TARIFF COMMISSION-PIDS JOINT RESEACH PROJECT Staff Series No. 86-13

A STUDY OF THE EFFECTS OF THE TARIFF REFORM AND IMPORT LIBERALIZATION ON THE PAPER INDUSTRY

by

VIRGINIA PINEDA

MARCH 1987

The views and opinions expressed in this study are those of the author(s) and do not necessarily reflect those of the Tariff Commission and the Philippine Institute for Development Studies. ACKNOWLEDGMENT

I would like to thank Dr. Erlinda Medalla, Project

Director, Prof. Ruperto Alonzo, my thesis adviser, and I_.

John Power, _consultan%; for the_ir guidance, comments and suggestions on the study.

I wish to acknowledge Mr. Donnie Baldevieso and Mr.

Ramon Lucero of the Tariff Commi'ssion for the distribution : and retrieval of the survey questionnaires.

Thanks are also due to Dr. Filologo Pante, PIDS Pre- sident, Mrs. Chulia _zarcon, _ariff Dommission Chairman, Fro.

Isaac Puno III, PIDS Director Tot Operations, Mr, Juamar

[aldepe_as, Mr. Herminio Isip, and the rest of the PIDS Ope- cations staff for their valuable assistance and support. TABLE OF 00_TENTS

PAGE

I. INTRODUCTION l

i.I Scope, L_mi_a_ions, & Methodology 2

i_.2 Objectives 3 1.3 Sources of Data 4 1.4 Significance of the Study 5 1.5 Review of Literat_ 5 1.6 Organization/Sequence of Presentation 6

II. INDUSTRY BACKGROUND 7

2.1 Product ahd Industry Description 7 2.2 A Brief History of the industry ll 2.3 Production Structure 12 2.4 Policy Environment 20

2.6 Industry Problems 41

._III° THEORETICAL FRA_WORK 46 '

IV. THE EMPIRICAL FINDINGS 61

4.1 _ Description of Sample Firms 61 4.2.1 Effects of th_ Tariff Reform Program 62 4°2°.2 DRC Variations Across Firms 88

4.3 Effects of Import Regulations 91 4._.I EPR and DRC Using Pries Comparison 91 _.3°2 Effects on Import P_rform_nce 99

,.f _

V, SU_,_RY A_UD CONCLUSION 106

REFERENCES

AP_NDICES LIST OF TABLES

Table No. Title" Pa_e

i Import Substitution in the Philippines 22 2 Tariff Reform and Import Restrictions 23

3 •Gross Value Added in P_per and Paper Pro-ducts 31 4 Production and Sales Indices of Paper and Paper Products 32

5 Annual Production and Sales of Paper and of PULPAPEL members 34 6 Cost and Census Value Added per Gross• Output "35 7 Ps:yroll, Gross Output aa.d Census Value Added Per Employee 36

8 Total Paper Imports 37 9 Total Paper Exports 39

i0 and Waste Paper Imports 40 ll Summary of EPR and DRC Results 64

12 Tariff Rates on Output _ 65 13 Tariff Rates on Inputs 66-

15 Comparative-Protectio_ Rates and Efficiencz : Ratios (Input-Output Data) 92"

16 .Efficiency Ratios (Establishment Data),. 1977 93 17 Implicit Tariffs and Price Comparison Ratios 94 18 EPR s_nd DRC/SER Estimates (Using Price Com- parison Data) 95 19 Imports of Selected Paper Products lO1 20 Import Composition 104 ABSTRACT

The purpose of this study is to analyze an_ evaluate the

effects of the Tariff Reform Pro_am on the paper industry. It

aims to identify the adjustment problems and to provide an in-

dication on the kind of assistance and policies _opropriate. to

the industry.

The paper utilized the Effective Protection Rate (EPR)

and Domestic Resource Cost (DRC) frameworks in the analysis

using establishment data, covering the years 1980, 1982, and

1984. Two sets of estimates were computed: in the first set,

the border prices were imputed from the tariff and saies tax

rates; in the second set, they were obtained from the Hongkong

Import Statistics an@, in few cases-, from the Foreign Trade

Statistics of the Philippine_o

The.. re, suLt.a, sho-we.d_,the_, followin@=_,. L)_, pr_o_ec_io,_,_,i_ ....

inverseily related to efficiency; 2) _igger firms can adjust to

lower protection as evidenced by the improvement in their capa-

city utFilizaticn and output levels} 3) the DRC variations across

firms can be attributed to factor productivity, as measured by

the ratio of value added to labor and capital; 4) the improve-

i ment in efficiency can be associated "_'ithincreasing value added

and declining .import content; and3 ) in general, the'bigger firms

have higher efficiency ratios than the smaller firms.

The findings also indicated that although the industry has

been able to capture a significant share of the domestic market,

it has not gained international competitiveness because protection

.0n_y shields it from competition and fails to correct the under-

lying structural weaknesses that cause unoompetitiveness and in- efficiency. These weaknesses include limited economies of scale

(under study by the BOI) and dependence on imported raw materials.

For the latter, the long-term solution is the development of indi-

genous raw materials which hav_ low costs and are in abundant and

regular supply, together with the technology suitable for large-

scale operations.

It needs Z_)_-a_ance of the; government which has already become

part-owner of some of the firm_ through equity investments arising

from their financial restructuring programs. On the technical as-

pects_ it could provide assistance through its existing scientific

instituticns_ particularly ¢he Nation_ Science and Technology

_u_hOr_y II(_STA)_:Dn_he nf±uaan=ial;ms_B=t•s,•it •;cou1•d_hmm_nml _dSAnds

towards inv_-stments,to build up and strengthen science, teohnology_

and institu_tions relevant to the industry. CHAPTER 1

I NTRODUCT ION

Tariff protection has played an integr.al part in Phi-

lippine development strategies since the 1950s./In additio/

to revenue generation, one of its primary functions iS to

promote selectively the growth of priority industries, espe-

. ,C.._al:.t. y::_"d:.uf_i:_g:::_-::t_ _.r:_".i.n.f a.n:c_::_-._.::_)n_:,a"!.__lon g.-._t_m._...:.:.-b-a,s _s. , :"

:".eXlp.e.C.:_e.d .t.h:a..:t... t.he:s_i.-nd u.s.t=_..i._es,:_:wou.:t.d.:-,be:_::_..co:m.p.e.t.i:.t _;we>-:;wi:t.h:

those estaID-l-I_h_d_earlier in other countries. Paradoxically,

protection may work in two opposite ways - on one hand, it

may encourage the achievement of efficiency through econo-

mies of slale and mastery of production techniques and other

skills, in the long run, but on t_e .o_her hand, it .may. stifle

impr.ov_ment _nd :_ff i_.:i_-_y ._e'c.a:ui_.:e_

i stimulus p rovlded by competition. There are also uncertain-

ties concerning-the length of time required to make the

industries eventually stand on their own, and the bias oF

probable misallocation of resources-entailed by' the system

of protection.

In the Philippines, studies on protection and. efficien-

cy •(Power and Sicat, 1971; and Bautista, Power and Asso-

ciates,. 1979) indicated that the relatively more inefficient.

and high-cost industries were generally receiving heavy

%, protection while othecs efficient in •saving or earning fo-

reign exchange were effectively being penalized. The Tariff

Commission (Haresco, 1982) also pointed out that.aft.er two

decades of high tar'iffs, the results were proven to have

...,beencounterproductive rather than development'al. Thus,

the.re had been a policy• shift in the 1980s from inward- to _k 2 -

outward-looking approaches towards growth and industrializa-

q tion. This underlies the current Tariff Reform Program (TRP)

which aims to make industries more competitive through lower

and more uniform levels of protection.

The current phase of the TRP is administered in stages

over the period 1981-85 to Cushion hhe adjustment pressure

..O•n.i•nd us _tri,_es:._•.E._••a:L_a_i•o_n•_.o{_-:_.t_e•_,.•o:_pernk_f_.o•_mac_•:•••_Qf._••---_o_e_,n•e_-_.•

the kind o1[___-_iate pol_cies that should be implemented

in the future, covering the entire indusirial structure.

For thisI study, the subject industry is paper manufacture-.

_It has been considered a priority industry by the government

because, it _ is import substituting. Consequently,._ it has been _hi_hly qgr.o_t_e_J:_d::and ..:h_s::_be{_n.{a_e_c_[p.i:eht Dr .._ce nt_[v.es

accorded .re industries in such category. A stud.y on the

effect of the •increase in prote, ction in 1974 (compared to

1969) on thee efficiency of the paper industry (V'illanueva,

1979). show_d that the t-esult had been unfavorablle since the

industry•as a whole became inefficient'. From these fin-

dings, it can be inferred that a policy reversal, i.e., a

reduction of protection which is embodied in the TRP, may

have a positive impact on efficiency. The present study • is

an examination of the actual effects of the TRP on the

performance of sample • firms in the industry.

i.i Scope, Limitations, and Methodolo9 _

The study is focused on the manufacture of paper and

paperboard from pulp, and covers the years 1980, 1982 and

1984 - before and within the Tariff Reform Program. The

other sectors, namely, pulp manufacturing and paper products

import liberalization on the paper-industry utili-

zing the Effective Protection Rate (EP.R) and Domes-

tic Resource Cost (DRC) concepts, as well as

I other performance indicators such as output, em-

ployment, import content, factor intensity and

productivity;

2. to assess the changes that have occurred and how

the firms in the industry have made-their adjust-

men ts ;

3. to identify the adju._£ment problems of the indus--

try and to recommend policy measures to lease the

adjustment pro-cess; and

4. to simulate I the effects of further reduction of

tariffs to the 20-30% range.

I. 3 So u_ce.s of Datza_ l-

Data for EPR and DRC _alculations were derived from

survey questionnaires administered to the sample firms in

the industry. These were supplemented by financial state-

ments obtained from the Securities and Exchange Commission

(SEC). Statistics on production, rated and= _c_t_u-ei capacity

_u_ _i_i:z_ _:iQ n: a _' _,__e_'iO a s__i_c:d a_t_ _,w_r'e p r_w_ d_e@ _ _ !_t he PUlp_

(PULPAPEL).

Publications used included the Central Bank Statistical

Bulletin, NEDA Statistical Yearbook, Philippine Yearbook

NCSO Foreign Trade Statistics, Tariff and Customs Code.

National Internal Revenue Code, Business Day's Top 1000

Corporations, and .H_ongko.ng Import Statistics. :-- 5-

1.4 Significance of the Study

The paper is similar to the previou

Villanueva in 1979, which was concerned with the effects of

protection on efficiency. But it is also different in the

sense that, the TRP represents a reversal of the previous

strategy to hasten industrial development_

Despite the studies on the negative iipact of higher

_,:p_0 _e_t:_i.o_ .,,--I,_s'_eZ:f_i_ci_e_c:y:,_;,_,.:t_h_e: :mo.,v._',:_.o., .t_o,,wer :'.:.pr_.e.te,c_e n _i,_a S,

-b Ou rid- -to me e_t_ s't-a nce "es p e c i a !l°Y " fr o m -t h e" a f-f e c ted p-at-

ties. A study of concerned industries will provide an

assessment of the efficacy of the program particularly in

promoting efficiency. Likewise, the identification of the

adjustmeni problems encountered and their possible solution,

as we l! as the _xa_ninati_Dn _f the _atures _nd _ra_ter_s-

tics that {determine performance, Imay serve as a springboard

in the formulation of appropriate stra£egies and assistance

to other fndustries{ under the program.

1.5. Review of [_iterature

Studies on protection and efficiency in Philippine

industries were made by Power and Sicat in 1971, and by

Bautista, Power and Associates in 1979. Their findings re-

vealed that the protection structure induced resource misal-

location by favoring the inefficient industries and penali-

zing those which were efficient. The paper industry has been

covered in these studies as part of the manufacturing sector.

A closer examination and more detailed study wa_ made

by Villanueva in 1979 using Input-Output data for 1969 and

1974, and establishment data for 1977. Its-results were -- 6 --

consistent with the findings of previously • mentioned stu- dies.

The effects of the TRP on the "effective protection rate

of the industry were also estimated by Chan (1982) and by i the Tariff Commission •(1982), covering some paper products.

Both studies showed a decline in EPR at the final stage of

the program in 1985 compared to 1980.

Chapt_r-- II_s a desc[iption of the industry structure

and its performance in the light of hhe policy environment

in effect for the period under review.

Chapter III is a presentation of theoretical frame- L work and methodology, the assumptions and adjustments made,

tors utilizedJ in the study.

Chapter IV is a discussion and analysis of the findings

based on [he framework used. It also a_tempts to' explain :the

behavior of the• variables and to hi_ghl_ght the deviations

q and the distinctive characteristics that give rise to the

observed variations.

Chapter V summarizes the important points in the paper.

It discusses the policy implications and presents the recom-

mendations for possible consideration by concerned parties. CHAPTER If

INDUSTRY. BACKGROUND

2.1 Product and Industry Description

Paper is the general term for the substance commonly used for writing Or pt-inting, and for wrapping. All types of paper are made from pulp containing vegetable, mineral or man-made fibers that form a matted or felted sheet on a screen when moisture is removed (Encyclopedia Britannica,

11 1971). The name is derived from "papyrus, a sheet made from pasting together th_ sections of an Egyptian reed (Cyperus papyrus) and used in ancient times as a writing material

(Encyclopedia of CheMical Technology, 1952).

The various paper grades can be classified a's follows

(The New Enc}[clopedia Britannica, 1979):

Ii_ GrQundwood _nd{ Ne_4sp_nt Papezr_

Of _nd converging grades,

groundwood paper contains varying amounts of I

groundwood pulp, together with small per-

centages of chemical wood pulp for

strength and _urability!. It is not_q__f_r

ar_:_"'_v_n:::_ .. . u._n..,_.fo..r m,_:,=f-Orm a-.,_z_o_,a,a4_...: _a.-..-.h.-lg.m.r_e: ,_ttr...... e:._:

bf 6padity_. I t ':tend::s _ .to. be,-..bu.tky,: a:nd :..-,i_s...... r receptive to printing ink. It does not have

high whiteness and tends to turn yellow.when

exposed to light and after long aging.

2.

Bond paper is characterized by •bright color

cleanliness, and by a degree of stiffness, durability for repeated handling and filing, and resistance to

the pehetration and spreading of ink.

3 Bookpape r

Most bookpape:.rs are made of various combina-

tions of chemical wood pulp. For low-priced

grades, ground wood , semi-chemical ,and de-inked

was,t;_ '.p_pe r _a:,re_,_as o:l_us ed. :'I:n_?::add i:.ito_. to puip

,_the:'_m_i:X,_/_e,_:,:_f,._h±c<:om:h: boo_M_pmper _i:s mad e :co n_ta:i,n__ " r

various 'amounts of i , fillers and dyes.

4. Kraft Wrapping

Kraft wrapping is a heavy stock used for

p,aper bags. It is composed of wood pulp in

unbleached condition mad_ from _oftwood,

usually pine. ;It is d is'tingui:shed bY

outstanding tensile and tearing strength.°

K_aft wrapping is sized to T_t[ard _4etti:ng when

exposedi to water.

5. Sanitmry Paper

Sanitary paper includes toilet tissue, towel-

ling, facial tissue and :napkins. These grades a-re

made from various proportions of sulfite and

bleached kraft pulps with relatively little refi-

ning of the stock to preserve a soft bulky absor-

bent sheet. Eecause of this texture, sanitary paper

is relatively weak. Since it is often exposed to

wetting in use, it is usually treated with "_esins

to increase .

6. Paperboard

Paperboard is a general term descriptive of products O.O12 inch (0.30 millimeter) or more in

thickness, made of fibrous materials on paper

machines, It is commonly made from wood pulp, straw,

waste paper or a combination of these materials.

There are three main types of paperboard:

a. boxboards: used for products such as

food board, food trays, plates and paperboxes.

b. containerboards: used for the manufacture

of corrugated and solid fiber shipping containers.

c. Paperboard specialties: include items

such as bin_erboard, electrical pressboard, and

build ing boards. 7.Bristol

The general term bristol refers to a group of

stiff, heavy pape!r with thickness rangiSg from

0.006 in cb_ J(O. 15 ram) upward ....These g_ades are made i

from various combinations _ of chemical wood pulp.

The stock is beaten to a medium degree and usually

well sized to prevent penetration of molsture. In

recent years, it has b@en increasingly used for[

_pdmch_cards: in tabulat._©@--a_i_si_ _chines, i

;:-"_'e,:' .p"a-p°e,,__i_:d'!h -_"_r.9 __',:i_._iVo,!"_e_i:i:_ h.e i-_ma_f,ec, .tu_.re,-..._:if .r-_m. _:fp.u..!..p. of paper and paperDoard, which in turn are _urtner cut into

size or shape and converted into products for industrial and

consumer use. The distinction between paperboard and paper

is not sharp but, generally speaking, paperboard is-heav!er,

thicker and more rigid than paper, and is commonly used for

containers and boxes for various commodities. Based on the - i0 -

PhiliDr)ine Standard Commodity Classification-(PSCC), the

criterion Eor the distinction is the weight per square

meter. Thus, if the weight per square meter exceeds 300

grams, it is classified as ipaperboard.

In general, the industry's products produced locally

includes the following:

,I. Paper: printing, writing, wrapping, sanitary

and other_

2-. __"_d_ b_"xb6_rd, chipboard., cl.a.yfilled.

board, bleached b6ard: and (printer's

board), coated board-(used by cigarette, cosmetic

and drug manufacturers as well as the publishing

industry) , containerboar d, kraf.tboard, .newsb.oard,

,.taghoard., .and .__pe-cial_y,;_3o.ard _.

In 1980, the manufacture of paper, and paper products

included _-41 establishments, with gross output of P3.12 i

billion, Census Valu-e Added of P71.1 milllion, to.tal employ-

ment of 15,180 persons, total receipts of P3.O9 billion, .and

-total costs of P2.70 billion. Most of these establishments

are paper .converters but the present study is main.ly'co-r_cer-

ned with the millers or manufacturers of paper from pulp,

since the importation of converted items has been very

minimal. Based on the latest list and data available (1983)

from PULPAPEL, the 24 firms (of which 19 are

PULPAPEL members) in the country have a total .rated" capacity

of 550,195 metric tons (m.t.). In 1984, production a's repor-

ted by 12 of its members totalled 265,444 m.t. For the .same

year, total paper imports reached 149,892 m.t. while total

paper exports were merely 1,433 m.t., which was only 0.54% of domestic production.

Of the 24 firms, five are integrated pulp and paper/pa-

perboard mills, four are paper and paperboard mills, 13 are

purely paper mills, and, the •remaining two are solely paper-

board mills. The industry's total •rated capacity in 1983

ranged from 3,960 m.t. for the smallest firm which accounted

for only a 0.7% share, to 184,335 m.t. for the biggest firm

(PICOP), which constituted a 34% share of the total rated capacity... The six biggest firms in the industry already

k comprise 67% of the total rated capacity which indicates •,

that the share of the greater number (18 firms•) is only 33%.

Most • of the•ifirms arle concentrated in Luzon (14 in Metro

Manila, four in Centlral Luzon, ,and two in Southern Tagalog). ; [

Only two are iocated in the Visayas and another two in

Mindanao..

Z. 2 A- Brief History of the.• rndus•tr_y••

The industry started in the Philippines with the estab-

lishment of the first paper mill, the Compania Cellulosa de

Filipinas (now the Central Azucarera de Bais), in Negros

Oriental in February 1941. Its 6peration, however:, was dis-

.-._i__.'_i_:..",:by' '.___,,_i._._,.--a,n_:""_.._:-_,_a...... r,,_s:,-*_.,:_m--__-:''-_: o nl:!,"_y_.i_._:_.Decembe...... :..,...... r !9.4-9_?It:

_,s,]

pulp in making se!veral kinds of_paper and paperboard (Impre-

so , i974 ) .

For the period 1950 to 1984, additional firms were put

up but not all .of them survived. The list of PULPAPEL in

1983 indicated that the still existing firms (survlvors)

totalled 24, and were established in the following periods: "-12 -

NO'. :of Mill's* Period Established

1940-1949 1 1.950-1959 5 1960-1969 7 1970-1979 6 1980-1984 J

* Net addition - includes pnly the survlv_ors.

_B_a_s:ed?_:_i%h _ _..a_£__'Ie'sb;,_n_f•o rma.t __h, _ifou r__:_,of_t_ _9.e._2:&_f _ _

:<_hageal_@a__d -down as of .1985 0"

2. 3 Production Structure

A. Raw Material Requirements

The industry is import substituting but its raw mate-

rials, which include long and _h_rt fiber pulp, ,scrapwaste

paper, and'Tzhemicals, are ]nosily impor£ed (approximately

6O% ).

Pulp ican be derived from rice straws, grasses (such as

cogon), abaca, rags, -agricultural wastes (such as sugarcane

), !chemicals, wood waste, hardweod and softwood sPe-

cies. On a worldwide scene, wood, which was discovered as a

cheap raw material for paper in 1839, currently represents

about 85-90% of the fiber material used in paper manufacture

(Serrano, 1985).

In the case of the Philippines, the 'raw materials used

include wood, sugarcane bagasse, abaca fibers, waste paper,

and imported pulp. Since the country lacks softwood species,

the source of long fiber pulp is abaca which however, is

limited in supply and relatively expensive. Thus it is used

only for specialty . Moreover, the short .£iber pulp

produced by integrated mills is just sufficient (or even ,._.'.

.nadequate) E,or _heir own needs thereby necessitating the

.mportation of both long and short • fiber pulp to satisfy the

•equirements of the industry.

The availability of raw materials in sufficient luantities is crucial to the success of the paper

.ndustry. Building a pulp and paper mill in a developing

:ountry based on imported raw materials is very langerous, particularly if the source is a_ developed

:ountry. Such a mill should be able to control a substantial part,. 0f its raw m_terial requirements and to.

Dring these to the miill site at a reasonable cost, preferab- i 1 ly lower than in developed countries. Most of the time, the ability to' use • cheap!er raw mate=ials is• the only advantage I that such a mill can • claim over a similar mill in a deve- loped, c:ount:ry (Pic:o_nel]-, "1978 ) _.

Mo:s.t:of. :.,th-__ 1,o.cla,]_p:ap.e_,r a:_-.p:Eoc_uxzec_ h_.,com£[ir£k_.g_ s_or_ i fiber pulp with long f_be=- pu_p in various proportions depending on the required quality o_ the. paper. Printing .and

• F writing paper such as bookpaper and bond paper generally

:Contain more short fiber pulp while Wrapping paper and

_:_._i_i_f_._£_5`._fd!s._?_:..e.q:_]_.i!r_e'..._.a_:_h._ig_her_:_p.._9p_.t.r.._.n_ fiber....-:,-,.,;,.,,,._pulp.::-.-, ..,::..`i_!__ ,,.. T

current shortag# ,and higher costs of raw materials, the ! i industry is now relying heavily on the recycling of scrap

paper for its..inputs but this . has resulted in th_ production

of poor quality paper (Eveninq _ost, 2 July 1984).

Information from the. United Nations International

Development Organization (UNIDO) on appropriate •technology

for paper and small pulp mills relates that with -- ±4 -

temporary exceptions only, all the materials used for paper manufacture have come frQm discarded or waste materials.

(This claim also applies to pulp produced from wood. There had been previously a surplus of timber as initial forests were cleared for land development.) Nothing is, or should be produced or grown simply for the. manufacture of paper. For the industry to be truly viable and to endure, paper mus.t always be produced from waste materials of low intrisinc value fr-om other- industries, such as agriculture (Western,

1979).

In the Phi.lippi_es _, forest resources are-being counted on as raw.materials _Eorfpaper manufacture. But the country's supply of w_)od-based! materials is very limited..A study conducted by Arthur D. Little, an American consultancy firm_ in conn ection_ with the proposa]L_.to include a Phil_ippine

that the country's timber stands:have been so depleted that they can no longer support a pulp and paper project (Busi- ness Day, 19 January 1981). This problem has also cons- trained PICOP's expansion program, which requires the clear

_ _i£i._!i_!_6_f.,..S:vee_ ''th o us and.,_..ae_ ar.es_O.fl,._.._.__)_W.th _:_.re:so t

:a#_4_,_:_ v:6ry:_.?_l:a_:"ifl_t-i!:._._9}8:7.__ :Su _:_'i_(_i_i_t_i_ l:iei._r_cg:_gmi:i_i._h-e.

Bureau of Fores_ 'Development (BFD). Director Cortez'of the said bureau oppos'ed PICOP's expansion, program because of the need' to conserve the dwindling forest resources in Mindanao, specifically those within the PICOP concession area. He believed that PICOP should scale down its expansion project

since there were no adequate raw materials to support it

(Bulletin Todlv, 21 December 1984). - 15 -

The government has encouraged tree farming and

plantations by small farmers but those that wereestablished

were still so insufficient to meet the needs of the paper

industry. Considering that Iforest plantations t_ke time to

grow, and lwith the policy of forest conservation, it might

be advisable to rely increalsingly on the _ore readily avai-" .i _'i ab:_l:__ewa_st_i _te._r i_l s_ • whe,te :,dis p os a i: may_ _yeno, h_, a _P-rQb l._,m_::

in p:_ipe r_ as_-__e_li:_.'_as/:;:i_no t h:er ,_ind us t r i:_e_s_,o_.po i i c _ e:_s

should be-aimed directly at the root causes of the lack •bf

competitiveness. In the case of paper, these include limi-

ted economies of scale (a study on integration is already

being undertaken by the Board of Investments) and .import

dependence _n _caw _materiel_, Xn -_he ,lat,ter ,aspe=t, the ]

crucial role to play.

Phil_ppine industrial firms have been criticized for

their pronounced propensity to purchasi.e technology outriglh_

rather than develop their own through internal 'technology

generation efforts (Reyes, 1985). A pitfall of this practice

was exemplified by the experience of Celloph_l Resources

Corporation, a , which had been reported to have

enc0untered technical problems because the French contractor

commissioned to set up the project never:completed it (Times

Journal, 30 August 1982).

In the past, technology enabled PTCOP to utilize hard-

wood for its paper production. Previously, 'only softwo¢

species were deemed suitable for paper manufacture. Unfortu-

nately fcr PICOP, the current problem/of the Country's

dwindling forest resources poses a major production cons- '- 16 -

traint. Thus, it becomes necessary to'look for alternative

non-forest based raw materials.

In 1983, the Laguna Lake Development Authority (LLDA)

reported a breakthrough in their research on water lily I i products. LLDA scientists claimed that they had perfected

• ; [. the formula from to Il(Times Journal;

research agency commissioned by the German Agency for Tezh-

nical Cooperation, Ltd., to undertake its project on banana

•fiber processing. The experiments made by. ATLANTA had given

decisive and positive starting pQints for the processing of

b ana na_ .fi.b-er_ :to _Dulp _ _In tt_Lrn.,_ne _pu_10 x_I)u'id-_Jge"pro:c_:s_e d

with the _onventional -technology ito •.paper and xzardboard,

which

due to its_ good strength characteristics. But although it

had been _ecommended from a technolpgi_al point! of view, it

is still necessary to carry out comprehensive scientific

experiments (ATLANTA, 1975)..

As previously mentioned, •four firms have closed down as

of 1985. But [here are also newcomers in the industry. Based

on the PULPA-PEL list, these included four firms. Two of them

has ventured into the production of coated board which was

•previously produced by only one firm. The third firm has

gone into the production of printing and writing paper, and

industrial packaging products, using traditional materials.

The fourth firm would be producing printing and writing

paper with rice • straw as raw material. Not in the PULPAPEL

list are very small firms which utilize indigenous raw _- 1T-

materials and very labor intensive methods. The firms in- clude the following:

i. Cordillera Paper Products (Baguio City)

The firm started operating in March 1984. ! It has been producing paper (mostly stationery and envelopes

_'hich are dyed) from the leaves and barks of ipil-ipil trees, a certain type of grass (ronos), papyrus and abaca leaves (Business Day, 6 June 1984).

2. "Duntog Paper Mill (Baguio City.) ° It has been making paper by hand from vegetables such " as okra and pechay, from wild grass like cogon, from wastes such as sawdust, and from traditional raw materials like cotton linters, banana stalks, rice stalks, corn[ hair, water lily, bamboo and barks of trees (Bulletin Today,

24 Ap_:LL 1.984).

3. Hyacinth Products Enterprises and Resources

Development Corpoi'ation (HYPER), Angono, Rizal

The firm has been manufacturing paper (mostly ) from water hyacinths, thus helping solve Laguna

Lakel_s_peren_nial problem of water lily con_/::ioTT. It star,

The products of these three firms are handmade and thus, the process is very labor-intensive. This would there- fore have a favorable impact on employment generation. But the present method may be suitable only for small-scale operation and not for large-scale production wherein the capacity involves thousands of metric tons per year. - 18 -

Another issue concerns the uncertainty in the sufficiency

of the indicated raw materials for t_at output level. The

thrust of any forthcoming research, therefore, should be on-the

identification, development and utilization of indigenous

raw materials which have minimal cost and are available in

abundant and continued supply, together with a technology

that would permit large-scale operations. [

'i t.:" _f:S_s:"fii_.t.1%_d v_' _:a__.!,_:.',.'_,_Oi:_:?:p.'_m_:te ;..:.the pr.o_.d.u_.._ i.Q_.,._.._.[_..?:._9.p,_:_

tices. At tnls tlme, i_ may I no_ be possible to compete in

the production of mass-produced items which is dominated by

industrially advanced countries having abundant raw mate-

rials. The ._Philippines, however, may have some success in

the export

B. _roduction Process

The l_aper production process begins with stock prepat-a-

tion whicN includes mechanical treatment (beating and refi-

ning) and chemical addition. In th=is Operation, sizing

agents, pigments,.colors and other materla!s may be added

depending on the end-use of the paper.

From the processed stock, paper is then made on the

-either the Fourdrinier machine or the cylind@r

machine. Details of the process are described below (Encyc- cicoedia Bcitannica, 1971):

I. Stock Preparation

a. Mechanical Treatment

l)Beatinc. The beater consists of a tank

containing a heavy roll that revolves against

a bed plate. Pulp is put into the beater, and _-19 --

water is added to facilitate circulation of

the mass between the roll and the bedplate.

Much of the beating action results from the f rubbing of fiber on fiber. This splits and

mashes the fib@rs, creating hairlike fibrils

and causing them to absorb water and become

slimy.• They will then drain more slowly on

the paper machine wire and bond together more

readily as more water is removed and the wet

web is pressed.

2)Refining. J The purpose of refining is to

brush ou_-knots or clusters of fibers and to

cut t_e fibers to more uniform len@ths. Refi-

ners operate• on the principle of one set of

bar_ or k_ive_ _p_singr anot_h_L - set at a con-

b. Chemical Addition

Non-fibrous materials added to the stock

supply the required properties not inherent in

paper made from fibgrs alone such as: i) size

:a••n••:4aluminum•:sulfate to •g•ive _e•_1•s_Da__c_••to I

wa_e_•• p•enetra•Zi[6n•; 2•)_:C:•e:_tain _esins to cive

wet strength properties; 3) fillers to enhance

the Opacity and brightness of paper; 4) pig-

ments and dyes to'give color; 5) def[occulants

to reduce the tendency of fibers to agglome-

rate; and 6) other additives to increase.the

tensile strength, absorbency, softness and

filler retention properties. Chemical additives i_,_20 ....

may be added in the beat, er, or continuously at

almost any point in the processing operation.

2. Paper Formation

For this • production phase, eithe_ the Four-

drinier machine or the• cylinder machine is used.

.The cylinder machine differs from the Four-

drinier machine mainly in the method of forming the

continuous paper wet. This is accomplished by the

use of wire-covered cylinders •or molds that rotate

L in a vat containing a:dilute stock suspension. As

the water d_ains through and passes out at the ends

of the cylinders, the fibers are formed on the

wi_e. The w_t web is transferred from the cylinder

into a felt that is pressed against the cylinder by

a_ couch roll..-

IrY th e. Fourd :ri-n±e r_ mach f n-e_:;_:a_._:..we bT-o:f:_:: pa p e:_ i_s • j formed from the. stock as H the. water- is removed from

the fiber water mixture by drainage and by suction

k boxes. It then passes through the press and drier

sections where water is removed further until it

•_.e.a_..he-s;;;.it.-he.c-.ai e:nd:ar se_t_l_a_ ._w_e__h_q c a-ienda r s i___h_ p_ _:n__i_ _ "_e -"--__......

gloss t_ the surface.

2.4 Policy Environment

I In line with its import substitution policy which i

Prevailed in the postwar period, the government.has encou- raged the growth of the paper industry since its early beginnings in. the 194Os. This was effected through high protection and incentives in the form of various tax exemp- tions or reductions. Thus, from the 194Os to the 197Os, the industry grew steadily and successfully supplanted imports in the domestic market. The ratio of import valu_ to produc- tion value greatly declined, from 43.79 in 1948-1949 tO less than one in the following years up to 1980 (Table I).

In recent years, as part of the move towards outward- looking strategies, importation of 51 out of the 55 paper product.s banned since 1970 was liberalized in 1981 and 1982.

Perhaps the most significant policy change is the Tariff

Reform Program (TRP), ;implemented in stages from 1981-1985, which lowered tariff fates considerably for paper products from 30-1OO% in 1980 t_ 10-50% in 1985. A sample of the commodities affected is given in Table 2, which shows the nominal rates applicable beflore and after the TRP, and the changes i_;_impoE t_ c lassI;i_;i;c:atio_ _

Despite_ these efforts, at liberalization, the_ govern-- ment implemented new nonitariff barriers which had been more restrictive than tariffs in limiting imports. A large number of paper p,:oducts were newly regulated in 1982 and i

1983, in the form of requirement Of prior iL%P_o_r-ti_ =-epproval or r

Bf)I" d _s _'not '_i IC;W imDOrta•tion o_ paper/prod_rCt_ _which <,are comparable in quality and competitively priced with imported ones (Daily Express, 30 June 1983) i . It also has _ guide- line on a one-to-one ratio (for packaging products), i.e., a manufacturer should equally mix both imported and locally sourced materials in making his finished products (Times --22 -

Table I

IMPORT SUBSTITUTION I_ _A2_ AND PAPER PRODUCTS

Value of Imports/ .i Year Value of Production A--/

1948-1949 43.79

1956 .98

196o .35

!968 .55

197o .49

1974 .29

z980 .4L

1/The ratios from 1948 to 1968 were estimated by Baldwin (1975) and were also indicated by Tan (!979).

The estimates for 1970, 1974, _nd 1980 were computed from this ratio:

...... w_!ueo_ imports (_ czF)_ .....?_-aiue of Eross ou-opu'_kP)

SOURCES, Baldwin, 1975. Annual Survey of Establishments, NCSO, 1981 (Preliminary). Foreign Trade Statistics, NCS0, 1980. Philippine Yearbook, 1977. Tan, 1979. - 23 -

Table 2

TARIFF,REFOEI_ AND I_PORT RESTRICTIONS

Re lat # Nominal Tariff(%) Import _

1980 1_84 1_80 1_84

Waste paper_ l0 lO Yes Yes Pulp 20-50 10-20 No No Bond paper 50 30 Banned Banned Book-paper 50 30 No Yes Boxboard 50 50 No Yes Carbor=izing tissue 30 20 No Yes Clayfilled board 50 50 - No - Yes Chipboard 50, 50 No Yes Corrugating medium I00 40 Banned Yes Facial timsue and related item_ I00 50 Banned Liberalized Foil laminate 100 40 No Yes lO0 50 No Yes Linerbo ard lO0 50 No Yes t4anifold pape_ IO0 40 No Yes - Newsprint 30 30 Yes Yes St at ionerie s'_ i00 40 Banne& Liberalized Warpapsr i00 50 No Yes

1-_based on the inputs and prodhcts of the sample firms.

2_Regulated Import • refers to a product of which importation requires prior approval by the Board of Investments (BOI). Yes indicates that the COmmodity _S a regulated import while No indicates that it is not a regulated import.

Banned Items are product_ which canno_ De impo/_ta_-without •prior "_i_,hori_-Ati_n._,;_m..:_he._..Cs_t.r:a_;!iB_(,::CB!__,o__,

°_hich"_San _lrg_ be impsrtedwith0ut p_i0r BOI or CB _pproval, ae p_ovide_ _ C_ =Circul_ _Oo 758 (e_fective januar_ l, 198l) • and CB Circular N_. 850 (effective February 15_ 1982). =

_may be imported only by paper mills/manufacturers. -- 24 -

Journal, 29 June 1985).

The 1982 import regulation was in response to the

petition by PULPAPEL for protection to the local paper

industry, in view of the influx of imports resul_ing from

the tariff reductions in 1981, as claimed by the associa-

tion. The industry had been suffering from low capacity

utilization (59% in 1981 anl 56% in 1982) and high produc-

tios costs, making the local products uncompetitive with

imports, which the association claimed were undervalued.

On ddmestic pricing, the Price Control Council has

indicated that there are no price control.s on paper products

at present. But in effect, the depressed demand pu'ts a

constraint on _output p_ice increases.

The specific policies in the 1940s to the 1980s which

have affected the industry are as follows:

Before 1980

i. Republic Act (R.A.) AS a new and necessary industry, No. 35 of 1946 paper manufacture was entitled to

full exemption from paying internal

revenue t&xes for a p_e.Kio_ of 5

years.

2. R.A. No. 901 of/195_ This law granted the industry full (Amending R.A. No. 3_) _ ' exemption :from paying import

duties, compensating tax, special

import tax and foreign exchange tax.

3. Tariff Act of 1957 The tariff rates on imports were

increased, for pulp: from zero duty "-"23 --

in 1909 to 10% in 1957.; and for

finished products: from 10%-40% in

1909 to 5%-100% in 1957.

4. Investment Incentlves As a priority project, £'he industry Act of 1967 and Export Incentives Act of 1970 was granted incentives in the form

of tax exemptions and tax credits and

deductions.

5. Central Bank Circular The importation of commod-ities No. 289 (Feb. 21, ,1970) under the Unclassified Consumer

Goods (UC), Semi-unclassified

Consumer Goods (SUC), and Non-

essential Consumer Goods .[NEC)

categories', which covered 55 paper

products, required prior CB approval.

6 Memor•and um tO Aultho- Th_ impor_tat.ion::_.o:_-_:.newsp:rin:t'._e--:_' rized Agent: Banks . (MAAB) No.s 33 and 61 qulred prior aut_orizat-ion and.-li" (October and December 1972) censing from the CB.

7. R..A. NO. 37 (Revised Three-level tariff rates (30, 50, Tariff and Customs Code of the 100%) tariff rates on paper and Philippines as _ ...... _ " _a_;id_:b_ye%_9_%;_.';4 . :.p_pe:_bo a_;_!_l_,_oduStsL._e_re[i.m,pesed _. dential 'Decree (P.D.) _:_!_i:_:;_i_._.;__U a"ry_:I;/_ ba s e_ ;ion i;e'ssg.nti a l:i_ty_,_:::a_._n_:_ 1972) i _ availability of local produc-

tion. For input, 50% was levied

on pulp iother than long-fibered,

which in turn had a tariff of 20%. 8. MAAB No. 13 Paper waste may be imported only (Amendment tO 1977 PSCC) Jan. 27, 1978 by paper mills/manufac_urers.

9. P.D. No. 1395 This required advance payments (May 31, 1978) of duties and taxes on all

imports, which included paper

products and inputs. iO. Circular No. 683 Advance margin deposits on (July 6, 1979) import licenses were also

requ ired.

After 1980

i. Import Eiberalization_

(effective Jan. i[,_ 1981) products was liberalized..This im-

plies that they can be imported

without prior CB or BOI approval.

b. CS Circular No. 850 Tne importatlon of a_dd_i_ional (effective Feb. 15 :<19_;) , a s:e_:pa:p_e=_ipr_u_tswaslib_ra_0

lized.

2. Import Regulations

a. Circular Letter The importation of machineries (Feb. i0, 1981) _ and equipment of non-integrated

mills, falling under seven speci- - 27 -

fic categories required prior

clearance from the BOI).

D. MAAB No. 48 The importation of 88 ,paper (effective Nov. 29, 1982) products required prior BOI

approval. Except for semi-chemical

fluting paper, the items libe-

ralized previously were not inclu-

ded in this regulation.-. c. MAAB (Unnumbered) The importation of 15 paper pro- (effective Aug. 1983) ducts also required prior BOI

approval. This also excluded pre-

viously.liberalized items. d. CB Circular 1029 I Banned commodities were defined (Oct ....12, 1984) as those products whose impor- ....

_a_ion requires prior CB _approval,

and are classified under the UC

and NEC categories. For the paper

industry, the 'three banned commo-

dities are: i) Bond paper, in

r!u!_d_, lin_d::_r squared:_< in_ roil_s;

or sheets; and 3) Cigarette paper,

cut to size, in leaves, booklets D or tubes. i i--28 --

3. Incentives

a. P.D. 1789 This is the new consolidated in- (Omnibus Investments Code of 1981, amen- vestments and incentives code d ed by Batasang Pam- bansa Blg. 391, which provides incentives to pulp, known as the Invest- ment Incentive Poll- paper, and paperboard mills regis- cy Act of 1.983) tered with the BOI. These incen-

tives include tax credits and

exemptions, protect_ion of patents

and rights, post-operative tariff,

prot'ection from government compe-

tition, and priority on financial

and investment assistance and ex-

port promotion.

b. Letter of Instruc- These are the Investment Priorities tions (LOI) No. ! 1212 (1982) and Plan fo_ 1982 and 1984 under.the LO! NO. 1304 (19B4) SOl, covering:

i) pulp from indigenous raw

materials ;

2) integrated pulp and paper pro-

ductio_n;

3 )f i_r:board fro,m ind igenDus _raw_

materials; and

4) packing containers for export

requirements.

c. Pulp and Paper This aims to improve indu&try Rat ional izat ion Program structure/efficiency throug h moder- (still under study by the BOI) nization of equipment and possible

merging of firms. "--29 --

4. Tariff Reform Program

a. Tariff and Customs The TRP seeks .to lower very high Code of the Philip- pines (1982) tariffs and to even off the

dispersion of the levels Of

assistance among and within in-

dustry sectors. TO cushion the

adjustment pressure on industries,

the program has scheduled tariff

rate adjustments in five stages

over the period 1981-1985. Thus,

a high tariff rate in 1980 dec-

lines gradually for each year

(stage) until it reaches the final

rate in 1985 as provided in the

Tariff and Customs Code I. Before

the TRF, tar_f_ rates:on the paper-

industry ranged from 10-50% for

material inputs, and 30.-100% for

finished products. At the final

stage of the program, the tariffs

range from 10"20% for inputs, and

:•i0_50%• Z b:r f!!lished ••prod•ucts•.

2. 5 Industry Performance I The postwar growth of the paper industry was largely

I influenced by the policy and economic environmentprevailing

during the period. In this context, the performance of the

industry as a whole shall be evaluated based on the general - 30 -

trends of selected indicators, taking into account the major fluctuations and deviations,as well as their underiying causes. Due to the inavailability or incongruence of some of the data at certain years, the period coverage was not the same for each indicator. The series on production and sales indices of paper and paper products was discontinued after

1980 while the indicators obtained from PULPAPEL are in metric tons and cover _he _period 1979 to 1984. Lastly, the most recent data on costs and census value added- per gross o_t_put and per employee are only up to 1981. Subject to _ these constraints, the performance of the industry is discussed below.

i. Gross Valu_ Added (GVA)

At constant prices, the industry's GVA showed[ an increasing pattern from 1972 to 1977, It fell drastically inI 1978 and _'egistered _ generall.y de,c_linin_,.trend :up _o;_.1984. Excep.t..

for 1983, the .GVA was low#r in the yeaKs following 1980.

This is consistent with the findings to'be discussed later

in the paper that the years after 1-980 had been less favora-

Dle to the industry.

[ increasing excelpt in 1975 when there was a drop of 16.1% in

production quantity index and 5.4% decline in gross

sales/receipts index (Table 4). This downward t_rn may be

attributed to multiple increases in crude oil prices, shor-

tages of raw materials and high inventory levels (Philippine

Yearbook., 1977). --3i --

Table 3

GROSS VALUE ADDED IN PAPER AND PAPER PRODUCTS (in millionS)

At Constant At Current IPrice e Year Prices Of 197_2 !972 345 345

!975 826 486

1976 1,0o9 _38

1977 1,030 520

1978 627 195

1979 878 202

198o 9z9 191

1981 967 188

1982 920 172

1981_ 1,1!5 i96

1984,.. _,865.,_. 182

SOURCE, NEDA St_tistlcal Yearbook, 1986. - 32 -

Table 4 PRODU_fi0N A_D BALES INDICES OF PAPER AI_ PAPER PRODUCTS

Physical Volume Gross Sales/Receipts Index Indsz

1972 !00.0 I00.0

1973 ii!.6 149.9

1974 107.6 184.5

1975 90.3 174.5

1976 113.8 263.8

•1977 120.9 290.7

1978 130.7 291.9

1979 132.4 573.3

SOURCE: Central'Bank Statist,_cal Bulletin, 1980. 7 -33 -

Based on PULPAPEL data, production had been generally

decreasing from 1.979 to 1984, from 331,601 m.t. in 1979 to

265,444 m.t. in 1984, but it must be noted that not all the

firms reported their production in 1982-1984. Capacity uti- t

lization had also been declining, from 86% in 1979 to less

than 60% in !984 (Table 5). Production and capacity utiliza-

tion of the sample firms in the study also showed a similar

trend .

The raw material component of paper constitutes approxi- ma_tgly 60% of total production (Bulletin Today, 25 October

i983). The data available from the Philippine Yearbook (Tab-

le 6) indicated tha_ the percentage of total cost to gross

had been out[3u t increasing, from69% in 1973 to 77.2% in

, I 1981. Addftional indicators from the same source are shown

in Table 7.

3 Impor ts_

Paper impo_ts, as classified in the Foreign Trade

Statistics arecategorized into two major headings, namely, •

under Commodity - Code 641: Paper and Paperboard Ilnports, and

642: Paper and Paperboard Cut tQ Size or Shape and Articles

conversion of p_per and paperboard into various products

The latter category .constituted a ve_ry minimal percentage of

total paper imports.

In 1974, import value increased tremendously (by 65%).

However, imports in the subsequent years, up to 1978, had

been generaliy much lower than the 1974 figure. Moreover, - 34 -

Table 5

ANNUAL PRODUCTION AND SALES OF PAPER AND PAFER_OARD. OF PULPAPEL )_M_ERS (in metric tons)

Capacity Year Production Sales Utilization (%)

1979 331,601 329,371 86 "

1980 307,592 272,147 70

1981 290.,.212 272,643 59

198 241,395 219,04T 56

1983-JJ 271,841 - 275,165 63

1984 _I 265,444- 238,36.2 5? '.

l--_mitted by i4 of its member firms

2_ bm£t.t.ed.,,byi12 :.o£;'i_.s,'mem_e: r-£i_ms_-

SOURCE I PULPAP_L • --35 -

Table 6

COST AND CENSUS VALUE.ADdED PER GROSS OUT_JT A-/

..

Year Output Gross Out_ut Gross Output (%)

1973 6oi 30.1 69.0

1974 4.5 34.8 65.2

1977 4.1 25.4 74.6

1979 5.4 36.9 72.0

1980 6.5 31.5 77.7

1981 7.8 22.8 77.2

1-/R_tios for 1975 and 1974 are from _stablishments with 5 or more workers. Ratios for 1977 and suc=%eding years sinefrom all sstab-

SOUR_E_ Philippin$ Yearbook, 1951 an_ 1985.

• .i' ..7 • --,36 --

Table 7

PAXROLL, GROSS OUTPUT.AND. CENSUS VALUE ADDED PER EM2LOYEE,

Payroll_mploy_e Gross Output_mployee Census,Value "Added/ (_) (_) Employee (o)

z974 5,838 130,546 45,472

1976 7,480 142,497 54,865

1977 6,799 166,738 42,305

1978 9,487 136,444 19,328

1979 $1,483 213,289 78,704

1980 13,773 84,288 24,644

'!981u_/ 15,261_ 194,514_ 44,316

J pre liminary

J :...',:.OURC.F,S.::,l_..,::DA. ,S%.a__ st i c.a±,...-I._,:am:boQk,__.,,_Z_9_!4':::. ;., ._:.P_ili_pine..Yearb0ok,. 1.98_5i_.'"" - 37 -

Table 8

TOTAL PAleR IMPORTS I_ (Q in '000 NK ; V in '000 CIF $)_

ql v

1.9,7.2., 158,524:I 35,286 2J I 1973 94,42,6 41,373

1974 lO4,95_ 68,359

1975 53,422 36,044

1976 49,161 32,393

1977 ,65,632 40,995

-1978 104,93 6 _61.709.2

1979 118,340 58,283

1980 !23,921 80,984

1981 .116,757 17i,619

1982 136,360 79,948

1983 132,446 75,437

1984 149,892 77,437

1/includes paper, paperboar_ and their respective products.

_ / -u_or 1972, the import value is in '000 _wOB _, since the value in CIF $ is not available.

SOURCE: Fwreign Trade Statistics, NCSO, 1972 to 1984. - 38 -

imports in 1975 and 1976 were even lower than in 1973 (Table

8). Similar to the case of production, the higher cost of

oil which took up a greater share of import expenditures,

and the worldwide inflatioin which made imports /note expen-

sive, res.ulted in lower imports of other commodities, inclu-

ding paper and paper products.

From 1980 to 1984, the quantity lof total paper

imp or ts haCh_:_b_eln_igea__:a_ly bn the up_r_n_ _ • rQm_ 12_3,9_2_m_.

in 1980 to_14_7_92 in 1984, with an average percen_ change

of 5.3% (Table 8). The share of the same commodities to

total Philippine •imports in terms of value was .98% in 1980 ' _

and 1.2% in 1984.

4. :ExporZs

Paper •exports had been negligible, constituting only

about 2.1% of production in 1974, and also in 1.979 to 1983

(average)!.The country's exports included newsprint, •printing

and writing paper, paperboard, toilet paper, paper bags and

boxes, en!velopes and stationeries. Mo@t of the paper exports

• are in the 642 category, i.e., Paper and Paperboard, cut to

size or shape.

5. PrOfitability

From 1980 to 1982, most Of the paper mill firms had a

reduction in profits and some even incurred losses such as

the Bataan Pulp and Paper, Menzi Development Corporation,

United Pulp and Paper, and PICOP. These firms were ranked

among• the Top i000 Corporations (Business Day). Combined

industry losses as reported by PULPAPEL increased to nearly

P270 million in 1981, from PII7 million in 1980 (Daily " 39-

Table 9 TOTAL PAPER EXPORTS-_-]' (Q in ,0o0 NK _ V in 'O00 FOB $)

Y,_ar _ V

:_"L3__(_ ,50,433 9!_'&-_.....5 "t974 7,455 4,977

1975 ' 868 ?04

19"(6 250 419 i!)77 2,75 376

!978 .8_0 " "598

.i_79 2,673 ].., 138 1!980 54Z •664

1_81 9,686 1,349 i

198 2 i0,492 _ 4,161

1983 7,405 2,762

1984 1,433 1,037

!Jlncludes paper, p_perboard, and their respective products.

SOURCE: Foreign Trade Statistics. 1972 to 1984.

,.,_._L._.!. • _,_.._-'_,_. .,.._-_,..._.._,+._#,_.. -,,,,_._ _._-_ ...... _,--_ ,...,,,,_F,_,.,....__,,...,,,,,,;,_#_;_ " _!mJ_tW • z'_lfil_m_l_.. -. ,@,"i....:.'.-',,,,r,_. ._,. - 40 -

Table I0 I_JL/ A_[DWASTE PAPER I_,_?ORTS t-Q in '000 NY_ ; V in '000 CIF $)

YeW Q 19,._._.. .,,_.2,2oi.... 8,._088

1973 67 _507 12,726

1974 86,357 28,776

1975 39,201 ...1'3,026

1976 72,217 21,.4.61

19 77 119 _098 50,310

1978 :93,988 25,818

1979 113,302 35,924

198o zo2i.sz6 4o_o64

1981 92,689 37,046

1982. 95 _634 36,606

1983 113,795 35,089

1984 112,552 36,247

1-_'For1972, the import v_lue is in 'O00 FOB $, since the value in CIF $ is not available.

SOURCEI Foreign Tra_e Statistics, 1972 to 1984. - 4i -

Express, 21 September 1982). In 1984, the situation improved

as indicated by either the reduction" in net losses or the

increase in income of most of the firms (Business' Day's Top

iOOO Corporations, 1985). However, as of 1985, four mills

have already discontinued oDerations. The industry had .been

affected by unfavorable• economic conditions starting with

the global economic reces._ion in the second half of 1980.

:B_'even in_'_._::h_e_9_7_Os_,_',_:._'.'th_,,_._ indus:t_y was;_...... ep_>r,:ted_ _D_:_h_v_o

al:s o be:e__hi't ::_by_:re_:e s s_io:n_:and, :had_-_b_en,__-_

to recover in 1978 (PicorDell, 1978). The problems of

depressed demand for output and high production costs had

negative impact On the profitabilitY of the industry.

2.6 Industry Problems

The •.•studyby the 2hi_lippine _CounciLl :.for _griculture and

Resource.4 Research and Development or PCARRD (Serrano, 1985)

provides a good discussion of the problems of the industry,

as follows :

i. _nancial Difficulties

For the paper industry which • has d'ifferentiated pro-

d'ucts, the series of •inflation and peso •devaluation sinmze

1980 had been non-neutral. They increased the costs of

materials, spare parts and other production inputs but out-

put prices had been Constrained by depressed demand, thus

aSfecting profitability. The mills were also burdened with

liquidity problems caused by unprecedented level of receiva- bles which they found difficult to collect. This in turn may

be ascribed to the financial difficulties of their .clients.

Some of the firms in the industry also had loans from the - 42 -

government and probably their inability to pay may have

caused the conversion of these loans into equity, making the

government part owner of some of these firms.

2. Plant FacilityProblems

As the Philippine grew old

(three decades old now), so did many of t:_hepulping equip-

ment and f a c:il_ t i e s ...... For e con om ic_ co n str ai_ t s _..th: es:e._fa _-ili-

:ties :"0ha_ve_-:ne:_e:rg'b_L_-:n_rep:]-a.ced _r renovated ' Some_ of 'the

have beconf_ ODSO±ete while others still operate but with

low efficiency.

Small pulp and paper mills have also proliferated in

the different parts of the country, resulting in low effi- C ciency, low productivity and uncCmpetitive scale of opera-

_i-on ..

Even ibefore the i98Os, the government had adopted a

policy th@tI disallowed the establishment I of new non-integ-

-rated mills unless they can get a longrcerm agr ment with

domestic pulp producer for their supply of raw materials

-(Picornell, 1978). However, sources from the industry had

claimed that people were able to bring in new non-integratec

mills without-the government approving them as such (Busi-

ness Day, IT July 1980). This implies that the enforce-

ment/implementation of the policy had not been very effec-

tive. Despite the difficulty of sourcing raw materials, the

entry of the new firms may have been encouraged by the high

protection of paper products which ensures a greater share

of locally-made items in the domestic market. - 43 -

An example of inefficiency, as related by one of the

Tariff Commission commodity specialists, involves the pro-

duction by small firms of various product types which re-

quire the reheating of the machine after one kin"d of output

is finished' and replaced with another type of product. This

entails a greater consumption of energy/fu_l. But with only

one._product, iine,, .the_,:_):perat'ion of the,_machi!ne_. _.is-_costi,--,_

::nuo_us..The pr,oduct:,.:_x.,,:.ho-_e_ver.;depends on ithe market:

demand. Neve-_heless, a larg_e firm with more machines to

separately produce each commodity type as dictated by mar-

ket demand Would be more efficient in terms of energy sa-.

rings. The issue of integration is already being studied by

the BOI and hopefully, it may be alble to come. up with a - I =s_h_me _-ac c-ep t_bl_ _t-o_-th,e--par.ti_es -:cbnce rned,

3. Un[fair Product Competitioh

Foreign-made paper and paper produc.ts, whose qual_y are [

at par or b.etter than-.locally made produlcts find rtheir way

J to the country through dumping or techniical smuggling. They,

u,sually come from indus%r±alized countries like Japan and

Scandinavia who are burdened with too much supply in their

own market.-At times, these products come in to the Philip-

pines misdeclared or undervalued.

4. Raw Material Shortage

The industry suffers from perennial shortage of raw

materials. While the government has encouraged tree farming

and pulpwood plantations by small-farmers, those that-were

established-are still insufficient to _neet the raw material

needs of the industry. In 1982, -the country produced only -44-

40% of the pulp and waste paper requirement of the industry.

The rest had to be sourced from abroad. With the devalua-

tion whic_i had been non-neutral, the import" of the above i materials had become very costly and prohibitive. i 5. Pollution Problem

A study conducted by the Economic• Dev_lopment Founda- i

t:i o.n -(.EDF.) -:.int-'l97:_:_,re.,ve:a_ed--_i_:t_hat- the_, pu i p.,,..@rid, pape r ..-i-_,st-_Y

,:ran_'S-•_:s-ec-,cn_%_g,..:--the_ .._nd.,._s,_. i trie s.:Tp,o .l-1u t .ia",g_wa,t_.e;_.,..-' :' " ': ' " ,".b_d-"i_s"_; .,...... " " I t'

is estimal;ed that if the ihdustry puts up treatment, fac{li'.-

ties, total capital expenditure industry-wide would be about- J l P57.2 million.

The ,.pulp and paper mills a_e strictly required by law J _to _.uZ-.up "necessary ant-i_poll_]ti-pn-fa-ciil,i,.ties ,,_espec,iai!y .for waste i i_uor treatment. The i,Ddustry, however, is con-

strained by the relatively high cost involved which has

direct e._fecti on .the overall practicability i o_: :,the enter-

prise. Thus, not all the firms could !comply wfthi the requi-

rement. The possibility of putting th_ .effluents into good

use should be explored. In most mills in industrial coun- i

tries, the suspended solids and sludge are used either as

land fill or incinerated after a process of thickening.

Experiments showed that the effluent of paper mills, if

properly treated, can be used for irrigation (Western,

1979 ).

6. Manpower Problems

The pulp and paper industry lacks technically trained

manpower both for the maintenance of the industry's facili- - 45-

ties and equipment and in the production of quality paper

and paper products. Even in the area. of pulp and paper

research, the country has a "limited number of scienti'sts at work. A lot of research work has yet to be done on raw material production, pulp and paper manufacture and utili-

zation. - 46 -

CHAPTER III

THEORETICAL FRAMEWORK

The main objective of a policy of protection is to

assist local industries to grow and be competitive with

industries established earlier in foreign countries. Other

objectives of protection are to correct _arket failures, ge_,er_te _empl_oyment, _#_mprove income d istr_b_i_ and_C_'_

nation a_tonqp_gy._9:roteqtlon policies ale nO_m_all_ desi_gned# _

for a specific time perlo_, during which incentives are

gradually reduced as the policy objectives are being at-

tained. This is desirable since protection policies, like

other price intervention policiies, tend to allocate resour-

ces inefficiently. This brings lIthe concern of the paper also

to the elfficiency of an economilc[ activity. Protection and J efficiency can be measured using the Effective Protection

Rate (EPIR) and Domestic Resource C0s_ (DRC) •0oncepts, res-

pectively.

A. Effective Protection Rate (EPR)

The effective protection rate on product j (EPRj_-

is basically a measure of incentive given to firms or indus-

tries, which in this paper includes mainly tariffs • and

taxes. It is defined as the percentage excess of domestic

value added at protected prices (Vj), made possible by

protective measures such as tariffs, taxes and import res-

trictions in certain cases, over the value added at free

trade prices (Vj), i.e., without protection:

EPRj = Vj '- Vj (i) vj - 47:-

Value .Added at protected prices (Vj') is the dif-

ference between value of production at selling price and to-

tal cost. of raw materials used, both net of sales taxes:

- Aij - _ Aij (2) vj ; = PsOj •Z 1 + di [i!+ fi(l + mi)]

where

P.sj....=_ --th_ unit s.e!ling price of prO_uctj na,__. of sales t:ax (d j); J Qj = the quantlty of product j per annum; th Aij' = cost of the i local raw material used per-- annum; ; th di = domestic . sales tax rate on the i raw

material ; t i. Aij = '.cost of the i imported raw material used -per annum; th fi = advance sales £ax rate on the i imported raw material ; .and i th .: mi. = mark-up rate on the i i imported raw material.

Data on sales taxes and mark-up are obtained from the

National Internal Revenue Code. The Advance sales tax is

based on the landed cost of the imported good plus the mark- i up set by the NIRC, on the assumption that this represents

theoretically the selling price of the imported good.

Aij' and Aij are both inclusive, of tariffs and taxes

and are treated separately because data provided by firms

are available in such forms. It is also convenient to treat

local and imported raw materials separately because each is

subjected to different tax rates.

Value Added at free trade prices (Vj) is the diffe-

rence between the value .of production at border prices and

the total cost of raw materials at border prices: - 48 -

vj -- Psi Aij (3) + Nj /_(i + ti)(l + di) _ 1 + Ti where i Nj = the nominal protection rate of pro- duct j ; th ti = tariff rate on the i iQcal raw material; and i ,; i| th Ti = implicit tariff rate on th_ i imported raw material ;

Due -to £ax :credits oh intermediate inputs granted •by

the government to producers who source them locally, the

products of firms are classified into consumer and interme-

diate goods, to determine the nominal protection rates ap-

plicable.

-Users of izonsumer _product_s _re not en t _tled to tax

credits, which implies that for consumer products, the ex- ! [

cess of #omestic price over border price includes the advan-

ce sales!taxes, in addition to the tariffs imposed on such

commodity. Hence, for consumer products,

1 + Nj = (I I1 + f9 (i + m_)] tj) (I + dj)

where, for product j,

tj = tariff rate;

fj = advance sales tax rate;

mj = mark-up rate; and

dj = sales tax rate.

The domestic sales taxes on intermediate products are

credited against the domestic sales taxes on output by

users. This implies that the prices to the user (net of

%aXes) reflect only the protective effects of tariffs. Since - 49 -

advance sales taxes do not provide additional protection,

fj = 0 in this case. Hence, as a result of the tax credit

system, for intermediate goods:

1 + Nj = i + tj.

The deflators for local and imported raw materials in equation (3) are different because of the taxation system.

When tradable inputs are sourced locally, the cost is assumed to reflect the tariffs and domestic sales taxes.

Thus, local raw materials are deflated by:

i + ti)(l +di).

;•For imported inputs, the advance sales taxes and mark- ups are assumed to be included in the cost of materials reported by firms.• Therefore, the relevant deflators are the

implicit tariff rates, expressed as:

1 + Ti = (1 + ti) [i + fi (i + mi)].

!••By substituting equations (2) and (3) into (i), the EPR formula used in this •study is as follows: ••

EPR_i_= PsjOj - _ _ij/_+di)]. _ _ij/l+fi(l+mi)] - i (4)

PsjOj __, Aij' I+Nj (l+ti)(l+di) - _ l+TfAij

From equation (4), it can be seen that EPR takes into

• * account the protection of both inputs and output. Thus it is more'_eaningful than implicit tariffs (Tj) and nominal - 50 -

proteQtion rates (Nj), both of which represent the diffe-

rence between the domestic price and the border price of a

commodity from the point of view of the consumer, i.e.,

inclusive of sales taxes, and the producer, i.e., net of

sales tax, respectively.

There are two ways of computing the Tj and Nj: ]) by

d irec_ comparisons and 2) by tariffs and sales taxes. The

second method is based on the assumption that the difference

between domestic and border prices is caused by sa4d ira- !=.

postsl. Choice between these approaches is influenced by the

availability of data, the need to reflect quality differen-

tials, and the presence of import controls. Tariff protec-

tion may also be redundant, hence justifying the use of

direct price comparisons. However, as argued by Medalla and

Poweri: (1979), if one assumes imperfect competition, hetero-

geneaus products and varied consumer preferences, the tariff

protection may result in increases in the market shares of

the domestic product, even without price changes; hence, it

is nob redundant.

iThe issue of redundancy usually favors the use of

direct price comparisons over the legal tariff and tax

rates, as a measure of implicit protection rates (T). On one hand, with import regulations, the actual values for T based

on the ratio of domestic price to border price (Pd/Pb) may

exceed those that are implied by the tariff and tax system.

On the other hand, where import substitution is almost

complete, the ratio Pd/Pb may be less than that made possi-

ble_by the legal rates of protection, i.e., the protection - 51-

offered by the tariff and tax system may have become redun-

dant. But as argued in the previously mentioned study

(Meda].la and Power, 1979), price comparisons need not reflect total protection if imperfect competition_ is assumed,

as it is reflected ins£ead in increased market share. This is explained further below. ! Under assumptions of imperfect competition, differen,

tiated products and consumer preferences, there would be one

set of price differentials, and demand curves facing indivi-

dual sellers would be downward sloping and not equal to the

marginal revenue curves. The profit maximizing pofnt would

be where the marginal revenue curve equals the marginal cost

curve: {MR=MC). The imposition of a tariff would have either !:

price O r quantity effects (or both) depending on C, the

elastiicity of MC with respect to quantity. If C is infinite-

ly great (vertical MC curve), there would be no quantity

effeclt, and the price effect would equal the tariff rate. If

C is_zero (horizontal MC curve) there would be only the z{i'_.

q_tantity effect Price would be unaffected by the tariff If

C is_less than one (nearly horizontal MC curve), as empiri-

cal .studies indicate, the quantity effec_ would predominate.

Thus,;:_a situation wherein tariff protection has resulted in

a greatly increased market share with little price effect

should not be viewed as evidence of redundant protection.

The _fact that imports may have been reduced to a very small

proportion and the measured price differential falls far

shomt of the margin offered by tariffs may mean that tariff - 52 -

protection is _ully effe_'tive, producing a large quantity effect and a r small price effect (Medalia and Power, 1979).

The EPR measure is normally interpreted to provide some ind.ication of the way trade policies influence the direction of resource allocation in the economy. When a tariff is imposed on a certain product, it provides an

incentive to producers to increase the production of said ! i: product. To attract factors and other raw materials into this_firm or industry, producers will have to offer higher factor prices. Hence the effect is to move resources from non-Protected sectors to protected sectors. Under ri- sing marginal costs, though, society pays for the increasing

inefficiency for each additional unit of output, inefficien- cy ca!n also result from protection per se due to a less

compeltitive environment. In this, protective trade policies

tend to misallocate resources.

.To estimate effective protection rates, one can make

use !of firm-level data or input-output data. In this study,

the _;SPR estimates are based on firm-level data and the border

prices are imputed from domestic values. Another set of

esulmates uses border prices based on Hongkong and NCSO

Statistics. The following assumptions in partial equilib-

rium_terms are used in the EPR framework: i) elasticity of

subst_itution among inputs is zero; 2) foreign elasticity

of _m_ports is infinite; 3) production takes place under

cond_i!tions of constant costs_ 4) the supply elasticities

of p_imary factor inputs to domestic industry are less than

infinite: 5) the supply elasticities of other inputs are

infin_ite; and 6) tariffs are not prohibitive. - 53 -

B. Domestic ReBource Cost (DRC)

The DRC is a cost-benefit ratio representing the social

valuation of domestic resources used per unit of net foreign

exchange earned (or saved ) by the export (or import

substitution) of a given product (Bautista and Power, 1979).

When. compared with the shadow exchange rate, the DRC gives an

indication of the compara t'ive position of the industry.

The use of social or shadow prices iS anchored on the

premise that market prices do not reflect the real costs of

inputs and the Keai

the case of most developing countries, wherein foreig n ex-

change is a scarce factor and market distortions exist.

Thes_ distortions, in turn, may arise from genuine market

failures (monopoly, externalities and imperfect competition)

and/pr government policy intervention (price controls, pro-

tect_Qn structure and state trading). For this type of

eval.uiation, the national parameters required include the

shadqw prices of foreign exchange, capital and labor.

.A/shadow exchange rate (SER) needs to be estimated to

correF_t the distortion in relative prices between traded and

hon-_aded products and resources due to the protection

str_c_ture. Using an SER greater than the OER (Official

Exchange Rate), a situation normally applicable to most

deve_Qping countries, reflects the premium placed On

foreign exchange to correct its Undervaluation as a result

of the protection structure (Medalla, 1979). - 54 -

Similarly_ the shadow price of capital (SPK) reflects the premium attached to investment and saving over consump- tion, due to the government's inability to attain its optimum level of saving and invest_nent. The SPK is defined as the net present value of the aggregate consumption stream generated by one peso of marginal investment (Manala_ sayi i979).

The rationale for the estimation of the shadow wage rate !(SWR) of unskilled labor stems from the lower value of

the marginal product of labor in the traditional sector as against the industrial sector wage. This is attributed to

labor Union pressures, minimum wage laws and compulsory

allowances, the traditional rules of setting the waqe in the

agriclultural sector, and the surplus supply of unskilled

labor in developing countries (Medalla, 1979).

For this paper, the shadow prices utilized are based on

the estimates of previous studies. Following Medalla and

Power (1984), the shadow Wage of unskilled _abor is placed at 60% of the minimum wage or the actual average wage,

whichever is higher, while the shadow exchange rate is taken

to bel 20% above the official exchange rate. From Manalay-

say's study (1979), the shadow price of capital, q, is set

at 15%. This rate had also been used by the National Econo-

mic and Development Authority (NEDA) in project evaluation,

and i_s considered as a long-ru n rate. :! /liThe DRC formula in this study is based on the "fully

traded assumption" wherein all tradable outputs are consi- - 55 -

dered foreign benefits and all tradable inputs are consi-

dered foreign costs. The shadow prices of tradable goods are

taken to be their border prices or opportunity costs. Simi-

lar to the EPR calculations, two sets of DRC, estimates were

computed. In the first set, the border prices were derived

by deflating the domestic values of outputs and inputs by

' their relevant tariffs and sales taxes. In the second set,

the border prices (data for inputs were not available)were

based on the import prices from the Hongkong Import Statis-

tics and in few cases, from the Philippine Foreiqn Trade

Statistics.

The basic formula used may be expressed as follows:

DRCj= Kd ( d + q ) + R + PbjOj - [Pbi-e_ Kf (d+q.)+f_' i!_.J , + " 4 l+Tf k _" I+Nj

W + ODC _ X OER

_ (l+ti _i'(l +_. Ii )- q + OFC] ¬Œl+Ti

where

Kd = replacement value of buildings and structures;

R = land rent ;

w = value of wages in shadow prices;

ODC = other domestic cost;

Pbj = border price of product j;

Oj = quantity of production ;

Pbi = value of local and imported raw materials used at border prices, i.e., T.[Aij /(l+ti) (l+di)] + _ [Aij/l+Ti] ;

Kf = replacement value of production, transport and office eauipment; - 56-

Tf =_ implic{t tariff of capital equipment;

I] i= average •value of output j's inventory; th if = average value of the i local raw •material inventory; th Ii = average value of £he i zmpor ted raw material inventory;

OFC = other foreign costs;

d = depreciation rate;

q = shadow rate of interest; and •

OER = official exchange rate.

All values are in pesos on an annual basis.

The above elements of DRC can be categorized into apital,• Land, :Labor and Other Costs. Estimation of their

na(_0w!border prices is described• below:'

i•, Capital. This includes equipment (production

achinery, transport and office equipment and other fix-

ures), • inventories, buiidings and structures. Capital costs

onsist of depreciation and interest costs of these•assets,

btai_ed from this procedure:

a. The replacement • values •of the capital assets,

except for inventories, are derived by ;inflating

their acquisition costs ••by the appropriate price

indices (see Append ix 2). The equipment Category

is further deflated by an annual productivity

change of 3% to arrive at their replacement va-

lues, thus taking • into account the aging process

which affects their productivity (Power, 1979). • - 57 -

b. Depreciation and interest costs are then estimated

by applying the straight line method and the sha-

dow interest rate of 15%, respectively, to the

replacement values. They are allocated into their

domestic and foreign components in accordance with

the origin of the assets. Equipment are assumed

to be 100% imported while buildings and structures •

are considered • wholiy domestic, following the

assumptions of earlier studies (Bautista, Power •

and Associates, 1979). The border prices of equip -•

ment are derived by deflating their replacement

values by their/respective implicit tariffs.

_c. For inventories, the only relevant.cost is the

shadow interest rate of 1•5% " the opportunity •cost

of holding these inventories. All inventories are

classified as foreign costs, since the study uses

the fully traded assumption. To express invento-

ries in border prices, each is deflated by the

appropriate, implicit tariff: for product invento-

ries, by the nominal protection rate (Nj);

for local raw materi'al inventories, by the statu-

tory tariff rates (ti) and the •domestic sales tax

rates (di)_ and for imported raw material inven-

tories, by the •implicit tariffs, (Ti).

2. Land. Land may be owned, leased or rented. If it

is owned, the opportunity cost is the imputed rent by ap- plying the• shadow interest rate of •15% to the estimated current value of land. The current vaIue of land rnav he - 58-

provided by the firm or may be computed by inflating £he

original acquisition cost of the land, using the CPI (Consu-

mer Price Index), from the year it was acquired to the

current year desired. Since current prices of land are

difficult to procure, the latter method (apply{ng the CPI)

is utilized. The CPI is used as inflator since rent/housinq

is one component in constructing the CPI which is then

assumed to approximate the price increase of land.

If the land is leased, the lease payments are adjusted

for actual and expected inflation rates since it is assumed that the latter is part of the negotiated lease payments

(Malaiuan, 1979). The adjusted lease payment is:

te-tn .L where

Rn = lease payment reported or stipulated in contract negotiated in yea r tn;

r! = average annual inflation rate from year tn to year te ;

r2 = average annual inflatioD rate from tn'5 to tn ;

te = current year; and

,tn = year of most recent negotiation of Contract.

If land is rented, th= a_LUdl r_n_a±s_are assumed to

already reflect the opportunity cost on the assumption of

I fair competition.

Land rent is considered entirely domestic. - 59-

3. Labor. The shadow wage rate (SWR] for skilled labor is assumed to be the actual earnings, while the social productivity of unskilled labor is assumed to be 60% of

their average wage or the minimum wage, whichever is higher.

Labor costs are classified as domestic or foreign, based on

the information suDmitted by the firms.

4. Other costs. These include all costs incurred in operation which are not elsewhere specified. As indicated in

the questionnaires (Appendix 3), they are categorized by the

firms into Other Damestlc Costs (ODC) such as electricity

and water bills, anid Other Foreign Costs (OFC) which include

royalties [and cons_Itancy fees.

The estimated DRC is £hen compared with the shadow

i exchange rate (SER) which is equal to the official exchange

rate ,_(OER) inflate@ by 1.2 (Medalla and Power, 1984]. A DRC

less than the SER (or DRC/SER less than one) implies posi-

tive net social benefits and that the industry is socially desirable or profitable, and vice-versa. -61 -

CHAPTER• IV

THE EMPIRICAL FINDINGS

4.1 Description of Sample Firms

The survey conducted by the Tariff Commission and the

Philippine Institute for Development Studies (PIDS) in the

b second quarter of 1985 to study the effect_ of the Tariff

•Re_orm_.._.._Pr.og r a-n%_r_;TRP_._co'_.e:_,red:._:::our..f, in_.u.s.t:ri_e!s__e-'ae:_.'./_.-_..:0c.c"'_a_a

terized Dy __ar iff s.""On'e of -them is _cbe "paper-' i_dustn_ [ ' .

The sample firms were seleclted from the list provided by

PULPAPEL. From the list of 24 firms, excluded • were four

firms which have already closed down and another four firms

which have been established within the TRP period and are_

still on .the start-up stage of .operatiOn, 'They constituted

7% and 8.6!%, respectively, of the_ 1983 total rated capacity.

The sample size of 16 was further reduced because of a

strike in !one firm and fires in two (2) firms..In. 1985,

three paper mills, including the second biggest•; Manila

Paper Mills, were victims of fire.

There were seven firms which responded to the question-

naires but only six had sufficient information required for

the study. The six firms constitut.ed 54% of_..the 1983 rated

capacity of • the paper manufacturing industry. Their pro-

ducts included printing, writing, wrapping, sanitary and

other paper, which amply represent the commodities in the

industry.-.

Using rated capacity as an indication of size,-the

firms can be categorized as follows: - 62 -

Size Rated Capacity Respondents (m. t./yr. )

Large 24,750-184,335 3 Medium 11,970-18,000 2 Small 3,960-10,000 1

The performance of the firms as indicated by their

levels of output, employment and capacity ,utilization, °

was generally more" favorable in 1980 than fin the following

_!._ _he finding_ _onl the PeT-

formance of the industry aS_ a whole based on PULPAPEL data

wherein production and capacity utilization was lower in

1982 and 1984. other indicators from secondary sources such i • as Net Income and Return on Equity (from Business Day), and p Gross Value Added (Philippine Yearbook) also showed lower

levels in 1982 and 1-984 but _with !improvement in 1984, similar

to some o_ the sample firms.

On the average, the percentage of imported raw mate-

rials to total raw materials value (im@ort •content) had been

declining :for the sample firms from 1980 to 1984. This can

be attributed to the higher cost of importation because of

devaluation and the shortage of foreign exchange particular-

ly in 1984.

. 4.2.1 Effects of the Tariff Reform Program

A. Industry-Wide Effects

With the gradual lowering of protection, it was expec-

ted that the EPRs will also decline. But for two firms whose

product composition and proportion have not changed signifi-

cantly, EPRs increased abnormally in a particular year (Firm

B in 1984 and Firm C in 1982) because of a very small free iv_•63 -

trade value added for the said year. • This in turn was a .°

result of the faster rise in raw material costs compared to

output prices, which were constrained by depressed demand.

General observations that can be made on the eff.ects of the

EPR changes on the firms are as follows:

i. High EPRs _ are associated with high DRCs; thus pro-

....te c.tion ..is..,in.,versel-y._Ielated ....to....e ff i c lency!,

•.:2..;.-:-..:_he_.:_:on..=le_e.:y,,pi::t-iO_n.i=s.sF:irm._.;F,_,,i_,,wh i_c.h.-had_..t h-___!:_s_.t.

EPR and t_qS._-cond, highest DRC in 1984. This may not seem :. logical because a firm witi_ such characteristic would not'

survive. Further examination showed that the firm had indeed

been experiencing heavy losses over the past years.

3. The DRC ratios followed the movements .of the EPR.

•Decre.a_ses....i.tin....EPR_s...have:resu!ted ,._n lo...wb_i.DRCs.,..:Ii..e.., red uc-

tion of ph.otection, had positive ,impact on the efficiency of

the f irms,

4. The Dlggest sample tlrms (Fir_s D..and .E) were able

to adopt to lower protection. In 19-84, despite the decreases

in their respective EPRs, the said .firms showed increases in

o_tput and capacity utilization (Table 14). Firm E eve__had

an increase in employment.

5... In contras.t, the smaller firms, with lower protec-

tion in 1984, experienced declines in output, capacity uti-

lization and employment.

6. This .implies that the .bigger firms would be able to

adjust with the further reduction of tariffs to the 20%--30%

(from the current 10%-50%) range, as against the smaller

firms. -64 -

Tablo !i

SU_,IARY OF EPR & DRC RESUIJ2SI-/

EP_(_) Actual Capaoity F_II Capacity

I_8o 1982 1984 _ 1982 I_84 198o 1982 1984

1. _rm.A 57.30 1!5.8 85.8 2.07 * * 2.07 15.02 1.81 Product 56.03 I18.6 97.3

2. Firm B 192.66 98..77 298.3 * * * * * *

Px'odug_ "262.!3 109.83 81.03

3. Firm 0 187.35 960.83 101.6 4.2 * 24.2 2.8 * 1.6

Produc% 4_7,9 128.2 49.7

4. Firm D 343.9 94.3 62.4 _ * * * 9.7 1.95

P_oduct 339.9 108.9 74_8

5. Firm E 96.0 55-4 49_9 * * .9 4.74 1.42 .53

Product 138,4 72,8 54.1

6.-Firm F - - 23.6 - - * - - 3.95 Product - - 28.2

AGGKEDATE. i16;3a.3....170_:_3.---::"._.56:,573,4 .* i,.0.7-. 3,98 ....I_:"_5":....35

[

l_The border price= were compu_e_ using implicit tariffs.

* n_gative ne_ foreign exchange saving.

- no datai 65

Table 12

TARIFF 'RATES ON OUTPUT: Tj (Z)

1980 1982 1984

I. Facial and Toilet Tissue" I00 70 50 2. Paper Napkins I00 70 50 3. i00 70 50 4. Paper Towels !00 70 50 5. Kraft Paper I00 60 50 6. Corrugating Medium I00 60 40 7. Liner Board i00 60 50 8. Foil Laminate i00 60 40 9. Manifold Paper I00 60 40 10. S ta=ioneries _ i00 60 40 [I. White Paper and Special Paper I00 60 40 12. Boxboard 50 50 50 13. Clayf illed Board 50 50 50 14. Chipboard 50 50 50 15. Cigarette Paper 50 20 20 16. Bond Paper 50 30 30 17. (coat_:d) 30 30 30 18. Newsprint 30 30 30 19. Carbonizing Tissue 30 20 20 L

SOURCEz Tariff and Customs Code_ 1978 an_ 1982. - 66 --

Table 13

198o 1982 i_84

i. Short fibere@ pulp 50 20 20

2. Unbleached long fibered pulp 20 20 20

3. Chemicals (average) 20 20 20

4. Bles_hed/Semi-bleached long fibered pulp I 20 i0 iO

5. Waste pap_= iO i0 i0

6. P_lpwoo@ lO lO l0

7- Dy_s_ffs i0 _ 10 lO

8. Fillers IO i0 lO

SOURCE: Survey Questionnaires Tariff andS!Customs Code, 1978 and 1982. - 67 -

Table 14

PERFORMANL_ INDICATORS OF SAMPLE FIP_

Output (in metric tons) 1980 !982 _ 1984

l..:-,.:Firm A- ',11i.,:183 16,126L •9,642

2. Firm B 8,305 8,890 £,872

3. Firm C 16,367 10,145 5,412

4. Firm D 19,574 15,915 16,017

'5. Fir,_ I_ .153,290 106,_31 .32,693

6. Firm F - 4,461 1,473

TOTAL 208,719 162,_68 175,109 - 68_-

Table 14 (continued)

Output Value at Constant Prices (in l_82pricem) 198o i 8a i 84. I

.:I....Firm A 30i.._,1209,_._!800.... 5_,,$,._._'_O.. 30 _00.3!_31841.

2. Firm B 168,0271939 178,845,255 198,942,514.

3. Firm C 163,727,907 107,659,550 75,678,768

4. Firm D 134,192,543 i07,362'411 105,898,604

5. Firm E •.931,143,718 649,535,342 :.802,254_682

6. Firm F - - 10,851,515

TOTAL 1,427__301,907 1,093,_44,548 i_223_62_ ,467

I

'.._

[

: .l_.. w \

...... _ --__.--._...... 7...-_._._.:_, g:_'_-,"._,_,_"_ ,,..,, _ ,.::-_A,"T:"_--,'__':_'.r_/:_'_. _ _" _ _r'_"._""__ .. ,,_ - ."_'_"_;_ _,_'_'_.":-_ _W_" -_I_ ,_',_?_-_y'_ _'_'__ _,_'__'_ "_Ir_I_""'_...... _ • !. _._, .....• __...__ ...... __::_:..._.__....::...... _.,_:.:.,.__...... _..,._.,,_:,.._...... _.:_-... ._:• ., ,_...... , ...... _...... _,...... _ .,..,.:,_..... ,_:,,_.,..._._,_.... ,,_,_...... -.'.':- ....._' '_. .... "F'.<,"T...-'-_CT'31"" '.'-T-'-T-C._-".T.-.'" ....T>.-...... r_.:'_"_ _-_',, _,,,.,,. , ....',_i'_-

• .- .... - 69 -

T_ble 14 (continued)

wlu_ of _t p_t.__©

1980 1982 1984

.i!_ _Firm"-A _.3.D.',:_:6!:_iO43:_ _. ' '5.0.,441,.9_._. .57,827,.603-

2. Firm B 155,761,1834 178,845,255 331,813,086'.

3. Firm C 195,911,700 107,659,550 142,117,000

4. Firm D 131,436,475 i07,362,411 196,927,050

5- Firm E 813,189,314_ 649,_35,342 _ 1,608,693,320

6. Firm F - - 25,420,538

TOTAL 1_327,060,365 1,@93_44_548 2_362,798,597 - 70 -

Table 14 (_ontinued)

Capacity Employment (No.) Utilization (%) 1980 19,82 1984 1980 1982 198_

i, I. Firm A .-.ll_- _143 123 .... 99.. 81 __8

2. Firm B 739 841 829 100 56 66

3. Firm C 392 377 318 60 37 20

4. Firm D 329 329 299 72 58 59 ]

5. Firm E ?,948 5.,820 6,283 82 57 V1

6. Firm F 328 301 213 - 78 20

TO_L 9,849 _,7,8Z_ •8.065 _V_. 8__3 6! 47 ,Table 14 (cont inued )

Real Output Value/Worker 198o 19821 1984

•1.._.::.FiA bm 1:2-6.71',..13:43.. ..35 2.,741. 243,930.

2. Firm B 227,37_ 212,658 239,979

3. Firm C 417,673 285,569 237,984

4. Firm D 407,880 326,330 354,176

5• .Firm E A17,154 il_",604 A27,687

# 6. Firm F .... 50#946

AVEI_GE_ --287_ 484 25_, 780 209,117 - 72 -

Table 14 (continued)

Value Aaaea (_ _Current _prices ) I_8o _1982 ,!98L4

• i

I._.....Fir.mA., :20:i:6.0:,974_.. .2!,078,_535: 28,143,O50

2. Firm B 51,935,794 59,083,341 59,411,306

3. Firm O 94,529,314 36,293,105 83',665,360

4- Firm D 66,746,781 58,467,448 I08,466,912

5,, Firm- E 609.,891,986 513 ,132 ,920 i.,319,128,522

6. Firm F - _

_%r_P_%GE 168,812_924 L37,_II,070 269,034,630 l [ - "_73-

Table 14 (cont inued)

.Import Content Value Added Ratio

., _980 1982 1984 198Q 1982 1984

I. Firm A --5_ o45 .30 _68 .42 -49

2. Firm B .40 .47 .48 .33 .33 .18

3. Firm C .83 o81 .52 .48 .34 .49

4. Firm D ,65 .61 .53 .51 -54 .55

5. _"irm E ..28 -25 '..54 .-7:.5 -79 .82

6. Firm F - - •77 - .- .'61

AVERAGE .55 .52 .49 .55 .48 .32

Conten_ = P Value of Imported Raw Materials P Value of Total Raw Materials Used

Value Added Rat io - Vj PsjQj - 74 -

Table 14 (cont inued)

Out put Value/C apital Value Added/Ca_t al 1980 1982 1984 _ 1982 1984

1. Firm_.A .77_ 1.07 .71 " ..53- .45 .35

2, Firm B 1.90 .ll .75 .63 ,24 .1:3

3. Firm O 3.39 .72 .68 1,64 ,24 .40

4. Firm D .65 .45 .48 '33 .24 ,26

5. Firm E .:52 °39 .57 -39 .31 -47

6. Firm F - - .II - - .o7

AVERAGE 1.45 .67 -55 1¶70 .50 .58

Capita/: Replacement _alue of Capital Equipment

..

. .

...... _i_ < _:____ ...... __o_ _ • _. _:_ • .,/,... • ._ ":_".',i_._1,.. _.',. ': ...,,,, :;.' v,,,>.,..' - 75 -

Tabl_ 14 (continued)

, Value Added/Werker (Current prices )

lie80. 1982 1984

I. FLT_ A 185,493 147,402 228,805

2' Firm B 70,27_ 70,254 71,666

3. Firm 0 241,146 96,268 263,09.9

4. Firm D 202,878 .177,713 362,766

5- Firm E 76,735 88,167 209,952

6. Firm F - .- 72,266

AVE2__GE 155,306 ,=I151,961 201,426 ! - .76 -

Table 14 (continued)

Capit al/Labor

198o .982 ,! 84

1. Fi_m.A -..3.52,608 •3 29,916 ..659,654

2. Firm B i09,033_ 298,6?? 933,829

3. Firm C. 147,376 395,641 654,899

4. Firm D 618,870 728,562 1,384,683

5- Fir_ E 197_491 285',778 4_8,334

6. Firm F - _1,090,268

AVEI_AGE -284,971 _40__ 795_278 J - 77 -

7. Three firms have moved to produce a greater propor- tion of higher tariff items in 1982 and 1984.

8. With the exception of Firm B, all the firms had declining import content. This may be ascribed to the high _osts of raw material imDorts and the scarcity of foreign exchange.

9. Firm B, whose import content had _een increasing, was the only_firm w-Tfichvh_d=_ne_gative fore i_n _exchange _sa- vings from--f980 to 1984. i iO. Regardless of the EPR. and DRC trends, all the firms have become more capital intensive and this had been fos- tered by the incentive structure since the 1950s which favored the use of capital. This included the essentiality rule (-in the 195Os), the low tariff rates on imported capi- tal equipment (in the 196Os), and other BOI incentives related tg capital.

B.Effects at the Firm Level

i. Firm A

Firm A had the lowest EPR and DRC among the sample---

__rms in 1980. Already operating at 99% capacity during the year, it expanded in 1982 and produced additional new items which have higher tariffs than its previous products.: This could account for the increase in effective protection in

1982 and 1984.

Tie firm's expansion was not sustained inasmuch as

output and employment went down in 1984. Moreover, in 1982

and 1984, Firm A experienced a decline in capacity utiliza-

tion and value added/capital, resulting in negative net - ?8 -

Firm A

1980 1982 1984 i

Firm EPR (%,)' 517.3 115.8 85.8 DRC AcLual Capacity 18.63 * * Full Capacity same 153.97 36..24 DRC/SER I Actual Capacity 2.07 * * Full Capacity same 15.09- 1.81

Product EPR (%) 56.03 i18.'.6 97.3

Output (in m.t.) _i,183 16,126 9,642 Output Value (Current Prices) 30,7_I,043.32 50,441,990.2 57,827,602.62 Real Output Value (Constant Prices) 30,209,800 50,441,990.2 30,003,384

Value Added (Current Prices) 20,960,747 21,078,535.39 28,143,049.73 Import Content Ratio i .57 ,45 .30

Employment (No.) 113 143 123 Capacity Utilization (%) 99 81 48

Real Output Value/Worker 267,343.36 352,741.2 143,9.29.95 Output Value/Capital .77 _ 1.07 .71 K/L 352,086.3 329,916..53 659,654.02

V.] /L 185,493.3 147,402.34, 228,805.28

V3,/K 53 .45 .35 vj/psjQ .68 .42 .49 _, ,4

* negz%ive neZ forsie-n exchange saving. - 79 -

foreign exchange saving, based on actual capacity.

If the firm had been operating at full capacity,

its DRC/SER ratio in 1984 would have been lower than the

preceding years , indicating I an improvement in e{ficiency.

The value added ratio also increased slightly in 1984 but it

was still lower than 1980. iThus, its more favorable per- iformance can be assc)ciated mainly with the risekin the -,

value • adde_labor in 1984 which was its hig_:hest for the

years covered.

Firm A, on the average, is the second most capital •

intensive among the sample •firms. Like most of the firms,

its import content (P value of imported raw materials used/P

value of total raw materials used) had been declining from

1980 to 1984.

2. Firm B

The firm is the only•one which •had its higHeSt EPR

(also the highest among the firms) in 1984. Its

P production consisted of both industrial and consumer

products. In 1982 and 1984, the proportion of consumer

goods, which had relatively higher tariffs, to total

production, had increased.

In 1982, despite the fall in EPR,• Firm B's output and

employment still increased. This may be the result of the

firm's expansion during the year in anticipation of greater

demand £or its products since it was already operatin 9 a't

full capacity in 1980. But the expected demand may not h_v_

materializJed inasmuch as cap_. C-fty ut_i_iz_ti%n Tell to its

lowest level in •19812. Mor4oQer, its capital •productivity - 80 -

Firm B 1980 1982 1984

Firm EPR _%J 192.66 98.77 298.3 DRC Actual Capacity * * * Full Capacity * * * DRC /SER Actual Capacity * _ * Full Capacity * _ *

Product EPR (%) 262.13 ]09:,."83 81.03 [ Output (in m._.) 8,305 8,890 9,872 Output Value (Currant Prices) 155,761,833.95 178,_45,254.9 331,813,085.6 Real Output Value (Constant Prices) 168,027,939 178,845,254.9 198,942,514.9

•Value Added (Current: Prices) 51,935,794.1 •59,083,340.9 59,411,306.5 import Content Ratio

Employment (No.) 739 841 829 Capacity Utilization (%) I00 56 ' 66

Real Ou tpu t Val,_e/Worker 227,3 71.04 2 II, 657.85 239,9 78.91 Output Value/Capital I.93 .71 .75 K/L 109,033 298,677.38 533,829

V3./L 70,278.48 70,253.68 • 71 666.23 V. IK .64 .24 .13 J

v./PsjQ) .33 .33 . 18

* negative ne_ foreign exchange saving. - 81 -

_atio, which had been the second highest in 1980, declined and became one of the lowest in 1982 and 1984.

Firm B was the only one which had negative foreign exchange saving throughout 1.1980-1984, even at full capacity assumption. This can be ascribed to its having the lowest { labor productivity .and valu e added ratios among the firms for the salne period. These indicators further, fell in 1984, in contrast to hhe other firms. In addition{, as previously i mentioned,-{ts capital productivity ratio had been one of the lowest in 1982 and 1984. On the average, its import content had been in the middle range but its trend had been increasing, unlike the rest of the sample firms.

3 ._ Firm C

With the tariff reform, Firm C had moved to produce those products which have higher tariff rates.

In 1982, the Firm EPR deviated from what was expected.

It increased to a very high rate (960%) despite the reduc- i tion in the tariff rates. This can be ascribed to a very low

free trade value added arising from the faster increase_of

the _ border prices of its raw materials than the border

prices of its finished products. With the reduction of _ts

output level in 1982, its production value declined by 44%

but the cost of raw materials used declined by only 22%. For

the same year, Firm C's Value added ratio (VA/PsjQ), valu@

added/labor and value added/capital were at their Idwes't

Consequently, its net foreign exchange saving became nega-

tive in 1982, based on b<_th actual "and full capacity'utifi- - 82 -

Firm C

1980 1982 1984

Firm EPR (%_ '187.35 960.83 " 101.6

DRC Actual Capacity 38 •2 * 484.3

Full Capacity i 25.4 * 32.6 DRC/SER Actual Capacity 4.2 * 24.2 • 1 6 Full Capacity 2.8 ! . }

Product EPR (9) ,&27.9 IZ8.2 &9.7'

Output (in m.t.) !16,367 i0,145 5,412 Dutput Value" (Current Prices) 195!,911,'700 107,659,550 142,[17#000 Real Output Value (Constant Prices) 163,727,907 Ib7,659,550 75,678,768

Value Added (Current Prices) 94,529,3i3.:6 36,293,105.2 83,665,360.38 Import Content Ratio .83 .8! : ".52

Employment (No) 392 377 318 Capacity Utilization (%) 60 37 20

Re_l Output Value/Worker 417,673. 2 185,569.1 237,983.5 Ou=put Value/Capital_ 3.39 .72 .68 K/L 147,37_.47 395,641.& 654,899.4

V./L 241,'146.2 96,268.18 263,098.6 3 V../K 1.64 .24 .40 ]

Vj/PsjQ. .48 .34 .59

* negative ne% foreigTrexchange saving. - 83 -

In 1984, the firm was operating at a much lower

capacity util{zation than in 1980. Thus, based on actual

capacity, it is more inefficient in 1984. But for thissame

year, under full capacity _ssumption, its DRC/SER is more

favorable,! as a result of the improvement in the value added

ratio and value added/labor which were even hiqher _han in

1980.

....The firm's out-put!,_ employment, capacity utilization and

import cont-eTY_ naa been dedlining from 1980 to 1984.

4. Firm D

The firm's effective protection had been moving down-

ward, and its net foreign exchange saving had been negative

(based_on actual capacity) for the yeats under study. Howe-

ver, its outDut and capacity utilization were higher in 1984

t despite the lower EPR, compared to 1982.

Usin_ full capacity assumption, Firm D's net_. foreign

i f exchange saving was still negative for 1980 but the positive [ ,: F and low DRC/SER ratio for 1984 showed _n improvement in

"comparative advantage. This can be associated mainly with J the increase in value added/labor, which was at its highest

in 1984. Valu_ added/capital also increased during the year

but it is still lower than in 1980. These productivity

indicators were at their lowest in 1982, just like output

and employment.

Firm D is the second biggest among the :sample firms and

also the most capital intensive. Its import content, like

themajority of the sample firms, was declining. - 84 -

Firm D

1980 11982 1984

Firm EPR (%) 343.9 94.3 62.4 DRC Actual Capacity • * * Full Capacity * 99.58 39.9 DRC/HER Actual Capacity , • ,. Full Capacity * 9.7 i.99 product EPR(%) _ 8.9 108.98 74.8

Output (in m,t,) 19,574 15,915 16,017 Output Value (Current P_ices) 131,436,475 107,362,410.7 196,927,049.9 Real Output Value ¢Constant Prices) 134_192,543 107,362,411 I05,898,60&

Value Added (Current Prices) 66,746,780.56 58,467,447.84 108,466,911.5 Import Content Ratio .65 .61 .53

Employment (No,) 329 329 299 Capacity Utilization (%) 72 58 59

Real Output Value/Nbrksr 407,880. i 326,329_5 354,175.93 Output Value/Capitai .65 .45 • .48 K/L 618,869.88 728,561.96 1,384,682.59

V_/L 202,877.75 177,712.61 3162,765.59 VJ/K .33 .Z4 .26

QVj/PsjQ .51 .54 .55

* negKtive net foreign exchange savlng. - 85-

5. Firm E

The firm's EPRs are relatively low and their

trend had been declining.• However, although the EPR was at

its lowest in 1984, Firm E'S output, employment :and capacity

utilizatio{_ for that year ware higher compared to 1982.

The firm's DRC/SERs were also falling, under full capa-

city assumption, indicatlng an improvement _n comparative

"advantage. In 19S4',_-Firm E became • efficient (DRC/SER-< i)

using both--actual and full capacity assumption. This is r i primarily due to the significant improvement in the value

added/capital, which was the highest among the sample firms

in 1984, and the value added/labor, Which rose by three-fold

from 1980. ' Both productivity indicators were at their J_highest

in 1984.

Asidel from being the biggest sample firm, Firm E also

had the !o_est import content, the least capital/labor ratio J .and the hilghest value added ratio (Vj/_sjQj) among the

sample E irms from 1980-1984.

•6. Firm F

The data for Firm F are inadequate for time series

comparison- For 1984, its EPR had been relatively low

(23.6%) but its DRC/SER (3.95) based on full capacity

assumption, had been one of the highest.

Aside from paper, the firth has been producing a small

amount of another commodity, wh{ch constituted••30% of • the

total quantity of production. Its inclusion in the c%icula-

tions results in a higher EPR• (19.6%) and a lower DRC/SER

ratio (2.•28) but the findings are still the same. - 86 -

Firm E

1980 1982 1984

Firm EPR (%) 96 55,4 49.9 DRC Actual Capacity * * i8.03 Full Capacity 42.74 I_.54 10.6 DRC/SER Actual Capacity * _ .9 Full Capacity 4.74 1.42 .53

Product EPR (_) !28._ 72.i8 54.1

Output (in m. _.) 153. 290 106,931 132,693 Output Value (Current Prices) 813,189,314 649,535,342 1,608,693,320 Real Output Value (Conscan= Prices) 931,1_3,718 649,535,342 802,254,682

Value Added (Current Prices) 609,891,985.6" 513,132,920.2 1,319,!28,522 Import Content Ratio .28 .25 .34

Employment (No.) 7,9&8 5,820 6,283 Capacity Utilization (%) 82" 57 71

Real Output Valu_e/Worker Ii 7, 15.&:4 7 ill, 604 127,686,56 Output Value/Capital .52 .39 .57 K/L 197,491.i 285,777.74 448,334.32

V./L 76,735.28 88,167.17 209,952.02 3 V,./K .39 .31 .47 1 v IPs.Q .75 .'79 .82 .] _1

*negative net foroign exchange saving. - 8? -

Firm F

1984

Fit EPR (y_) 23.6 DRC Actual Capacity * Full Capacity 79. i5 DRC /SER Actual Capacity * Full Capacity 3.95

Product EPR (7_) 28.2

Output (in m-t.) 1,472.795 Output Value (Curren_ Prices) _25,420,538.53 Real Output Value (Constant Prices) 10,851,515

Value Added (Current Prices) 15,392,63i. 28 Import Content Ratio .77

Employment (No.) 213 Capacity Utilization (%) 20.73

Real Output Value/Worker 50,946. I Output Value/Capital .Ii K/L _ i, 090,268.07

V./L 72,265.87 J V./K .066 J Vj/PsjQ .61 as-

The firln'S capacity utilization had been one of the

lowest among the sample firms in 1984. For the past years,

it had been incurring heavy losses which started with the

collapse of the export market for its main product. It also

turned out that the domestic market for the commodity had

been very "price competitive. Presently, government financial

institutions have equity investments in this firm as part of

.....its financial restr_ucturing program.

Firm_E 3n_-_haracteristics similar to Firm B, the most

inefficient •firm. It had the lowest capital productivity

and the second lowest labor productivity (next to Firm B) in

1984. However, its value added ratio had been relatively

high. For"the same year, its import content had been •.the

highest among tine sample firms.

4.2.2 DRC Variations Across Firms

To explain the DRC variations across firms, the perfor- J

mance indicators were ranked, and the _firms were compared

and contrasted accordingly.

The differences in efficiency among the firms can be

attributed mainly to factor productivity. This finding was

indicated_by Zhe performance of each firm in 1984. Using

full capacity assumption, Firms A, C, D and E had their most

i favorable comparative advantage ratios (lowest DRC/SER) in

1984. This is the same year when their respective labor

productivity ratios (value added/labor) rose .to its high_st

level, in the case of Firm E which wa_s the 0_nly one.to .have

a DRC/SER less._Dan r unlty , its capltal Rreductivi£y (value

added/capital) also reached its peak, and was _he "highest - 89 -

among the firms •during the year. Ranking next to Firm E in

terms of efficiency was Firm C, which had the second highest

labor and capital productivity ratios in 1984. However,

among these four firms, Finn D•which had the highest labor

productivity was also the most inefficient, which was due to

its having the lowest value added/capital !for the same year.

But in some cases, the effect of capital productivity on the improvement of co_rative advantage through the years was

not as con_,-l-_s-i_ve_as that Of labor productivity. Despite the

increase in the value added/capital of Firms C and D in

1984, the ratio was lower compared to 1980, while Firm A had

declining capital productivity for the whole period (1980-

1984). These movements do not concur with the improvement of i

the DRC/SER ratio in 1984 compared to 1980.

The four firms also experienced improvement in their

value idded ratios (value added/production value)in 1984.

For Firms C, D and E, the ratio was their highest for the

three years covered while for Firm A, it was stlll lower

than in 1980.

In contrast to the preceding firms, Firm B was the-z)nly

one which had negative net foreign exchange saving for the

whole period, even under full capacity assumption. It had

the lowest labor productivity and value added ratios among

the firms from 1980-1984. These indicators fell further in

1984, unlike the experience of the other firms. Firm B was

the only one which had increasing import content, although

t_is ratio was nei-ther the lowest unor the . bigh_._. t among__ -...... bhe_

firms. Compared te-Firm_A, C, D _ and E, _the firm.also hac}"

the lowest capital productivity in 1982"and 1984. - 90 -

Next to Firm B in inefficiency is Firm F. Although its

data are available for 1984 only, it had characteristics

similar to Firm B. Firm F had the lowest capital productivi-

ty and the second lowest l_bor productivity (next to Firm B)

in 1984. But unlike Firm B, its value added ratio was rela- [

tively high and fts import content was the highest @mong the firms for the same year. Although its net•_oreign exchange

S a_ing _w_s _not neg_ive/ its DRC/;S_ER ratio 'was the -_h_ig,N_est_

compared t_ _ne rest of the firms.

Factor intensity cannot be strongly iinked with •the

DRC variations in all cases. Firm D, which was more capital

intensive than Firms A and C, also had a higher DRC/SER

•ratio than the two firms. But both the mosd eff{cient_firm, J

Firm E, and the most inefficient firm, Firm B, had the ? lowest capital/labor ratio among the firms from 1980-1984.

The @ize of the firm can also be correlated with the

difference_s in efficiency. The two mos_ efficient J firms were

in the category of high rated capacity level while the two

most inefficient firms belonged to the low rated capacity

gmoup. Moreover, the biggest sample firm had been the ollly

one which was able to have a DRC/SER ratio less than unity

in 1984 (covering the whole period under study), ind{cating

absolute efficiency.

The findings of the paper on the negative correlation

between protection and efficiency are consistent with a

. , . previous study on the industry (Villanuev a, 11979). But•_the

results concerning the cause of DRC variations are diffe-

rent. Villanueva's study indicated that the factor intensi-

ties in ,production_accounied for the variations: the more capital intensive, the higher the DRC. The present paper

implies that it is the efficiency in the use of the factors

(productivity) rather than th_ factor intensity, that deter-

mined the comparative advantage ranking/performance of the

sample firms under the study (See Tables 15 and 16 for the

past estimates).

As observed by one of the commodity specialists, the

biggest components of the DRC are the capital costs - land,

buildings, and machinery and equipment. Minimizing the costs

of each component would have a favorable impact on compara-

tive advantage. At the firm level, one way of doing this is

to put up the factory in the countryside where land prices

and labor costs are lower than in the cities. This is based

on the assumption that these cost reductions more than

compensate for the increase in transportation costs entailed

by this:strategy. On the part of the government, Considering

that it has become part-owner of some of the firms, it

should encourage the development of the local capability to

produce machineries needed by the industry.

4.3 Effects of Import Regulations

4.3.1 EPR and DRC Using Price Comparison

With the exception of Firm B, the rest of the sample

•firms had sufficient data for price comparisons (Table 17).

One of the firms, Firm F, had an average Pd/Pb

•(Domesti_c Price/Border Price) ratio which was almost the

same as :its implicit tariff in 1984 (data for other years

were not • available). Hence, its new EPR and DRC/SER esti-

mates (Table 18) were identical to those of the first - 92 -

Table 15

_OMPARATIVE PROTECTION RAT_S AND EFFICIENCY RATIOS (Input-Output Data) 1969 and 1974

Implioit

Input-Output _Tariff(%) EPR(%) _ DRC/SER Seotor 1969 _ _ 1974 1969 1:974

Pulp, Paper & P ape rbo ard ManUf_otur ing 56 43 50 38 •93 *99

Paper Products 69 117 172 195 .93 1.20

•Paper and Paperboard Container s 107 138 70 181 •98 I o24

Miscellaneous Converted Paper Products, n.e.s 72 82 71 478 .79 i.II - 93 -

Table 16

EFFICIENCY RATIOS (Establishment Data) 1977

Normal Full Capacity Capacity

Non-integrated Paper Mills

II-A 1.31 1.26

II-B 1.26 1.21

II-C .93 .90

II-D 2°24 1.81

Integrated Pulp and Paper Mills

III-A 8 .28 4.29

III-B 1.34 1.14

SOURCE: Villanueva, 1979. '-94 -,

Table !7.

IMPLICIT TARIFFS & PRICE C_ARIS0N RATIO_ (from Hongkong 1 + T P./P. Statistics) 1980 ii9-_2 !984 19_0 D 1982 1984

Newsprint 1.3 1.3 1.3 .1.4 1.31 1.36 Printing & Writing Paper: Average " 1.83 1.5 1.37 1.92 !.29 2.22 Bond Paper I.5 1.3 1.3 Manifold 2 1.6 1.4 Stationery 2 1.6 1.4 "Bookpaper (coated) 1.3 1.82

Kraftpaper 2 1.6 1.5 1.85 1.67 1.71 Corrugating Medium 2 1.6 1.4 1.78 2.64 1.94 Sanitary Papers : Average 2 1.7 1.5 Paper Towels & Napkins 1.25 1.01 .89 Toilet Paper 1.33 .81 1.01

Wax Paper 2 1.7 ii.5 1.15 I.23 .99 Foil Lamina=e 2 i.98

White Paper & Special Paper 2 !.6 '1.4 - - -

Paperboard : Average .93 1.19 1.23 Boxboard 1.5 1.5 1.5 Clayfilled Board 1.5 !.5 1.5 .Chipboard 1.5 1-5 1.5

Pd/Pb was based on NCSO Foreign Trade Er_z_s (Exporl

no _a_a - 95 -

Table 18

(Using Prioe Comparison Data)

1980 1982 1984

1. Firm A -22.8 89.25 70.47 Produot -17 •4 15 •17 23.19

2. Firm C 88.15 -24.92 -3.21 P_oducz 15.5" -Z6.9 -38.85

3. Firm D 246.75 114.28 lO8.34 Product 207.4 141.0 154 •99

4. Firm E 96.78 73.76 76.8

ProdUct i17.47 142.82 97.29

•5. Firm •F - 23.3 Product - - 156.89

were lumped into consumer and industrial produots.

2-/The negative'EPRs resulted from DVA/_TVA I.

- no data. - 96 -

Table 18 (continue_)

Actual Capacity F_II Capaoit,y ,1980 i_82 i_84 I_80 !_82 1984

i. Firm A .59 28.65 * .59 5.72 1.52

2. Firm G 1.48 5.16 1.27 1.22 1.45 .68

3. Firm D * * * * * 11.61

4. Firm E * * 1.5 4.93 2.05 .73

5. Firm F - _ . - - 3.95

negative net foreign exchange saving. - 97 -

method (using .I + T). The firm also produces another pro-

duct not related to the paper industry. If it were included

in the calculations, the EPR would be lower and the DRC/SER

would be less than one based on •price comparisong, since the

domestic price of this commodity is slightly lower than its

border price.

Two firms, A and C,,had lower effective protection rate

:esults al-,_ _ho._,_ that they had been penaiized - Firm A in

[980, and Firm C in 1982 and 1984, since their DVA/FTVA

(domestic value-added/free trade value-added) ratios had

been less than unity, resulting in negative EPR,s. However,

the term "penalized" does not seem appropriate in these

i.nstanc_es. •Most of ,the firms _ _0roducts _Irea6y had 50%-_0%

tariff rates, and more importantly, the negat-ive EPRs had

-been caused by the lower domestic prices of these items as

against their border prices (Pd/Pb < l)._ori the _{ears

specified. As a further effect, _he _corresponding DRC/SER

{ ratios of Firm A in 1980 and Firm C in 11984 became less than

one unlike in the earlier method. The price wedge may have

reflected quality differentials but the former appeared to

l_ave been the fnore dominant factor in consumer preferences.

The findings indicated that in products wherein the domestic

price is less than the border p_ice, such as in particular

types of and consumer sanitary papers, the

importation had been very minimal, only .004% and .06% of

total paper imports, respectively, from 1980 to 1984 even

after some of these items.had,been l_beralized in 1981. This

implies that import substitution--in d_hese products had been • - 98 -

almost complete.

Both Firms A and C produced a greater proportion of

high tariff items in 1982 and 1984 compared to 1980. For

Firm A, the additional new pt,-oducts had higher Pd/Pb ratios

than their implicit tariffs, which may be attributed to

their ilaport •regulation since 1982, resulting in higher EPR

and DRC/SER ratios than in 1980. For Firm C, its .higher

J 79% of tota:L pr_tion quantity in 1984), which on the

average had Pd/Pb ratios less than unity and lower than

their implicit tariffs, resulted in lower EPR and DRC/SER

estimates compared to 1980, using price comparisons.

In the case of Firms D and E, the Pd/Pb ratios of {

•their ,p_oduc.ts, !on the average, _nad been!...higher than .their

implicit tariffs, specifically in .1982 and 1984, which

-again may be attributed to the import regulation since 1982

Consequently, their EPR and DRC estimateis had been higher

than in the. first method but _he tre6ds ':had .been similar.

For Firm D, there had .been no Importatlon of .its main pro-

duct line from 1978 to 1984, except in 1983 (NCSO Foreign

Trade Statistics). But the commodity heading •(kraft

paper) under which this specific product falls, and on which

the price comparisons had been based, showed substantial

growth in importation. It had been observed that in products

wherein Pd/Pb > (i + T), specifically kraft paper/lin-er, im-

portation continued to rise, _from a 19.8% share of total

paper imports in 1980 to a 44.8% share in 1984, despite its-

import regulation since 1982. - 99 -

The above findings imply, subject, to market demand,

that the production of items whose domestic prlces are lower

than their border prices has a favorable impact on compe-

- titiveness and efficiency of' the firms - in line 'with the

international trade theory of comparative advantage.

_. 4.3.2 Effects on Import Performance

ding those c_T_t_ize or shape (based. on the PSCC), of,which

103 had been_classified as regulated items in 1982 and 1983/.

three had been banned since 1970, and 51 had been liberalized

in 1981 and 1982. Except for semi-chemical fluting paper, the

liberalized items .had not been inciuded in the import restric- i t_ons that followed, Table .19 presents _he •import performance

of these prbducts as categorized, before and after the policy

•changes. Also shown is the impor,.tation of newsprint which

had been regulated since •1972. Semi-chemical flu_ing paper

had been treated separately because it was the only commo-

dity which had •been liberalized in •1981 land then regulated in

1982.

From •1981 to 1984, the importation of newsprint

declining, in contrast to the period 1978 to 1980. Its share

in •total paper imports fell from 4.4% in 1978-1980 to 1.9%

in 1982-1984. In 1984, there had been a move to a11ow the

tax-free importation of newsprint (Parliamentary Bill No.

1422) but it did not push through. As indicated by the .Ta-

rif_ Commission, this would penalize the newsprint manufac-

turers.

For semi-chemical fluting paper, importation greatly, - i00 -

increased, from .257 metric tons in 198.0 to 2,783 m.t. in

1981, after it was liberalized in January 1981. This conti- nued to rise despite the regulation of the product since

November 1982.

The share of liberalized items to the total value Of paper .imports had been very minimal., an avevage of 4.4%

-_i-._.197.8-_.n i._80 i,_a:nd;_:,2,_.._%:i,n._:':-_:19..8'2-_-;i98::4:...In. :oo_n:t_ast°r..c'_Se-,,._g;u_ lated .items constitut-ed., o.n...the average, .86.4% .and 87....4%of i total paper _mports (value) in 1978-1980 and 1982-1984, res- pectively. Their respective responses to the import policy changes, as measured by their import performance, showed nO definite pattern, as described below (see Table 19 for the

.exact figures).

•a) Liberalized _[tems {Jan. 1981) : Except for

1983, imports had been declining from 1981 to 1984.

b) Liberalized Items (_Feb. 1982): Tmports sharply

increased in 1982, from only 14 m.t. in _981 to 6,.890 m.t.

in 1982. However, the level went down to'29 m.t. and 6.4 m.t. i

in 1983 and 1984, respectively. The importation of Creped or

Crinkled Kraftpaper accounted for the surge of imports in-

this commodity c_lassification. From only 13 net kg. in 1981,

imports of the product rose to 6,489 m.t. in 1982. But in

the following years, importation had been' zero (NCSO Foreign

Trade Statistics, 1981-1984). This may had been.due to the

difficulty of sourcing foreign exchange,, as a Tesul-t of the

economic crisis in 1983 to 1984.

c) Reaulated Items (Nov. i982): The quantity of imports

slightly deoreased in 1983-Dut increased again in i984. - I01 -

Table 19

IMPORTS OF SELECTED PAPER pROIYJCTSI-/

Product s

Newsprint 2-/ FlutingSemi-Chem.3paper _J/ Liberalized_nJan. 1981 Q V Q V Q V

1978 4,999 1,689 551 137 635 981

1979, 19_12 8,129 962 376 925 -. 1,055 ,,

1980 20,012 10,245 257 109 1,086 7,809

1981 4,894 2,872 2,783 1,319 820 1,562

1982 2,671 1,903 3,279 i,215 676 1,595

1983 I _192 64.2 6,866 2,634 1,115 i ,580

1984 2,374 1,132 19,926 8,071 456 1,272

_-_'Qin '000 Net Kilograms (NK,);_..in '000 CIF $.

2-/Newsprint has been regulated since 1972.

3-/Semi-chemical fluting paper was liberalized in 1981 but was regulated in Nov. 1982.

_/Excludes semi-chemical fluting paper.

SOURCE: Foreign Tra_e Statistics, NCSO, 1978 to 198d. - 102 -

Fable 19 .'ontinued)

Product s Product s Newly Products Liberalized in Regulated in4/ Regulated in Feb. 1982 Nov. 1982 _-J Aug. 1983 Q V Q V _ V

- _-"!_:_978 2.,_-8. ,_.._._ _.9.6.,084 .... 54.#.6_-441' 96_ 1,&5_.

1979 fZ 28 93,652 54,516 1,390 1,404 "

1980 32 27 97,238 56,729 748 1,301

1981 14 41 106,434 62,459 714 1,287

1982 6,890 2,284 120,763 .69,079 789 :' 1,061

1983 23 41 120,155 66,880 1,358 1,214

1984 6_.4 21 125,342 64,298 '770 911 - 103 -

d) Regulated Items (Auq. 1983) : Imports rose in 1983

but dropped again in 1984.

To supplement the above dinformation, the composition of

paper imports was compared for the years 1977, 1980, and

1984 (Table 20). This also showed that the _ffects of the

regulations on importations Were not conclusive. Although t'he share o_f _ach co_od ity _heading to total _p_ imports i had been gen_ra_-y_maller in 1984 compared to 1977, the

percentage had already been Oecreasing in 1980, even before

the reguIations. Furthermore, similar to semi-chemical

fluting paper, the importation of kraft paper and paperboard,

which comprise only six commodity lines, grew at a tremendous

rate, from only three percent of total paper imports (value)

in 1977, to 45% in 3984, despite the regulation oh its importation

since 1982.

At least for liberalized items, .we Tan say that the

effect had been insignificant, in view of their very minimal

share to total paper imports and the fac£ that this share

even declined further. Such inference cannot be made for the

regulated items considering their import magnitude and the

presence of very small domestic firms which may be easil_y

a£fected by slight changes in imports. In 1982, the paper

manufacturers, through PULPAPEL, complained that the "twin

measures of import liberalization and tariff reduction in

1981 triggered a deluge of undervalued imports" which

severely affected the industry. It was not really a deluge

but there was some basis to this claim. Between 1980 and

1982, the percentage increases in the importation of the

.- 105 -

items subsequently regulated in 1982 had been higher than•

in the preceding years. With the regulation, the association

indicated that the industry showed positive signs of recovery

in 1983, until it was affected by devaluation. Thus, despite I the small changes in the importation level of regulated pro- L

ducts (and increases in some cases), the impact of this

policy cannot be discounted. !Moreover, there is always the pos s ihi i ity •.that•.•witho u:tlthe. re s tri c t ion s_: impor.t:at ioa_ would

have been hf._2her-_b_an it had ibeen. But this measure should

not be relied on as the major: instrument to ensure dominance

in the domestic market. Efforts should be increasingly

focused towards developing the industry's structural compe-

titiveness,, rather than justshielding it from competition. i •- 106 -

CHAPTER V

SUMMARY AND CONCLUSION

The study was aimed at evaluat'ing the effects of the

Tariff Reform Program on paper and paperboard manufacture,

[ particularly with regard to efficiency, and identifying the

adjustment problems of the firms in the industry. It uti- lized t:h-e EPR _.nd :ORC measures .in_ the anal__sis .u_s:ing:es_c-ab-

lishment data, b6verin_ the years 1980, 198_ and 1984-..

Its findings on protection and efficiency are as

follows:

i. Increases (decreases) in protection, as

measured by EPR, resulted in higher (lower)

DRC/SER, which in turn:, indicate a loss (gain) in

comparative advantage.

2. The two biggest sample firms were able to adjust

£.o lower protection. Their output and capacity

utilization increased despi_e a reduction in EPR

in 1.984, .for the period 1980-1984.J

3. With the TRP, three firms moved to produce a

higher proportion of items with higher tariffs,

-in -1982. In the same year, their respective

DRC/SER ratios also increased.

4. DRC variations across firms can be

mainly attributed to the differences in factor

productivity, as measured by the value added/fac-

tor ratio. Fir_s which had relatively better

comparative advantage ratios also had high levels

of either or both labor and capital productivity.

The improvement in efficiency can also be traced - lO7 -

from the rise in factor productivity. Findings

on the role of factor intensity (capital/labor)

were not conclusive.

5. The firms which showed improvement in efficiency.

ratios also •experienced increases in the value

added ratio and decreases in the import co n£ent

ratio. The lower' import content _ _ay be due to the

high costs of raw material imports and the •scar-••

_-ii_ of_ foreign exchange, partzcularly in 1984.

6. In contrast, one'of the two most inefficient

firms (Firm B) showed increasing import content

from 1980 to 1984 while the other firm (Firm F)

had the highest import content in 1984. Firm B

also had the lowest value added ratio for the

whole period.

7. The size of the firms can also be linked with the

differences in comparative advantage., in general,

the bigger firms had higher efficiency ratios 4 than the smallest firms.

The findings also indicate that the industry has be_gn able to capture a significant share of the domestic market but it has not gained international competitiveness. This stems n_ainly from the weaknesses in the in_dustry structure which protection failed to remedy because it •only provided a shelter from competition and has not directly addressed the core of the problems. One of the constraints pertains to the limited economies o_ scale since many firms in the industry are small. Along this line, the BOI is currently undertaking a study on the possible integration and rationalization of - lO8 -

the industry.

Another crucial factor concerns the dependence of the industry on imported raw materials. Since inputs constitute % approximately 60% of the t_tal cost, the industry is Very I vulnerable to external conditions. This includes devaluation which had been non-neutraL in the case o_ the paper industry w hebefh p rc_U_Cts _e differentiated. It incre_a._ed the costs of inputs but the output prices had no% incr%ased as much because of depressed demand. These problems, which started

in the 197Os as a result of oll price . increases and world" wide inflation, became worse in the 198Os with another round of world recession. Hence, PULPAPEL has been clamoring

for _he postponement of liberal_zation programs to a more h 1 opportune time, probably until 1987, when the situation

hopefully becomes favorable.

Since the _ountries that supply raw materials are also

producers of compet_ing imports, local products Will be edged

out by imports in terms of price and iquality. Removal of

protection threatens the survival of the industry, and yet

continued protection is not likely to _ake the indus tr_

competitive DOt efficient. The long-term solution does not

depend on the issue of protection but on the industry it-

self. There is no doubt that external factors are very

important; but, more than just relying on such forces, the

industry should derive its strength from within, and build

its own capability to compete, through finding ways to

minimize costs rather than the current emphasis on increa-

sing the price of foreign goods as effected by the tariff

protection. Further reduction in import dependence (on raw •- io9 -

materials) is one of the ways of doing this. This follows from the earlier observation that improvement in efficiency is associated with high• or increasing value added and dec- reasing im[9ort content. It may be achieved by s6rengthening the country's research, dissemination1 and application acti- vities towards the utilization of its indigenous raw mate- t rials. The process is a long-term endeavor _nd it may take a

long time before the results could be of be Defit to the

industry.

Thus,• •in the meantime, as interim measures, the indus-

try should minimize costs which are within its control.

PICOP has taken a step in this direction. By utilizinQ wood

fuel in lieu of imported bunker fuel oil., the corporat:ion

had saved millions of pesos. PICOP had been twice awarded by

the Energy Conservation Movement of the Philippines for its

outstanding energy conservation measures and the increased use of ind%genous sources of energy.

In conclusion, specific recommendations and possible

government assistance to make the industry viable under

lower levels of prDtection are as _ollows:

i. devel_op and utilize own indigenous waste

materials as inputs for paper manufacture;

2. foster closer coordination/linkages between PULPA-

PEL and technology research agencies of the

government particularly, the National • Science and

Technology Authority (NSTA), as well as relevant

international institutions;

3. explore potentials of products which may have

opportunities for export, such as paper from water - Ii0 -

hyacinths ;

4. use indigenous substitutes for fuel and adopt

production techniques which save on imported ener-

gy ; and

5. provide financial and other assistance in the

,, field of technological research and application. I Appendix I

Yirm Location Year of Rated Capacity . Operation (Metric Tons/Year)

i. Aalem ?aDer Mills, InZ. Office:Manila 1963 Paper: 16,500 -_!i : Laguna - -"

2. Aszar£ Corru=_aned Box Office:Manda!yong 1983 Paperboard:9,900 w.-'o Co__p -_=._o_ Div Mil!:Ouezon City (start-up)

3. Ba-mmn Pu!> and Paper v_ .... =....=_ Mills, Inc. (Inngg- Mill:Bataan 1962 Paper: 25,875 rated Pulp-& Paper ._iz!)

4. Central £zucarera de 0ffice:Makazi Bais-Paper Div. (inneg- Mill:Nezros Paper: 10,180 razed Pulp, Paper & Orienzal 1941 Paperboard:2,995 Paperboard Mill)

5 Cont:_iner Corp. of =he Office & Mill: 1962 Paper/Board: Philippines Ba!intawak, Q.C. 13,960

6. :/_sr___r:Papa: }_] is<,.... 0fficE=Ma_iIam Incorporalted*_ Mill:: Mar+_ki=E - 19601 Paper_:• 181000

7. Globe Paper __i!s Office:Binondo, 1959 Paper: 8,9.80 Manila Mill" _- _-" -

8] Fi._.'_erlv-CiarkPhil. Office: M_kaii 1963 Paper: 15,@00 Lnzorporane6 Mill: •Laguma

9. Liberzy Paper Mill, 0Zfice=-Quezon City i974 ?ape=: _,490 !nzorpor_ted* Mill: Va!enzuela

.....=...... ap .... I! s ,.N_.T.r 0ffice: M_n"a:1" !958 -PaDer/Pamerboard Mill: San_andaa_n 72,600

!!_ Man_-a"-' Press,Inc.- Office: Bizondo 1958 Paper: 4,%90 , Paper Mill Div. Milk: Las P_2_as i 12. Massive Paper Mills Office & N_Tl : _a!enzue!a 1983 Paper: 6,600 [ 13.Menzi Dev. Corp. Office: Maka:_i "1973 Paper: v,.300

Paper iMill) 14. Paper Industries Corp. Office: Makati Paper: 184,335 of the Phil. (PICOP) Mill: Bislig, 1972 (integrated Pulp & Surigao del Paper Mill) $ur & Iligan, Lanao del Sur 1962

15. Paperlaad, Inc. Office & .Mill: Balintawak,Q.E. 1977 Paper: !0,000

16. Paragon Paper ind., Office: Makaci 1982 Paper: _4,750 INc. _l!: Ba_aan

17. People's Paper Mills, Officg: SEa. Cruz 1'984 Inc. Manila (s_art-up) Paper: 6:000 -Mill: Pampanga

18. Pb_]_ippine Paper Mills Office x Mill: Inc. _ Tondo, Mla. 1951 Paperboard: 11,970

19. Premier Paper Corp. _ Office: Maka_i 1961 Paper: 3,960 Mill: Pasig

20. Sco_t Paper Phil., Office: Makati 1961 Paper: 27,390 inc. Mill: Baesa, Q.C.

2!. United Pulp & Paper Office: Maka_i 1973 Paper 30,930 Co. inc. (integrated Mill:: Bulaca_ Pu!o. &.Pape= M!!!J

22. _ti!ity =n_erpTxses Office: Intramures 1980 Paper: 13,200. Corp. Manila P__i!!:Cebu 23. Vansom Paper In6ustrial Office- & Mill: Corporation Valenzue!a 1977 Paper/Board: 6,600

L 24. _ork_,de Paper MB_i!s, Office: SYDM, Q.C. 1954 Pager: 5,400 _nc. Mill: Q.C. a_d Board: 8,790 Par_Baque

Sourcel

P_APEL SeptemBer 6, 1983

* _losed as of !985 latest information Appendix 2 Price Indices Used in DRC Estimation

(i) !2) (3) (4) r : : : Machinery & : Office Year : CPI : PCI Transport Equipment Equipment : : : Index : Index _Tb-'/O : 78.862 : 84.15 : 80.14 : 84.89 1971 : 84.150 : 93.42 : 92.85 : 94.11 1972 : I00.00 : I00.00 : i00.00 : i00.00 1973 : 115.854 : 120.16 : 109.70 : _i6.55 1974 : 154.675 : 189.29 : 136.45 : 193.15 1975 : 167.276 : 190.41 : 158.82 : 197.45 1976 : 176.220 : 205.54 : 172.62 : 215.60 1977 : 190.040 : 221.59 : * 180.50 : 225.75 1978 : 203.250 : 240.66 ; 196.78 : 248.50 1979 : 242.,480 : 290.86 : 218.90 : 276.50 1980 : 287.600 : 335.97 : 241.00 : 332.70 1981 : 322.560 : 382.09 : 262.03 : 365.10 1982 : 358.130 : 410.35 : 297.29 : _391.46 1983 : 396.950 : 457.02 : 2_].96 : 4,' 1984 : 592.560 : 670.08 : 525.04 : 7 t_.59_

Source: (i) - NEDA (2) -- NEDA National Accounts Staff (3) & (4)- CB Statistical Bulletin_ 1980 (3) .....the_ inde_ was_ estimatec%_a_ the average of electrical machinery-apparatus/Applianoes index and machinery/ except electrical. This average then is averaged again into transport equipment index to get (3) (4) Average of furniture and fixtures index and electrical machinery apparatus/Appliances

CI'I - Cons_ners Price Index ['CI - P_ivate Construction Index- APPFNDIX 3

SET A

I. PRODUCT LINES

For questions 1-3, please imdicate your answers .in the answer grid below.

I. What are your major product lines?

2. Please rank the products with thehighast to l_est volume of production. Assign a rank of "i" to the product w_gh uha highest volume of productidn, "2" to the second highest, an_ so on.

3. In the same manner, rank them from most profitable to least profitable.

4. In the same manner, rank them from greatedt export potential to least export potential.

5, Foreachproduct, who are your major competitors? Please check appropriate spaces:

An_e.r t_r£d

Major gompeti_o[ c _,lajor product Volume of Product- Profitability Exp.or, t_ Foreign Domes,. : llna ion Ranking Rankin E Potential Ranking u " "i: "- :

I .&_..--

P • a • ;

5, Are competing imports banned or controlled? Please cSeck

appropziac_ box. / '_ Yes ! / No

If yes, what are the major effects on your product? Please rank the effects by assigning "I" to the most important, "2" =o the n_xt most important, and so on.

1 -: : : : ; Product _ , : : . : : : : : : : : a. highe_ price : : : : : ;

b. greater market share : : : : : : : : : : : ; c. others, pls. specify : : : : : ._ : 7. Given that the tariff rate on competing imports is 40Z or _ore, what are the major effects on your product_ Please rank t_e effects in descendingbrder of importance, as inl #6.

: : : : : Product : : : : :

a. higher price : : • mmlm, i =_ . r : ...... : : : - : b. greater marke_ share : : : : :

c. others, pls. specify : : : : : I : : : • :

8. What would be YoUr responses to an increase in the tariff rate on competi_ imports? Please rank your responses in descendinE order of imporLance, as in #6.

a. increase production

b. _i_nraas_;_capiral_InvesZanent

C. increase price

d. others, please specify &

9. Where would you rank your firm in production efficiency within the industry? Please check appropriate space.

a. _op 25Z.

b. next 25g.

c. nex_ 25Z.

eL.'. _ow_st 25Z.

i0. Ir_icate,percenuage u_ilizauion of plant capacity: If operating below full capacizy, state reasons.

]l. Is the industry overcrowded? Please check appropriate box.

/ / Yes / / No 3

° If, INPUTS i, What are your major inputs per product llne? Zndicate your answers in the answer grid below.(Use a_iditional paper if apace is not enough. ) :

Product : Product : Product

J. Imported Local : Imported Lo.cal : Imported Local

4

m

Product : Product

ImportQd Local : Imported Local

,l :'7

2. Aza there re_a!a_ed ..... _4-_=4 imported inputs that you might use in production ? Ch_ck'a_propz-la_e box.

If yes, what is the principal effect ? Please check space(s).

Inputs • • : : : "

a, higher teat of inputs : : : : : : : , -o *° : . 5. lower quality of inputs : _ : : : : : : : : : : I ¢, sh/f= tol other local. : : : : : subs tltut es : _ : : : : d. others,pls, specify : : : : : : 3. U-nat is the principal effect of tariff on imported inputs? Pleas4 check appropriate spaces•

I • ) • 4

Inputs : _ : : : J _ a. high er cost o! inputs .....: : : : •" i b. lower quality of inputs : : : : : Q c. shift to other inputs : : : : ..... i d. others, please specify " " : : :

4. Are you free to import what you need? Please check aDDroorim_e box and specify the items.

5. What percent of total _awmaterlals are imported? %

6. Are you compelled to buy domestic materials? Check appropriate bcx.

l l No l l Yes If yes,

Specify the itp_. 1

7. _%a_ would be your primcipal resFonse(s) _o

i) an increase in the tariff raue on impor=ed inputs?

a. substitute io¢al inputs

b. shbs=itute other ±uput$

c. chanEe product mix

d. #i_area_e produc_ price

e. o_hers, please specify

4. On the whole, how would you assess the effec= of the recent tariff chanB=_ on your firm? Please che=k appropriate boxes.

/ / favorable / _ unfavorable

IV. Others

i. What: government: controls, policies and institutions af{_ting your industry would you like to be reformed? Indicate h_w.

2. What form of government assistance is needed by your industry and what policies would you llke to be Implemented?

f r . i

3. How would you react to another round of tariff reforms toward more unifo_ rates and trade llberalizations7 Please chenk appropriate boxes.

I" / favorable / 7 unfavorable

_ r_utral

A. What would be the major consequences for your business? #

l

_B. Wha= would be your major response or adjustment:? -J.-

Set B

I. •Inventor), and Production Data for 19_0

: : • o• .• : : : Beginning_ Inventory : Ending Invento1"y : Productlo_ /or 1980 : ; : : | : ! , ! :• Products : Quantity : Yalue : gH_ ant_ty •. Value : Quantlt F : Value :

' 2 "' : : ...... "--: : : : ; : : : :

: : : : : : ,' : : ..... o , : : : : : : :

: : , : : _ : : : •. : ." : ° : : .' : •b .• ,• : : : : : : : : : : : : : : : : : : : ! ! •p : . .' .o ! : :

: : : ! : .. : : : : : : : • .• : : : : , : : : : : : • : ° : : : • -2-

inventory and Production Data for 1982

: : Beginnin_ Inventory : Ending Inventory : Pt.oducttou [o_ 1982 j . Prod_cts Q_mntity Value Oua ty Value Quaintity Vaiue

_' : _- .: .* : _ : • i

; : • : : : : : : • ° -_Inventory and Production Data for 1984

: ; i " : " : : Beginning .Inventory ! Ending Inventory : Productlo]i for 19 84 : -: .... Produc ts . : .... , ,-- : .... ; quantity : Value . ; Quantity : Value ''_ l q,mntttv : Value : : : : | : : : ;

: I. L .... : ,

"* " : i ' "' ' " * • oa - . __ ...... : • : : : _. : : : [

• : : i- _ "" ; .... " ...... :

: : : i : : : :

2. Based on bours a day, days a yea_ full capacity operation, wh_t _a_ your race of capacity utilization in 19807 % _9827 %-1984? %.

3. Do you export? If yes, wh_Lt percent i._ it of total ovti,ut? % 4. Raw MatarSals Inventory

A. Fill in information for major raw materials. O_her materials may be lumped together under "others."

- Raw : Beginning Inventory: Ending Inven_,ory: Purchase FiaLerials : Value : Value : Value fo_" , : F , 1980 : 1980 ; 1980 I. Local

ri. : : :

9

! ir_1 3. : . :

4. l : i|_ . : i.

5. Others : : [I. Imported

,t f r f i i. : : : 2, . : b

3. .

4 ' ¢ ( m 5 Others : { |w " ,_aw -- Beginning Inventory: Endlng inventory': Purchase_ Materials : Value : Value : Value for L. L'oca.]. " " : 1982 ..... ; _. 19_7. " lgS? [" : r -

2. : : . 9 r --. 3. : :

4. : : 5. Others : . . * i m * If. Imported

r,

I, g -" : :

3, : : :

d 5. Others :

Raw "- Beginning I_ventory: Ending Inventory: Purchase Materials : Value : Value : Value for : 1984 : [984 lq,q4 i. Local --- --...... [ i .Z : : i 2. : : 5. __ : .

5. Others : --5--

If. imported

!. : : .

9

3. : : . , ,: _. : : :

5. Others : : :

B, CaDital Inputs Land _ :"

I) Do you own i=_4_-- : if yes, _lease. give the fo1!o_._:-. information.

a. size : : : , :

1 b. looa_ ion : : : :

c. acquisition : : : : value : : : : l

2) If ren=ed, please give the following information: a) size i b) location

e-) re_nra]i _aT_e_-s_ f_=_ I_80_ ,.L_. 1982 1984

d) da_e of last negotiation of rent

3) If leased, please give the following information: a) _ize

b) location

c) payments for 1980 - ' 1982 1984

d) year _han leas__ wa_ last negotiated

_uilding and Structure_q

I) Do you own _he 5uilding? If yes, please _ive _he fo!lowin_ informa_i0n.

a. c2s_ : : : B. expected life : : :

• de,repletions, for _he year:. : ; :

2) If rented, how much rent expense did you pay in 19807 19827 198_? .._ -6""

ProduccIoa, Transport _lnd Office Equipment 19BO

No. of : Purchase : Deprectat[o_ for : Book * : F_pected : :: T'IPE ;_._.!_,_Its : Value ... ", £he year ", Value : Life :

..

• . ; _ !

• : ; : _.

, ., : :

: : : : •

• • • _

. • _ • ._ • C. Labor-

i) 1980.

FILIPINOS ..... A_IE_ 1 TOtal To_a] Ntm_ber Compensa=ion N_aber Compensat!_. Salaries Personnel Unskilled* Others

Wage Earners Unskilled* Others

Total ......

2) 19B2 Total Total Number Compensation Number Compensation1

Salaries Personnel Unskilled* Others

Wage Earners Unskilled*

Otherm

Total ---....

3) i9s4

Total Totnl Number Compensation Number Compensgtio_

Salaries Personnel Unskilled* Others

Wage Earners Unskilled* p Others

Total ......

Unskilled laborers or common laborers_are those eng9geo zn manual occupations that involve the performanie of simple _u_ies that may he learned w_.thin a short period of time and that _equir_ the e×er_-i of little or no independent judgment in the perfo_mnce of their wo? D. Other Domestlc, Costs _Amount, Paid

19S0 1882 !984

Electricity __ _ - =

Advertising and Promotion .- i --

_su_ance ' _ _- --r

Freight = ---

Transpor_a_lo_ jr _ ,

Telephone a_ Telegram " : . -

Postage _ ._ ,

Legal Service ..... --

Medical Service ,_ = .. _- -

Accoun_in8 and A_dltinK ...... _=_= ...... _r--_...... :

_king-. Service. _. , =

Storage and Warehousing _ _ -- =

_pedlfic and Sales Taxes __-

Other Opera_in_ Costa Specify _ - -

E. Other Foreign Costs:" • Amoun_ Paid

1980 1982 ! 984

Royalties ; _ . - q

Licensing Yee , _- --

Technical Assistant Fee _=

Dividends on Foreign Share -

Others (specif¢) _ = t -9-

Ii. PRODUCTION COST (Note: If product is of different size_, types, mDdels or brands, choose one that is most representative and/or saleable).

I. Product specification

Dnit of Measure

Pe__TLO5nitr Cost Materials and Supplies Direct raw materials (local) 1980 1952 1984

CI)

(2) , __

Dizect ra_materials (imported) (i)

(2) _._ Direct Labur: '

Manufacturing Overhead:- Indirect labor _ =_.....=._ ,._.

Gasoline

Diesel

Bunker

Others ___

ElectriciTy __

Water ....

Containers

Depr?ciatio_,_" " Interest Co_t (Actual and !_puted) I Others, pl_&se .specify

Total Unit Cost

Sal_s Tak , ! Selli_g/and Administrative Expe_,_es _ , + I

g • •

.t •Q _" ,4 ."

b ,,. = ." ,, .:

" : : ....• ,.., _ i _ ;

; "-" i : = :

_61 : Z_61 : O-_61-: _-?-_-61: _861 : 0_61: @ _T_cl _oa_ i13 : _T-_..I _C,.zOa_:~x'_ : :_npo.zcT" ; .= : i

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