Don’t kill the goose that lays the golden eggs!

Recently, industrialist Raul Concepcion urged the government to reduce or remove the fiscal incentives being enjoyed by the country’s business process outsourcing (BPO) companies, including call centers, to help address the country’s fiscal problem. We share Mr. Concepcion’s concern for solving the fiscal crisis because it’s the only way the country could get good sovereign ratings. It’s the only way the government and the private sector could have access to much-needed international money at favorable rates. Nevertheless, I think doing so by penalizing the BPOs is the wrong way to go.

Taking away the BPO’s perks is like killing the goose that lays the golden eggs. Besides the rising remittances by the country’s overseas workers, outsourcing these days is the only industry that are keeping the economy afloat and providing jobs to thousands of young Filipinos. Because of bad weather, the country’s farm sector has not been doing better in the last three quarters. Our industry sector has been doing relatively well but they are not hiring more workers probably in their efforts to maximize current manpower and computerize to improve efficiency. The country’s export sector, particularly the electronics industry, is suffering from low growth so exporters simply do not have the incentive to expand payroll. But in the last five years, the call centers have been doing the country a great service by hiring 365 days a year. And it has been generating a lot of jobs in other services sectors as well including banking, real estate, wholesale and retail, transportation, food manufacturing, and other urban-oriented services. Why penalize success especially that this industry is the only ones we could be proud of right now?

The Board of Investments (BOI) says the BPO industry, also called “information technology and information technology-enabled services (ITES), now employs about 141,762 people, of which 80,000 are into call centers. The BOI expects the BPO jobs to expand to 640,157 by the year 2010. From P12 billion this year, the BOI said investments into the sector would reach P44.7 billion by 2010 and export revenues to reach US$6.4 billion from this year’s US$2 billion. That this industry emerged during the time when the country’s politics is in its most volatile period speaks highly of the dynamic character, the efficiency, and the resiliency of this industry. Why should we shoot ourselves further in the foot?

Outsourcing has a strong social equity angle. Contrary to popular perceptions, workers in the call centers and other outsourcing business come from lower middle or even poorer classes in society. If you kill outsourcing by taxing it or by lessening its viability, you also kill the hopes and dreams of these young people, more than half of whom are actually breadwinners. Yes, they have this nice Americanized accent but most of them are actually sons and daughters of people from the poorer segments of our society, mostly struggling professionals like underpaid teachers. The kids from rich families sometimes try their hands at call centers but most of them could not take the pressures of a job whose function include getting yelled at by some distant voices from some unknown parts of the earth.

We really don’t know much about this industry. Everybody seems to assume that outsourcing is out there growing fast and it’s transforming the country’s economy. Yet, even until this time the number crunchers at the National Statistical Coordination Board could not seem to figure out the industry’s contribution to the country’s gross domestic product. Any effort to raise taxes on this industry therefore would have unknown, uncertain, and probably counterproductive results.

Maybe Mr. Concepcion was calling for reforms in the country’s fiscal incentive system so that we could generate more revenues to fund economic development. We share his concern. The best way to achieve this end is not taxing outsourcing but rationalizing the granting of incentives. In the last several decades, the country’ policy makers have produced several hundreds of laws and rules from which investors could draw fiscal perks from. I suspect a lot of these investors are actually engaged in “double dipping” or getting perks from several agencies and laws for a single project.

Recent estimates from the Department of Finance indicates that the country is losing about P300 billion each year from foregone revenues because of this big loophole. Right now, there are several agencies—e.g. Board of Investments, Philippine Export Zone Authority, Clark Development Corporation, Subic Bay Metropolitan Authority, and the Phividec Industrial Authority— granting fiscal perks using different criteria. I suspect that these gargantuan powers being welded by unelected bureaucrats manning these agencies are being abused for ends other than that of the national interest. The process of granting of these incentives is not transparent and the agencies giving them do not seem to have any record or report of their monitoring activities whether or not the terms for which the incentives are given are being observed properly. Therefore, if there’s something that the country’s legislators should really do something about as soon as possible, it’s this system that seems to have institutionalized corruption and rent-seeking in the country’s bureaucracy.

Because the granting of fiscal incentives always carries with it opportunities for corruption, i believe that—under ideal condition—the country should rather abolish totally all fiscal incentives and it replace them with a very low corporate tax, say 15 percent instead of the current 35 percent. The assumption for a low corporate tax policy, however, is the presence of adequate economic and social infrastructure. Since we can’t put the required infrastructure overnight, the second best policy could be rationalizing the country’s fiscal incentives laws.

Congress is doing something about this. But because of the country’s pre-occupation with the “Hello, Garci” controversy (election cheating), fertilizer scam, and other political issues, reforming the country’s fiscal incentives system will probably take some time. While Congress is still undergoing the process, the best thing each one can do vis-à-vis the outsourcing industry is observe the Hippocratic Oath: Do no harm!