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S.M.N.I. Truth That Matters

Welcome back to Business and Politics. We're talking to Director General Teo Panga of the Philippine Economic Zone Authority.

Sir, very interesting discussion on your work.

What we hear from other guests on this program is that the work of the Philippines to promote itself as an investment destination is paid harder

by the fact that our neighbors are also going after the same cohort of investors.

But how are we faring, I mean, from your perspective?

What are the advantages that we have, let's say, that maybe Indonesia, Malaysia, or maybe even Singapore does not have?

Where do we excel and where do we need to have some improvement?

Well, I would say it's a very stiff competition for FDI because we're up against other ASEAN economies.

And our neighbors or competitors in the region are now resorting to what we call race to the bottom.

So they're really trying to give all concessions from incentives, from infra development,

just so that they're able to bring in more investments into their economy.

So we're up against that backdrop.

And so I would say our biggest selling point really for the Philippines is our labor, the high productivity of our labor.

Okay.

And the cost of doing business because our incentives, I would say, is comparable, if not better.

We've looked at the length of the running of incentives across ASEAN.

It ranges from five to 15 years.

This is the income tax holiday.

Yes, income tax holiday plus combination of special corporate income tax.

It's even longer for the Philippines, ranging from four years up to 17 years.

Okay.

And then under the crate regime, the Philippine president is also even authorized to grant a longer income tax holiday period for as long as 40 years.

And this is even longer than what Vietnam gave to Samsung for 30 years of income tax holiday.

Wow.

So on labor, as our comparative advantage, there was even a survey made on Filipinos given their high capacity to engage in sophisticated type of work.

Okay.

So we're now seeing…

So high skilled.

Yes, high skilled.

And this is why we now see more companies located in the Philippines into higher value, high tech companies and type of activities.

Some are even into R&D and innovation, making the Philippines as their global site for R&D.

So we're able to support that.

In fact, one of the challenges that we have now is that while we're up against other economies competing for the same FDI into the same sectors probably, they may be into electronics or automotive.

The city, for instance, has told me that we're even supporting the operations of their subsidiary companies in Vietnam.

So it's people coming from the Philippines supporting their operations in Taiwan, in Vietnam especially.

So the best way really we can keep up with the competition is to provide the best location and ecosystem.

And we can provide that through the economic zones.

Because, you know, in the economic zones we have the industry clusters.

Okay.

We have the ease of doing business.

Okay.

They can bring in their items tax and duty free and export out of the Philippines where we can enjoy GSP Plus.

Right.

They have the labor force.

We have the supply chain to support their operations.

And even those that are resource-seeking investors.

So we have feedstock to offer them with land, with the crops.

So this is where we can draw advantages and where we can be most competitive in attracting investments.

Those that are resource-seeking, efficiency-seeking, and market-seeking investments.

That's interesting.

So if I understand you correctly, would I be correct in saying that the Philippines is not competing in terms of low labor costs?

Because you said there are a lot of skilled Filipinos and that they are highly desired by the locators that you are attracting to the country.

Is that correct?

And also, if that is correct, are you limiting your search to particular industries that are suitable for the resources that we have that are maybe less labor-intensive but more the type of, you know, high-tech?

Is that something – is that the right way to understand the situation that you were describing?

Yes.

Well, this is the reality.

While we're saying that we're doing quite well with investment promotions, but if you try to compare the Philippines, let's say, against Vietnam.

Yes.

Vietnam is getting three times as much in investments and is able to export five times larger than the Philippines.

Okay.

So having said that, the Philippines cannot be really choosy when it comes to investments.

Okay.

We welcome any investments as long as these are listed as priority in the SIPP.

Right.

And the way our incentives is designed, we prioritize sectors that are listed in the SIPP.

There's an investment priorities plan.

Investment priorities plan.

And there is an industry and location tier.

Right.

So that the more sophisticated the project, in the case of R&D, they will enjoy a better incentives package.

Right.

The farther they locate from Metro Manila, from urban areas, they get the better incentives.

So we're open to investments, but we're trying to, at the same time, diversify the mix of industries.

Like we're trying to target advanced manufacturing.

Okay.

This is the trend now to keep up with the demands of the agile investors.

Okay.

Some are into smart home technologies, big data, 3D printing.

Right.

New materials, autonomous vehicles.

I see.

In the same manner, we're looking at not just IT, voice and non-voice, but we're now trying to get frontier technologies,

the likes of AI, blockchain, fintech.

And when it comes to agriculture, not just the traditional land-based agriculture,

we're looking at the blue resources.

By the way, this is a new type of economic zone that we are promoting,

which is now water-based because we want to promote mariculture.

Okay.

Marine energy at the same time, marine regeneration.

I think we should step back a bit and maybe explain to people that economic zones are not just manufacturing centers

because there are agricultural economic zones.

There are many kinds of, as you said, even maritime zones.

Yes.

Could you maybe just give a broad description of what kind of different zones fall under PESA?

Okay.

So before PESA, there was the former EPSA.

Yes.

The Export Processing Zone.

Yes.

That was the creation of the father of current president, Bongbong Marcos, the late president, Marcos Sr.

As I mentioned, we were second to Taiwan in the region of experimenting with the economic zone.

So since EPSA being our predecessor, so we inherited the types of economic zones that were already being promoted at that time.

Export-oriented, yes.

So these are the EPZs.

You have the agro-industrial park.

And in 2000, with the entry of ICT, we ventured into vertical type of economic zone,

which we call IT parks, IT centers.

And so we're also into tourism, so agro-industrial.

But the ecosystem models have been evolving over time.

And this is where we can be competitive by trying to attract niche industries.

So I mentioned about marine parks.

This will be a new type of economic zone that we'd like to venture into.

Then we have already approved the guidelines for knowledge, innovation, science, technology park.

And we crafted the guidelines together with the DOST.

And with this, we want the state universities, colleges to host these KIST parks, we call it, to promote innovation and R&D.

So we want more localization of R&D in the Philippines.

And then in mineral processing, with the lifting of the moratorium on mining extraction,

and we happen to be the fifth mineralized country in the world.

That also falls under you?

Yes.

So meaning, if we just do all the value-adding in the Philippines, that will really boost a lot our production.

That's your aim, to put the processing here.

Yes.

I noticed that from some of your interviews, you were explaining, and please correct me if I'm wrong,

that as you said, the initial directive was to promote exports,

but you're also looking at manufacturers who will supply domestically.

Is that correct?

I think 60% or 70% exports, but you're open to investors who will distribute locally.

Is that correct?

Yes.

That's pursuant to the CREATE law.

So under the CREATE law, PESA can now register even domestic market-oriented projects.

In the previous regime, we were predominantly catering to export-oriented.

So that in the mix of industries now in the economic zones, we're about 94% export-oriented,

6% are domestic market-oriented.

So with this CREATE law now, the investors would have the option already to whether register it with the BOI.

These are the companies that are outside of the economic zone.

If they want to be co-located in the economic zone, even while they're domestic market-oriented,

they can now register with PESA with incentives.

Right.

You were mentioning the CREATE law, and there were some issues with that, with PESA.

I know there's been some negotiations, and I think there have been some general agreements made.

Are we done with that, or there are still further improvements you would like to see from CREATE law

that would be favorable for the Philippines to attract more foreign investors?

Well, much has been done to address the issues of our locators,

particularly on some of the incentives on zero VAT and VAT exemption,

which locators are unable to enjoy because of some restrictions that were put in

when the IRR of the CREATE law was crafted, which became the basis for the BIR.

The IRR was problematic, not the law itself.

Yes.

There was already a categorical statement that the IRR, which became the basis for the BIR RMCs,

went beyond the spirit and intent of the law.

And together with the FIRB, with the BIR, of course the DTI, we were able to reconcile our differences.

And so locators, in terms of availment of these incentives, are already restored, and we're happy with that.

There are some minor issues we're trying to address so that the investors that are located in PESA especially

can enjoy the incentives as promised to them in our registration agreements and in the law itself.

I guess to go straight to the point, no prospective locator is shying away from the Philippines because of the CREATE law.

Is that correct?

Well, because of that resolution of the issues.

But I think if you look at the lifecycle of technology, which takes six years to produce a product,

then we look at the sunset period as provided in the CREATE law.

Because it says after some time, like for the pre-CREATE companies registered with PESA, after 10 years,

they will have to graduate to the regular corporate income tax.

And this is something that we want revisited because I don't think we can be competitive that way

and we can sustain the retention of our investors if after 10 years they will have to graduate to the regular corporate income tax.

And we look at the current tax rates across ASEAN, Vietnam is already doing 17%, Vietnam is 20%,

and we're still at 25% for large corporations.

So that will surely signal an exit of our locators if we're unable to address that.

So we hope the current administration will look into this.

Because otherwise we won't be getting new companies to be creating legacy products in the economics ones,

but we might see a scenario where companies will just allow their products to be obsolete

and then transfer elsewhere to avail of new incentives.

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