Potential Philippine Industries

Industry Overview

This chapter presents an industrial weather chart of some industries in the Philippines from 1994 to 2000. The chart presents the gross value added each year, and opportunities, critical success factors and key risk areas for each industry. The analysis is made by University of Asia and the Pacific. According to the chart, the Philippine industries are heading towards the year 2000 with a substantial growth. The charts are removed from the WWW-version.

Consumer Goods

Food

Opportunities

Critical success factors

Key risk areas

Beverage

Opportunities

Critical success factors

Key risk areas

Footwear / Wearing apparel

Opportunities

Critical success factors

Key risk areas

Intermediate goods

Wood and Cork Products

Opportunities

Critical success factors

Key risk areas

Paper and Paper Products

Opportunities

Critical success factors

Key risk areas

Chemicals and Chemical Products

Basic Industrial Chemicals

Opportunities

Critical success factors

Key risk areas

Plastics and Plastic Products

Opportunities

Critical success factors

Key risk areas

Fertilizers

Opportunities

Critical success factors

Key risk areas

Capital Goods

Nonelectric Machinery

Opportunities

Critical success factors

Key risk areas

Electrical Machinery

Opportunities

Critical success factors

Key risk areas

Transport Equipment

Opportunities

Critical success factors

Key risk areas

Construction

Opportunities

Critical success factors

Key risk areas

Mining and Quarrying

Opportunities

Critical success factors

Key risk areas


Consumer Goods

The Philippine consumer market is unique, because it possesses wider ethnic and linguistic diversity than any Southeast Asia country. The country possesses the second largest English-speaking population after the US.

Although a high proportion of the Philippine population is relatively poor and can only afford life's basic necessities, there is a growing wealthy minority. This group is predominantly of Chinese or Spanish origin. However, the most rapidly growing sector is the middle class, which is also the major target for firms interested in selling consumer goods to the Philippines. At present there is large spending power disparity between urban and rural areas, and many companies tend to channel their marketing efforts towards the urban consumers. As a result, the penetration of consumer products has become quite saturated in urban areas, while the rural areas remain largely untapped.

Modern supermarkets, department stores, and large shopping malls can be found in major cities in increasing numbers. Metro Manila possesses the country's largest shopping complexes. The huge upmarket malls have a great deal to offer over street level shops: comfort, parking and reputable shops are particularly popular with the middle class. SM Megamall, Manila's largest shopping center, attracts some 200 000 customers daily.

The availability of consumer financing facilities provided by commercial banks and retailers/dealers has expanded the annual sales volumes of consumer household durables. Around 80% of such sales involve installment payment terms for a period of 12 to 24 months after a 20% down payment.

In spring 1996, foreign companies are forbidden to participate in the retail sector. However, the government is considering opening this sector to foreign department stores, some of which have positioned themselves in anticipation of the opportunity to tap this market of 70 million consumers. A word of warning though: marketing of products has to be cautious due to the US style product liability in the Philippines.

TV and newspapers are used for advertizing in the Philippines. The newspapers have an especially strong foothold. Advertizing space and time are quite cheap compared to Finland. Fairs are a very effective way of attracting the consumer's attention.


Telecommunications

The liberalization of the Philippine telecom industry started in 1993 through the implementation of Executive Order 59, which required carriers to interconnect with one another. Until then, there were hardly any interconnections between the dominant carrier, Philippine Long Distance Telephone Co. (PLDT) and the consortia of numerous private operators. To provide universal access to telephone services, EO 59 was soon followed by Executive Order 109, which mandates International Gateway Facility (IGF) and Cellular Mobile Telephone Service (CMTS) providers to install 300 000 and 400 000 landlines respectively in three years time in designated service areas. Although landline installation costs have gone down tremendously, capital expenditure of nine international gateway and five cellular operators will be astounding. Hence, massive changes in ownership structure and in the financial leverage picture of telecom companies is anticipated. Some operators are considering a possibility to build wireless networks of Nordic Mobile Telephone (NMT) or a similar standard to replace the building of fixed lines.

In March 1995, Republic Act 7925 was passed in order to pave the way for the direction of the industry. It defined the government's role in the sector through the Department of Transportation and Communication (DOTC), as the policy-making body and the National Telecommunications Commission (NTC) as the regulatory arm and the principal administrator of the new law. Radio Paging Service is no longer regulated except in terms of radio frequencies, which are issued by NTC on an open tender basis, where the demand exceeds availability.

The fact that the international toll operations have been highly profitable and the installation of an international gateway facility is less costly than landline buildout, has drawn the exceptional number of nine international gateway operators in 1996 from only three before 1992. In other countries, there are usually only one or two international gateway providers.

The current concern of the new players is the issue of interconnection because the only nationwide backbone is operated by PLDT. Thus, an interconnection fee has to be remitted to PLDT. As the PLDT's interconnection fee is about ten times that of the US, Australia, Canada, Sweden and Britain, a company owned by the other operators, called Telicphil, is setting up an alternative backbone dubbed the National Digital Transmission Network (NDTN).

Another concern is a possible price war. NTC, being the approving body for price adjustments, is presumed not to allow a price war to erupt at least in the next three years, although the leading operators have formulated plans to increase the accessible population.

The mobile wireless segment still remains the most dynamic in terms of growth, competition, and technology. Growthwise, the number of subscribers exceeded 500 000 in yearend 1995 from only 200 000 at the start of the year. By yearend 1996, estimates are optimistic as the target has been 1 000 000. The upcoming introduction of the Personal Communications Network (PCN) will be the next concern of the industry. It might offer a threat to current cellular operators, as the PCN handsets are cheaper than current cellulars and they will target the same low and middle end market. The fact that four out of five current cellular operators have applied for a license highlights this concern.

In 1992 there were only two cellular mobile telephone operators, Pilipino Telephone (PILTEL) and Express Telecommunications (EXTELCOM) in the cellular mobile telephone industry. These two were joined by Smart Communications in 1993, which is the fastest growing operator in 1996. Since then, these analog operators have been joined by Globe Telecom and Isla Communications, both using digital GSM technology. The new operators in the field of cellular as well as internal gateway operations are not small-fry. Several of the country's richest magnates have entered the field with a strategic, global partner with state-of-the-art expertise in telecommunications. For instance, Singapore Telecom has a 38% stake in Globe Telecom, which is majority-controlled by Philippines property and manufacturing conglomerate Ayala Corp.

In the Philippine market, a purchase of a cellular telephone is integrated in the contract with an operator, because a foreign company is not allowed to participate in retail business.

The current economic growth will serve as a platform for the telecom industry. Improving affluence will further increase the accessible population while the improvement of commercial activity will increase toll traffic. Other factors such as unserviced demand and improvement in technology which will broaden applications will further boost revenue earnings of telecom operators in the years to come.


Energy

In 1992 and 1993 the Philippines had an extensive energy crisis. In Metro Manila daily power shortages i.e. brownouts of 10-12 hours occurred. This was due to the cancellation of all new power plant projects between 1986-1992. Since then, the Philippine government has taken steps to achieve sufficient power production capacity. At present the government has supervised the installation of 1300 MW by end-1993, completion of about 15 plants by end-1994 and sought agreements for an additional 5000 MW. These measures strongly supported the policy shift from public to a public/private sector collaboration for the development and rehabilitation of generation capacity.

In 1994 power sales in the Philippines were 28.7 TWh. In 1996 the World Bank estimates it to be 33.8 TWh and in 1998, 40.3 TWh.

In 1994 oil was the major source of energy (36%), and after that geothermal (19%), hydro (19%), gas turbine/combined cycle (18%) and coal only 6%. However, by 1998 the Department of Energy (DOE) expects geothermal energy to be the major source, followed by coal, oil, hydro and gas turbine. After the year 2000, the Philippines plans to rely more and more on coal. However, new gas findings are also going to be used in the future.

Energy needs are clearly divided regionally. Luzon is the major energy consumer with 74% of the total consumption in 1994. Its share is estimated to remain the same in the following ten years. Mindanao's share is 16% and Visayas' 10%.

Three to four trillion cubic feet of natural gas has been found in the Malampaya / Camago area in Palawan. The developers of the reservoir, Shell Exploration, B.V. and Occidental Philippines, Inc. are conducting an appraisal program of the reserve base and are seeking a long term gas sales agreement with the government. The most probable way to transport the gas to the mainland is to build about 600 km of private offshore and onshore pipelines from Malampaya / Camago to Manila through Batangas. This should provide 450 million cubic feet of gas per day. The pipeline can also be built using Build-Operate-Transfer (BOT) or the Build-Operate-Own (BOO) arrangements of the government.

Energy production is privatized and liberalized. The National Power Corporation (NPC), which is to be privatized, is now more like a wholesaler of the energy which is produced by Independent Power Producers (IPP). The financing and the fast participation of private power producers has been made possible by using the BOT scheme or its derivatives. A more detailed description of BOT is to be found later in this publication.

Though the Philippines has survived the power crisis, there is still a need for renovating old power plants and building new, long term base load plants. The efficiencies of the existing power plants are often poor and losses are high.

Power transmission is still in the hands of NPC. It owns most high voltage transmission lines and intermediate voltage subtransmission facilities. Though Manila Electric Company (MERALCO) also owns some higher voltage lines of 138 kV and 69 kV, it uses them only to draw electricity from NPC's delivery points on the fringes of its service area into urban areas. It is unlike that any serious private sector offers for developing transmission facilities will be made in the future unless the government formulates the necessary policies concerning wheeling charges and the disposition of higher voltages to consumers presently served by the NPC.

At present, the NPC’s transmission system is made up of two principal elements: the bulk power "backbone" system and the radial subtransmission lines feeding out from the backbone system to rural load centers. In Luzon the backbone operates at 230 kV and in Visayas and Mindanao at 138 kV. Though the backbone is quite extensive its power transfer capacity is limited by the relatively low voltages and the lack of interconnections between adjacent transmission lines, dictated by the rugged mountainous terrain. However, there are some reinforcements going on and in year 1998 in Luzon, Department of Energy (DOE) has planned new transmission lines of 1 324 km of 500 kV and 800 km of 230 kV.

There are projects going on to interconnect Cebu transmission lines with those of Leyte in 1996, and that of Luzon with the Visayas in 1998. The Luzon-Visayas-Mindanao interconnection should be completed in 1999.

The distribution of energy is done by some 135 private investor-owned distributors (IOD) or member-owned cooperatives, all of whom have exclusive rights to provide medium and low voltage services within their franchise areas and are subject to price regulation. Only MERALCO is of substantial size, with established international commercial credit. The others serve small towns and villages and their performance is judged to be from acceptable to poor. In fact there are only 40 cooperatives and IODs that have achieved losses below 15%. This is high compared with distributor utilities in other countries. Their lack of both financial and technical capabilities have led to tariff cross-subsidizing from MERALCO to the others.

The Independent Power Producers are unregulated as regards the pricing. However, transmission and distribution utilities are subject to price regulation, as is all electricity offered for resale. Each IOD has a Congressional charter which stipulates a maximum rate of return while coops are subject to National Electrification Authority’s pricing. However, there are differences: in Luzon the price is PHP 2 / kWh, in Visayas PHP 2.1 / kWh and in Mindanao PHP 1.5 / kWh.

The total capital investment requirements in the energy sector from 1994 to 2010 are estimated to be PHP 1926 billion. 80% of that is expected to come from the private sector; 64% of the total will be invested for power generation and transmission. Energy development share is 13%, electrification 9%, downstream development 8%, energy efficiency development 5%, and non-conventional energy development 2%.

All these prospects may create potential markets for Finnish companies, in anticipation of the shift from energy production to energy transmission as construction, modernization and consultation services related to these are needed.

The ADB has been financing many energy projects through the Build-Operate-Transfer (BOT) and Build-Operate-Own (BOO) schemes.

Power sector investment (1994-98)
USD / kW demandPhilippinesIndonesia
Generation18771774
Transmission581417
Distribution3811003
Total Sector28403194


Environmental technology

Environmental legislation

The weight of environmental issues has increased in the Philippines. The legal basis consists of the Philippine Environmental Policy and the Environmental code. The code provides a modern system for Environmental Impact Assessment (EIA) and environmental management. Under the regulations, corporate officials, including foreigners, can be held criminally liable for violations.

The implementation of major water infrastructure projects, particularly those under the Build-Operate-Transfer scheme, will now be facilitated with the enactment of the National Water Crisis Act of 1995. The new law also allows the privatization of all government water agencies.

Enforceability of the legislation

The underlying problem with environmental regulation in the Philippines has not been insufficient legislation but a lack of will to enforce the existing laws. Under President Ramos, the government has taken a more conciliatory approach. It has attempted to negotiate pollution-control goals and deadlines rather than try to force the violators in an arbitrary way as earlier. This has reduced the level of uncertainty when dealing with the environmental issues. The Department of Environment and Natural Resources now offers tax exemptions and technical assistance to companies that set up their own antipollution facilities.

But many problems still remain: for example, the price of resources like coal, fuel and water is low and doesn't encourage the use of appropriate methods for waste disposal and the shift to cleaner technology.

Waste management, municipal and hazardous waste

In 1996 Metro Manila generates more than 14 000 tons of solid waste per day (industrial, domestic, commercial and other sources). Of an estimated 6100 tons of domestic solid waste per day, about 15% ends up in bays, on river banks, vacant lots, storm drains and streets. Of an estimated 4.6 tons per day of hospital waste, 92% is disposed together with residential waste.

Hazardous wastes at plant sites are usually poorly handled. Generally, they are either dumped on land within the plant area or discharged with the waste water. In the Metro Manila Area alone, an estimated 25 million cubic meters of acid and alkaline liquid wastes is disposed of annually. Recently, markets for industrial waste have been created to encourage more efficient use of raw materials and to speed up recycling in the Philippines.

Water pollution, measuring and water engineering

When the major industrial sectors of the Philippines are considered, the majority of the larger industries are high in water use and tend to discharge wastes that are high in Biochemical Oxygen Demand (BOD) and Total Solid Substance (TSS), rather than highly toxic substances. Many firms have some level of waste water treatment equipment, even though many facilities are neglected and in a state of disrepair. On the average, the 100 most polluting industries are achieving less than 50% treatment efficiency.

Many of the country's more important river beaches and coastal areas are polluted to a state which is of critical concern. 47% of the river monitoring stations and 60% of the coastal stations showed lower water quality than even the worst possible official classification. In Metro Manila, the Pasig River BOD levels from 20 to 120 mg per liter has been measured. The suitable BOD level even for industrial cooling requires BOD levels to be no greater than 10 mg per liter.

In Metro Manila, the lowering of the ground water level has been very significant and may soon pose a serious problem. The water supply is on a critical level and shortage is acute. According to estimations, 60-80% of the population has access to drinkable water. In Metro Manila about half of the water doesn't reach paying consumers because of leaks and illegal tappings. The Philippine Government's current emphasis is on providing potable water supply rather than providing wastewater collection and treatment.

Air pollution

Metro Manila has one of the worst air quality among the ASEAN countries. Transport is the main source of particle and lead pollution in Manila where about 50% of all gasoline and diesel oil in the Philippines are sold. The vehicles in Metro Manila consist of jeepneys, buses, taxis and utility vehicles, which are mostly diesel powered and usually in poor mechanical condition. The WHO guidelines for air quality have been exceeded lead levels by almost 400% and particulate by 200%. The vehicle population in Metro Manila has increased by more than 40% from 1990 to 1994 levels. Unleaded gasoline is available, but its use is not subsidized.

Forestry sector in the Philippines

In 1934, the forest area of the Philippines was estimated at 17 million hectares and accounted for 57% of the country's total land area. In 1996, the forest area of the Philippines is equivalent to only about 21% of the total land area. Due to this massive deforestation, the whole forest products industry is suffering heavily. Once a great exporter, they must nowadays import logs.

Environmental monitoring and measuring

Environmental quality monitoring data are very scanty due to the inadequacy of equipment to analyze samples both in the field and in the laboratory. For example, all emission measurements are concentration-based, making it possible to reach the required emission levels simply by diluting the emissions. The lack of laboratory facilities for analyzing environmental samples also hampers enforcement of pollution control laws.

Markets for environmental technology and consulting services

In less developed markets, like the Philippines, drivers for environmental improvements are less effective, which results in low priority given to the environmental issues by industries. Because of this, the need always appears to be much greater than the real market.

In the Philippines, the estimated environmental market size is USD 300 million with annual growth of 10-12%. The demand is high for low cost industrial wastewater treatment plants, waste management facilities and equipment, mining waste treatment systems and also in power plant scrubbers. Possibilities for project financing are low and financial arrangement of an environmental investment often create an constraint in the Philippines. For government projects in particular, donations from the investor country are expected.

The opportunities for establishing significant environmental consulting firms in the Asia-Pacific region are promising. The Philippines is at an early stage of development when compared to many other Asian countries. However, more developed markets are not too far in the future.

ADB environmental policy and projects

Over the past decade the Asian Development Bank has moved from a position of merely responding to environmental problems to one in which it tries to anticipate critical environmental needs and intervenes in the most appropriate manner. In 1994, the ADB's lending to the Philippines totaled USD 136 million.

Priority areas for ADB's environmental lending

Department of Environment and Natural Resources (DENR)
  • Responsible for development, implementation and enforcement of environmental regulations in the Philippines.

Environmental Management Bureau (EMB)

  • Formulation of environmental quality regulations and standards and administration of the Environmental Impact Assessment system (EIA).

Pollution Adjudication Board (PAB)

  • Juridical body with the authority to serve Cease and Desist Order (CDO) on regulation violators.

DENR's Regional Offices


Infrastructure Projects

In the Philippines infrastructure needs are enormous. According to the World Bank estimates, the country's need for infrastructure is between USD 36 to 45 billion for the next ten years, approximately an average of 7% of the Philippines' annual GDP. Due to lack of funds, infrastructure projects are mainly completed and financed by the private sector using the BOT or BOO schemes. The national budget funds for infrastructure were reduced from PHP 47.7 billion in 1995 to PHP 37.4 billion in 1996.

The government has approved 18 types of infrastructure projects for private enterprises. These include roads and other transportation facilities, construction, water facilities, power projects, information technology, database infrastructure, and health facilities.

The objective of the Department of Public Works and Highways is to increase the road density from 0.54 km / km2 to 1 km / km2 in the year 2000. This implies construction of 139 000 km of new roads. Upgrading of existing roads for all weather use is also a major issue. The planned spending for road construction from 1996 to 1999 is PHP 142.5 billion.

The construction of an extension to Manila's existing Light Rail Transit system to the south and east along Epifanio de los Santos Avenue (EDSA) will be finished in 1998. Several other expansion projects are in the pipeline.

The construction and improvement of airport facilities is also on the government's priority list, along with the upgrading of the air traffic navigation and communication facilities. There are plans to place the whole country under radar surveillance.

The prospects of developing sea transport facilities are good, especially in terms of developing port facilities and constructing maritime navigation search and rescue vehicles.

Construction growth is expected to continue in the next few years. The real estate industry is booming in regional centers and the government has targeted 1.2 million new housing units by 1998 under the National Shelter Program.

Infrastructure Projects and Financing (1994-98)
Million USD(number of projects)BOTStateTotalBOT share
Energy(58)1085296392049152%
Transport(20)716468581402251%
Water(2)1481099124712%
Tourism(2)505410449%
Industry(2)2923926911%
Gas(1)200002000100%
Total(85)20290178903813453%


Tourism

General, incentives for investment

Some of the most beautiful places in the whole world are situated in the Philippines. These include, for example, the white-sanded Boracay Island, Baguio, the summer resort, and Palawan, the last frontier of the Philippines.

The warm, hospitable and friendly Filipinos have a special way of making travellers feel welcome. This has strongly contributed to the development of the tourist industry in the Philippines.

The Board of Investments offers attractive incentives to tourism investors. These include 100% equity participation, income tax holidays and the possibility for capital repatriation. Fiscal incentives are, however, limited to existing and potential investment centers for tourism development outside the Metro Manila Area.

The following tourism activities are registrable and entitled to incentives: development of tourism estate, establishment and modernization of accommodation facilities and operation of tourist transport facilities.

Ecotourism

The concept of ecotourism is to help protect the environment in which tourism thrives, from natural resources, and flora and fauna to cultures. It does not limit itself to nature-related tourism like scuba diving or wilderness tours, but concerns the whole tourist industry as well. Once understood and practiced, it guarantees sustainable development of the tourism industry not only for present generations, but for coming generations as well.

Ecotourism is a small but growing segment of the industry. It minimizes the negative environmental impact of tourism in natural areas and maximizes the economic and social benefits of tourism for the local communities. The Philippine Department of Tourism provides continuous research on ecotourism activities.

Rated as one of the most beautiful places in the Philippines, Northern Palawan represents one of the nation's most environmentally and culturally sensitive areas. It is not earmarked for mass markets. Rather, its primary goal is to develop a tourism sector that is both environmentally and socially sensitive, sustainable, and internationally recognized.


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