Philippine regions are centre of new investment and government strategies

As a result of the election of President Rodrigo Duterte in mid-2016, decentralisation and countryside development have been put on the Philippines’ immediate national agenda. Metro Manila faces an unsustainable traffic congestion problem, which a 2014 study by the Japanese International Cooperation Agency, in conjunction with the National Economic and Development Authority (NEDA), estimated costs the country at least P2.4bn ($50.8m) per day. The capital city has significant infrastructure bottlenecks, escalating real estate prices and a population density that was 60 times higher that of the entire Philippines in 2015. Prospective investors, government planners and citizens are increasingly encouraged to look at provincial sites as destinations for investment, development and migration. Decentralisation, however, remains a slow-moving process, as the dominance of Metro Manila as the country’s economic, political and cultural nucleus has only grown stronger over the years, having been the leading magnet for investors, factories and migrants, often at the expense of previously more buoyant regions further afield.

As a result, the Metro Manila urban-industrial concentration accounts for a disproportionately high amount of the country’s output. Having grown at a rate of 6.6% , Manila posted the highest gross regional domestic product (GRDP) in 2015 at P219,114 ($4640) per capita, or nearly three times the national average of P74,700 ($1580), accounting for 36.5% of national GDP.

Regional Contribution

Investors are looking to the provinces, with the three fastest-growing regions in 2015 located outside of Metro Manila, namely Bicol, Western Visayas and Calabarzon. Geographically, improved economic performance has been largely confined to neighbouring regions immediately to the north and south borders of Manila. These areas have benefitted from improved connectivity with the metropolis, thriving local economies, the formation of industry and special economic zones, and the expansion of the business process outsourcing sector. As a result, Metro Manila and its surrounding provinces of Calabarzon and Central Luzon accounted for nearly two-thirds, or 63%, of the country’s total GDP in 2015 whereas 15 years ago this share stood at 55%. The degree of economic centralisation in the country has also been a major factor behind sluggish job creation and barriers to more inclusive economic growth. For instance, whereas the Philippines’ GDP grew by 7.2% in 2013 – one of the fastest growth rates in the world at the time – it only added 0.17% more jobs to the economy.

Power Plays

Although Metro Manila is the undisputed catalyst of economic growth in the Philippines, political and economic activity was not always concentrated in the current capital. Prior to the arrival of the Spanish, the Philippines’ leadership structure relied on small settlements based on family or kinship ties that were spread sparsely throughout the archipelago. The geographic discontinuity of the country naturally lent itself to a highly decentralised political structure until Spanish explorers established the first colonial capital in Cebu City. During Spanish rule, Philippine settlements were governed by the Reduccion System, which grouped barangays (villages) into towns organised around a newly built church. The Spanish adapted the barangay as the most basic administrative unit, with a chief at the head, whose primary function was the collection of taxes. As the capital moved to Manila, government rule became more centralised and consolidated throughout the subsequent phases of Philippine history, from the US occupation to the declaration of martial law under President Ferdinand Marcos, who increased central government powers with minimal authority allocated local government units (LGUs).

After the return to democracy, the 1987 constitution drafted under President Corazon Aquino allowed for the referendum that formed the Autonomous Region of Muslim Mindanao (ARMM), which comprises the predominantly Muslim provinces of Maguindanao, Lanao del Sur, Basilan, Sulu and Tawi Tawi. Autonomy in the ARMM was motivated by crisis and the escalating hostilities between the Moro National Liberation Front (MNLF) and the national government – conflicts that have carried on until today, as the MNLF and splinter groups continue their armed struggle.

The constitution also allowed for the establishment of an autonomous Cordillera region, comprising the provinces of Abra, Benguet, Igufao, Kalinga, Mountain Province and Apayao in Luzon; however, voters in the region rejected the plan twice in 1990 and 1998. In addition, the 1987 constitution established the Local Government Code (LGC) of 1991, which still serves today as the legal basis and operating framework for the local government system.

Self-Government

The LGC sought to strengthen local government autonomy by assigning revenue-generating powers to LGUs and by increasing resources to finance regionalised functions. LGUs are allowed to craft their own budgets – subject to review by the national government – and are responsible for delivering basic social services, including health, education, agriculture, environmental protection, natural resource management and public works. Since its enactment, and despite a provision within the code that mandates its evaluation every five years, no major reform has been implemented to amend the LGC.

In 2014, however, through a P12.5bn ($264.4m) loan from the Asian Development Bank, the code underwent a comprehensive review to identify areas in need of improvement. This was a much-awaited effort that aimed to strengthen LGU capacity to deliver services, enhance tax collection, and enable better accountability and more efficient responses to their constituents.

The 18 current designated regions are the highest local administrative divisions in the Philippines. Of those, only the ARMM is autonomous, and therefore has its own elected assembly and governor; whereas the other 17 are groups of provinces and do not possess their own LGU. The ARMM was meant to be replaced by the Bangsamoro Autonomous Region, which would have enjoyed enhanced autonomy and fiscal authority, as part of the peace accord process with the MNLF. However, after President Benigno Aquino III drafted and signed the Bangsamoro Basic Law (BBL) in 2014, it failed to pass in the 16th Congress after a clash between the Islamic militant groups and the Philippine National Army in Mamasapano in 2015. This event greatly deteriorated support for the peace process. President Duterte, however, has sought to revive the BBL by establishing a Bangsamoro Transition Commission to draft a revised version of the bill and fast-track its passage in Congress.

Local Area

LGUs in the Philippines are organised into four main groups of autonomous regions: provinces, component and independent cities, municipalities and barangays. As the name suggests, independent cities are politically and legally independent from provinces. The subnational level of government in the Philippines comprises 81 provinces, 145 cities (105 component and 40 independent cities), 1489 municipalities and 42,036 barangays. Each province is divided into cities and municipalities, with these in turn separated into barangays, the smallest form of LGU. Provinces are headed by governors, cities and municipalities are headed by mayors, while barangays are headed by captains, all of whom are chosen through direct elections every three years, with a maximum of three consecutive terms. Controversially, in early 2017 President Duterte proposed the cancellation of elections for barangay officials scheduled for October, proposing instead to amend the law to put national government in charge of appointing the country’s roughly 42,000 barangay captains. The move was allegedly suggested as a way to rid LGUs of local criminal elements.

Investment Promotion

A major enabler for regional investment has been the Philippine Economic Zone Authority (PEZA), an investment promotion agency attached to the Department of Trade and Industry. The authority is tasked with identifying, creating and overseeing the development of the country’s economic zones – investment areas that offer assistance, infrastructure and financial incentives. As of February 2017 the Philippines had 365 operating economic zones across the country: 249 IT parks and centres, 74 manufacturing and industrial estates, 21 agro-industrial zones, 19 tourism economic zones and two medical tourism centres, according to PEZA data.

Since its inception in 1995, PEZA has served as the country’s one-stop shop for investors, directly issuing permits and visas, simplifying business registration for locators and assisting with Customs processes. The major thrust of PEZA lies in its ability to select and develop zones, whether through the private sector, LGUs or on its own, in areas that have high economic prospects for buildout across different industries. Throughout its history, PEZA has largely relied on the private sector to invest in and operate economic zones, with the agency currently managing four just public zones in Baguio, Pampanga, Cavite and Mactan. This imbalance, however, is expected to reverse with the new PEZA administrator, Charito Plaza, vowing to add two new public economic zones per region, an effort that would add 36 public economic zones to the country’s total. Given the administration’s emphasis on stimulating countryside development, the pace at which economic zones will be developed is expected to rise, especially as the agency aims to develop underused land across provinces in the country to pursue industrialisation and generate employment.

Foreign investment pledges to the Philippines’ seven investment promotion agencies (IPAs) faced a 10.7% dip in 2016, declining from P245.2bn ($2.4bn) in 2015 to P219bn ($2.1bn), as PEZA similarly saw its approved foreign investments drop by 28.2%, from P168.9bn ($1.6bn) to P121.2bn ($1.2bn) during the same period. Nonetheless, PEZA maintained its leadership role among IPAs in 2016, comprising 55% of the total recorded foreign investment. By the first quarter of 2017 the growth trajectory of the agency seemed to be back on track, as investment pledges jumped by 50.5% year-on-year to P51.3bn ($500.5bn). These numbers are expected to significantly increase after promotional tours at investment showcases to the US and the Middle East. As of December 2016 there were approximately 3916 PEZA locations across the country, which together employ around 1.36m workers.

Moving Forward

The agency aims to release a map of national economic zones, where it will highlight existing and potential sites for economic zone development based on the competitive advantages of areas throughout the archipelago. It is eyeing the development of economic zones catering to the industrial, business process outsourcing, agro-industrial and tourism sectors. Future economic zones, however, will not be limited to existing industries. In fact, the strategy under the new PEZA administration includes the development of new types of economic zones such as a defence industrial complex, for example. PEZA intends to attract defence industries worldwide to capitalise on the country’s manufacturing base and facilitate the modernisation of its own armed forces. In addition, to further accelerate investment in the least developed areas, PEZA has signed a memorandum of agreement with the Regional Zone Authority (REZA) in the ARMM – the Philippines’ poorest region and where REZA has been historically inactive – to replicate the success of the rest of the country by identifying, developing and marketing economic zones to investors.

Challenges

The process of decentralisation has faced a number of challenges, mostly due to disparities in recently expanded fiscal responsibilities. The transfer of spending functions to LGUs without granting powers of taxation has prevented them from being fully independent and economically viable. The LGC provided LGUs with authority over revenue and expenditure functions, turning the collection of property and local business taxes into primary sources of revenue; however, low collection performance makes LGUs unable to survive on local taxation alone. This has led to a ratio of local revenue to total revenue hovering around 7% to 8%, with provinces exhibiting an over-reliance on the internal revenue allotment – funds for LGUs remitted from the national government.

The revenue share of each province, city and municipality is determined on the basis of their population and land area. At present, at least 40% of the country’s internal revenue income has been allocated to the LGUs, dedicating 23% to provinces, 23% to cities, 34% for municipalities and 20% to barangays.

For 2015 the Internal Revenue Allotment (IRA) continued to be the top source of revenue for LGUs at 62.69% of total current operating revenue according to the Philippine Statistics Authority. Calabarzon received largest share of IRA, with P33.7bn ($712.9m), followed by Central Luzon at P29bn ($613.5m); all other regions received less than P20bn ($423.1m).

Outlook

The centralised unitary government structure in the Philippines has often put the national government at odds with provincial needs and priorities. Although most of the members of the House of Representatives are already elected locally, senators are chosen by national elections and do not necessarily represent the specific regions they head.

There have been many calls in the past for a more federalist system of government, and these ambitions have achieved substantial traction with the election of President Duterte, who advocated for federalism as a major part of his campaign platform. There is still uncertainty about the mode and timeline that will be undertaken to amend the 1987 constitution, in addition to ongoing consultations to provide clarity about the sharing of powers between the national government and LGUs. However, the current administration is determined to push for the system as a way to stimulate provincial growth and put an end to the secessionist aspirations of Muslim rebels in southern Mindanao.

Regardless, the economic development of the Philippines’ regions is pushing ahead as corporations andinvestors move away from the saturated capital city seeking available land, cost-competitive and well-trained labour, and new burgeoning markets to serve.