
8
23
38
5
10
59
82
47
63
83
96
18
2
54
95
43
73
Source: Porter et al. (2004).
The Philippine telecommunications market, compared with India, also
offers lower prices (30-50%), shorter procurement times (3 weeks as opposed
to 3 months), and less transmission delay.
Tables 16 and 17 provide further information on the competitiveness of
the Philippine IT infrastructure in comparison with other countries.
Real estate
estate. The Philippines has readily available locations and
infrastructure to support the IT-enabled services industry. The primary physical
locations where enterprises would most likely operate are located within and
around the capital city of Manila. The options are primarily focused in five physical
locations:
• Metro Manila, specifically the central business district of Makati, and
Ortigas, Filinvest Alabang, and Fort Bonifacio;
• Technology parks located within Metro Manila (i.e., predominantly
suburban locations just outside Manila);
• The two repurposed military bases located two or three hours outside
of Manila (Subic and Clark);
• Established regional growth centers, especially Cebu in the Visayas
and Davao in Mindanao; and
257
Table 16. Competitiveness of Philippine IT infrastructure
Philippines
India
China
Singapore
Hong Kong
Thailand
Indonesia
Vietnam
Japan
United States
Broadband Specialized Competition Gov’t online Laws on Gov’t
priority
Internet
IT services
in ISPs
services
ICT
on ICT
access
4.6
4.4
2.3
4.1
3.6
4.6
4.3
5.6
4.5
3.9
3.2
5.8
3.5
5.3
3.7
3.5
2.9
4.3
6.4
5.4
6.2
5.3
5.2
5.8
6.1
5.7
4.7
5.3
5.3
6.0
5.1
4.9
3.2
3.5
3.9
3.9
2.8
3.7
4.2
2.0
3.4
4.0
2.8
4.7
2.7
2.2
2.7
3.4
4.8
3.2
4.2
5.3
3.3
5.7
5.3
5.9
5.4
5.4
5.7
6.6
Source: World Bank Development Data Group.
Table 17. Key ICT indicators: Philippine vs. India and the United States
Philippines
ICT infrastructure and access
Telephone lines per 1,000 people
Country
In largest city
Waiting list (in ‘000)
Revenue per line ($)
Cost of local call ($ per 3 min.)
Mobile phones per 1,000 people
International telecoms
Outgoing traffic (min. per subscriber)
Cost of call ($ per 3 min.)
Computers and the Internet
Personal computers
Per ‘000 people
Installed in schools (‘000)
Internet
Users (‘000)
Monthly off-peak access charge
Service provider charge ($)
Telephone usage charge ($)
India
United
States
42
265
-721
-150
38
136
1,649
198
0.02
6
667
--1,566
0.09
451
49
4.8
14
3.2
156
--
21.7
77
5.8
239
625.0
16,322
2,000
7,000
142,823
23.9
--
10.0
0.2
5.5
3.5
258
Table 17. (continuted)
Philippines
ICT expenditures
Total ICT ($ million)
ICT as % of GDP
ICT per capita ($)
3,131
4.2
40.5
India
19,662
3.9
19.0
United
States
812,635
7.9
2,923.8
•
Geographic centers of academic activity, such as (in addition to the
locations mentioned so far) Baguio, Naga, and Dumaguete.
“Ready-to-occupy” locations are available, especially in Metro Manila. Due
to the Asian economic crisis of 1997, the Philippines has an overcapacity of real
estate space. As a result, the price of commercial real estate is quite low
compared with equivalent options in Bombay, India. All other destinations
compare favorably with the Philippines.
Utilities
Utilities. The Philippines, however, has one of the highest tariffs for electricity
rates in Asia. Though not often cited, the high power rates is a source of disadvantage
for BPO companies that must continuously operate all day, seven days a week, at
climate-controlled environment (i.e., air conditioned). With power rates accounting
for roughly 10 percent of total operating BPO cost, any improvement in this area will
lead to additional cost advantages for Philippine BPOs. Possible measures, in the
short term, could include “peak-load” pricing for electricity consumption. This will
mean lower electricity bill for BPOs at night, coinciding with the complementary time
zones of the Philippines and the US.
Organizational resources
Ultimately, the success of any BPO company will depend on the firm’s access to
financial and human resources.
Financial resources
resources. Investing in a BPO project requires considerable
amount of capital. For instance, a call center project would need about
US$10,000 per seat. Thus, a modest 100-seat call center will require an
investment of about US$1 million. At an exchange rate of US$1 to PhP55, this
means that a startup call center will need PhP55 million. Payback can, however,
be very attractive. Based on estimates, one call center seat can earn a net
income anywhere from US$1,000 to US$2,000 per month.
Investments for other BPO services are much higher. Animation companies,
for example, need to invest as much as US$3,000 to US$6,000 per seat. This
covers both hardware and software components needed for intricate 3D designs.
Given the high investment levels and risky nature of BPO projects, financing
comes only from any of following:
259
Figure 17. Venture capital availability
Source: Porter et al. (2004).
•
•
•
foreign-based BPO companies wanting to establish service base in the
Philippines (e.g., e-Telecare, SYKES);
global companies wanting to consolidate service activities in a regional
office (e.g., Citybank, Maersk); and
venture capitalists.
For a Filipino company wanting to open a BPO business, venture capitalists
can be the only source of financing. However, access to venture capital is quite
difficult in the country. In contrast, India already has a number of indigenous BPO
companies (e.g., Daksh was an Indian-owned company before it was bought by
IBM). Entrepreneurial financing for these companies were primarily from Indian
technology professionals who migrated to the US but came back to India to
jumpstart the country’s entry into IT-related ventures.
Human resources
resources. The competitiveness of the Philippines in attracting
BPO projects rests in its proposition of lower cost BPO professionals armed with
university degrees. In fact, a call center agent’s salary (entry level) in the Philippines
is one of the lowest in the region, bested only by India and matched by China
(Table 18).
Philippine wages are competitive not only for call center operations but for
BPOs in general. In 2003, for example, among business workers, the average
base wage for the Philippines is about US$234 per month—the third lowest in
Asia (Figure 18). India, however, is still more competitive at US$150 per month.
With salaries and wages taking anywhere from 40 percent to 60 percent of total
BPO costs, savings in salaries of BPO agents are very attractive to foreign
companies.
The Philippines’ competitiveness rests not only on cost considerations.
Overall, Philippine labor force cost and quality compare favorably with China,
260
Table 18. Annual average salary of call center agents, 2004-2005
Salary (in US$)
United States
Phlippines
India
China
Hong Kong
Malaysia
Singapore
Thailand
25,000
2,828
1,689
2,804
16,438
3,960
11,748
3,949
% of US salary
1.00
0.11
0.07
0.11
0.66
0.16
0.47
0.16
* estimates, average of entry-level agent and with experience.
Source: 2003 Call Centre Benchmarking Study, as cited by Huang (2003).
Figure 18. Comparative labor costs
but at a disadvantage with India—especially for the higher value-adding IT skills.
San Agustin (2004) summarized the research results of three different business
consulting companies and call center-specific Internet resource, namely, NeoIT,
Political and Economic Risk Consultancy, Ltd., and ContactCenterWorld.com
(Table 20).. The only advantage of the Philippines over India is its cultural affinity
with the US, currently the biggest BPO market. Thus, overall, the Philippines
would be more suited for BPO activities that require customer interaction, while
India would be more suited for backroom operations.
However, the main factor that attracts BPO projects into the country is the
very same one that defines the industry’s critical limits. The most pressing problem
of BPO companies today is their ability to attract and retain qualified BPO
261
Table 19. Philippine wage rate statistics (2003 estimates)
Wage rate for contact center agent
Wage rate accountant
Wage rate for accounting clerk
US$200-US$300 per month (i.e., entry level)
US$300-US$380 per month (i.e., with some type of vertical expertise)
US$300-US$500 per month
US$150-US$200 per month
Table 20. Overall comparison of labor force attractiveness
Overall
labor force quality
India
Philippines
China
Highly
suitable
Highly
suitable
Unsuitable but
quality is improving
Skill
neoIT*
PERC**
CCW***
Good
Good
Good
Fair
Fair
Good
Poor
Fair
Fair
English
proficiency
neoIT
PERC
CCW
Good
Good
Good
Good
Good
Good
Poor
Poor
Poor
Cultural
affinity
neoIT
CCW
Fair
N/A
Good
Good
Poor
Poor
*neoIT is a BPO consultancy company; **PERC is Political and Economic Risk Consultancy, Ltd.; ***CCW
is ContactCenterWorld.com.
Source: San Agustin (2004).
professionals—from call center agents, to computer animation artists, to
transcribers, and others. This is a common concern for the whole industry.
This situation was brought about by the rapid growth of the industry, leading
to supply-side bottlenecks. The demand for ICT-enabled workers, where BPO
professionals belong to, had grown by 87 percent from 2003 to 2004; for
2005, it is projected to increase by another 47 percent (Table 21).
Consistent with industry market growth, demand has been strongest for
transcribers (including medical transcriptionists), followed by call center agents
(Figure 19).
The problem, however, is that the growth in demand for BPO professionals
cannot be matched by the available supply of qualified applicants. In 2003,
based on a 2004-2005 study by the Information Technology Association of the
Philippines (ITAP), the acceptance rate among applicants for BPO positions
ranged from 2 percent (for software development) to 17.3 percent (animation).
These relatively low acceptance rates were aggravated by high turnover rates—
ranging from 7 percent (call centers) to 19.4 percent (animation) (Table 22).
More recent estimates of acceptance and turnover rates, however, paint a
graver situation for BPOs—particularly for call centers. The main challenge for
262
Table 21. Workforce demand for IT workers
Workforce demand for IT workers
2003
2004
2005
No. of workers
ICT-enabled
ICT providers and non-ICT entities
Total
41,800
70,165
111,965
Growth rate (in %)
ICT-enabled
ICT providers and non-ICT entities
Total
78,351
82,565
160,916
115,324
92,072
207,396
87
18
44
47
12
29
Source: ITAP (2004).
Figure 19. ICT workforce demand growth, 2004-2005
the Philippines’ emergence as a regional leader in call center operation is the
shortage of qualified agents. From the 7 percent acceptance rate reported by
the ITAP study, early 2004 estimates point to just 2 percent acceptance rate.
Toward the end of 2004, some of the biggest call centers were reporting an
acceptance rate of just about 1.6 percent.
A key weakness of applicants for call center positions is their Englishlanguage proficiency. Although the development of software-aided language
training programs can remedy this, only those at the “high-failure” level can
viably be trained at the moment. “High-failure” refers to the upper percentile of
those who failed in call center application exams.
Employee turnover is also becoming a problem for call centers, with some
experiencing attrition rates of 2 percent per month. During the first quarter of
2005, big call centers experienced annual turnover rates of above 40 percent.
263
Table 22. Average acceptance and turnover rates by industry, 2003
Rate ( %)
Acceptance
Turnover
Animation
Manufacturing (ICT)
Real estate, business services
Software development
Telecoms, media and entertainment
Systems integration
Wholesale, retail trade
Data transcription / conversion
Trade services (ICT)
Financial services
Contact center
Others (non-ICT)
Education (non-ICT)
Manufacturing (non-ICT)
Education (ICT)
Government
17.3
1.8
2.0
8.9
6.1
11.5
9.5
6.6
10.1
3.3
3.8
13.8
8.5
5.4
24.8
19.4
17.6
15.0
13.5
12.1
11.7
11.4
10.3
9.0
9.0
7.8
7.0
7.0
5.5
4.3
2.3
1.2
It must be noted, however, that even among call centers, attrition can vary
greatly depending on the type of client accounts being serviced by the agents.
For example, retailing companies (e.g., K-mart) and credit card accounts are
high-tension assignments where agents have to deal with difficult customer
complaints. In these key accounts, attrition can be higher.
The main factors that cause higher labor costs are the increasing costs of
recruitment, selection, hiring, and retention of qualified employees. With low
acceptance rates and high turnover rates, competition among call centers for
new employees and experienced ones has been bidding up industry salary and
wage levels. As a result, call centers are resorting to wage premiums for
“international call center experience” and to signing bonuses, having multiple
locations14, conducting inhouse pre-employment training, and giving more
benefits (e.g., educational opportunities).
Summary of Philippines’ attractiveness as a BPO location
Based on interviews and a review of past BPO researches in the Philippines, the
main criteria used to evaluate the competitiveness of the country as a BPO
offshore location includes the quality and availability of human resources, cost
Having multiple locations increases the chance of recruiting qualified candidates or
applicants from the catchment area.
14
264
of doing business, infrastructure and utilities, and the business environment
(DTI 2003a) (Table 23). Francis Huang of SGV’s Knowledge Institute,, in a 2003
study on call centers, identified “international awareness” as a factor (Table
24). McKinsey, on the other hand, in a 2002 study, identified “country
attractiveness” and “people attractiveness” as major factors.
Table 23. DTI’s factors for Philippine BPO competitiveness
Factor
Determinants
Quality of human
resource
Availability of qualified and educated staff
Access to multilingual skills: English and other regional languages
Cost of doing
business
Flexibility of labor (labor laws, workforce attitude)
Labor cost
Infrastructure
and utilities
Property and telecommunications costs
Availability and reliability (telecommunications)
Office space or building with backup power supply
Business
environment
Easy access (local and international)
Support services (recruitment, setting up, telecommunications)
Stability, reliability, etc.
Data protection
Bureaucracy
There is convergence in the assessment by analysts of the relative advantage
and disadvantage of the Philippines in comparison with the leading BPO destination—
India. Two assessments are presented here—one performed by a local consulting
company and the other by an international consulting company.
SGV’s Knowledge Institute found that the Philippines’ main attraction is
based on its more developed telecommunications infrastructure, which can be
attributed to previous government efforts to liberalize the industry. Meanwhile,
in terms of labor, India has a higher cost advantage than the Philippines due its
bigger population base (Table 25). Key technical skills—e.g., software skills—are
also more developed among Indian BPO professionals. Filipinos, on the other
hand, have the edge in soft or people skills, for example, its cultural compatibility
and English adaptability, which are highly suited for the US market.
A broadly similar assessment was arrived at by AT Kearney, a globally
recognized BPO consultancy research firm. It cited the Philippines as very strong
in financial structure, next to India (Table 26). Again, this can be traced to the
relatively lower wages and cost-effective telecommunications infrastructure in
the Philippines. The size and skill of available manpower were, however, rated
much lower than India. But, by far, the biggest drawback of the country is its
Table 24. SGV’s Knowledge Institute’s factors for Philippine BPO (call center)
competitiveness
Determinants
Factor
People
Educational level
Size / depth of labor pool
English literacy / accents
Retention levels
Cost
Cost of labor
Cost of infrastructure
Real estate
Telecommunications facilities
Government incentives
Environment
Country risk (peace and order)
Cultural compatibility
Friendliness to expats
International
awareness
Trade missions / Institutional marketing
Presence of industry groups
Track record
Source: Huang (2003).
Table 25. Factors for Philippine BPO (call center) competitiveness
Factor
Philippines
India
Overall cost advantage
Labor cost
Size of labor pool
Government support
Telecommunications
infrastructure
High
High
Medium
Very High
Very High
Very High
Very High
Medium
Quality (US market)
Cultural compatibility
English adaptability
Availability of software skills
Very High
Very High
Very High
Medium
High
Medium
Medium
Very High
Medium
Very High
Overall awareness
Source: Adapted from Huang (2003)
265
266
Table 26. Overall attractiveness of the Philippines
Overall
Scale of
India
China
Malaysia
Czech republic
Singapore
Philippines
Brazil
Canada
Chile
Poland
Financial
structure
(40%)
1 to 4
3.72
3.32
3.09
2.64
1.47
3.59
3.17
1.00
2.99
2.88
Business
environment
(30%)
1 to 3
1.31
0.93
1.77
2.02
2.63
0.92
1.41
2.48
1.68
1.57
People skills
and availability
(30%)
1 to 3
2.09
1.36
0.73
0.92
1.36
0.94
0.86
1.94
0.70
0.88
Total
7.12
5.61
5.59
5.58
5.46
5.45
5.44
5.42
5.37
5.33
Source: AT Kearney (2004).
unstable business environment, broadly defined by AT Kearney to include the
political situation in the country. In this particular measure, the only countries
that scored lower than the Philippines were Russia (0.51), Vietnam (0.70), and
Turkey (0.73).
Overall, the Philippines is attractive as a BPO location for the following reasons:
• Competitive wages, which are slightly higher than the wages in India
but much lower than those in the US;
• Generally skilled labor force (business-related and people skills), with
strong cultural affinity with the US (the main market);
• Advanced development of its telecommunications infrastructure, owing
to deregulation and liberalization in the 1990s; and
• Availability of suitable locations for BPO office space (although pressure
for upward rate adjustments are building up).
On the other hand, its main drawbacks are the following:
• Increasing difficulty of finding qualified employees (especially for call
centers)
• Deteriorating quality of education for higher level IT skills;
• Undesirable political and regulatory environment, especially the
unstable political situation, graft and corruption, and threats to physical
security; and
• High power rates, which are among the highest in the region.
Government Initiatives
In spite of resource limitations, the government has been trying to address the
impediments to BPO sector development by way of partnerships with the business
sector and the academe. At the forefront of these efforts is the DTI, through its
267
brand management approach to export development.13 The DTI has been the
lead national government agency supporting private sector initiatives in
addressing the two primary constraints of BPOs—the international promotion of
the Philippines as an offshore BPO location and the enhancement of critical
BPO skills among college students.
The DTI, primarily through its brand manager for IT-enabled services and
through the Center for International Trade Expositions and Missions (CITEM)
has been assisting BPO industry associations in promoting the Philippines as a
preferred offshore location for services.
In addition, it has been instrumental in generating awareness among other
government institutions—both at the national and local levels—about the
importance and potential of BPOs. In particular, it has been active in promoting
partnerships between BPOs and the academe in the development of courses
that would introduce university students to the opportunities provided by BPOs
and, at the same time, enhance the critical skill sets related to BPO operations.
At present, several universities are already offering academic subjects related
to enhancing BPO-related skills, in partnership with private BPO companies.
Other agencies actively trying to address the looming shortage of qualified BPO
professionals include the Technical Education Skills Development Authority
(TESDA) and the Commission on Higher Education (CHED).
Local government units (LGUs) have also taken a primary role in preparing
their constituencies to take advantage of the employment opportunities offered
by BPOs. Some have already initiated computer literacy and advanced language
courses. These LGUs include the cities of Pasig, Manila, and Dumaguete.
In the area of infrastructure development, the country continues to benefit
from the deregulation of the telecommunications industry in the 1990s. As
technology continues to evolve and converge, government response must keep
pace. The regulation of telecommunications in the country is within the mandate
of the National Telecommunications Commission (NTC). Unfortunately, the NTC
is severely undermanned and lacks the resources to keep abreast with new
developments in the sector. However, its recent decisions have indicated that it
foresees the critical role of technology infrastructure in the development of user
sectors. These include its policy decision on the voice-over-Internet protocol
(VoIP). It is seen as a way to break the hold of bigger telecommunications
players on business applications, including certain BPO activities.
The policy framework for the infrastructure side of IT-related businesses is
expected to be developed once the Commission on Information and
Communications Technology (CICT) is elevated into a full-blown government
department. A legislative bill has already been filed in Congress to this effect. However,
it is not given sufficient prioritization due to resource constraints in creating a new
department and the fluid environment caused by the unstable political situation.
The government, through the DTI, has identified 10 priority export sectors, including ITenabled services. As defined, IT-enabled services cover BPOs.
13
268
POLICY RECOMMEND
ATIONS
RECOMMENDA
Revisiting the Industry Value Chain Blocks
Setting the Philippines’ strengths and weaknesses in terms of the BPO industry
value blocks, it is strongest in cultural, demographic, and technological factors
(Table 27). Meanwhile, it is weakest in political environment, human resource
skills, entrepreneurial access to financing and expertise, and international
marketing and promotions.
Table 27. Overall assessment of Philippine BPO value chain
Value block elements
Assessment of Philippine advantage vs. main competitor
Cultural and demographic
factors
Business and political
environment
Qualified human resource
pool
Stronger affinity to Western culture
Technological infrastructure
Well-developed, reliable and cost-effective
Utilities and office space
Available IT buildings
Higher power rates
Entrepreneurial access to
financing and expertise
Limited access to venture capitalists; India has advantage owing to
Indian IT Professionals who migrated to the United States.
International marketing and
promotion
RP just starting with industry-wide efforts at country branding;
Indian NASSCOM is a benchmark organization.
Unstable political environment; threats to peace and order
Significantly lower wages than in the United States but slightly
higher than in India; stronger in soft skills, weaker in technical
(IT) skills
Specific Recommendations
Policy recommendations should therefore enhance the strong points in the
value chain and address the weaknesses.
Cultural and demographic factors
A large population base oriented toward the Western culture has been a key
consideration of companies (not only of BPOs) that are establishing businesses
in the Philippines. However, this is an advantage that in the future may not be
easy to sustain given the globalization of culture, which is brought about by the
advances in mass media and communications. What should be emphasized
and further developed, therefore, are the unique traits of the Filipinos rather
than their strong affinity to Western culture. These traits include customer service
orientation and good work ethic. These are qualities that overseas Filipino
professionals and workers have been known for. While enhancement of these
269
cultural factors is actually not policy actionable, they can be emphasized during
marketing and promotional campaigns.
Business and political environment
Although this is a general weakness not peculiar to the BPO sector, it needs to
be addressed since it is the main impediment to attracting BPO projects. While
fully solving this problem will necessarily require a longer time frame, efforts at
insulating the BPO sector—from investment promotion, to business registration,
and to actual operation—are currently being undertaken through active
government front offices dedicated exclusively to BPOs (e.g., ITECC, DTI’s brand
management approach, etc.).
Convinced of the potential offered by BPOs, LGUs are also increasingly
being involved. LGUs outside Metro Manila are promoting possible locations in
their towns and provinces. Telecommunications facilities are being developed
as well as IT infrastructure in their localities. As support to enhance the quality of
their work force, English is mandated as the medium of instruction in schools,
and IT courses are also introduced in public schools. Ensuring the safety of BPO
professionals (especially those working during the night shift) is also given priority.
Compared with national government initiatives, local government involvement is
more direct and thus envisioned to yield a more immediate impact.
Qualified human resource pool
BPOs, especially call centers, have started to partner with higher education
institutions in programs that aim to provide competent skills to prospective BPO
professionals. This is important in developing a pool of trained BPO workers.
However, these initiatives may not be able to stem the tide of the steadily
declining quality of education in the Philippines, especially for critical subjects
such as math and science. Government will have to provide the general direction.
First, budgetary priority should be given to education, as mandated in the
Constitution. Second, the government should diagnose the poor performance
of schoolchildren in math and science. Third, it should review the pedagogical
basis for shifting to Filipino as the medium of instruction in schools. While from
the perspective of call centers there are obvious benefits of going back to
English as the medium of instruction, there must have been a reason why it was
changed previously. Partly, the advocates of Filipino were claiming that concepts
are better learned by students when taught in their native language. If this is
indeed the case, then there are strong considerations to stick to Filipino as the
medium of instruction.
However, the issue of which language of instruction to use should also be
considered within the context of which is more effective in terms of developing
higher level technical skills. This is critical if the Philippines wants to move up
the BPO value chain. Currently, the country’s main area of advantage is in terms
of soft skills, while India is dominant in the technical skills. This allows India to
concentrate on backroom operations where there is also potential for higher
270
value addition, while the Philippines focuses on BPO activities with greater
customer interface (e.g., call centers).
The 2004 ITAP Philippine ICT Workforce Demand Study provides the following
recommendations:
• improve primary and secondary education;
• have an IT certification exam to ensure the quality of graduates;
• improve the quality of teachers;
• make education more affordable;
• teach critical thinking, instead of memorization; and
• greater industry-academe linkage, e.g., through value-adding
internships or on-the-job training and industry collaboration in
designing ICT curricula.
Tec
hnology infras
tructure
echnology
infrastructure
While this is the strongest advantage of the Philippines, India is fast catching up.
Thus, there is a need for the country to consider further policy changes in the
telecommunications industry. These may include the removal of the cap on
foreign ownership of telecommunications companies (presently at 40 percent)
to further introduce competition in the industry’s various segments. Another
consideration is to further clarify telecommunications policies, especially as
they converge with Internet service providers (ISPs). For instance, a more liberal
policy on VoIP could provide an alternative, less costly (though currently, less
reliable) platform for BPO operations.
Utilities and office space
The 24/7 nature of BPO operations, together with the technical requirements of
their equipment, requires intensive power use. Thus, efforts by the government
to lower electricity rates in the country will benefit BPO companies. In the short
term, however, “peak-load” pricing mechanisms could be a way to enhance the
attractiveness of the Philippines, especially for BPO services that take advantage
of time zone differences with the US.
Entrepreneurial access to financing
and technical/market expertise
As Filipino executives become more exposed to BPO operations of global
companies, opportunities will develop for local professionals to set up their own
BPO companies. In the meantime, special programs can be explored to provide
incentives to successful foreign-based Filipino IT professionals to return to the
Philippines to jumpstart entrepreneurial activity in strategic BPO areas.
International marketing and promotion
Industry and government have started collaborative efforts to promote the
Philippines as a regional hub for BPO operations. Key players include the DTI,
ITECC, and industry associations. However, India’s NASSCOM remains to be the
model. Formed in 1988, it is the umbrella association of Indian IT and IT-
271
enabled service organizations. With about 850 members, covering 95 percent
of total industry revenues, NASSCOM has been a major catalyst for the growth of
the software-driven Indian IT industry. It partners with the government to actively
promote the Indian IT industry abroad, providing a unified marketing approach.
AREAS FFOR
OR FUR
THER S
TUD
Y
FURTHER
STUD
TUDY
On BPOs and the National Statistical System
There is a need to formally study the contribution of BPOs to the Philippine
economy. Due to the problematic nature of national statistical classification
systems as they apply to BPOs, there is a real possibility that the impact and
importance of BPOs are currently grossly underestimated.
BPOs are currently classified under “private business services” and “other
business services.” Based on the Philippine Standard Industrial Classification
(PSIC 1994 as amended), it is considered under:
• Division 74 (Miscellaneous business activities);
• Group 749 (Business activities, n.e.c..);
• Class 7499 (Other business activities, n.e.c); and
• Subclass 74999 (Miscellaneous business activities, n.e.c).
The National Statistical Coordination Board has recently formalized a new
classification system—the Philippine Centralized Product Classification (PCPC)—
that is also consistent with the new international system proposed by the United
Nations. Under the PCPC, BPOs and its various subsegments will be more clearly
captured. For instance, call centers will be under:
• Division 85 (Support services);
• Group 859 (Other support services); and
• Class 8593 (Telephone-based support services)
o
859310 (Telephone call center services, including taking orders
for clients by telephone, soliciting contribution, or providing
information to clients by telephone, telemarketing)
Though the PCPC has already been adopted, it is not yet being used by the
government. There is a need to urgently implement its use and conduct studies
on the actual impact of BPOs.
Another problematic area for BPO research is the estimation of “trade in
services.” Measuring IT-related BPOs is quite difficult because the concept of
gross value added is more difficult to apply in services, since it is not represented
by a tangible product. For example, as illustrated by the WTO, e-commerce
covers a range of service activities:
• Customer sits down at computer - computer services
• Logs on to the Internet - communication services
• Orders products - distribution services
• Pays for it - financial services
272
•
Downloads the product or has it mailed to home address - delivery
services
There are also other items in international trade measurements and
methodologies that capture IT-related business services. These include:
• Royalties and license fees (computer related services that are delivered
to foreign markets through cross-border software licensing agreements);
• Other industries (software bundled with computer hardware); and
• Services that can be delivered both electronically and physically via
optical disks.
Given all these data classification and estimation problems, the Philippine
System of Accounts, and the nature of BPO activities, BPO’s contribution to the
economy is ambiguously captured. Most likely, its contribution is understated
and its total contribution dispersed or credited to other industries.
On Population and the Philippine Educational System
All other things being equal, a large population base will improve the
attractiveness of a country as a BPO location. However, having a strong education
sector is also an important prerequisite. These two are the emerging important
drivers for BPO competitiveness.
India and Russia fit this description. For example, in the 2004-2005 Global
Competitiveness Report of the World Economic Forum (Figure 20), India was
ranked 2 nd most populous country and 11 th in terms of the quality of its
Figure 20. Educated population as an advantage (math and science)
Source: Porter et al (2004).
273
educational system. Russia, on the other hand, landed 8th in population and
23rd in education. On the other hand, Australia, Canada, and Malaysia have very
advanced educational systems, with small-to-medium population base.
The Philippines is grouped together with China and Thailand—countries
with large population base but inadequate educational systems. Thus, if the
Philippines wants to eventually graduate to higher value-added BPOs, significant
attention must be devoted to improving the quality of our educational system—
especially in the areas of math and science. Incidentally, these are the very
same disciplines where some of the country’s biggest competitors (current and
emerging) are quite good at.
REFERENCES
AT Kearney. 2004. 2004 Offshore location attractiveness index: making offshore decisions
[online]. http://www.atkearney.com/shared_res/pdf/Making_Offshore_S.pdf
[Accessed October 25, 2004].
Besanko D., D. Dranove, M. Shanley and S. Schaeffer. 2003. Economics of strategy. John
Wiley & Sons.
Boston College. 2004. Trends in International Mathematics and Science Study. Report on
the 2003 International Student Achievement in Mathematics and in Science [online].
TIMSS & PIRLS International Study Center, Lynch School of Education, Boston College.
http://timss.bc.edu/timss2003.html [Accessed December 18, 2004].
Deloitte Research. 2004. The Titans take hold: Summary of the second annual global
offshore survey [online]. http://www.deloitte.com/dtt/cda/doc/content/
DTT_DR_Titans_May2004.pdf [Accessed October 25, 2004].
Department of Trade and Industry (DTI). 2003a. Business process outsourcing (BPO)
roadmap: positioning RP as global BPO hub [online]. http://www.dti.gov.ph/
contentment/9/16/119/422.jsp [Accessed December 2004].
Department of Trade and Industry (DTI ). 2003b. The Philippine business process outsourcing
industry. Working Draft. Makati City, Philippines: Board of Investments, Department of
Trade and Industry.
Huang, F. 2003. The Philippines answers the call: call center industry 2003. The SGV
Review 1(4) [online]. Knowledge Institute, SGV. http://www.ey.com/global/
download.nsf/Philippines/The_Philippines_answers_the_call/$file/
Contact%20Center%20Industry%202003.pdf.
Information Technology Association of the Philippines (ITAP). 2004. ICT workforce demand
study 2004. Makati City, Philippines: Information Technology Association of the
Philippines.
Information Technology and Electronic Commerce Council and Accelerating Growth
Investment and Liberalization with Equity (ITECC and AGILE). n.d. Strategic roadmap
2003 [online]. http://www.ncc.gov.ph/files/strat_roadmapReport.pdf [Accessed
November 2004].
Linder J.C. and S. Cantrell. 2002. BPO big bang: Creating value in an expanding
universe [online]. http://www.cito.re.kr/bbs/data/papers/bpm_big_bang.pdf..pdf.
McKinsey and Co., Inc. 2002. NASSCOM-McKinsey Report 2002: Strategies to achieve
the Indian IT industry’s aspiration. New Delhi, India: NASSCOM.
neoIT. 2003. The Philippine opportunity: offshore BPO. Offshore Insights, Issue 7 [online].
http://www.neoit.com/ [Accessed December 2004].
274
Porter, M., K. Schwab, X. Sala-i-Martin and A. Lopez-Claros. 2004. The Global
Competitiveness Report 2004-005. Geneva, Switzerland: World Economic Forum.
San Agustin, K. 2004. Call center industry: a silver lining. UA &P Industry Monitor September
2004: 6-9. Pasig City, Philippines: University of Asia and the Pacific.
United Nations. 2002. Manual on Statistics of International Trade in Services. Statistical
Papers Series. ST/ESA/STAT/SER.M/86. Washington, D.C., USA: Statistics Division,
Department of Economic and Social Affairs, United Nations.
United Nations Conference on Trade and Development (UNCTAD). 2004. World investment
report 2004. Geneva, Switzerland: United Nations Conference on Trade and
Development.
————. 2003. E-Commerce and Development Report. Geneva, Switzerland: United Nations
Conference on Trade and Development.
World Bank. 2004. ICT at a Glance [online]. World Bank Development Data Group. http://
web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS
World Trade Organization (WTO). 2006. Measuring trade in services: a WTO training
module
[online].
http://www.wto.org/english/res_e/statis_e/
services_training_module_e.pdf [Accessed November 2004].
Institutions’ Web sites
Commission on Higher Education (Philippines): http://www.ched.gov.ph
Department of Trade and Industry (Philippines): http://www.dti.gov.ph
World Trade Organization (Switzerland): http://www.wto.org
Results Matter, Inc. (Canada): http://www.itmatters.com
Gartner, Inc. (USA): http://www.gartner.com
Montgomery Research, Inc.: http://www.outsourcingproject.com
Interactive Response Technologies (USA): http://www.callcenter.com
Chapter 7: Trade Representative Office 275
7
Does the Philippines Need a Trade
Representative Office?
Gloria O. Pasadilla and Christine Marie M. Liao
ABSTRACT
The paper describes the current decisionmaking structure for trade policy
formulation in the Philippines and compares it with the systems in selected
countries. It cites difficulties in the current setup, such as: (1) turf mentality
among government agencies that tends to paralyze interagency committees in
coming up with an overall position that fully acknowledges trade-offs; (2) lack
of appreciation and capacity for trade research that should inform negotiating
positions; (3) unclear delineation of authority; and (4) lack of suitable
mechanisms for consultation and feedback on negotiation progress and impact
regarding not only tariffs but also other items under discussion.
This paper argues that there is a need for a single agency that will handle
all international trade negotiations, coordinate effectively with other government
departments and agencies, and formulate final trade positions for negotiations.
It proposes either: (1) the creation of an independent agency for trade
negotiation, something akin to the US Trade Representative Office, or (2)
considering fiscal realities in the short run, at least the strengthening of the
existing Bureau of International Trade Relations (BITR) position within the Tariff
and Related Matters (TRM) Committee structure. A stronger, centralized body,
principally or primarily in charge of trade policy negotiations, would be able to
curb the turf battles among different agencies, or, at a minimum, prevent them
from stalling the realization of trade mandates for negotiators.
The paper also stresses the crucial role of trade research in supporting
negotiations and suggests ways to strengthen capacity in this area.
INTRODUCTION
Like other Asian countries, the Philippines is involved in bilateral and regional
trade negotiations because World Trade Organization (WTO) trade talks have
gone into a crawl. The Philippines is part of the Association of Southeast Asian
Nations (ASEAN) Free Trade Agreement (FTA) and the Asia-Pacific Economic
Cooperation (APEC). It signed on the Early Harvest Program for the China-ASEAN
FTA, and has concluded bilateral negotiations with Japan, the results of which
276
are now under review. Even as it maintains commitment to multilateral
discussions, it is also considering bilateral negotiations with the United States
(US), Australia, Korea, and India and, perhaps, with other countries in the future.
With the potential increase in the number of international negotiations, it is
appropriate to ask whether the Philippines has adequate resources and capacity
to enter into all these trade discussions, and more pointedly, whether it has
adequate government structures that can effectively deal with presumably
prepared and structurally organized foreign counterparts.
To the extent that successful negotiations rest on good preparation, the
paper analyzes the current system’s strengths and weaknesses and how policy
formulation and preparation for negotiations are undertaken. It studies the
systems and structures in selected countries, assesses their positive and
negative aspects, and derives some policy recommendations for improving the
current structure in the Philippines.
This paper argues that there is a need for an agency—something akin to
the US Trade Representative Office—that will have the decisive voice in coming
up with final trade positions, handle international trade negotiations, and
coordinate effectively with other branches of government. This would curb many
of the difficulties in the existing system, such as turf mentality among government
agencies, discussed in the following sections, and prevent final trade position
formulation from being unnecessarily and lengthily stalled. It would hopefully
improve the ordering of domestic and national priorities that should inform
trade positions. It would be a source and depository of all information affecting
international trade negotiations, disseminate information and analysis on trade
impacts of new rules, provide the public with a better handle on more and more
complicated agreements involving sanitary and phytosanitary and technical
standards measures, intellectual property rights, environmental and labor laws,
and other agreements that would eventually be multilaterally adopted. With the
proliferation of bilateral and regional agreements, the central agency should be
in a position to analyze and ensure their consistency with each other and with
the country’s WTO commitments. The paper also stresses the crucial role of
trade research that can effectively support negotiations and suggests ways this
can be strengthened in the Philippines.
Nevertheless, the paper underscores the fact that the improvement of the
policy formulation and negotiation structure is no panacea. Because the setting
of national priorities from which trade positions are derived remains the
responsibility of elected politicians, much of the success in trade negotiations
and its actual impact on the economy still rests on the overall quality of national
polity and choices. To put it succinctly, better structure can help but good policy
choices still depend on the vision of whoever is at the top.
The paper is organized as follows: the next section gives an overview of
the institutions and processes involved in trade policy formation and trade
negotiations in the Philippines. It sheds light upon the organizational setup,
consultation mechanisms, and dispute resolution mechanisms that are currently
in place. The third section explores areas in which there is room for positive
change, comparing the Philippine situation with those in other nations, specifically
those that have significant influence in the world trade system. It takes the
example of the US, the European Union (EU), Canada, and Japan, and delves
into specific aspects of their trade policy formation and trade negotiation
processes that could have benefited them and helped them in successfully
concluding beneficial trade agreements. Malaysia rounds out the group as a
nation that is in a situation similar to the Philippines and yet has more successfully
navigated the waters of international trade negotiations. (For detailed
information on the trade policy formation processes of these countries, see
Appendix.) The fourth section concludes with an agenda for reform.
TRADE POLICY FFORMA
ORMA
TION IN THE PHILIPPINES
ORMATION
The Philippines, unlike other countries, does not have a single agency that deals
with the formation of trade negotiations for goods and services. While the
Department of Trade and Industry (DTI) is the defacto lead agency in most
international trade negotiations, it has no veto power over positions taken by
other agencies. Rather, trade policymaking is done by consensus under the
Tariff and Related Matters (TRM) Committee apparatus, and individual
departments and agencies bring their own initiatives, research, and trade
positions to the Committee. This section discusses in detail the trade policy
formation process in the Philippines.
Tarif
elat
ed Matt
er
ee
arifff and R
Relat
elated
Matter
erss (TRM) Committ
Committee
The TRM Committee was organized by virtue of Executive Order No. 230
(Reorganizing the National Economic and Development Authority [NEDA]) in
19871 with the following functions and responsibilities:
• To advise the President and the NEDA Board2 on TRF and on the
effects on the country of various international developments,
• To coordinate agency positions and recommend national positions
for international economic negotiations, and
• To recommend to the President a continuous rationalization
program for the country’s tariff structure.
The Executive Order amended Letter of Instructions No. 601 dated 20 September 1977 that
established the National Economic Development Authority (NEDA) Board Committee on
Trade, Tariff and Related Matters.
2
The NEDA Board, which the TRM falls under and to which it is responsible, is composed of
the President of the Philippines as Chairman, the Secretary of Socio-Economic Planning
and NEDA Director-General as Vice-Chairman, and the following as members: the Executive
Secretary and the Secretaries of Finance, Trade and Industry, Agriculture, Environment and
Natural Resources, Public Works and Highways, Budget and Management, Labor and
Employment, and Interior and Local Government. In the years since the board was created,
presidents have used their authority to add the Secretaries of Health, Foreign Affairs,
Agrarian Reform, Science and Technology, Transportation and Communications and of
Energy. The Deputy Governor of the Bangko Sentral ng Pilipinas was the last member
added.
1
278
It was decided upon by the NEDA and the DTI that “related matters” under
the purview of the TRM would include trade and investment agreements and
shipping matters.3
There are three levels to the TRM: (1) the Committee Proper, which is at
the Cabinet level and is theoretically composed of the different Department
Secretaries; (2) the Technical Committee, traditionally populated by
Undersecretaries and Directors; and (3) the four Sub-Committees on (a) Trade
and Investment Agreements, (b) Economic and Technical Cooperation
Agreements, (c) Shipping, and (d) Tariff and Non-tariff Measures, also known as
the Technical Working Group on Tariff Review.
The TRM Committee is chaired by the DTI and co-chaired by NEDA. The
agencies that have seats in the Cabinet Level of the TRM are:
• Department of Foreign Affairs;
• Department of Agriculture;
• Department of Finance;
• Department of Environment and Natural Resources;
• Department of Budget and Management;
• Department of Agrarian Reform;
• Department of Labor and Employment;
• Tariff Commission; and
• Central Bank.
The Executive Secretary also sits in as a representative of the Office of the
President.
Figure 1. The organizational chart of the TRM
Committee Proper
(Cabinet
Committee)
Technical
Committee
Subcommittee
on Trade and
Investment
Agreements
3
Subcommittee
on Economic and
Technical Cooperation
Agreements
Technical Committee
on WTO Matters
Subcommittee
on Shipping
Subcommittee
on Tariff and
Non-tariff
Measures
From the NEDA briefing paper on the Committee on Trade and Related Matters (CTRM).
In the Technical Committee, senior officials from the Department of
Transportation and Communications, the Board of Investments, and the Bureau
of Customs are added to the list. Representatives from the Department of
Energy, the National Telecommunications Commission, the Securities and
Exchange Commission, and the Department of Science and Technology are also
invited to the meetings as necessary. A representative usually from the legal
office of the Office of the President sits in to provide advice on legal issues as
well as facilitate communication and liaise between the President and the TRM.
There is a special Technical Committee on WTO Matters (TCWM) whose main
function is “to discuss and recommend Philippine positions/strategies on issues
with direct relevance to the country’s implementation of its WTO commitments
and the continuing participation in the multilateral trading system.” Unlike the
main Technical Committee, which receives support from the NEDA-based
Secretariat, this group is provided with technical and administrative support by
the WTO Desk of the Bureau of International Trade Relations (BITR) under the
DTI. The TCWM also has its own interagency subcommittees and is divided into
one for agriculture, headed by the Department of Agriculture, one for services,
headed by the NEDA, one for industrial goods, headed by the DTI-Board of
Investments, and one for other rules, headed by the DTI.
Figure 2. The organizational chart of the TCWM
Technical
Committee on
WTO Matters
Subcommittee
for Agriculture
Subcommittee
for Services
Subcommittee
for Industrial Goods
Subcommittee
for Other Rules
The different committees of the TRM meet regularly. The traditional
schedule of meetings of the Committee Proper and the Technical Committee,
both of which are supported by a Secretariat composed of members of the
Trade, Industry and Utilities Staff of the NEDA, is once every 45 days, although
special meetings are called when necessary.
Process for Multilateral Negotiations
These line agencies involved in the TRM, in theory, carry out consultations with
the respective producers and service providers or their constituencies regarding
trade-related issues. Acting as sponsors and defenders of their industries, they
submit policy proposals to the TRM Committee.
280
When these officials meet, the proposals are reviewed and discussed
until a consensus opinion is reached. The TRM’s decisions are not arrived at via
voting. The proposals that pass muster in the Committee Proper are forwarded
to the Tariff Commission, which is given the charge of holding public hearings on
the matter. The Tariff Commission makes its recommendations based on the
hearings, and the TRM studies these recommendations. The TRM then compiles
a set of policy guidelines, which are given to the negotiators themselves and act
as the latter’s mandate.
After negotiations are concluded, the NEDA Board confirms the agreements
before these are elevated to the President and/or the Senate.
Figure 3. The development of negotiating positions
Line agency consults with industry !
Line agency passes on a proposal to the TRM !
TRM subcommittee discusses the proposal !
TRM Technical Committee reviews the recommendations
from the subcommittee and elevates them to the Cabinet committee !
Tariff Commission holds hearings !
Tariff Commission makes recommendations !
TRM Cabinet Committee reviews all recommendations, makes decisions,
complies policy guidelines, and gives mandate !
TRM submits complete staff work to NEDA Board !
Representatives negotiate !
NEDA Board confirms agreements !
Other International Negotiations
There are several other agencies that handle trade policy depending upon the
international body or trading partner with which the Philippines is negotiating.
When it comes to ASEAN and APEC matters, for example, a separate committee
called the Philippine Council on ASEAN and APEC Cooperation that also has a
Cabinet committee level and also falls under the NEDA, takes charge. For the
Japan-Philippines Economic Partnership Agreement (JPEPA), meanwhile, the
Philippine Coordinating Committee4, created in May 2003 by an executive order,
is the lead working group. The Philippine Coordinating Committee Secretariat
falls under the BITR of the DTI.
Unlike interactions in the area of trade in goods, which have a common
venue and a dedicated agency (such as the Tariff Commission), the consultation
process when it comes to trade in services is even more decentralized. Be that
as it may, the NEDA, as the head of the TCWM’s Subcommittee on Services, acts
as the main coordinator, while the line agencies themselves, such as the
Departments of Environment and Natural Resources, Transportation and
Communication, Trade and Industry, Tourism, Labor and Employment, and Energy,
as well as the Central Bank, the Professional Regulatory Commission, and the
Commission on Higher Education, all handle trade issues affecting their particular
industries.
Policy Administration and Dispute Resolution
For dispute resolution, the DTI, as the Chair of the TRM, officially elevates the
issues to the WTO. However, the respective line agencies are allowed to take
the lead in the process. They coordinate with the Ambassador to the WTO who
usually comes from the Department of Foreign Affairs (DFA).
When complaints from other nations are directed to the Philippines, a
committee of three DTI undersecretaries, specifically those for Consumer
Welfare and Domestic Trade Regulation, International Trade, and Industry,
conducts meetings and discusses the culpability of the country. The BITR acts as
the resource institution, which clarifies WTO rules.
The organizations involved in the Philippine Coordinating Committee are the Department
of Trade and Industry as Chair, Department of Foreign Affairs as Vice Chair, Board of
Investments, Tariff Commission, Bureau of Customs, Bureau of Export Trade Promotion,
Center for International Trade Expositions and Missions, National Economic and Development
Authority, Department of Energy, Department of Environment and Natural Resources,
Department of Agriculture, Department of Finance, Tariff Commission, Philippine Economic
Zone Authority, Garments and Textile Export Board, Construction Industry Authority of the
Philippines, Bangko Sentral ng Pilipinas, Depar tment of Tourism, National
Telecommunications Commission, Air Transportation Office, Civil Aeronautics Board,
Securities and Exchange Commission, Commission on Higher Education, Department of
Labor and Employment, Maritime Industry Authority, Technical Education and Skills
Development Authority, Department of Health, Professional Regulations Commission, Bureau
of Immigration, Philippine Overseas Employment Administration, Department of Budget
and Management, Department of Public Works and Highways, Department of Justice,
Philippine International Trading Corporation, Bureau of Domestic Trade, Bureau of Trade
Regulation and Consumer Protection, Intellectual Property Office, Bureau of Food and
Drugs, Department of Science and Technology, Bureau of Agriculture and Fisheries Product
Standards, Development of People’s Foundation, Inc., Philippine Council for Agriculture,
Forestry and Natural Resources Research and Development, Small Business Guarantee
and Finance Corporation, and Bureau of Small and Medium Enterprise Development.
4
282
Again, the line agencies depend strongly upon the private sector for technical
input in disputed cases. They request industry associations as well as specific
firms to provide support and information.
Among the pieces of legislation that exist to protect Philippine trade
interests are the Anti-Dumping Act of 1999 (Republic Act No. 8752), the
Countervailing Duty Act of 1999 (Republic Act No. 8751), and the Safeguard
Measures Act (Republic Act No. 8800). By law, any natural person may file a
complaint if he feels that a domestic industry is being materially harmed by
increased imports. The President, the appropriate Senate Committee, or the
appropriate House Committee may submit a request for the same. The petitioner
is directed to file the necessary documents with the Secretary of Trade and
Industry for all nonagricultural products and with the Secretary for Agriculture if
the product is agricultural in nature. Upon confirmation of the receipt of the
complete set of documents, the department has five days within which to come
to a decision on whether or not an investigation should be opened. If the
department decides that an investigation must be conducted, it carries this out
within 30 days, requesting that interested parties submit evidence to legitimize
the complaint. After this allotted period, the findings are submitted to the Tariff
Commission, which also asks interested parties to submit evidence and
positions over the course of 15 days. A formal investigation, including marathon
public hearings, is then undertaken for 120 days. After this, a recommendation
for appropriate action is made.
Figure 4. The dispute processing mechanism
Individual files a complaint with the DTI/DA!
Secretary decides whether to initiate an investigation (5 days)!
[Public notice is given] (2 days)!
Secretary makes preliminary determination (30 days)!
Secretary submits findings to Tariff Commission!
Commission undertakes formal investigation (135 days)!
Commission recommends to the Secretary
an appropriate course of action
INSTITUTIONAL INEFFICIENCIES IN THE CURRENT
STRUCTURE
On paper, it would appear that the institutional structure in place for the handling
of trade policy development and trade negotiations is not entirely dissimilar to
those of other nations. However, the system is somewhat inefficient in practice,
and certain institutional failures occur, brought about by both the less-than-ideal
setup and the unique political climate in the country.
Interviews with officials from different agencies of the government indicate
several weaknesses in the current system.
Tur f Mentality
The first among these is that the representatives of the different line agencies
that sit in the TRM Committee tend to be caught up in a turf mentality that
prevents the creation of a whole, cohesive cross-industry trade strategy. There is
a spirit of competition instead of cooperation that prevails.
While the TRM is perhaps meant to be a unifying mechanism, it does not
always effectively function as one. Instead of aspiring to work as a team toward
the formulation of a sound overall strategy for the country, the different line
agencies ascribe more to an “every industry for itself” attitude, in which
representatives seem to be of the mindset that the industry they are fronting for
must be protected at all costs, no matter how harmful the consequences of
refusal to cooperate may be on other industries and on the economy as a whole.
This is ultimately counterproductive, especially in the light of the single
undertaking framework of the WTO.
During the formulation of negotiating positions for the country, the
representatives of the different line agencies always insist upon the protection
of their own sectors. This conflict leads to a less-than-optimal final proposal. A
good and balanced national position is not achieved, having been sacrificed in
the name of furthering sectoral agenda. Priority sectors cannot be clearly
identified because everyone wants his or her industry to be it. Focus, a very
important part of effective negotiations, is lost.
It must be noted that even the chair of the TRM may find it difficult to have
as his sole concern a unified view of trade because part of his responsibility is to
pursue the good of domestic industry. It has been commented upon, not only in
the Philippine context but also for other countries, that an agency that splits its
focus between international trade and the domestic economy has a tendency
to sacrifice sound trade strategy for the protection of local interests.
Contrast this divided attention and the endless jockeying among line
agencies with the experience of far more successful negotiators from the US
and Canada, each of which boasts of having an efficient single agency tasked
with handling trade policy, and trade policy only.
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United States
In 1962, the US Congress mandated, via the Trade Expansion Act, that the
President needed to establish an interagency trade policy mechanism for
developing and coordinating US government positions on international trade
and trade-related investment issues. The Act also required the President to
appoint a Special Representative for Trade Negotiations. The Congress
recognized at the time that there was a need to find a way to balance domestic
and international interests when it came to the formation and negotiation of
trade policy. In 1963, executive orders issued by President John Kennedy
established the Office of the Special Trade Representative, who was to represent
the country in all negotiations under the 1962 Act as well as others that were
authorized by the President.
Over the next decade, the Congress continued to expand the responsibilities
of the agency, giving the STR jurisdiction over an ever-greater number of trade
agreement programs. A legislative charter was set up as part of the 1974 Trade
Act, and soon after, the office was elevated to Cabinet level. By 1979, the
renamed United States Trade Representative (USTR) had the overall responsibility
of coordinating trade policy. The US had officially centralized government
policymaking and negotiating functions for international trade. This was not the
end of the growth of the USTR, as even presidential trade responsibilities were
shifted to the agency in succeeding years. The Congress deemed that “the USTR
should be the senior representative on any body the President establishes to
advise him on overall economic policies in which international trade matters
predominate and that the USTR should be included in all economic summits
and other international meetings in which international trade is a major topic”
(USTR official website). This was an unmistakable acknowledgement from the
government of the significance of the body and the importance of centralization.
Canada
Canada has had a similar experience in the apprehension of the importance of
having a single trade agency. While special attention was given to trade issues
even back when there was only the Department of Foreign Affairs and
International Trade (DFAIT), the Canadian government finally acknowledged that
the best course of action would be to officially create separate bodies that
focused solely on each of the matters at hand. Given that one in every four jobs
in Canada is linked to trade and that roughly 38 percent of its gross domestic
product is sent abroad, it is no surprise that the country promulgated the
Department of International Trade Act, which created the International Trade
Canada (ITCan) in order “to recognize the central importance of trade and
investment to the long-term growth of the economy and the prosperity of
Canadians” (ITCan 2004). The entity, which was born in December 2003 and
was spun off from the DFAIT, was given the charge of conducting and managing
international negotiations, and coordinating Canada’s relations regarding
international trade, commerce, and investment.
Malaysia
Malaysia provides another alternative. While its Ministry of International Trade
and Industry (MITI) does not have the USTR and ITCan’s special nature of being
focused solely on trade, MITI nevertheless remains clearly and authoritatively
the point agency when it comes to the country’s international trade affairs. In
Malaysia, even more than in Canada or Japan, it can be seen that the trade
ministry truly has jurisdiction over the myriad aspects of trade. From the initial
choice of the sectors in which liberalization ought to be pursued, to the
implementation of trade agreements and the monitoring of compliance, to the
handling of disputes, the MITI is able to exercise its power and deliver cohesion
to the process. A virtuous cycle occurs, for as the Ministry is able to gain more
experience and knowledge from all the trade-related activities it pursues, it is
better able to deal with the ever-changing conditions in the trade arena.
Japan
The one other nation covered in this study that has some similarities to the
Philippines’ more decentralized style is Japan, which has four key players in the
trade policy development field—the Ministry of Foreign Affairs (MoFA), the Ministry
of Economy, Trade and Industry (METI), the Ministry of Agriculture, Fishery and
Forestry (MAFF), and the Ministry of Finance (MoF). (For details on this, see
Appendix.) While Japan has had more success in arriving at beneficial
agreements, one can reasonably argue that its accomplishments have been
achieved not because of, but despite, this flawed institutional structure. It has
been observed, for example, that the jurisdictional delineation between the
MAFF and the METI has left the nation handicapped in negotiating industry-wide
agreements, particularly in the WTO. Since Geneva conventions lump fishery
and forestry with the manufacturing sector, METI has the responsibility of
negotiating for them. However, MAFF retains jurisdiction over the two sectors,
one that the collegial nature of the Japanese system prevents METI from
counteracting. The result is a forced protectionist bent for METI, as MAFF places
strict limits upon the liberalization of those industries. Having its hands tied in
the manner reduces METI’s ability to come up with the most ideal creative
solutions in the barter system that exists.
Interviews with academics and those who have served in the Japanese
ministries, as well as books and essays on the policy formation process in the
country, have hammered home the reality that the Japanese structure is
problematic. For example, the insistence of the MoFA upon lording it over the
line agencies who have more expertise on the particular trade areas and its
practice of striking the nuances that the latter introduce into trade documents
may not produce the most effective proposals.
It has also been acknowledged that the split focus of a ministry like METI
intermittently leads to the prioritization of the domestic industrial side over the
trade aspect. Even within the ministry itself, certain divisions make requests to
protect less competitive domestic industries. The move toward liberalization is
thus curtailed.
286
Having said that, it must be noted that a trait of Japanese bureaucrats that
has yet to be strongly ingrained in many of their Filipino counterparts is an
ultimate willingness to rise above the interagency conflicts of interest and aim
for the common good.
Unclearly Delineated and Highly Fragmented Authority
Two of the practices in Japanese negotiations that allow them to overcome the
natural shortcomings of the decentralized system are that authority, while divided,
is clearly delineated, and that a rigorous consultation mechanism ensures a
unified front. The jurisdiction of each ministry is set forth very clearly in Japan; no
other ministry aside from the MoFA, for example, can draft final proposals to
third countries. Negotiators are also under strict instructions to consult back
when talks lead to significant changes in the Japanese proposal. The members
of Philippine contingent to the JPEPA negotiations were quick to note that their
counterparts frequently conferred with one another, as well as with ministry
officials in their home country, before agreeing to proposed alterations.
This is a far cry from the Philippine system, wherein the absence of a clearcut hierarchy, mandate, and delineation of authority, has led to some confusion
and a waste of resources, as discussed below.
Even in the policy building stage, before the nation offers to enter into an
agreement with a third country, the insufficiently rules-based TRM encounters
difficulties. The status quo is that any two line agencies with conflicting opinions
on an issue in which both are directly involved tend to dominate the discussions.
The chair is left in the unenviable position of wondering how the issue is to be
resolved, as the amount of authority he has is nebulous. There is difficulty in
terms of overcoming the committee’s collegial nature in order to come to a
decision on a hotly contested matter.
Another demonstration of the insufficiency of the rules is that in the late
1990s, the BITR used to have a lead role within the TRM. While all agencies
were allowed to voice their recommendations, the Bureau was there to set and
clarify the nation’s general policy orientation. The BITR had the strongest voice,
and, at the end of the day, if agreements could not be reached, there was a
sense that the Committee could turn to the BITR for final judgment. However,
this is no longer the case. Because that authority of the BITR rested on tradition
rather than legal mandate, it slowly dwindled over the years. Now, the Bureau is
simply another member of the Committee.
The disorganization extends to the negotiating table as well. Due to limited
resources, people from different line agencies sometimes end up being tasked
to represent the country in bilateral talks. There are times when these assigned
representatives in specific sectoral negotiations are simply not well versed
enough in the language and traditions of trade talks, and, without being trained
to consult, they end up agreeing to terms and conditions that put the Philippines
at a distinct disadvantage without their realizing the cost. This discord was
highlighted most recently in the JPEPA talks, in which less experienced negotiators
were found agreeing to nontrade-related, governance-impinging demands by
the Japanese that those more knowledgeable of its implications staunchly
vetoed.
This disjointed behavior can negatively impact the nation in two ways. One
is that more savvy trading partners can take advantage of the ignorance of
negotiators (especially on “newer” trade related issues) and make demands
that go beyond what is commonly acceptable. Another is that potential trading
partners may become wary of dealing with the country because the mixed signals
make the negotiations unreliable.
Another problematic aspect of the current delineation of authority is the
fact that it is very fragmented. Wholly different interagency consultation
mechanisms are in place for handling different trade organizations (e.g., TRM
for WTO and other matters, and the Philippine Council on ASEAN and APEC
Cooperation for APEC), and even with the existence of these bodies, the
government still has to create ad hoc committees such as the Philippine
Coordinating Committee when it enters into bilateral talks. Aside from leading
to the unfortunate loss of institutional memory that naturally results from not
having a centralized agency to handle all negotiations, this ad hoc creation of
committees is a strong indication that there is no proper fit between the system
and the nation’s trade activities.
In contrast to the troubling stalemates in the TRM and the parceling out of
responsibility over trade negotiations in the Philippines, an important feature of
the USTR’s mandate as the trade department of the US is its supremacy over
other agencies with regard to determining final trade positions in all negotiations.
While the US system places strong emphasis on interdepartmental consultations,
and certainly, lengthy debates also take place in the meetings between the
different departments, the fact remains that if particular issues are not resolved
and a consensus is not reached, the USTR may overrule objections by specific
line agencies with regard to different international, regional, and bilateral talks.
It is, by law, the lead agency on the development of trade policy, and functions
as such. After considering all the tradeoffs, it has the power to table market
access offers even without the unanimous agreement of the different agencies.5
Additionally, all their negotiators belong to the USTR and not other government
agencies, which makes strategy coordination easier. In the fast-changing
environment of trade negotiations, this adaptability is key to creative solutionfinding. Because it is issued by one strong and decisive voice, the negotiating
position of the US is more consistent and more likely to inspire confidence and
trust from other countries looking to form trade partnerships with the nation.
Taking into consideration, of course, the high likelihood of approval by the US Congress
of the trade package they want to table in negotiations. The USTR, in considering the trade
package, have the vote count in Congress in mind, pitting the number of liberal members
against those that come from districts that are going to be adversely affected and are,
thereby, going to be more protectionist.
5
288
For its part, the EU would not be successful if it were not for committed
national political decisions to obey the rules set forth and agreed upon by the
European Council and ably interpreted and protected by the European Court of
Justice. Given the complicated political setup of the community, to which belong
15 (now, 25) distinct, sovereign nations with greatly varying economic statuses
and interests, it was recognized very early on that a clear set of rights and
responsibilities needed to be laid out. Jurisdiction and hierarchy are specified in
the treaties and the Constitution of the Union, allowing the institutions to
function confidently as they go about their task of balancing these divergent
stands and finding a position that the myriad governments will find acceptable.
Insuf f icient R
esour
ces ffor
or TTrade
rade R
esear
ch
Resour
esources
Resear
esearch
As has been alluded to earlier, it is not simply the lack of coordination that
threatens to undermine all efforts toward effective negotiation. Simply put, the
Philippines is gravely weak in resources. The different line agencies do not have
the monetary or technical capability to form the requisite in-house research
teams to carry out the all-important task of preparing feasibility studies and
analyses of planned adjustments to trade policy. Not only do the agencies not
have enough manpower to conduct research into the actual implications of
negotiating positions, they also rarely have time, proper skill, and understanding
of the dynamics of international trade and negotiations.
A few outsourced studies from academia and think tanks are available,
usually thanks to foreign funding, and these can be useful. Yet they are also
often steeped in macroeconomic analysis with little bearing on, and direct
usefulness for, negotiations. Because many economic researchers do not have
a clear grasp of trade laws and negotiation, their reports often need further
processing and ‘translation’ by overburdened in-house staff for these to be
serviceable in negotiations. Due to this lack of resources, line agencies
sometimes find themselves dependent upon analyses and studies initiated by
private sector lobbyists, which may not always emanate from the most accurate
and objective point of view. Even with this kind of help, there is still inadequate
coverage of the myriad trade issues that need to be explored. As a result, there
is insufficient understanding of the ramifications of the various agreements the
country is entering or has entered into.
A government official notes that the TRM mechanism itself has
shortcomings, being partly comprised of departments not usually involved in
international trade and having representatives who do not fully grasp the ‘give
and take’ dynamics of negotiations. Because of this low level of trade policy
understanding in certain segments of the committee, the consensus papers
that it comes up with are sometimes irrelevant to the actual issues in trade.
Contrast this to a nation like India, which allocates about 10 million US
dollars per year to research efforts in support of negotiations and spins this
large budget out to agencies that specialize in the development of trade policy,
or to Korea, whose Korean Institute for International Economic Policy is mandated
to do all research for negotiations. Consultants from the Korean research and
policy institute are given an active role and allowed to sit in during negotiations,
accompanying the nation’s official negotiators throughout the process. This
practice carries the double-sided benefit of helping inform the institute’s research
and giving negotiators adequate technical backup. This form of participation is
very helpful in negotiations, in which issues that the nation did not prepare for
beforehand may crop up. With the presence of adept consultants, the negotiators
can immediately process the costs and benefits of new proposals and are able
to send clear, well-informed feedback to those in positions of authority back
home, who can adjust the mandate as they see fit. The process is therefore
greatly facilitated.
Canada, for its part, prides itself upon not only using the specialized inhouse research teams of the ITCan, particularly the Trade and Economic Analysis
Division, which assesses the benefits and costs of certain trade commitments,
but also taking full advantage of the resources of outside institutions and other
federal departments, provincial and territorial governments, other
intergovernmental organizations, think tanks, and other institutions.
In the US, meanwhile, there is a federal agency whose main mandate is to
provide trade input and information to the different departments of the
government, with a special emphasis on assisting the USTR. The latter is heavily
dependent on the International Trade Commission for technical input, and the
International Trade Commission is always ready with reports regarding the US’s
prospects and analyses of its competitiveness.
Malaysia also strongly recognizes the value of technical input. Aside from
MITI’s very strong in-house planning group on which the Ministry greatly relies,
semi-independent research institutes such as the Malaysian Institute of
Economic Research, various universities, and the Institute of Strategic and
International Studies Malaysia are also invited to contribute to the preparation
of policy initiatives.
Clearly, the lack of resources is not a big concern for the EU. Aside from the
250 people employed by the Directorate-General Trade of the European
Commission who are directly involved in the fashioning of trade policy and trade
negotiations, each member state has its own able trade administration to provide
technical support and manpower. Of course, the availability of resources does
not automatically guarantee the wise use of them. In the case of the EU, however,
there are indications of cooperation between the administrations of the member
states of the Union’s institutions. The Commission also takes advantage of
nongovernment resources by hiring independent researchers and analysts to
conduct studies pertaining to trade issues.
Str
ong P
olitical Influence on TTrade
rade P
olicy
Strong
Political
Policy
Yet another area of concern is the fact that there is a very strong top-down
influence in policy formation in the Philippines. Lobbyists are able to take
advantage of the existence of multiple power centers in different segments of
the government. Instead of systematic participation in the policy planning
process, it is the ‘clientelistic’ process that has become the practice of big
290
industrialists, who exert pressure on Congress and other key officials in the
executive branch of the government. The unfortunate result of the current
political climate in the Philippines is that the shield that is supposed to protect
policy from inordinate public influence does not hold.
This is precisely the issue that the US sought to address with the creation
of the USTR. The presumption is that government sectoral agencies have the
tendency towards ‘sectoral policy capture,’ such that an independent, nonaligned
agency capable of doing a more objective processing of economic tradeoffs is
needed.
Weaknesses in the political structure and the lack of discipline in the
policy formation process, whereby decisions that have been processed and
lengthily debated in interagency committees may be overturned by the stroke of
a pen of a high-ranking politician successfully lobbied by private interests, can
contribute to the lethargy of the TRM mechanism itself. When patronage rules
the day and can eliminate decisions that were painstakingly arrived at by the
committee, there is a sense of futility that may slow down the committee’s
activities and increase its tendency to persist in deadlocks which the members
feel are simply best resolved elsewhere.
Low Level of Awareness
It could be proposed that the deleterious impact of political lobbying could be
reduced if more numerous formal consultations were conducted across a wider
range of stakeholders before, during, and after trade negotiations. Before this
can be done, however, there is another concern that must be addressed: the
fact that there is an alarmingly low level of awareness in practically all sectors
regarding the depth of the Philippines’ involvement in trade agreements. In
other countries, producers, who are naturally expected to have a vested interest
in the issue of trade policy, are often eager to have their voices heard and
protect their private interests by interacting with the government as much as
possible. In the Philippines, however, industry players oftentimes do not have a
clear idea of the concessions they would like to obtain from the nation’s trading
partners.6 When consulted, they are unable to present the government agencies
with well-outlined, reasonable goals and specific sets of expectations in terms
of improved market access abroad. Given this experience, it is not unthinkable
that the different departments would be less than enthusiastic about pursuing
frequent consultations. The opportunity for the private sector to contribute
constructively to trade policy formation is not taken advantage of.
In addition to this, the unfortunate reality is that government officials also
often find themselves grappling with condescension from the private sector. In
This is slowly changing, however. The big industry associations are now more aware of the
possible adverse implications of trade commitments. But their orientation remains
defensive, i.e., how to protect their domestic interests, rather than providing inputs on how
the government should open up foreign markets for them.
6
Philippine society, it is not unheard of to come across big industrialists who feel
a strong sense of entitlement. The resource-weak and inadequately compensated
government officials have a difficult time standing up to them and effectively
pushing for the public good. Though undeserving of it, some highly qualified
government officials involved in trade negotiations suffer from the public’s
generally poor opinion of government service and bureaucracy.
This is contrasted to other nations, in which trade officials are respected in
their own right. In Japan, public servants are professionals and career people,
and their work is considered a legitimate and no less illustrious alternative to
working for the private sector. In the Japanese system, those who would like the
privilege of working for a ministry such as the MoFA or the METI are required to
take examinations to prove their qualification for the task, and this state
examination bestows a certain legitimacy and prestige upon them. In Canada, a
vast majority of ITCan employees have masteral or law degrees, with a good
number of PhDs as well. The same goes for the US and the EU.
Summary
Given these issues plaguing the institutional setup, the inadequacy of noteworthy
research, and the lack of a holistic vision of domestic priorities in the Philippines,
officials sometimes go to trade negotiations without a clear strategy or specific
objectives. Instead, a more passive mandate, that is, “negotiate in order to
achieve the policy space that our economy needs,” becomes the working rule.
This partly explains why, unlike India, the Philippines seldom has “lead” trade
positions that other countries could support; rather, the country satisfies itself
with following and aligning with other countries’ proposals. While it is not
uncommon for smaller economies to band together in multilateral talks to get a
good deal, it must also be remembered that good trade policy is one that is well
integrated with the development strategy of a nation. When a third country
knows that trade interests and objectives are not clearly defined, it is easy for it
to take advantage and push for greater concessions.
In bilateral negotiations, the existence of a comprehensively studied,
cohesive trade policy that ties into development strategy is even more important.
In the JPEPA negotiations, for example, the Philippine negotiators brought no
specific texts to the table. Instead, they were only armed with a very general idea
of what the country wanted out of the agreement. As it was, all documents for
the negotiation were written by Japan, that is, using templates of their previous
agreement with Singapore, outlining, of course, their objectives. The Philippines
was expected to merely react to these proposals. The first-mover advantage
had been lost.
Without having a clear idea of what concessions Philippine industries truly
want from the nation’s trading partners and what concessions the country can
and can absolutely not afford to offer, negotiators are already on shaky ground.
Factor in inherently Filipino traits such as a desire to please others, and the
nation may end up with a raw deal, giving the third country substantially more
benefits than it itself is able to obtain.
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Additionally, the absence of a specific mandate leads the negotiators to go
for a “minimalist” approach to liberalization. Since there is no strong vision and
backing from the top, no set of guidelines upon which to rely, the representatives
tend to aim for the least amount of liberalization possible because it is the most
‘politically safe’ and would guarantee their not being fired from their job. Sticking
closely to the status quo reduces the likelihood of protests at home, and this is
appealing to a negotiator who is concerned about his job security and future
retirement. Realizing that further liberalization, while possibly a good step for
the economy, also has the ability to spark a huge backlash from the public, he
could easily grow concerned and become inordinately cautious. Here, as in
other principal-agent relationships, the personal objectives of the negotiator—
naturally inclusive of a stable career path—may not be congruent with the
attainment of an economically efficient outcome for the State. By giving out
broad parameters, not backed by clear assessment of overall costs and benefits
to the economy, the government increases the likelihood that the negotiator will
fall back upon the personal objective-maximizing default position of minimum
change. The full benefits of liberalization end up unrealized.
AN AGENDA FOR REFORM
The major weaknesses in the Philippine system can be distilled into two
important needs that must be filled.
First is the need for a government body that has the prime authority to
determine the final negotiating positions of the nation on trade agreements and
to authoritatively represent it in front of other nations. A department that
nominally has the mandate to negotiate but which finds itself subordinated to
other ministries and agencies in a variety of areas shall not be optimally effective
in its task. The unanimity that is virtually required from the interagency groups,
albeit chaired by the lead department, invariably leads to delays in finalizing
possible offers and requests because of foot-dragging by departments that are
hesitant to open up their sectors. Moreover, in the actual international trade
negotiations, which are broken up by sectors, the overall lead negotiator loses
full control over the negotiation by his inability to keep all the ‘cards close to his
chest’. Anecdotal evidence has it that sectoral agency negotiators tend to give
some (conditional) commitments during the sectoral negotiations even without
knowing the result of the negotiations in other sectors. This lack of coordination
hampers the capacity of developing countries to exploit within- and acrosssector tradeoffs.
Second is the need for a strong technical support system, a research body
that is able to provide up-to-date, accurate reports before, during, and after
negotiations. Studies must be conducted in order to determine the
appropriateness of pursuing agreements for a particular sector, as well as to
better predict the short and long-term effects of recently concluded negotiations.
Within the context of the negotiations themselves, a team that is well-versed on
the issues on the table can provide much-needed insight to on-the-spot
negotiators. Given the dynamic nature of negotiations, representatives sent to
meetings often find themselves having to react to ever-changing proposals.
There is a clear requirement for a research body, either in-house or independentbut-government-owned, that specializes in trade research that will specifically
and ably back these negotiators and provide the background and support that
they need in order to make informed decisions within their mandate.
Even in the aspect of in-country public relations, it is valuable to have a technical
group that undertakes detailed studies into particular trade areas. There is often
what is termed as an “analytical deficit” in the eyes of the public that imbues the
interaction between private interests or lobbyists and the government. The public is
growing more and more uncertain about, and fearful of, the impact of liberalization,
and the proper reaction of governments is to provide clear facts and analysis. It is
only when it is apparent to the people that matters have been thoroughly examined
by those in charge, and shown to be, on the whole, beneficial, will a fair majority
agreement on liberalization be reached.
Only when authority and proper support come together will an agency tasked
with the formation and negotiation of trade policy be able to take advantage of
all that the increasingly open global market has to offer.
To address the need for a strong lead agency, there are few avenues of
action that we propose.
Independent TTrade
rade R
epresentativ
e Of f ice
Representativ
epresentative
The first option is to carve out the trade groups from the DTI, Department of
Agriculture, NEDA, and the DFA to fuse them into a single agency, akin to the
USTR or ITCan, which is devoted solely to trade negotiations, be they bilateral,
regional, or multilateral. It will be headed by a Cabinet Secretary and will be
directly under the President. All negotiators would come from this single agency,
and no longer from different line agencies of the government. Its employees
would ideally be well versed not only in the economics of international trade, but
also in trade law.
It is envisioned that this new Philippine trade agency would have strong tieups with line agencies and intensely consult with them, but also have its own
sectoral experts. For instance, it would have an expert with the agriculture
portfolio who understands the agricultural sector and deals with the Department
of Agriculture, another expert in telecommunications, and so on and so forth.
These experts would be in charge of coordinating with the line agencies in the
run up to trade negotiations, and will carry out the negotiations with the trading
partners. This agency is expected to be fully staffed to carry out good analysis
and information dissemination before, during, and after the negotiations.
The interaction between this new international trade department or trade
representative office and the specific line agencies is envisaged to allow for the
education of those belonging to the line agencies, so that these will better
understand the international trading environment. Frequent exchanges or
sabbaticals from line departments to work in the International Trade Department
or the Trade Representative Office have worked very well in the case of Canada,
making line agencies more aware of the environment that those on the frontline
294
of trade negotiations face. This allows them to be more supportive of trade
negotiations, be it through carrying out adequate public-private sector dialogues
or through providing the Trade Representative Office with adequate data,
information, and feedback. Since line agencies would continue to interact with
their respective industries and narrow constituencies, and would perhaps receive
the most regular feedback from industrialists and other economic sectors, it is
important for them to have a good understanding of how the needs of the
domestic producers fit into the context of trade negotiations. It is in this way that
they can be effective and responsive channels.
The new agency will lead all interagency subcommittees down to the director
level and will coordinate the line agencies’ positions, allowing for cross-sectoral
trade-offs. Trade-off is always an important element in negotiations and
particularly so in the quid pro quo system of international trade negotiations.
This system means that no matter how much the country may wish to, it cannot
possibly protect all its sectors if it wants to take advantage of greater access to
markets abroad for the sake of other competitive sectors. For example, the
country may want to negotiate better access for Philippine mangoes in exchange
for lower domestic tariff for other products, say, automobiles. Necessarily, any
member country that engages in negotiations has to give up ‘something for
something else,’ which demands that the national polity truly understands its
strategic priorities, where its competitive advantage lies, and where it wants to
take the economy.
There are, of course, advantages and disadvantages to this kind of setup.
On the positive side, the new agency would have a clear mandate to make final
decisions while coordinating with line agencies. Its existence would facilitate
the development of institutional memory, as it carries out multipronged trade
negotiations, and it would have the incentive to undertake or be supported by
transparent trade analysis and disseminate them. In many disputes on various
positions, these analyses would be the Trade Representative Office’s best
defense. On the negative side, the first problem is that creating this fully
functioning department would be costly, necessitating the filling of a complete
staff, together with its own department Secretary and Undersecretaries.
Additionally, there is the political economy issue. Will individual line agencies be
willing to relinquish some of their authority and allow themselves to be overruled
by this independent agency? Will they agree to have their trade-related bureaus
carved out and transferred to the new department?7
There exists a bill in the House of Representative, numbered 4798, which proposes the
creation of the Philippine Trade Representative Office (TRO). Many aspects of the bill
mirror our own proposed agency and the TRO described in the bill seems at least partly
fashioned after the USTR. The bill, however, is unclear about the TRO’s relationship with
Congress and forgets that Services is an important component of trade negotiations. Perhaps
one thing that must be clarified further is the role and extent of involvement of the
recommended Advisory Committee for Trade Policy and Negotiations. Where is this committee
7
Reforming the TRM
Considering the budgetary and fiscal constraints of the government and other
political distractions, it might not be very feasible to expect the creation of a
wholly separate Cabinet-level agency dedicated solely to international trade
negotiations. A second option, then, that could be successful if correctly
implemented, is the strengthening of the current TRM system, particularly the
role of BITR within it.
The BITR must head all subcommittees (whether they relate to agriculture,
industry, or services) down to the director level for the TRM’s Technical Committee
and the TCWM, and not be merely one more member. It has to proactively
consolidate the positions of various relevant government agencies and provide
them with deadlines to submit their proposals, in the absence of which the TRM
would be mandated to accept the BITR’s default trade strategy position.
To effectively carry out this strengthened mandate and provide better
secretariat and trade policy analysis support to the TRM system, the BITR staff,
which has dwindled to below 20 from a high of 52 when it started, must, once
again, be expanded. Considering the high knowledge and skill requirements,
e.g., proficiency in both the economics of international trade and trade laws, for
major positions in the BITR, an exemption from the salary standardization
requirement would be appropriate to attract highly qualified candidates. Finally,
given the difficulty of hiring highly skilled individuals for these positions, the
BITR should also be exempted from the Attrition Law.
Additionally, the TRM structure itself must be improved and the roles within
it must be clearly delineated. Aside from solidifying the central position and the
decisionmaking ability of the DTI-BITR, the potential of the DFA, especially in
gathering trade-related information in export markets, e.g., regulations and trade
barriers, should be better exploited. Formulating an optimal position for
negotiations would not be possible without sufficient information on the country’s
trading partners, and the DFA is in the best position to make this contribution.
The DFA’s mission should be geared more and more toward contributing to
trade policy, for a small developing country’s main foreign policy interest is,
necessarily, trade.
There is certainly a need for greater teamwork among the different
government agencies involved in the Committee. Senior and middle officials
must actively combat the tendency toward turf myopia and instead approach
meetings with a view toward determining what would be good for the country
overall, rather than what would be good for their sector alone. Discussions
expected to fall in the hierachy? Is it to take the place of the TRM? What kind of authority
does it have? The power of the Committee to dictate the attendance of particular
representatives at any trade negotiation may be a cause for concern, and might promote
the kind of undue outside influence that the creation of the independent agency was meant
to combat in the first place.
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within the Committee and disagreements between agencies are inevitable,
and, in fact, can be healthy as long as they are substantial, and backed up with
hard facts. At the end of the day, however, the Committee members must devote
time and effort to clarifying the national development agenda and clearly outlining
the Philippines’ trade priorities. They must come to an agreement in terms of
defining the country’s vital interests. The presence of core cabinet personalities
with a keen understanding of the workings of trade policy brought about by
close study will do much to inform the dialogues within the Committee and
hopefully lead it to making optimal decisions.
Besides strengthening the decisionmaking structure within the TRM, its
process and decisions should be respected. For instance, its recommendations,
painstakingly arrived at through numerous meetings and discussions, should
be made more difficult to overturn by parties that have the ears of the President
or other influential politicians. The authority of the chair and his capacity to
resolve deadlocks in the context of the collegial nature of the TRM must also be
clarified.
This option, too, has its pros and cons. On the positive side, by remaining in
the DTI, the BITR can exploit the research, linkages with industry associations,
and experience built up by the latter over the years. This option is also cheaper
and much more realistic, especially in the short run. On the negative side,
however, unless the capacity of BITR is bolstered, the TRM reform might become
cosmetic.
Strengthening TTrade
rade R
esear
ch Capacity
Resear
esearch
Whether the BITR is merely strengthened or the government decides to create
an independent trade office, the importance of allocating a sufficient budget for
research cannot be stressed enough. The development of institutional capacity
for analysis must be given strong emphasis. Given the knowledge-intensive
nature of trade negotiations, technical analysis is the backbone of successful
negotiation and can therefore not afford to be left in the hands of the unskilled.
The lead agencies need to have a strong internal capacity for research, as well
as links with private and foreign providers of research and information.
Much capacity building should be directed to bolstering in-house research
capacity because these teams are the ones always available to address, in a
timely and useful manner, new issues that emerge. This can imply an increased
budget allocation for an expanded research group within the lead agency to
support the negotiations.
The external research community should not, however, be left out of the
effort to increase the country’s research capacity. There is a need to engage
their services, considering the limited human capital resources that the lead
agency in negotiations can afford to hire. Here, India provides an example of a
deliberate use of external research organizations. The Ministry of Commerce of
India, under whose jurisdiction trade policy falls, parcels out different research
projects to specialized research groups and draws advice from them in crafting
trade positions. For instance, for issues related to investment, the Agreement
on Trade-Related Aspects of Intellectual Property Rights, nonagricultural market
access, sanitary and phytosanitary standards (SPS), and trade facilitation, it
counts on the Research and Information System for Non-Aligned and Other
Developing Countries. For issues on the Agreement on Agriculture and SPS, it
relies on the WTO Centre as well as the National Council on Applied Economic
Research. The Indian Council for Research and International Economic Relations
pursues matters relating to services. For other issues, the Ministry of Commerce
also draws from research of academe and institutions and civil society other
than these four major institutions.
The example that should be adopted from India is the seriousness with
which they carry out negotiations, and thus their recognition of the need for solid
research to back up their policy positions. Can the Philippine negotiators rely on
the research community in the country? Sadly, the number of researchers in the
Philippines who can straddle both the economics and law of trade is small and
this group can be spread very thinly when addressing the many facets of trade
implications. The majority needs greater exposure to international trade issues
and greater understanding of trade laws to make their contribution more directly
useful for negotiations. There is a need, therefore, to provide more scholarships
and to increase exposure to trade seminars dealing with trade laws and analytical
techniques, in order to build research capacity for trade.
Another noteworthy lesson can be gleaned from Korea. Since it is important
for negotiators to be able to stay in constant contact with a technical support
group, Korea, and to a limited extent, India, make their research consultants
part of the negotiating team. They may not be the spokespeople during the
negotiations, but they are seated close by, ready to provide advice when new
issues and demands from the opposite camp crop up. The experiences of these
countries have shown that the academics they brought with them helped
government negotiators elevate the discussions to a higher level.
Clear Vision of Economic Priorities fr
om the TTop
op
from
The strengthened TRM or, eventually, the new Trade Representative Office will
definitely enhance the decisionmaking process and make it more efficient. In
the final analysis, however, the quality of the trade positions they carry with
them rests on the quality of vision of whoever is at the top. The point is that
success in international trade rests a great deal on a strong, visionary leadership.
It is only this kind of leader who will be able to fight against narrow, vested
interests and bring all the key players onto the same wavelength and subscribe
them to a single game plan. The President alone, not an independent Trade
Representative Office or a strengthened TRM structure, has the capacity to
“bang the heads of major Cabinet departments” to come to an agreement.
Thus, a leader with a clear grasp of national development priorities is crucial if
there is to be hope of having a truly cohesive trade policy formulation and
negotiation structure.
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APPENDICES
INSTITUTIONAL STUDIES OF DIFFERENT COUNTRIES
Appendix A. United States of America
Organizational setup
The Office of the United States Trade Representative (USTR) is the principal
trade policy development body of the US. It is “responsible for developing and
coordinating US international trade, commodity, and direct investment policy,
and overseeing negotiations with other countries” (USTR official website). The
Office is headed by the US Trade Representative, a Cabinet member whose
different roles include being the principal trade advisor to and chief
spokesperson for the president on trade, the primary negotiator on trade issues,
and advisor on the impact of international trade on other US Government policies.
“USTR is part of the Executive Office of the President. Through an interagency
structure, USTR coordinates trade policy, resolves disagreements, and frames
issues for presidential decision. USTR also serves as vice chairman of the
Overseas Private Investment Corporation, which is a non-voting member of the
Export-Import Bank, and a member of the National Advisory Council on
International Monetary and Financial Policies” (USTR official website).
The major areas of responsibility of the USTR include:
• Bilateral, regional and multilateral trade and investment issues;
• Expansion of market access for American goods and services;
• International commodity agreements;
• Negotiations affecting US import policies;
• Oversight of the Generalized System of Preferences (GSP) and
Section 301 complaints against foreign unfair trade practices, as
well as Section 1377, Section 337 and import relief cases under
Section 201;
• Trade, commodity, and direct investment matters managed by
international institutions such as the Organisation for Economic
Co-operation and Development (OECD) and the United Nations
Conference on Trade and Development (UNCTAD);
• Trade-related intellectual property protection issues; and
• World Trade Organization (WTO) issues.
Policy formation and trade negotiations
Consultations between the USTR and the other agencies of the government
take place via the Trade Policy Staff Committee (TPSC) and the Trade Policy
Review Group (TPRG). Together, these groups are composed of 19 federal
agencies and offices and form the “sub-cabinet level mechanism for developing
and coordinating US Government positions on international trade and traderelated investment issues” (USTR official website). More specifically, the agencies
involved in these committees are the following:
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Council of Economic Advisors;
Council on Environmental Quality;
Department of Agriculture;
Department of Commerce;
Department of Defense;
Department of Energy;
Department of Health and Human Services;
Department of Interior;
Department of Justice;
Department of Labor;
Department of State;
Department of Transportation;
Department of Treasury;
Environmental Protection Agency
Agency for International Development;
National Economic Council;
National Security Council;
Office of Management and Budget;
Office of the United States Trade Representative (as Chairman);
and
US International Trade Commission (USITC, a nonvoting member).
The TPSC is the primary operating group, with representation at the senior
civil service level. Supporting the TPSC are more than 90 subcommittees
responsible for specialized regions, countries, sectors and functions, and several
task forces that work on particular issues. If agreement is not reached in the
TPSC, or if significant policy questions are being considered, the issues are
taken up by the TPRG, which functions at the Deputy USTR or undersecretary
level.
The final tier of the interagency trade policy mechanism is the National
Economic Council, chaired by the President. The National Economic Council
Deputies’ committee considers memoranda from the TPRG, as well as important
or controversial trade-related issues (USTR official website).
The USITC is an independent federal agency that provides trade expertise
to both the legislative and executive branches of the US government. One of its
stated missions is “to provide the … USTR … with independent, quality analysis,
information, and support on matters of tariffs and international trade and
competitiveness.” The latter is therefore heavily dependent on the ITC for
technical input.
There are also 33 private sector advisory committees, composed of
approximately 1,000 advisors from industry, organized labor, nongovernment
organizations (NGOs), and other associations. Much like their public sector
counterpart, these are arranged into three tiers. There is the President’s Advisory
Committee for Trade Policy and Negotiations. There are also six policy advisory
committees usually appointed by the USTR, some in conjunction with related
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departments. Finally, there are 26 functional, technical, and sectoral groups
organized into the areas of industry and agriculture. These groups provide
information and advice on US negotiating objectives and bargaining positions.
The general public’s opinions on a wide variety of topics are also solicited
via publication in the Federal Register several times a month. Written remarks
from interested parties are given consideration both in Congress and interagency
meetings.
Policy administration and dispute settlement
The USTR’s responsibility to “assert and protect the right of the United States
under all bilateral and multilateral international trade and commodity
agreements” is administered with the help of the Department of Commerce,
whose International Trade Administration is in charge of monitoring compliance
with international trade agreements.
In decades past, the Department of State had the full responsibility of
negotiating trade agreements. Since the creation of the USTR, however, there
has been a division of jurisdiction between the two. The Department of State is
the chief representative of the US to the OECD Committee on Investment and
Multilateral Enterprises and its subgroups. Meanwhile, the USTR has lead
responsibility for all negotiations under the WTO, trade and commodity issues in
the OECD, and trade, commodity and direct investment issues in the UNCTAD.
As part of the check-and-balance system in the US, there is a firm
Congressional-Executive Partnership in the conduct of US trade policy. The
Constitution vests the Congress with the ultimate authority to regulate trade
with foreign nations. Five representatives from each House are officially
designated as the Congressional advisors on trade policy, and the USTR provides
regular and detailed briefings to the Congressional Oversight Group. Apart from
these, there are, annually, hundreds of congressional conversations between the
USTR and the Houses spanning the range of trade issues from tariffs to textiles.
Section 301 of the Trade Act is the principal law of the US that addresses
unfair trade practices. A complaint under this section may either be filed by any
interested individual or be initiated by the office of the USTR itself. Once a
complaint is filed, the USTR is given 45 days to decide whether it desires to
initiate further investigation into the matter. Its decision on the matter is then
published in the Federal Register. If the office pursues the issue, it is given one
year to complete the investigation and to decide on what action to take against
the offending party. In this period, the USTR provides opportunities for the public
to comment on the issues and holds public hearings upon the request of either
the petitioner or any interested party. An important facet of the investigation
process includes consultations with the foreign government that is the target of
the complaint. While Section 301 asserts that the US does not need to gain
approval from any other body in order to take action, the country is committed
to pursuing dispute resolution mechanisms under the auspices of the WTO and
the NAFTA insofar as this is possible.
Appendix Figure 1. Flow of trade dispute settlement in the US
Individual files a complaint with the USTR!
USTR decides whether to initiate investigation (45 days)!
[Decision published in Federal Register]!
USTR investigates the issues and decides upon appropriate action (1 year)
Appendix B. European Union
Based on Article 133 of the European Community Treaty, the EU has a common
trade policy that is based on uniform principles. The member states have all
agreed to pool their sovereignty and follow a universal policy on international
trade. This Common Commercial Policy aligns the states in terms of changes in
tariff rates, the conclusion of tariff and trade agreements with nonmember
countries, the enactment of trade liberalization measures, export policy, and
trade protection. The main aspects of trade in both goods and services thus fall
into the exclusive competence of the EU, such that the responsibilities are
exercised entirely by the community and are not shared with the individual
states. All General Agreement on Tariff and Trade 1994 and WTO matters are
clearly delineated as falling within this exclusive competence.
Article 133 also spells out areas of mixed competencies, where
responsibilities are shared by the Community as a whole and by the member
states. Under this category fall matters pertaining to the General Agreement on
Trade in Services (GATS) and to the Agreement on Trade-Related Aspects of
Intellectual Property Rights. These include trade in cultural and audiovisual
services, educational services, and social and human health services.
Agreements on mixed competency areas must be jointly concluded by the
Community and the member states.
There is a balanced decisionmaking system in place when it comes to the
implementation of the EU common trade policy. The EU Commissioner for
External Trade, supported by the external trade administration known as the
Directorate-General Trade of the European Commission (or DG Trade), has the
charge of negotiating on behalf of the Member States. The primary task of the
directorate, as outlined in the Treaty of the European Community, is “to contribute,
in the common interest, to the harmonious development of world trade, the
progressive abolition of restrictions on international trade, and the lowering of
customs barriers.” Its specific responsibilities are:
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to define (and reappraise) the trade interests of the European
Community in both defensive and offensive terms;
wherever the Union’s commercial policy objectives so require, to
negotiate bilateral, regional, or multilateral agreements on the basis
of negotiating directives proposed by the Commission and adopted
by the Council;
to monitor and ensure the implementation of international
agreements by using the WTO dispute settlement system and the
instruments for trade promotion or defense adopted by the
Community (the antidumping and antisubsidy rules and the trade
barriers regulation);
to take part in devising and monitoring internal or external policies
that have a bearing on the Union’s trade and external investments
(single market, consumers, health, environment, technology,
intellectual property, competitiveness, competition, energy,
transport, agriculture, sectoral measures);
to ensure consistency within the Relex group between the
commercial policy and the Union’s general external relations policy
on the one hand and the contribution of the EU to global economic
governance on the other; and
to provide the public, both sides of industry, civil society and
professional circles with clear, comprehensive, and up-to-date
information while seeking their opinions in compliance with the
rules set down in the Commission’s codes of conduct.
While the Commission is officially the administrative arm of the EU and its
version of a central executive body, it is the Council of the European Union, usually
composed of the foreign ministers of all the member states and operating on a
qualified majority vote with a one country, one vote practice, which has the final
decisionmaking authority and is in charge of establishing the main objectives of the
EU. The Commission, as per Article 133 of the treaty, can only conduct negotiations
“within the framework of such directives as the council may issue to it.”
It is for the aforementioned reason that the DG Trade, in which roughly 250
people are involved with negotiating trade policy, works closely with the Article
133 Committee, a special permanent consultative body composed of
representatives of the trade administrations from the 25 member states and
the European Commission. The main function of the Committee is to coordinate
trade policy. Via weekly meetings, its members are able to discuss the full range
of trade policy issues affecting the Community. Specialist meetings are also
conducted by the Committee in order to discuss complex issues like trade in
services and textiles in greater depth. The Committee listens to the Commission’s
reports on trade policy issues and examines its proposed negotiating mandate.
It then makes recommendations and gives endorsements in behalf of the
member states. The Committee’s viewpoint is reflective of the stand of the
Council, so the amendments it proposes are normally accepted by the
Commission and integrated into the “directives for negotiation,” which are then
forwarded to the Committee of Permanent Representatives (or COREPER). The
COREPER has the task of elevating the proposal to the General Affairs Council.
Once the directives are adopted by the Council, they act as the Commission’s
mandate and guide the latter in its work. The major formal decisions, such as
the agreement to launch or conclude negotiations, are confirmed by the Council
of Ministers. Even in areas where the decisionmaking power was formally
delegated by the Council to the Commission, the rules generally provide for the
possibility of further review by the Council, which has the power to confirm,
modify or reject the Commission’s decision.
Other directorates within the European Commission that have considerable
input on trade policy matters are the Directorate for the Internal Market and
Industrial Affairs, the Directorate for Competition, and the Directorate for
Agriculture.
The DG Trade has a planning unit that conducts research on any policy
issue of interest to the Commissioner. In addition to this, independent external
consultants are often hired to conduct Sustainability Impact Assessments (SIAs).
These studies allow the Commission to examine the potential effects on
sustainable development, particularly the economic, environmental, and social
impacts, of its own proposals for WTO trade negotiations. The results of these
SIAs are posted on the Commission’s website as soon as they are available.
In order to draft policy that takes into account the concerns of all affected
parties, the DG Trade conducts a Civil Society Dialogue process with a wide
variety of groups, ranging from NGOs to organized labor and employers’
associations to the European Economic and Social Committee, in addition to
the institutional contacts that regularly take place. Within this framework occur
many plenary and ad hoc meetings. General ones are chaired by the Trade
Commissioner himself, while smaller ones focusing on specific issues occur in
between. Issue groups that include representatives of civil society, business,
and trade unions are also intermittently formed. The current Trade Commissioner
also holds regular internet chats to directly correspond with the public with
regard to their views on trade policy.
Member states maintain their own trade administrations for three major
reasons:
• For their participation in the formulation of EU common trade policy;
• For the implementation of issues related to shared competence;
and
• For the management of issues of national competence, e.g., export
promotion.
Unless there is a need to impose a new budget measure or set up a new
institution, the European Parliament currently plays no formal role in the
formation of trade policy in the EU and simply issues comments on Commission
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policies and proposals when it is briefed on such issues for transparency’s sake.
However, the draft Treaty establishing a Constitution for Europe, which was
adopted on 25 June 2004, gives the Parliament a stronger position. Once the
Constitution is ratified and comes into effect, the Parliament will have a role
similar to that of the US Congress under the fast track procedure. It will become
colegislator for autonomous trade policy and will have to approve all international
trade agreements. A duty will be passed onto the Commission to regularly inform
the Parliament of the state of play of negotiations, similar to the treatment that
the Article 133 Committee receives.
The European Court of Justice, as the interpreter of the provisions of the
European treaties, has also played an important role in implementing the EU’s
common commercial policy. It was the ECJ that defined the competencies of
the policy areas and, in the past, it denied the Commission’s requests for the
expansion of its jurisdiction over trade in services in 1994.
Appendix Figure 2. Flow of trade negotiation in the European Union
Commission proposes!
133 Committee endorses/makes recommendations!
Council determines mandate!
Commission negotiates!
Council approves!
Parliament is informed
Complaints and consultations are divided according to the Article 133
competencies as well. Shared competency issues may be brought up with the
individual trade administrations of the member states, while the Commission
has departments to deal with broader concerns. Individual industries with a
stake in policy may decide to operate either through their own national
associations or via their head associations on the union level.
If a particular industry feels that it is being materially harmed by dumped or
subsidized imports, it can address a complaint to the Commission’s Antidumping
Services group. Meanwhile, the Trade Barrier Regulation functions similarly to
US Section 301, in that industries may lodge a complaint with the Commission
if they feel that trade barriers restrict their access to third country markets. The
DG Trade is responsible for ensuring compliance by third countries with
international trade accords. If, upon consultation with the member states via an
advisory committee, the Commission decides that a complaint merits a detailed
investigation, it is bound to a strict timetable for dealing with the matter.
Conclusions for or against remedial action must be made within 13 months for
antisubsidy cases and within 15 months for antidumping issues. All parties to
the complaint are given full opportunity to state their case and appeals are
allowed by the Commission. After all disclosures and verifications have run their
course, the Commission proposes definitive measures to the Council. These
measures traditionally apply for five years.
In general, when it comes to third countries lodging complaints against a
member state, the Commission has an assisting and advising function. However,
it has a direct role in antisubsidy cases in which EU subsidies are involved, and
in all cases where imports from the EU as a whole are concerned.
Appendix Figure 3. Flow of trade dispute settlement in the European Union
Industry submits complaint to the Commission!
Commission consults member states via an advisory committee!
Formal investigation is undertaken (13-15 months)
Appendix C. Canada
Trade policy formation in Canada is characterized by strong interdepartmental
consultation. International Trade Canada (ITCan) takes the lead on issues relating
to international trade, commerce, and investment. Other departments such as
Agriculture and Agri-Food Canada, Finance, and Industry Canada also play
significant roles in the process. Any differences between departments and
agencies are ironed out at the working level and elevated to deputy ministers or
to ministers as appropriate. It is understood that the department with the lead
responsibility over a given issue has a major say. Decisions are not reached by
voting. Interdepartmental and interagency conflicts are minimized by instituting
a transparent consultative process that involves relevant departments and
agencies early in the process of trade policy formulation.
In the specific area of services negotiations, interdepartmental meetings
involving around 15 departments and agencies are convened regularly to discuss
issues relating to services negotiations, including the development of instructions
for international meetings, and the preparation or revision of services requests
and offers as in the case in the WTO. With some services sectors falling within
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provincial and territorial government jurisdictions, these governments are also
consulted on a regular basis.
The services community is regularly consulted by ITCan via informal emails as
well as formal interdepartmental meetings. The Services Trade Policy Division (EBS)
takes the lead in discussions and negotiations on services. The Director of the
Division is Canada’s negotiator. It is the EBS that drafts documentation, while other
departments provide input, confirmation and approval. Transport Canada, for
example, is given a say in transport services issues, the Department of Finance in
financial services issues, and Health Canada in health services issues.
It is the provincial and territorial governments that normally have jurisdiction
over the specific service sectors, so they are consulted in the process of
domestically determining which sectors are to be liberalized. Municipalities,
Canadian businesses, and civil society are also given the opportunity to air their
thoughts, since they are also directly affected by any changes in the manner in
which trade in services are conducted. Interdepartmental and interagency
consultations provide supplementary material. With the information gathered
from all these consultations, ITCan sets objectives and orders its priorities,
formulates its negotiating positions, selects the trade interests it would like to
promote or protect, and decides whether concessions may be made in particular
areas in order to meet specific objectives in other areas.
The Trade and Economic Analysis Division of ITCan is the in-house research
group that tries to assess the benefits and costs of certain trade commitments.
ITCan also takes advantage of the information provided by the WTO, the OECD,
other federal departments, provincial and territorial governments, other
intergovernmental organizations, think tanks, and other institutions. The agency
also takes it upon itself to recommend or support proposals for specific work in
other organizations such as the OECD in order to enhance the general
understanding of particular issues and shore up support for trade liberalization.
The mandate for negotiation is given to the Division by the Cabinet.
Other departments are given the opportunity to provide advice and submit
recommendations based on extensive interdepartmental consultations and
domestic consultations with provincial, territorial and municipal governments,
Appendix Figure 4. Flow of trade negotiation in Canada
ITCan consults with territorial governments, business and civil society!
ITCan sets objectives and formulates negotiating positions!
Other departments give recommendations!
Cabinet gives mandate for negotiation!
ITCan negotiates
business and academics, civil society, and other stakeholders. The outcome of
parliamentary hearings may also be considered as reference points.
Foreign Affairs Canada (FAC), the other half of the former Department of
Foreign Affairs and International Trade, still plays some role in trade policy
formation. Its geographical divisions gather information and intelligence, which
the department passes onto ITCan. FAC also stays in close contact with Canada’s
various embassies and missions and permanent delegates to intergovernmental
organizations like the WTO and OECD; these are able to provide valuable insights
that help form particular positions on different issues in service negotiations.
The private sector may voice its opinions via lobbyists and national business
associations or directly through mail (including electronic mail), in consultations
undertaken by the government of Canada (including online surveys), or by phone.
ITCan regularly prepares discussion papers delving into the different issues
being considered by the agency. Considered the main “basis for its consultations
both inside and outside the government apparatus” (Stairs 2000), these papers
contain general background and identify the possible issues likely to come up in
negotiations as well as give indications of what the resulting negotiations might
be like. The papers are often provided to any interested parties via download
from the official website. Feedback on these papers is highly encouraged. On
occasion, notices in the Canada Gazette have been published by the department,
“requesting input from any and all Canadians on the scope, content, and
processes pertinent to the negotiations” (Stairs 2000). To supplement this kind
of request, direct mailings to businesses and NGOs are sent and the notice is
also posted on the website. Other information available online for perusal
traditionally includes detailed information on pending WTO ministerial meetings
and how NGOs can register for attendance, the list of official Canadian delegates,
and the text of Canadian proposals tabled in Geneva.
Aside from general public consultations, around the time of the negotiation
of the Canada-US Free Trade Agreement, 13 specific Sectoral Advisory Groups
on International Trade (SAGITs) came into being, joining the preexisting Team
Canada Inc. Advisory Board in representing private sector interests. In the leadup
to major negotiations, the department conducts series of roundtable with
independent advisers, largely consisting of well-established experts in the
competition and trade policy fields. As a representation of the involvement of
the private sector, it is worthwhile to note that out the 84 delegates to the WTO
conference in Seattle, 14 were designated as “Private Sector Advisers.”
Additionally, 65 private Canadian organizations registered at the conference by
directly getting in touch with the WTO. All Canadian delegates, independent or
not, were kept as well informed as possible by the government throughout the
proceedings.
The public is welcome to send any services trade-related inquiries or
requests to the EBS. There are officers in the division responsible for the different
sectors, and whoever is in charge of the sector in question has the charge of
initiating contact with the individual as well as performing interdepartmental
consultation.
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ITCan supports its negotiators by providing them with information and
intelligence, as well as with human and financial resource necessary in their
pursuit of the objectives and positions set forth by the agency. Regular meetings
are organized between lead negotiators in order to ensure that developments
and challenges are dealt with and appropriately responded to, and to continually
clarify and explore the nation’s official position on particular issues. Most of the
groundwork is laid out at the working level, but the higher officers from the
Directors-General to the Ministers also get involved when it is necessary to read
interdepartmental consensus or to provide political guidance.
It is the Services Council of the WTO that monitors the implementation of the
GATS, and adherence to or violation of the rules is brought up at official meetings.
The WTO Secretariat also conducts regular trade policy reviews on all member
countries and scrutinizes their policies and practices closely on occasion.
The member countries of the GATS have the responsibility of ascertaining
whether their trade partners are upholding their commitments. In Canada, there
is no particular department or division that monitors such affairs. Those who
engage in trade, that is, the Canadian service providers themselves, are in a
position to determine whether markets are being opened up to them or kept
closed, if barriers to trade are being maintained or built instead of broken down.
If the firms or industries feel that trade is being hampered by a third country, they
can be brought to the attention of the government. EBS can then assist the
complainants in terms of ascertaining the schedule of commitments by other
countries and determining whether the latter’s actions constitute a breach of
any agreement. In light of the information gathered, EBS can consult with the
governments of other countries through bilateral discussions or demarches.
The Special Import Measures Act is Canada’s antidumping and
countervailing law, and it provides protection to Canadian industry. The
administration of this act is jointly handled by the Canada Border Services Agency
and the Canadian International Trade Tribunal (CITT).
The CITT is the quasijudicial institution in charge of complaints. The CITT
operates within the Canadian trade remedy system and reports to Parliament
through the Minister of Finance. It has the authority to:
• conduct inquiries into whether dumped or subsidized imports have
caused, or are threatening to cause, material injury to a domestic
industry;
• hear appeals of decisions of the Canada Customs and Revenue
Agency made under the Customs Act, the Excise Tax Act, and the
Special Port Measures Act;
• conduct inquiries and provide advice on such economic, trade,
and tariff issues as referred to the Tribunal by the Governor in
Council or the Minister of Finance;
• conduct inquiries into complaints by potential suppliers concerning
procurement by the federal government that is covered by the
•
•
North American Free Trade Agreement, the Agreement on Internal
Trade, and the WTO Agreement on Government Procurement;
conduct safeguard inquiries into complaints by domestic producers
that increased imports are causing, or threatening to cause, serious
injury to domestic producers; and
conduct investigations into requests from Canadian producers for
tariff relief on imported textile inputs that they use in their
production operations.
Simply put, the process of investigation is as follows:
Appendix Figure 5. Flow of trade dispute settlement in Canada
Producer files complaint with the Canadian Border Services Agency !
If at least 25% of Canadian production supports complaint, Canadian Border Services
Agency initiates investigation !
CITT initiates independent inquiry !
CITT makes decision (7 months)
Appendix D. Japan
Unlike the three previous examples, there is no single ministry in Japan that has
the primary charge for determining trade policy. Instead, there is what is known
as the main group of four: (1) the Ministry of Economy, Trade and Industry (METI),
which, until 2001, was known as the Ministry of International Trade and Industry;
(2) the Ministry of Foreign Affairs (MoFA), the diplomacy-oriented ministry whose
institutional mandate includes being in-charge of all international treaties and
intergovernmental agreements that Japan concludes, the organizing and enabling
of meetings between the negotiating parties, and the formulation of letters of
agreement or treaties; (3) the Ministry of Finance (MoF), in-charge of customs
affairs; and (4) the Ministry of Agriculture, Forestry and Fisheries (MAFF), which
has a leading voice in the realm of the importation of sensitive agricultural
goods. These four ministries often conduct coordination meetings at various
levels. Aside from these, other ministries also have a say when it comes to their
specific jurisdictions. The Ministry of Health, Labour and Welfare, for example,
works on the mutual recognition of nurse qualification, while the Ministry of
Internal Affairs and Communications plays an important role in talks concerning
telecommunications liberalization.
Within the METI, it is the Trade Policy Bureau, known to be one of the prime
advocates of free trade in the nation, that takes primary charge of trade policies.
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The Bureau has seven divisions, and one department that deals with multilateral
trade issues. The seven divisions include a policy coordination division, a research
division, region-specific divisions (Americas, Europe and Middle East, Northeast
Asia, Southeast Asia, and Australasia), and a “regional cooperation” division
dealing with bilateral Free Trade Agreements (FTAs) or Regional Trade Agreements
(RTAs). Much like their ministerial counterparts, industry-specific bureaus under
the METI do get involved when products under their jurisdiction is at issue. The
Trade Policy Bureau coordinates the METI’s external trade policy and negotiates
with the MoFA. This Bureau is also actively pursuing an integrated domestic and
external economic policy with the twin objectives of maintaining the global free
trade system while shaping the international business environment in such a
way as to boost Japan’s industrial competitiveness.
Within the MoFA, it is the Economic Affairs Bureau that takes charge of
trade issues. A Free Trade Agreement/Economic Partnership Agreement Division
was established under this bureau recently, and the FTA/EPA Headquarters was
created. This Headquarters conducts consultations regarding the formulation of
Japan’s comprehensive strategy for FTAs and EPAs, with the intention of “ensuring
a unified and coordinated response and supporting negotiations with specific
countries on a ministry-wide basis.” (MoFA press release).
Final decisions regarding policy are made at Cabinet meetings chaired by the
Prime Minister. Decisions are made by consensus, though there is no established
formal system of coordinating, integrating, and synthesizing the diverse opinions
and requirements of the various government institutions. In the run-ups to
negotiations, informal interministry meetings to discuss issues relating to policy
are frequently held, especially between the ministries with a strong stake in the
policy outcomes. These meetings take place at various levels, from Division
Director to Bureau Deputy Director General. Before the formal negotiations open,
however, the Cabinet Secretariat, which is formally superior to all ministries,
summons representatives from all related ministries and agencies.
In principle, no ministry or agency is superior to others, and “different
sectors of Japan’s bureaucracy seem to exercise veto power against each other”
(Funabashi 1995). During votation, however, the one with the loudest voice
often prevails, as in the case of agriculture. In rare instances, the office of the
Prime Minister intervenes in a limited capacity.
Proposals are finalized in the form of official cables issued by the MoFA. No
standardized process for this exists. Sometimes, the MoFA drafts the original text.
On other occasions, depending on the area of expertise, the METI or the MoF does
it. Proposals relating to agriculture, forestry, and fisheries are exclusively drafted by
the MAFF. “In the process of coordination, other ministries often try to change the
text, but the irony is much of the inter-ministerial negotiations is conducted in
Japanese. When the MoFA translates the text into English, the subtle nuance of the
original Japanese is often lost and it is often the MoFA’s stand that is most strongly
represented” (Araki, interview, January 21, 2005.).
When the METI comes up with proposals dealing with trade remedies (e.g.,
antidumping policies), it is given much latitude by the government. The
bureaucrats are free to consult with the private sector, but can also begin the
initiative for new negotiations themselves. The MAFF does not have such a
privilege in agricultural issues. Instead, their mandates come from politicians
and agricultural cooperatives. These are formally given out in Cabinet meetings.
In major ministerial conferences, agricultural politicians and representatives of
cooperatives are always present to monitor that MAFF officials (or officials of
other ministries) are acting within their mandates.
Ministries that oversee domestic industries are often protectionist and
passive in trade negotiations. The continuing liberalization of the economy is
then often a result of external pressures from trading partners. Private initiative
is traditionally the more common root of Japan’s trade policy changes, although
it is acknowledged in the inner circles that the government is often behind these
so-called private sector moves anyway. To this end, study groups are organized,
and these groups make joint recommendations that endorse particular courses
of action. In response to these, the METI initiates the selection of sectors to
liberalize. The MoFA has virtually no power to propose any domestic sector’s
liberalization.
The Research Institute of Economy, Trade and Industry, an incorporated
administrative agency affiliated with the METI, has in its employ economists
who can use the Global Trade Analysis Project general equilibrium model to
assess the benefits and costs of certain trade commitments. Industry
associations are often consulted by the government, as private funding for
research is often helpful in the undertaking of more detailed studies that are
often necessitated by serious moves to liberalize.
The general mandate for negotiation is in the Law Establishing METI. METI
has an uncontested jurisdiction over all manufacturing sectors, except for ships
and pharmaceuticals. However, when it tries to assert its negotiating mandate
over the services sector (be it finance or telecommunications), it is strongly
objected by the relevant ministries.
Some sectors, such as the agricultural sector, are more influential with the
politicians and with the bureaucracy than others. In general, sectors lobby
relevant ministries and agencies, the ruling Liberal Democratic Party and the socalled zoku-gin lawmakers, who lobby in behalf of and are in turn benefited by
specific sectors. Some representatives are able to talk to government officials
and politicians, while others protest in the streets.
Public consultations are seen in Japan as more of a tool for information
gathering. Advisory councils or informal discussion groups are put together by
the ministries interested in getting outside expert opinions. Consultative bodies
are often composed of representatives from related industries, academia,
journalism, and NGOs. The results of these discussions are kept shielded from
the general public, however, retaining the air of mystery that surrounds
policymaking. The limited information released by the ministries can be accessed
at their official internet homepages, where members of civil society can post
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Appendix Figure 6. Flow of trade negotiation in Japan
Trading partners exert external pressure to liberalize !
Private sector forms study groups and makes recommendations!
METI initiates the selection of sectors !
Industrial Structure Council gives advice !
METI issues policy statement !
Cabinet discusses and decides on appropriate proposal !
Cabinet consults with the LDP !
Cabinet proposes !
Diet approves !
Cabinet gives mandate !
MoFA and co-chair negotiate
comments and questions regarding negotiations. Informal consultations with
civil society are rare in Japan. Business organizations receive questionnaires on
WTO negotiations in order for the Ministry to ascertain the needs of business
stakeholders. Sectoral organizations such as the Central Union of Agricultural
Co-operatives of Japan (JA Zenchu) who often lobby the government have more
success in influencing trade policies to some extent. Interindustrial business
organizations such as the Japan Business Federation (Nippon Keidanren) often
issue appeals on trade policies but do not necessarily influence or drive the
government’s trade policy formation a lot. Appeals are occasionally issued by
NGOs, too, but influence policies even less than by business organizations.
Generally speaking, NGOs interested in trade issues, which are antifree trade in
many cases, are not active in Japan as in Western and Southeast Asian countries.
The Industrial Structure Council, the general advisory organ on any METI policy, is
composed of academics, consumer groups, and labor representatives. It is
perhaps the one group with a truly notable voice. Its recommendations are
given directly to the METI Minister, to whom the Industrial Structure Council
reports.
There are two methods by which an agreement can be implemented. One is
through the passing of a piece of legislation, which goes through the Diet.
The parliamentary democracy that operates in Japan allows for a close
relationship between the Diet and the bureaucracy to begin with, and many
of the ministers are also Diet members. This results in a situation in which
the policies pursued by the Cabinet are ones to which the Diet has already
given tacit approval.
The other method by which a trade policy is implemented is by Cabinet
order, again founded upon a consensus at a Cabinet meeting. The Cabinet
Legislation Bureau ensures the consistency of the implementation of laws with
the WTO and regional trade agreement rules. The liberalization in the trade of
goods is monitored by the METI, under whose jurisdiction falls trade in general,
and the MoF, which has the charge over customs affairs. Liberalization of trade in
services is monitored by the relevant ministries and agencies. For example,
financial liberalization is overseen by the MoF and telecommunications
liberalization by the Ministry of Internal Affairs and Communications.
There is no equivalent of US Sec. 301 or EU’s Trade Barriers Regulation
that deals with complaints against third countries in Japan. All the complaints
are handled on an ad hoc basis. If the charge is dumping or illegal subsidy, the
complainants can have recourse to the antidumping/countervailing duty process
administered by MoF. The Office of the Trade and Investment Ombudsman in
the Cabinet also accepts such complaints. There are specific subdivisions of
the manufacturing industry bureau, which is under the Trade Policy Bureau of
the METI, that deal with specific industries. Firms and industry associations are
free to informally approach these subdivisions in the case of complaints.
If there are complaints against a country’s exports, METI has the jurisdiction.
Its Trade and Economic Cooperation Bureau, which is separate from the Trade
Policy Bureau, is in charge. Violators are criminally punished through fines and
imprisonment.
Appendix E. Malaysia
While the Federal Parliament of Malaysia has the constitutional authority over
external trade policy, the task of administration has been delegated to the
executive branch of the government. International trade policy in Malaysia is
handled primarily by the Ministry of International Trade and Industry (MITI). The
institutional objectives of this Ministry are:
• to promote and safeguard Malaysian interest in the international
trade arena;
• to spur the development of industrial activities; and
• to further enhance Malaysian economic growth toward realizing
Vision 2020.
Since MITI also has under its purview industry development as a separate
objective from international trade, there are agencies under the Ministry that
deal with its different purposes. More specifically, the Malaysian External Trade
314
Corporation (MATRADE) takes care of the export promotion of goods and
services. Its mission is to develop and promote Malaysia’s export to the world.
The specific functions of MATRADE are:
• to promote, assist, and develop Malaysia’s external trade with
particular emphasis on the export of manufactured and
semimanufactured products and services;
• to formulate and implement export marketing strategies and
trade promotion activities to promote Malaysia’s export;
• to undertake commercial intelligence and market research and
create a comprehensive database of information for the
improvement and development of Malaysia’s trade;
• to organize training programmes to improve the international
marketing skills of Malaysian exporters;
• to enhance and protect Malaysia’s international trade
investment abroad; and
• to promote, facilitate, and assist in the services areas related to
trade.
While MITI is the point agency when it comes to the formation of trade policy, all
policy decisions in Malaysia are ultimately made by the Cabinet. The Ministry presents
its opinions and suggestions to the Cabinet and each ministry may provide feedback
and air its objections to any issue or policy. If any ministry has a strong objection to a
proposal, the policy cannot be passed. The Ministries of Agriculture and Health both
play significant roles, especially with regard to import procedures, while the Ministry
of Finance is the final arbiter as regards taxes, including tariffs.
MITI has regular consultations with sectoral ministries and industry. The
MITI Minister conducts a formal dialogue with all trade and industry associations
in Malaysia annually. Before any policy decision is made, industry is given an
opportunity to present its view.
Those involved in international trade negotiations, be they made under
the WTO or more narrow regional trade agreements, get their mandate,
parameters, and limits via formal consultations with the sectoral ministries or
agencies and with industry. Regular updates as regards negotiation developments
and plans are provided to Cabinet. The Ministry of Foreign Affairs is always
involved in the consultation process.
Aside from handling negotiations, MITI also has the responsibility of
monitoring the interactions in liberalized sectors to ensure that all parties are
honoring the agreements. As part of this task, the Ministry conducts regular
consultations with industry and closely observes trade and investment flows.
The Ministry has an in-house research department that undertakes
feasibility studies in consultation with the sectoral ministries or agencies and
with industry. Semi-independent research institutes such as the Malaysian
Institute of Economic Research, various universities, and the Institute of Strategic
and International Studies Malaysia are also invited to contribute to the
Appendix Figure 7. Flow of trade negotiation in Malaysia
MITI undertakes feasibility studies !
MITI gets preliminary mandate, parameters, and limits from sectoral ministries
and the industry !
MITI presents proposal to Cabinet !
Cabinet decides which sectors to liberalize and bestows final mandate for negotiation !
MITI negotiates
preparation of policy initiatives. The results of these studies are presented to
Cabinet for consideration before decisions as to which sectors to liberalize are
made. Cabinet weighs in with its decision and is ultimately the body that bestows
the mandate for negotiation on the Ministry.
The negotiating officers of the Ministry are given the autonomy to consult.
The necessary resources are made available upon the request of negotiators.
Individuals or firms may lobby or air their concerns by writing letters to the
Minister, the Secretary-General of MITI, or directly to the officers involved with
the issue. They may also approach MITI via industry associations. MITI endeavors
to present a very transparent and business-friendly environment that allows
those concerned to give their opinions on its policies and decisions. Once
received, the Ministry considers these requests in light of national interests.
When it comes to dispute resolution, subdivisions of the MITI take charge.
The Trade Practices Division handles complaints against foreign imports.
Representatives from the Customs Department and the Attorney-General’s
Chambers assist in the investigation of the cases. Meanwhile, the Trade Services
Division collaborates with the Industries Division when it comes to complaints
against the country’s exports. These two work in conjunction to find resolutions
to such problems. If it is proven that an exporter has violated an agreement, the
exporter will be blacklisted by MITI.
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Interviews
Araki, Ichiro, Associate Professor at the International Graduate School of Social Sciences,
Yokohama National University. 21 January 2005.
Olivier de Laroussilhe, Director General, Trade Information and Communication, European
Commission. 22 November 2004.
Maria Isolda P. Guevara, Services Trade Policy Division, International Trade Canada. 20
January 2005.
Rebecca Fatima Sta. Maria, Director of Research and Publication, Stategic Planning Division,
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About the Authors
Dr
asadilla is a Senior Research Fellow and the Lead Economist for
Dr.. Gloria O. P
Pasadilla
research in services at PIDS. She obtained her PhD in Economics from New York
University, USA. Prior to joining PIDS in 2004, she was assistant professor at the
University of Asia and the Pacific and formerly Deputy Director for the Industrial
Economics Program of the Center for Research and Communications (CRC; now
University of Asia and the Pacific). She is a consultant for various international
organizations on trade and finance issues.
Jovi C. Dacanay is an economist and a full-time faculty member at the School of
Economics of the University of Asia and the Pacific (UA&P). She has a BS Statistics
degree from the University of the Philippines Diliman, an MS Industrial Economics
degree from the University of Asia and the Pacific, and an MA Economics degree (with
PhD units) from the University of the Philippines Diliman. She currently manages
Staff Memos and Industry Monitor, two research publications of the UA&P School of
Economics and also acts as managing editor of Economics 101, a basic economics
journal geared toward teachers and students interested in the fundamentals of
economics. Her research interests include the industrial organization of healthcare
markets, pharmaceuticals and entertainment economics.
Angelina M. Lantin, Jr
Jr.. holds an MS Industrial Economics degree from the University
of Asia and the Pacific. She is a consultant of PIDS.
Christine Marie M. Liao graduated magna cum laude from the University of Asia
and the Pacific in 2004, obtaining a master’s degree in Industrial Economics. She is
a consultant of PIDS. Her areas of interest are international trade and economic
growth.
Winston Conrad B. Padojinog is a faculty member and economist at the School
of Economics of the University of Asia and the Pacific. He obtained his master’s
degree in Industrial Economics from the Center for Research and Communications
and his double-major bachelor’s degree in Economics and Management from the
University of the Philippines in the Visayas. As a business economist, he is a consultant
to companies and industry associations in the Philippines and abroad. Prof.
Padojinog’s publications and researches are in the areas of industry competition and
industrial policy.
Ceferino S. Rodolfo is the Program Director of the MS Management Program of
the University of Asia and the Pacific. He is a PhD candidate (Public Administration) at
the University of the Philippines National College of Public Administration and
Governance. He obtained his MS Industrial Economics degree from the Center for
Research and Communications as a full scholar of the Hanns Seidel Foundation,
Germany, and his BS Economics degree from the University of the Philippines School
of Economics. His areas of expertise include trade policy, industry and services
competitiveness, and strategic management.
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Maria Cherr
yn S. R
odolf
o is the Program Director of the Industrial Economics
Cherryy LLyn
Rodolf
odolfo
Program of the University of Asia and the Pacific. She obtained her MS Industrial
Economics degree from the Center for Research and Communications and her AB
Management Economics degree from the Ateneo de Manila University. Her major
research areas include air transport and logistics, tourism and health-related services,
retirement, and garments.
Andrea L. Santiago is an Associate Professor at the Business Management
Department, College of Business and Economics of De La Salle University (DLSU)Manila. She currently holds the Cecilio Kwok Pedro Professorial Chair in Entrepreneurial
Management. She is also a Senior Research Fellow at the DLSU-Angelo King Institute
for Business and Economic Studies, where she heads the Family Business Studies
Center. At one point, she served as the Director for the Commission on Higher Education
(CHED) Zonal Research Center-NCR 1. Dr. Santiago received her Masters in Business
Management degree from the Asian Institute of Management and her doctorate from
the De La Salle Graduate School of Business and Economics. Among her fields of
academic interest are family business management, international and higher
education, and corporate social responsibility.