Tuesday, February 07, 2006

Incompetence without borders: The Case of Camp John Hay

IT'S so convenient to blame "political noise" and the Supreme Court's "interventionist role" for the Philippines ' inability to project a good image to investors abroad. But the case of Camp John Hay, Cagayan Special Economic Zone and Poro Point being stripped of their powers to grant fiscal incentives to investors point to the truth that the real problem really lies in government bureaucracy.

It's apparent that government planners simply did not do their homework before making deals with investors whose operations here are facing uncertainty over the government's failure to provide them a stable and consistent investment environment. This mess, which certainly is now hurting what is left of our credibility abroad as an investment destination, could have been avoided if only government planners and bureaucrats simply put their lawyers to work and examined the intricacies of the law regarding fiscal incentives.

Now the government is scrambling to do everything just to appease the investors who came in with their money in good faith, believing that the Philippine government had it all figured out smoothly so they can proceed doing business here.

Congress is currently rushing a bill that will supposedly provide those incentives denied by the Court for its illegality. When could they pass it, we don't know. Meantime, Trade Secretary Peter Favila is looking at the possibility of considering those special economic zones as custom-bonded warehouses and having them registered under the Board of Investments so the locators would continue getting the fiscal perks promised them by the government when they signed in several years ago.

Sources say the Philippine Economic Zone Authority (Peza) is also exploring several options to extend the perks that the locator companies lost because of the Supreme Court decision. The government now is practically panicking just to mitigate the damage that those lazy-or incompetent-bureaucrats have inflicted on the country.

As the government moves heaven and earth to sort out the legal conundrum that's troubling those disfranchised special economic zones, it might as well examine closely the scope of Peza's powers under the Special Economic Zone Act of 1995. In the last five years, the Philippines has been attracting a lot of investments from business process outsourcing (BPO), including call centers, medical transcription, animation, engineering design, legal transcription and software development. It has been a fast-growing industry generating thousands of jobs for young graduates.

Besides the Philippines ' skilled labor, among the major attractions for these BPO investors are the fiscal perks that locators could get once they site their operations in a Peza-accredited "information technology building" in Metro Manila and other major cities in Luzon and the Visayas.

Make no mistake about it. We support the growth of the outsourcing industry for the simple reason that the industry provides jobs and hope to many workers. Thus, it pains us to point out that Peza might be treading on tenuous legal grounds when it started giving Peza accreditation to "IT buildings." It seems that when Congress enacted the Special Economic Zones Act of 1995, its members were not talking about "IT buildings" for call centers but economic zones for investors engaged in industrial activities, commercial, banking and financial services. And the underlying principle behind the Ecozone Act is spreading economic activities outside Metro Manila, contrary to the current trend of these IT buildings being located in Metro Manila.

Consider the law's definition of special ecozones in Chapter 1, Section 4, Article a: "Special economic zones (SEZ)"-Hereinafter referred to as the ECOZONES, are selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial tourist/recreational, commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the following: industrial estates (IEs), export-processing zones (EPZs), free-trade zones, and tourist/recreational centers."

One can't see from the above-cited definition the IT buildings or call centers, or medical transcription or any other activities that define outsourcing-and this is what worries us.

Peza seems to anchor its powers to provide incentives for locators in IT buildings on its vague reference to "commercial, investment and financial centers" but it may have stretched the provisions too thinly. Are "IT buildings" synonymous with investments or "financial centers"? Is that the spirit and intent of the law? Has Peza clarified these matters thoroughly? Not to nitpick, but we don't want to see the day, yet again, when the government will be surprised by some legal geniuses who might start questioning these issues at the Supreme Court. And subsequently visit on the BPO investors the same horrors now facing the locators at Cagayan, John Hay and Poro Point.

Since 1995, Peza has been one of our most successful government projects. Private and public special economic zones under Peza now account for more than $31 billion worth of exports, equivalent to 80 percent of the country's manufactured and service exports. Cumulative investments in these special ecozones (including call centers and other outsourcing companies) have reached P888.5 billion, or 35 times bigger than when it started in 1995. Total employment has reached more than a million workers and still counting.

Last year, when everybody was having that sinking feeling because of the Hello Garci controversy, the discovery of the fertilizer scam, the Venable contract and other government shenanigans, only Peza gave us a little high with a 33-percent rise in investments, a 6.3-percent growth in exports, and a 9-percent increase in employment. It would be tragic if we suddenly lose all these economic gains simply because some lousy bureaucrats out there made legal shortcuts that are bound to be nullified by the Supreme Court whose main business is to define the constitutionality of our laws, rules and policies.


taoharu said...

Joblessness is the number one problem of the Philippines. Job creation is the government's top priority. The incentives given to industries should be designed for job creation.

Taxing enterprises can come later. The government can earn their taxes from those employed by enterprises. The more jobs companies create, the more taxes government gets. And with less people unemployed, there will be less social welfare spending needed also. More of the taxes can then be allocated to long-term infrastructures.

Industries could be allowed to keep most (even 100%) of their profits for as long as they contribute to job creation. Incentives should be designed to reward companies that employ more.

As for the Supreme Court: I think, they should look at our economic situation also and be concerned. And they should intervene or not intervene according to what's best under the cirmcumstances.

Dave Llorito said...

i agree with you but knowing the record of the supreme court, we might as well examine the scope of peza's powers before some genius out there tried questioning it. i dread the day when we are again caught with our pants down.