Duterte administration seeks to empower the Philippines' regional governments under a federal system

With some 175 ethnolinguistic groups spread across the vast archipelago of the Philippines, uniting some of the more remote regions and distinct communities under a national identity has been a challenging task for the central government. Political power gradually became concentrated in the present capital Manila under Spanish and US colonial regimes, and the notion of a strong central government was embraced by many of the initial post-colonial administrations.

However, the overthrow of President Ferdinand Marcos in 1986 kick-started a process of decentralisation, with one of the most important measures being the enactment of the Local Government Code of 1991, which transferred more power to local government units (LGUs). In order to promote development, resolve lingering tensions and attract investment in the regions, the incumbent administration of President Rodrigo Duterte is trying to gain support from lawmakers for constitutional reform to establish a federalist system of government that hands more autonomy to the regions.

As the constitutional debate continues, the Duterte administration won the backing of a two-part referendum in early 2019 to change the restive Autonomous Region in Muslim Mindanao (ARMM) into the Bangsamoro ARMM (BARMM). This will grant the region more independence from Manila on a range of political, economic and judicial matters, and hopefully unlock development by bringing peace and stability.

Governance Structure

Across the three main island groups of Luzon, Visayas and Mindanao, administrative divisions are divided into 17 regions, 81 provinces, 145 cities, 1489 municipalities and 42,045 barangays (wards). Each administrative division is governed by an LGU, which has its own rights, responsibilities and duties, although they remain subordinate to the central government. Various aspects of basic social services and facilities that used to be the responsibility of the national government now fall under the scope of the LGUs. These services include social welfare, field health and hospital services, certain tertiary services, agricultural on-site research projects, school-building programmes, tourism facilities, community-based forestry, locally funded public works, telecommunications services and housing projects.

LGUs are governed by distinct executive and legislative authorities, namely an elected local chief executive and an elected legislative assembly. Larger jurisdictions, such as provinces, exercise some authority over smaller jurisdictions, like municipalities. However, highly urbanised cities are not subject to the authority of provinces. Every four years LGUs are classified by the Department of Finance based on income, ranging from first class (highest income) to sixth class (lowest income).

Population 

The Philippines is the 13th-most-populated country in the world and the seventh-most in Asia, with 107.4m people as of early 2019 spread over 800 inhabited islands. Expected to reach 142m by 2045, the population includes diverse cultural and linguistic groups. According to the most recent census in 2015, major cities include Metro Manila with 12.9m inhabitants, Davao with 1.6m, Cebu with 951,000 and Zamboanga with 936,000. The population density stood at 337 people per sq km, representing a rise of 29 people per sq km, or 9.4%, since 2010. Reflecting the historic economic and political dominance of Manila, the National Capital Region (NCR) is the most densely populated region, with 20,785 people per sq km, while the Cordillera Administrative Region is the least densely populated, with 87 people per sq km.

In terms of provinces, Rizal – which is located in the Calabarzon region – is the most densely populated with 2439 people per sq km, followed by Cavite with 2410, Laguna with 1574, Bulacan with 1183 and Pampanga (excluding Angeles City) with 1098. Meanwhile, Apayao in Northern Luzon is the most sparsely populated province with 26 people per sq km, followed by Abra with 57, Palawan (excluding Puerto Princesa City) with 58, and Mountain Province and Kalinga, each with 65.

In the NCR, Manila is the most densely populated city with more than 71,263 residents per sq km, followed by Mandaluyong with 41,580 and Pasay with 29,815. The least dense municipality in the region is Pateros, with 6138 inhabitants per sq km.

Regional Disparities 

Regional development became an active part of broader economic planning when the National Economic and Development Authority (NEDA) was established in 1972. Since then, the most prosperous regions include the NCR, the Central Visayas Region and the Davao Region. After the decentralisation movement gathered pace in the early 1990s, local governments have worked to foster economic growth by improving connectivity between urban and rural areas and promoting agro-industrial centres.

In 2018 all 17 regions posted positive economic growth, according to the Philippine Statistics Authority. The region with the highest level of growth was Bicol at 8.9%, followed by Davao and MIMAROPA (8.6% each), Central Visayas (7.6%), Calabarzon (7.3%), Northern Mindanao (7%), Ilocos (6.5%), Zamboanga Peninsula (6.3%) and Eastern Visayas (5.9%).

In 2018 the NCR remained the largest contributor to GDP, accounting for 36%. Its economic dominance has created spillover benefits in neighbouring regions such as Calabarzon, which represented 9.8% of GDP the same year, and Central Luzon, which accounted for 17%. The NCR also had the highest gross regional domestic product per capita that year at P500,947 ($9320), which was approximately three times the national average.

Central Luzon saw the highest growth in household spending per capita, expanding by 6% in 2017, the most recent year for which statistics are available. Despite often being viewed as successful secondary cities, Metro Cebu and Metro Davao have not yet generated the same economic multiplier effect in neighbouring regions. Economic development has generally been confined to urban areas, and much of the Visayas and Mindanao remain relatively poor. Nevertheless, in 2017 Western Visayas and the Davao region saw household spending per capita grow by 5.3% and 5.4%, respectively.

Economic data also indicates a significant urban-rural divide, with more than 70% of GDP generated by cities. The seven largest cities and their metro areas – Manila, Cebu, Davao, Bacolod, Cagayan de Oro, General Santos and Zamboanga – are home to 54% of all formal jobs, contributing to growing rural-to-urban migration. In 2017, 45% of people in the Philippines lived in cities, a figure that is forecast to grow to 65% by 2050.

Reflecting this trend, real estate markets in secondand third-tier cities have witnessed significant growth. According to online real estate marketplace Lamudi, in June 2018 the top-four cities in terms of online demand for real estate were Bacolod; Davao; Lapu-Lapu, which is next to Cebu; and Zamboanga. However, lack of clarity and overlapping regulations are concerns for the business community. Access to credit in smaller cities also limits regional development, as most companies need to open credit lines in Manila.

Central Government 

In terms of public spending, the NCR and neighbouring Calabarzon received 50% of investment provided by the central government between 2013 and 2016. Combined these two regions also account for 53% of the country’s GDP. Such regional economic imbalances have prompted moves to further decentralise political decision-making. Specifically, the Duterte administration is trying to push through changes to the 1987 constitution, with a transition into a federal political system forming a cornerstone of the president’s election campaign. Under changes proposed by a consultative committee formed and appointed by the president, exclusive economic powers previously held by the central authority would be passed onto 18 proposed regions, giving them control over their respective budgets and the power to impose and collect taxes. The central government would also distribute half of its revenue from individual and corporate income tax, excise tax, value-added tax and Customs duties to the federal regions. In addition, 3% of the annual national budget will be allocated to a fund that will help regions that fail to collect enough local revenue to meet their needs. Under the proposed changes, federal states and autonomous regions would also have new powers over land use and housing; business permits and licences; municipal waters; indigenous people’s rights and welfare; culture and language; sports developments; and parks and recreation.

In terms of the separation of powers, the central government would keep its decision-making authority on defence; foreign affairs; international trade; citizenship and immigration; monetary policy and banking; telecommunications; interstate infrastructure; human rights; federal law and the justice system; and science and technology. The national and regional governments would have shared power in some circumstances, but in the case of conflict, the decision of the national government will prevail. In terms of political power, the president would head the federal republic, executive departments and agencies under the federal government. The president and vice-president would be elected for a term of four years, with one opportunity for re-election, in contrast to the current system where the president serves for a single six-year term. Regional governors would hold regional executive power after being elected by regional assemblies. The governors would appoint and have authority over the executive regional departments and bureaus. Some opponents of the proposed changes are fearful that a shift to a federal system would pave the way for President Duterte to serve a further two terms in office and consolidate his power, although the president has repeatedly stated that he intends to step down in 2022.

In any case, the prospects for constitutional change remain uncertain and has faced some opposition, with Congress making a number of changes to the draft charter in December 2018, including removing stipulations on the number of federal states to be established and controversially scrapping provisions intended to prevent political dynasties consolidating power in the regions. As of July 2019 the proposed constitutional changes had not yet passed through the Senate.

Sentiment among business executives appears divided on the merits of federalism, with a slim relative majority (43%) of respondents who participated in the 2018 OBG Business Barometer: Philippines CEO Survey describing a switch to a federal system or the further empowerment of LGUs as advantageous or very advantageous to the country’s economic development. The efficient distribution and control of public funds will be a crucial factor in reducing regional disparity.

Region Under Reconstruction 

The ARMM is historically the country’s poorest and most marginalised region. Although the Philippines’ economy has boasted GDP growth above 6% for seven consecutive years, the ARMM’s GDP per capita stood at $576 in 2018, which is equivalent to 10% of Metro Manila. Decades of struggle between the central government and the Moro Islamic Liberation Front are partly responsible for the region’s high poverty rate, which stood at 63% as of September 2018. Furthermore, 50% of the region’s working population are employed in agriculture, of which 80% are subsistence farmers living precariously. Among the backdrop of President Duterte’s push towards federalism, the ARMM transitioned into the BARMM in late February 2019 to grant the Muslim region more political and economic autonomy (see analysis).

The national government plans to allocate 5% of its internal revenues, approximately $1.2bn, to encourage facility and infrastructure building in the new administrative region. The BARMM government will be required to hand over only 25% of its internal revenue to the central government, whereas other regions are obligated to hand over more than 40% of their revenue. Additionally, the region will enjoy more control over its minerals and natural resources.

Key Infrastructure Projects 

Poor infrastructure and high utility costs continue to persist across the country, but especially in rural areas, despite consistently high GDP growth in recent years. In response, President Duterte initiated the Build, Build, Build programme, a $180bn infrastructure plan designed to improve nationwide access to quality transport networks and reliable utilities. NEDA figures indicate that out of a total of 4985 infrastructure projects in the government’s investment programme between 2017 and 2022, at least 3911 are region-specific and 98 are inter-regional. The government has identified 75 flagship public infrastructure projects for development in this period, including 32 roads and bridges, nine railways, six airports, four seaports and three bus rapid transit lines. Also included among the flagship projects are 10 water resource projects and irrigation systems, five flood control facilities, four power plants and three redevelopment programmes to deliver sustainable solutions to urban populations. These projects are aimed at creating more jobs, increasing the efficiency of moving people and goods, boosting productivity, and improving rural incomes and investment.

In order to fund these development projects, the government has shifted away from the previous administration’s preference for public-private partnerships in favour of concessional loans and official development assistance from partners such as Japan, China and the Asian Development Bank. Notable regional infrastructure projects expected to progress in 2019 include the Central Luzon Link Expressway, financed by a loan from the Japan International Cooperation Agency. In addition, phase one of the Mindanao Railway will see 102 km of track run through Digos City, Davao and Tagum in Mindanao, which will be financed through official development assistance loans from China.

Investment Opportunities 

Although the NCR and its environs remains the economic centre of the Philippines, other regions are emerging as attractive destinations for foreign direct investment (FDI) in their own right. Northern Mindanao recorded the largest amount of approved FDI in 2018 with P64.6bn ($1.2bn), followed by Calabarzon with P42.3bn ($786.8m) and the NCR with P37.5m ($697.5m). Northern Mindanao’s elevated ranking – boosted by FDI pledges of a significant P47.5bn ($883.5m) in the last quarter of 2018 alone – is reflective of the current government’s push for economic development on its southern-most island group. Northern Mindanao particularly benefits from sea links to the Luzon and the Visayas island groups, and also hosts heavy industries and agro-industrial ventures.

Special economic zones (SEZs) are another way that the Philippines hopes to generate investment. The Philippine Economic Zone Authority (PEZA), a branch of the Department of Trade and Industry, is responsible for overseeing and promoting the country’s SEZs. Companies operating in SEZs enjoy a range of incentives and tax exemptions, such as simplified import and export procedures, income tax holidays and special visas. There are seven segments eligible for PEZA incentives: export manufacturing, IT service export, tourism, medical tourism, agro-industrial export manufacturing, agro-industrial biofuel manufacturing, and logistics and warehousing services. However, this may change if the proposed Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill is passed, which plans to rationalise tax incentives.

Branching Out 

Infrastructure projects under the Build, Build, Build programme are also helping to unlock the potential of regions beyond the capital, opening up opportunities in a range of sectors including logistics, manufacturing, real estate, tourism and agri-business. The development of SEZs around the country also allows each region to play to its inherent economic strengths. For example, the Zamboanga City SEZ is developing a dedicated halal hub and opening up opportunities to invest in halal-certified products to cater to the needs of the Filipino Muslim population – which is mainly concentrated in Mindanao – while tapping into the rising global demand for halal products.

Another project to tap into the potential of regions outside of the NCR is New Clark City, a US military base transformed into a 9450-ha city with its own SEZ. In an effort to attract investment and reduce congestion in Metro Manila some government offices have been moved to the new city, such as the Department of Transportation. In 2019 the city employed 600,000 workers, and it is estimated that the city will be able to accommodate up to 1.2m people.

Tourism is another sector with high growth potential, demonstrated by the country attracting a record 7.1m foreign visitors in 2018, up 7.7% on the previous year. The closure of famed beach destination Boracay between April and October 2018 (see Tourism chapter) brought more visitors to other areas, such as Palawan, Siargao, Iloilo, Siquijor, Romblon and La Union. Investment in sustainable tourism can help stimulate inclusive growth by creating further job opportunities and boosting foreign exchange earnings.

The Philippines is also recognised worldwide as a centre for business process outsourcing (BPO) thanks to a high level of proficiency in English and low labour costs. Many BPO firms are located outside Manila, notably in Metro Cebu, Clark and Iloilo. Growth in the IT-BPO industry is expected to be supported by plans to develop an IT park area in every region in the Philippines.

Outlook

Although it remains unclear whether President Duterte’s administration will succeed in establishing a federalist system through constitutional change, ongoing efforts to improve nationwide infrastructure through the Build, Build, Build initiative should help reduce regional disparities over the long term and unlock new opportunities in areas such as logistics, agri-business, manufacturing, IT-BPO and tourism. Elsewhere, uncertainty over the rationalisation of incentives in special economic zones under the proposed TRABAHO bill are likely to cause some foreign companies to adopt a wait-and-see approach to regional investments over the short term. Nevertheless, if the government can convince international partners of the merits of making incentives more target-specific, transparent and performance-based, while addressing other barriers to business – such as high energy and logistics costs – then there is every reason to believe that the Philippines’ regions can further enhance their reputations as attractive destinations for investment.