The Global Challenge in Services Trade

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THE GLOBAL CHALLENGE IN SERVICES TRADE

A Look at Philippine Competitiveness THE GLOBAL CHALLENGE IN SERVICES TRADE

A Look at Philippine Competitiveness

Edited by

Gloria O. Pasadilla

PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas Copyright 2006 by the Philippine Institute for Development Studies (PIDS) and the German Technical Cooperation (GTZ)

The findings, interpretations, and conclusions in this volume are those of the authors and do not necessarily reflect those of GTZ and PIDS and other institutions associated with the studies presented in this volume.

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PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES NEDA sa Makati Building, 106 Amorsolo St. Legaspi Village, 1229 Makati City, Philippines Tel.: +63-2 8942584; 8935705 Fax: +63-2 8939589; 8942584 Email: [email protected] Website: http://www.pids.gov.ph

ISBN 978-971-564-056-5 RP 09-06-500

Photo credits (cover): PIDS photo files (first and second rows, left photos); The Farm at San Benito (first row, right photo); for collage, second row, right photo: www.hpproductions/ lc.com/production.htm (reel, foreground); www.elitehomevacations.com/images/film.jpg (reel, background); www.ststours.ca/cms_images/clapper.jpg (clapper, foreground).

iv Table of Contents

List of Tables ……………………………………………………………………………… vii List of Figures and Boxes ………………………………………………………… xi List of Appendices ……………………………………………………………………… xiv

Foreword Josef T. Yap ………………………………………………………………… xv Foreword Anja Gomm ………………………………………………………………… xvii

Acronyms …………………………………………………………………………………… xix

Chapter 1 Overview: A Look at Services Trade in the Philippines Gloria O. Pasadilla Importance of Services in the Economy: Some Facts and Figures …… 2 Prospects of Services as Dollar Earner ………………………………………… 5 Outsourcing Opportunities, Medical Tourism, and Others ………………… 15 Contribution of this Volume ………………………………………………………… 18 References ……………………………………………………………………………… 18

Chapter 2 Cross-border Transactions in Higher Education: Philippine Competitiveness Andrea L. Santiago Abstract …………………………………………………………………………………… 19 Background ……………………………………………………………………………… 20 Principal Issues and Concerns in Education Services ……………………… 22 State of Philippine Higher Education …………………………………………… 25 Measuring Philippine Competitiveness in Higher Education Trade ………………………………………………………… 29 The Asian Context ……………………………………………………………………… 38 Experts’ Views on Cross-border Transactions ………………………………… 43 Summary ………………………………………………………………………………… 46 Insights and Recommendations ………………………………………………… 47 Conclusion ………………………………………………………………………………… 51 References ……………………………………………………………………………… 52

Chapter 3 Challenges in Health Services Trade: Philippine Case Maria Cherry Lyn S. Rodolfo and Jovi C. Dacanay Abstract …………………………………………………………………………………… 55 Introduction ……………………………………………………………………………… 55 Global Trends in Health Services Trade ………………………………………… 56 Assessment of Capabilities ………………………………………………………… 76 Other Strategic Options ……………………………………………………………… 82 Appendices ……………………………………………………………………………… 90 References ……………………………………………………………………………… 97

v Chapter 4 Audiovisual Services Sector: Can the Philippines Follow “Bollywood”? Gloria O. Pasadilla and Angelina M. Lantin, Jr. Abstract …………………………………………………………………………………… 99 Global Overview of the AVS Sector ………………………………………………… 99 An Overview of the Philippine AVS Sector ……………………………………… 113 The Philippine Film Industry ………………………………………………………… 121 The Television Broadcasting Industry …………………………………………… 134 Summary and Conclusion …………………………………………………………… 147 Appendices ……………………………………………………………………………… 151 References ……………………………………………………………………………… 161

Chapter 5 The Philippine Information and Communication Technology Sector: Evolving Structure and Emerging Policy Issues Winston Conrad B. Padojinog Abstract …………………………………………………………………………………… 163 Background ……………………………………………………………………………… 164 The ICT Sector and Its Impact on the Philippine Economy ………………… 170 Evolving Structure and Behavior ………………………………………………… 186 ICT Absorption and Penetration …………………………………………………… 204 Policy Framework to Close the Divide …………………………………………… 217 References ……………………………………………………………………………… 221 Chapter 6 Sustaining Philippine Advantage in Business Process Outsourcing Ceferino S. Rodolfo Abstract …………………………………………………………………………………… 225 Introduction ……………………………………………………………………………… 225 Business Process Outsourcing …………………………………………………… 232 Growth of BPO Worldwide …………………………………………………………… 236 The Philippine BPO Industry ………………………………………………………… 243 RP’s Attractiveness as a BPO Location: Industry Value Chain …………… 249 Policy Recommendations …………………………………………………………… 268 Areas for Further Study ……………………………………………………………… 271 References ……………………………………………………………………………… 273 Chapter 7 Does the Philippines Need a Trade Representative Office? Gloria O. Pasadilla and Christine Marie M. Liao Abstract …………………………………………………………………………………… 275 Introduction ……………………………………………………………………………… 275 Trade Policy Formation in the Philippines ……………………………………… 277 Institutional Inefficiencies in the Current Structure ………………………… 283 An Agenda for Reform ………………………………………………………………… 292 Appendices ……………………………………………………………………………… 298 References ……………………………………………………………………………… 315

About the Authors ……………………………………………………………………… 317 vi List of Tables

Chapter 1 Table 1. Sector share to GDP (in percent) ……………………………………… 2 Table 2. Sector share in employment (in percent) …………………………… 3 Table 3. Distribution of FDI stock, by industry (in percent)………………… 4 Table 4. Average family expenditures by income class in the Philippines, 2000 …………………………………………………… 4 Table 5. Services as growth driver? ……………………………………………… 5 Table 6. Exports of services (balance of payments), 1999-2004 ……… 8 Table 7. Revealed comparative advantage of the Philippines, 2000 and 2003 …………………………………………………………… 11 Table 8. Embodied and disembodied service trade (in thousand PhP) …………………………………………………………… 13 Table 9. Comparison of OFW remittances with other BOP flows (in million US$) ……………………………………………………………… 13 Table 10. Percentage share of newly deployed OFWs by skill category……………………………………………………………… 14 Table 11. Alien employment permits issued by selected occupation group, Philippines: selected years…………………………………… 16

Chapter 2 Table 1. Number of FAAP- and AACCUP-accredited programs, SY 2002-2003 …………………………………………………………… 27 Table 2. Average number of students per HEI, SY 1994-1995 to 2001-2002 ……………………………………………………………… 27 Table 3. Number of foreign students studying in Philippine HEIs per school year ………………………………………………………… 29 Table 4. Foreign students enrolled in selected Asia-Pacific countries, 2001 …………………………………………………………… 30 Table 5. HEIs with the most number of foreign students, SY 2002-2003 ……………………………………………………………… 30 Table 6. Number of foreign students in Philippine HEIs by national origin …………………………………………………………… 32 Table 7. Number of Americans in Philippine HEIs, SY 1997-2002 …… 32 Table 8. Top 10 courses enrolled in Philippine HEIs by foreign students, SY 2002-2003 ……………………………………………… 33 Table 9. Number of foreign students at AIM’s major degree programs …………………………………………………… 34 Table 10. Growth competitiveness index and components, 2001 ……… 35 Table 11. Current competitiveness index and components, 2001 …… 36 Table 12. Tuition and living costs in the Philippines, 1999, in PhP and US$ ……………………………………………………………… 37 Table 13. Tuition and living costs, selected Asian countries, low-end in US$, 2001 ……………………………………………………… 37

vii Table 14. Tuition and living costs, selected Asian countries, high-end in US$, 2001 …………………………………………………… 38 Table 15. Tuition and living costs across major programs, selected countries, in US$ ……………………………………………… 38 Table 16. An Asia-Pacific regional typology of cross-border education … 39 Table 17. China’s cooperative relations with foreign institutions ………… 42

Chapter 3 Table 1. Median wait time and waitlists for British Columbia, as of 31 March 2005 ……………………………………………………… 58 Table 2. Comparative costs of treatment (in US$) …………………………… 59 Table 3. GATS modes of supply ……………………………………………………… 60 Table 4. Categories of consumers moving abroad …………………………… 64 Table 5. Major health tourism destinations in Asia ………………………… 68 Table 6. Japanese residents overseas: long stayers and permanent retirees ………………………………………………………… 69 Table 7. Summary of how US health plans treat healthcare received abroad …………………………………………………………… 70 Table 8. Investment rules on hospital and insurance companies ……… 74 Table 9. Supply of health professionals ………………………………………… 79 Table 10. Enrollment in medical schools ………………………………………… 79 Table 11. Health and social services in the GATS Scheduling Guidelines and in the UN Central Product Classification (CPC) List ………… 87 Table 12. Overview of commitments for Modes 1, 2, and 3 on medical, health-related, and social services …………………………………… 88 Table 13. Summary of specific commitments in the GATS ………………… 89

Chapter 4 Table 1. Market share of US films in different countries, 2000-2003 ………………………………………………………………… 102 Table 2. Top 10 world box office films, 1900-2005 (in million US$) ……………………………………………………………… 102 Table 3. Top 10 countries producing feature films, 2002 ………………… 103 Table 4. Top 10 countries in film investment, 2002 ……………………… 104 Table 5. Number of screens, 1990-2003 ……………………………………… 107 Table 6. Number of screens in Asia, 2002 …………………………………… 108 Table 7. Breakdown of the television industry’s sources of revenue (in percent) ……………………………………………………… 108 Table 8. Minimum quota requirements for different countries ………… 111 Table 9. Foreign ownership and investment requirements ……………… 112 Table 10. Gross domestic product by industrial origin (in million PhP at constant 1985 prices and at current prices) …………… 115 Table 11. Gross revenue of the audiovisual services sector as of 2001 (in thousand PhP) …………………………………………………………… 115 Table 12. Growth rate of GDP and major sectors, 1994-2003 (based on constant prices with 1985 as the base year) ……… 116 Table 13. Percentage distribution of employees engaged in the AVS sector, 2003 …………………………………………………………… 116 viii Table 14. Employed persons in major industry groups, 2003 …………… 117 Table 15. Regional distribution of employees engaged in the AVS sector, 2003 …………………………………………………… 118 Table 16. Percentage distribution of establishments engaged in the AVS sector, 2003 …………………………………………………… 118 Table 17. Motion picture and video production gross revenue, 2001 ……………………………………………………… 119 Table 18. Television broadcasting and relay stations and studios including closed circuit television services gross revenue, 2001 ……………………………………………………… 119 Table 19. Film contribution to the Philippine economy ……………………… 121 Table 20. Number of movie theater houses and screens …………………… 125 Table 21. Statistics of theatrical films (prints) reviewed by the MTRCB, 1983-2003 ……………………………………………………… 130 Table 22. Statistical distribution of local films based on rating, 2003 …………………………………………………… 130 Table 23. Number of NTC-registered Internet service providers and estimated subscribers, 1996-2004 ………………………… 132 Table 24. Summary of statistics for radio and television broadcasting (in thousand PhP) …………………………………………………………… 135 Table 25. Top 20 television programs (Mega Manila) ………………………… 138 Table 26. Number of cellular mobile telephone subscribers, 2003-2004 ………………………………………………………………… 144 Chapter 5 Table 1. Telecommunications industry’s range of services and number of players ………………………………………………………… 171 Table 2. Major market segments for IOS services …………………………… 173 Table 3. Broadband services in the Philippines, 2001 …………………… 174 Table 4. ISP subscription …………………………………………………………… 175 Table 5. Initiatives of Internet data centers, 2001 ………………………… 176 Table 6. Sample of e-commerce models in the Philippines …………… 177 Table 7. PEZA-registered companies in ICT services, as of 2002 ……… 182 Table 8. Total approved foreign direct investments (in million PhP) … 182 Table 9. Presence of telecommunications companies in the value chain of ICT …………………………………………………………… 196 Table 10. Mainstream value chain activities showing high levels of market concentration ………………………………………………… 197 Table 11. Estimated individual users of ICT …………………………………… 205 Table 12. Number of respondents and ICT users by major industry group, 2001 ………………………………………………………………… 206 Table 13. Regional distribution of telephone lines …………………………… 210 Table 14. Interpretation of Test of English for International Communication (TOEIC) scores ……………………………………… 214 Table 15. Average TOEIC scores by job category, 2004 ……………………… 214 Table 16. Average TOEIC scores of graduating college students of selected universities …………………………………………………… 215

ix Table 17. Number of persons assessed and certified by priority sector …………………………………………………………… 215

Chapter 6 Table 1. Modes of supplying services for cross-border transactions … 230 Table 2. Distribution of inward FDI stock in services (in percent share) ………………………………………………………… 232 Table 3. List of typical BPO services ……………………………………………… 233 Table 4. Offshoring and outsourcing: some definitions …………………… 236 Table 5. Estimated market for BPOs …………………………………………… 238 Table 6. Global market for IT-enabled services (2002 estimates) ……… 239 Table 7. Projected 2005 market for IT-enabled services (in billion US$) ……………………………………………………………… 239 Table 8. Market size of outsourcing, IT-enabled services, and BPO …… 241 Table 9. Summary of Philippine BPO segments ……………………………… 245 Table 10. Comparative call center industry sizes in Asia (in number of seats) ……………………………………………………… 247 Table 11. Representative foreign companies with IT-enabled activities in the Philippines …………………………………………………………… 248 Table 12. Structure of BPO costs …………………………………………………… 251 Table 13. Philippine labor pool statistics ………………………………………… 254 Table 14. Trends in International Mathematics and Science Study, 1999 and 2003 …………………………………………………………… 254 Table 15. Ranking of the Philippines in political factors ……………………… 256 Table 16. Competitiveness of Philippine IT infrastructure ………………… 257 Table 17. Key ICT indicators: Philippines vs. India and the United States …………………………………………………………… 257 Table 18. Annual average salary of call center agents, 2004-2005 …… 260 Table 19. Philippine wage rate statistics (2003 estimates) ………………… 261 Table 20. Overall comparison of labor force attractiveness ……………… 261 Table 21. Workforce demand for IT workers …………………………………… 262 Table 22. Average acceptance and turnover rates by industry, 2003 … 263 Table 23. DTI’s factors for Philippine BPO competitiveness ……………… 264 Table 24. SGV’s Knowledge Institute’s factors for Philippine BPO (call center) competitiveness ……………………………………… 265 Table 25. Factors for Philippine BPO (call center) competitiveness …… 265 Table 26. Overall attractiveness of the Philippines …………………………… 266 Table 27. Overall assessment of Philippine BPO value chain ……………… 268

x List of Figures and Boxes

Chapter 1 Figure 1a. BOP growth index for goods and services, Japan and Korea, 1991-2003 (1991=100) …………………………………………… 10 Figure 1b. Growth index for goods and services, Philippines and World, 1996-2003 (1996=100) …………………………………………… 11

Chapter 4 Figure 1. Evolution of broadcasting with digital technology: the shift in the pattern of media consumption …………………………………… 105 Figure 2. Evolution of broadcasting with digital technology: gatekeepers in the delivery chain ………………………………… 106 Figure 3. Breakdown of the film industry’s sources of revenue ……… 109 Figure 4. Flow of business in the film industry ……………………………… 123 Figure 5. The film production process ………………………………………… 126 Figure 6. Average channel shares for evening programs, 2004 ……… 139 Figure 7. Average channel shares for daytime programs, 2004 ……… 139 Figure 8. Net sales of ABS-CBN global, 2000-2003 ………………………… 142 Figure 9. The Media Plus Programme …………………………………………… 148 Figure 10. Institutional framework of India ……………………………………… 149 Box 1. The success of the hybrid foreign-produced programs ………… 137

Chapter 5 Figure 1. Relationship between Internet penetration rate per 1000 and gross national income ……………………………………………… 166 Figure 2. Internet penetration rate in Southeast Asia ……………………… 166 Figure 3. The methodological framework of the study ……………………… 169 Figure 4. Share of foreign equity investments and portfolio investments in the telecommunications industry to total foreign equity direct and portfolio investments …………………… 172 Figure 5. Fixed and mobile wireless penetration rates, 1996-2010 (in percent) ………………………………………………… 172 Figure 6. Market share of ISPs (end of 2001 estimates) …………………… 175 Figure 7. Market share of computer platform companies in the Philippines …………………………………………………………… 178 Figure 8. Market share of Philippine-based manufacturers of data storage devices ……………………………………………………………… 178 Figure 9. Market share of packaged software companies in the Philippines …………………………………………………………… 179 Figure 10. Market share of customized software companies in the Philippines …………………………………………………………… 180 Figure 11. Market share of IT consultancy companies in the Philippines …………………………………………………………… 180 Figure 12. Global BPO market by 2010 …………………………………………… 181

xi Figure 13. Board of Investments-approved ICT investments (in million US$) ……………………………………………………………… 183 Figure 14. ICT employment in export processing zones ……………………… 184 Figure 15. ICT exports of locators in processing zones ……………………… 184 Figure 16. Broad ICT value chain …………………………………………………… 186 Figure 17. Voice/Web Integration …………………………………………………… 188 Figure 18. Number of fixed and wireless mobile subscribers in Southeast Asia ……………………………………………………………… 189 Figure 19. Market share of digital and analog users in CMTS ……………… 190 Figure 20. Global circuit capacity …………………………………………………… 193 Figure 21. Mobile-to-fixed and fixed-to-mobile interconnection rates (in US$ per minute) ………………………………………………………… 198 Figure 22. Dial-up Internet prices in Southeast Asia (30 hours of use per month in US$, October 2001) …………… 201 Figure 23. Internet access rate per sector, 2002 ………………………………… 207 Figure 24. Relationship between Internet penetration and Internet monthly price ………………………………………………………………… 209 Figure 25. Internet and broadband penetration rates in selected countries ……………………………………………………… 211 Figure 26. Comparison among simple literacy, newspaper readership, and Internet penetration rates ………………………………………… 212 Figure 27. NSAT mean scores in the Philippines, 1997-2000 …………… 213 Figure 28. Relationship between the size of the rural population and Internet penetration rates, 2002 ……………………………… 217

Chapter 6 Figure 1. Outsourcing as a business model …………………………………… 227 Figure 2. Modes of supply under the GATS ……………………………………… 229 Figure 3. Shift in services trade structure (in percent share) ……………… 230 Figure 4. Structure of other commercial services exports (based on 1998 data) …………………………………………………… 231 Figure 5. Shift in the structure of inward FDI stock (in percent share) …………………………………………………………… 232 Figure 6. Gartner’s BPO model ……………………………………………………… 234 Figure 7. Limiting BPO definitions: services-oriented and IT–enabled ……………………………………………………………… 235 Figure 8. Locating BPO ………………………………………………………………… 237 Figure 9. Global BPO market by 2010 …………………………………………… 240 Figure 10. BPO industry structure in the Philippines …………………………… 244 Figure 11. BPO industry value blocks ……………………………………………… 250 Figure 12. Structure of BPO costs …………………………………………………… 250 Figure 13. Population structure by age ……………………………………………… 252 Figure 14. Annual population of college students ……………………………… 253 Figure 15. Graduates by discipline …………………………………………………… 253 Figure 17. Venture capital availability ……………………………………………… 259 Figure 18. Comparative labor costs ………………………………………………… 260 Figure 19. ICT workforce demand growth, 2004-2005 ……………………… 262 xii Figure 20. Educated population as an advantage (math and science) ………………………………………………………… 272 Box 1. Sample definitions of outsourcing …………………………………… 226

Chapter 7 Figure 1. The organizational chart of the TRM ………………………………… 278 Figure 2. The organizational chart of the TCWM ……………………………… 279 Figure 3. The development of negotiating positions ………………………… 280 Figure 4. The dispute processing mechanism ………………………………… 282

xiii List of Appendices

Chapter 3 Appendix A. Brief Profile of Health Tourism in Selected Countries … 90 Appendix B. The Private Hospital Industry in the Philippines …………… 91 Appendix Table B1. Average number of beds in private hospitals … 92 Appendix Figure B1. Total fixed assets of top private hospitals vs. total book value of fixed assets of surveyed establishments in the private healthcare industry (in PhP ‘000) ……………………… 94 Appendix C. Healthcare Financing in the Philippines ……………………… 94 Appendix Figure C1. Distribution of healthcare spending …………… 95 Appendix Figure C2. Personal and public healthcare spending by sources of funds (actual vs. targeted based on health sector) …………………………………………………………………… 96 Appendix Table C1. Output and income coefficients of variation in the healthcare industry and health-related sectors …………… 96

Chapter 4 Appendix A. Gross Revenue of AVS Sector ……………………………………… 151 Appendix B. Television Audience Measurement (TAM) Methodology … 153 Appendix C. List of Television Channels in Metro Manila …………………… 155 Appendix D. Some Insights on the Philippine Film Industry ………………… 156

Chapter 7 Institutional Studies of Different Countries ………………………………………… 298 Appendix A. United States ……………………………………………………………… 298 Appendix Figure 1. Flow of trade dispute settlement in the US ……… 301 Appendix B. European Union …………………………………………………………… 301 Appendix Figure 2. Flow of trade negotiation in the European Union ………………………………………………………………… 304 Appendix Figure 3. Flow of trade dispute settlement in the European Union ………………………………………………………………… 305 Appendix C. Canada………………………………………………………………………… 305 Appendix Figure 4. Flow of trade negotiation in Canada ………………… 306 Appendix Figure 5. Flow of trade dispute settlement in Canada …… 309 Appendix D. Japan…………………………………………………………………………… 309 Appendix figure 6. Flow of trade negotiation in Japan …………………… 312 Appendix E. Malaysia ……………………………………………………………………… 313 Appendix Figure 7. Flow of trade negotiation in Malaysia ……………………… 315

xiv Foreword

This book highlights the new way services are being rendered—their mobility and accessibility across borders. While before, co-workers were just tables away from each other, today, it is not uncommon to work with people who reside in other countries with the Internet as their connection. Health problems or wellness programs and even education are pursued away from one’s country with quality and lower prices as main considerations. The list could actually go on and on. The services sector has now become the fastest growing area in the global economy. A huge number of employment in many countries belongs to this sector and provides 60 percent and more of the global output. In the Philippines, it has outpaced industry and agriculture in terms of growth rates and shares to GDP. Between 2000 and 2005, it grew by an average of 6.3 percent, higher than the growth rates of agriculture and industry at 2.0 and 5.3 percent, respectively. As a result, 47.7 percent of our GDP came from the services sector, again higher than the shares of agriculture and industry. In this volume, the Philippine Institute for Development Studies (PIDS) aims to give a comprehensive analysis of selected subsectors within the services sector. The potentials they have created for the country are highlighted, along with the issues and challenges ahead. For a developing country like the Philippines, whose economic growth these days primarily emanates from the services sector, the further enhancement of this new growth engine will spell greater progress for the country. For instance, in the education arena, the opportunity lies in attracting students from neighboring nations to pursue further studies in the Philippines instead of going to the more expensive Western universities. The Philippines’ strength in the English language, in addition to the inexpensive tuition and living expenses, remains as its competitive advantage. In the health and medical field, the Philippines has a huge potential in the health tourism industry that could very well be the much-needed measure to arrest the worsening internal brain drain. The audiovisual sector, meanwhile, can play a major role in the continued growth of the services sector. While the United States has led the pack all these years with its “Hollywood” fame, India has been exporting many of its movies to different parts of the world and is quite successful with its own “Bollywood.” For the Philippines, it may still be a long road to follow suit but definitely a path worth taking. Likewise with the business process outsourcing sector, which includes the contact center industry, animation, finances, software development, and other works that have helped ease some of the nation’s unemployment problem. These can be seen as an alternative to overseas employment. Of course, integral to all of these is the information and communication technology sector that provides the necessary infrastructure support to the

xv services sector in the country. In view of this, it is critical that the appropriate parties urgently address the various issues, in particular, competition issues, that seriously restrain the full blossoming of this subsector’s potential. In addition, to help in making the overall services sector more globally competitive, there are issues in the international negotiating arena that the Philippines could advance. Crucial for the country to do so is to have, first and foremost, a strong, well-prepared, and capable negotiating entity that will intelligently articulate the country’s concerns. The issues related to this are boldly tackled in a chapter in this volume. I hope that what PIDS has started in this book will contribute to making a deeper understanding of the services sector and the big role it plays in the country’s economic development. Further research, publication, and other activities to support the growth of the service sector are, of course, highly welcome. My deepest gratitude for the generous support of the GTZ office in Manila— our co-publisher of this volume—particularly the Trade Policy and Trade Promotion Project headed by Ms. Anja Gomm; to Dr. Dante Canlas, Dr. Cayetano Paderanga, Jr., Dr. Joy Abrenica, and Dr. Aniceto Orbeta, Jr. for sharing their time and expertise in reviewing the chapters of this book; to Dr. Gloria Pasadilla for her dedication in leading this project and serving as its overall technical editor; and to Dr. Mario Lamberte, former PIDS president, for providing the vision on the importance of a research project on services and for his unwavering support in this endeavor. Finally, this book is dedicated to all the actors and stakeholders involved in the services sector. We hope that what is said in this volume will further push them to make the sector not only continue to grow but to fly.

JOSEF T. YAP President, PIDS

August 2006

xvi Foreword

The increase in services trade in the international economy and the growing relevance of international trade negotiations in the services sector have profound consequences for the growth and development of Philippine economy. For society as a whole, greater trade in services can signify reduced welfare costs of overpriced services in monopolistic/closed sectors, improved and increased human capacity building through the transfer of knowledge and job creation, and increased individual and overall income. For businesses, services trade provides the opportunity to tap a larger foreign market, and to learn state-of-the art products, processes, and services. The services sector’s strong interlinkages with the goods sector, coupled with exposure to foreign capital, know-how, and business partnerships, can fan growth to the domestic economy. On the other hand, the government also stands to benefit from a growing and carefully outward-oriented services sector through additional income and employment. The Philippines still needs to grow and exploit its competitive advantages, evidenced in the prevailing lack of domestic employment opportunities forcing many Filipinos to look for jobs abroad and join the large number of overseas foreign workers. The services sector’s share in GDP and employment has grown dramatically over the years; yet, there is still a need to actualize the full potentials of the sector. Given the significance of international trade in services, it is important to identify some determinants of the competitive advantages of services and how they apply to the Philippines. These determinants of growth in services trade include greater competition, better domestic supply structures, greater foreign market access and demand, and improved regulation. First, the state of the services sector can be improved with healthy competition. Lack of competition creates inefficiencies in services provision that cause high prices and unbalanced bargaining positions. In this regard, there is a need to allow more market entry and to create a coherent, clear, and comprehensive framework for competition to better ensure predictability. Second, domestic supply structures must be reliable for international investors if the services sector is to grow internationally. Service suppliers and exporters have to be strategically linked in sufficient quantity. They need to be aware of their mutual dependence (to meet market demands) and their need for independence (maintaining flexibility and enabling innovation). Small and medium enterprises (SMEs) are potential suppliers but there is a need for a better mechanism to channel the multitude of interests that they have in the services trade. Large companies have a voice in the national platform for policy debate and trade regimes. But should they be the only ones equipped to take advantage of windows of opportunity in services trade? The quality of linkages between service sector actors and other relevant factors (i.e., technology, prudent banking products tailored for service sector xvii needs, high skills, and access to foreign know-how, among others) is another important aspect. These high-value linkages also need to be established with the large population of overseas foreign workers. Being a source of capital, know-how, and experience, they are a strategic asset and therefore should be systematically tapped Third, foreign markets need to be understood in the evaluation of potentials for growth in global markets. As such, information on both opportunities and barriers to trade is crucial in the assessment of potentials in these markets. Existing expertise in the country must be pooled and coordinated in a way that allows all players—policymakers and entrepreneurs—to benefit and base their decisions on sound analyses. Finally, the government and the private sector should undertake measures to improve services sector regulations. The government has already taken regulatory reforms in various service sectors such as finance, telecommunications, transport and energy but more needs to be done and more sectors should be included in such reforms. Parallel to this, regulatory capacities need to strengthened in order to ensure the independence and competence of relevant regulatory bodies. In export and investment promotion, greater focus should be given to “existing winners” and not on creating winners given the public budget restrictions. The choice of winners should be determined mainly by the global market. The country’s comparatively liberal trade and investment regime can be used as an advantage against regional competitors. For example, easing the limits on entry and foreign ownership in certain sectors can attract more foreign investments and hasten the growth of the sector. Unfortunately, all the prospects and potential of the services sector are not very clearly understood. Because of the heterogeneous nature of the sector, trade negotiations become difficult and complex to communicate. Thus, the Philippines’ services sector must be studied in detail so that the country can better position itself in international trade in services negotiations and developments in the global market. The first step to any progress is knowledge. This publication can be seen as a first step to increase appreciation and understanding of the services trade and improve the analytical base for decisionmaking.

ANJA GOMM Manager, Trade Policy and Trade Promotion Project German Technical Cooperation (GTZ)

August 2006 xviii Acronyms

AACCUP Accrediting Agency of Chartered Colleges and Universities in the Philippines AACSB Association to Advance College Schools of Business ABC 5 Associated Broadcasting Network ABS-CBN 2 Alto Broadcasting System-Chronicle Broadcasting Network ACSC-AAI Association of Christian Schools and Colleges-Accrediting Agency, Inc. ADB Asian Development Bank AEP alien employment permit AIM Asian Institute of Management APEC Asia-Pacific Economic Cooperation ARMM Autonomous Region of Muslim Mindanao ASEAN Association of Southeast Asian Nations AVS audiovisual services AXN Action Network BITR Bureau of International Trade Relations BOI Board of Investments BOP balance of payments BPO business process outsourcing BSP Bangko Sentral ng Pilipinas CAS conditional access system CBFC Central Board of Film Certification (India) CCI current competitiveness index CHED Commission on Higher Education CICT Commission on Information and Communications Technology CIIT Canadian International Trade Tribunal CITEM Center for International Trade Expositions and Missions CMTS cellular mobile telephone system CNC Centre National de la Cinématographie COD Centers of Development COE Centers of Excellence COREPER Committee of Permanent Representatives (European Union) CPC Central Product Classification CPE continuing professional education DepEd Department of Education DFA Department of Foreign Affairs DFAIT Department of Foreign Affairs and International Trade (Canada) DFF Directorate of Film Festivals (India) DICT Department of Information and Communications Technology DOH Department of Health DOT Department of Tourism DOTC Department of Transportation and Communication DSL digital subscriber line DTH direct-to-home DTI Department of Trade and Industry xix EDGE enhanced data rates for GSM revolution EDR E-commerce Development Report ENT economic needs tests EPG electronic program guide EQUIS European Quality Improvement System ES establishment survey ESPN Entertainment and Sports Programming Network ETPI Eastern Telecommunications Philippines, Inc. EU European Union FAAP Federation of Accrediting Associations in the Philippines FAC Foreign Affairs Canada FAMAS Filipino Academy for Movie Arts and Sciences FAP Film Academy of the Philippines FCC Federal Communications Commission FDCP Film Development Council of the Philippines FDIs foreign direct investments FIT-ED Foundation for Information Technology Education and Development FTA free trade agreement GATS General Agreement on Trade in Services GCI growth competitiveness index GDP gross domestic product GMA 7 Republic Broadcasting System, Inc. GNP gross national product GOCCs government owned and controlled corporations GRPS general packet radio service GSM global system for mobile communications GVA gross value added HBO Home Box Office HEIs higher education institutions HIDF National Health Industry Development Forum HIPAA Health Insurance Portability and Accountability Act HMOs health maintenance organizations IAS International Affairs Services IBC 13 Intercontinental Broadcasting Corporation, Inc. ICHEFAP International Comparative Higher Education Finance and Accessibility Project ICT information and communication technologies IDC International Data Corporation IDCs Internet data centers IDP International Development Programme IGF International Gateway Facilities IMF International Monetary Fund (IMF) IOS Internet over satellite IPP Investments Priorities Plan ISPs Internet service providers ISR international simple resale ITCan International Trade Canada ITECC Information Technology and Electronic Commerce Council xx ITES IT-enabled services ITU International Telecommunications Union IX Internet exchange JPEPA Japan-Philippines Economic Partnership Agreement KAPP Katipunan ng mga Artista ng Pelikulang Pilipino KBP Kapisanan ng mga Brodkaster ng Pilipinas KDPP Kapisanan ng mga Director ng Pelikulang Pilipino KNTO Korean National Tourism Organization LGUs local government units MAFF Ministry of Agriculture, Fishery and Forestry (Japan) MATRADE Malaysian External Trade Corporation METI Ministry of Economy, Trade and Industry (Japan) MIB Ministry of Information and Broadcasting (India) MICE meetings, incentives, conferences and events MIT Massachusetts Institute of Technology MITI Ministry of International Trade and Industry (Malaysia) MIX Manila Internet exchange MMS multimedia services MoF Ministry of Finance (Japan) MoFA Ministry of Foreign Affairs (Japan) MPDAP Movie Producers and Distributors Association of the Philippines MRA mutual recognition agreements MSITS Manual on Statistics of International Trade in Services MTRCB Movie and Television Review and Classification Board MTV Music Television NAFTA North American Free Trade Agreement NAPs network access points NASSCOM National Association of Software and Service Companies (India) NCR National Capital Region NEDA National Economic Development Authority NES network-enabled services NFDC National Film Development Corporation (India) NGOs nongovernmental organizations NSAT National Secondary Achievement Test NSO National Statistics Office NTC National Telecommunications Commission NTU Nanyang Technological University NUS National University of Singapore OCWs overseas contract workers OECD Organisation for Economic Co-operation and Development OFWs overseas Filipino workers OMB Optical Media Board PAASCU Philippine Accrediting Association of Schools, Colleges, and Universities PACU-COA Philippine Association of Colleges and Universities– Commissionon Accreditation PC personal computer PCPC Philippine Centralized Product Classification PEZA Philippine Economic Zone Authority xxi PHIX Philippine Internet Exchange PIDS Philippine Institute for Development Studies PIM Program in International Management PISO Philippine Internet Services Organization PLDT Philippine Long Distance Telephone Company PMPC Philippine Movie Press Club PMPPA Philippine Motion Picture Producers Association PRA Philippine Retirement Authority PRC Professional Regulation Commission PSIC Philippine Standard Industrial Classification Code RCA revealed comparative advantage RPN 9 Radio Philippine Network RTAs regional trade agreements SA Standards Authority SAGITs Sectoral Advisory Groups on International Trade SAS service areas scheme SIAs sustainability impact assessments SMS short message services; subscriber management system SMU Singapore Management University SPS sanitary and phytosanitary standards STCW Standard of Training, Certification and Watch-Keeping for Seafarers SUCs state universities and colleges SWOT strengths, weaknesses, opportunities, threats TCWM Technical Committee on WTO Matters TELOF Telecommunications Office TESDA Technical Education Skills Development Authority TFC The Filipino Channel TNCs transnational companies TOEIC Test of English for International Communication TPRG Trade Policy Review Group (United States) TPSC Trade Policy Staff Committee (United States) TRM tariff and related matters TWF Television Without Frontiers UK United Kingdom UN United Nations UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organization US United States USF Universal Service Fund USITC US International Trade Commission USTR United States Trade Representative VAS value-added services VCRs video cassette recorders VoIP voice-over-Internet protocol VRB Videogram Regulatory Board WAP wireless access protocol WTO World Trade Organization xxii Chapter 1: Overview 1 11

Overview: A Look at Services Trade in the Philippines

Gloria O. Pasadilla

Why study services? When the Philippine Institute for Development Studies (PIDS) embarked on this project to study the services sector in the Philippines, we considered three important reasons: first, because services, now, has the dominant share in the economy of many countries; second, because it evidently shows huge export possibilities for middle-income developing countries; and third, because, unlike manufacturing, there is relatively little indepth knowledge about the services sector. That services would dominate the economies of rich countries has long been predicted. It had almost been an unquestioned dogma in development economics that as the economy grows, the share of agriculture in the economy shrinks, while the shares of manufacturing and of services increase. Further growth eventually makes services the main motor of the economy, edging out the pre-eminent place of manufacturing in the economy. In the United States (US) and in other developed economies, this trend has indeed been observed. In the Organisation for Economic Co-operation and Development (OECD) markets, services now account for 67 percent share of the economy, while manufacturing accounts for only 30 percent, and agriculture virtually accounts for an insignificant proportion of the gross domestic product (GDP). What has not been predicted is how quickly developing countries would catch up with the trend of having services dominate the other sectors, which seems to be happening now. The economies of the Association of Southeast Asian Nations (ASEAN), for example, are now highly dependent on services, albeit with still less proportional share in GDP than those of the OECD economies. Partly, the reason for the fast growth of the services sector in middle- income countries could be exports. Services exports, incomplete data notwithstanding, have ballooned starting in the mid-1980s. Global trade in commercial services, those that are captured by the balance of payments (BOP) accounts, rose from less than US$400 billion in the early 1980s to US$1.6 trillion in 2002. Commercial services exports’ share to total exports of high- income economies averaged more than 21 percent from 1998 to 2001, and had grown steadily from 17 percent in 1980. Low- and middle-income countries’ 2 The Global Challenge in Services Trade commercial services exports, on the other hand, grew from 11 percent of its total exports to 14 percent in 2001. With technological advances, these are seeking to take a more significant share of global trade in services, thanks to global outsourcing activities of multinational and big domestic firms in rich countries, especially in the US. In the Philippines, services now take about more than 50 percent share of GDP. Like other developing countries, the Philippines is looking at the huge export potential for outsourced service activities, travel demands for services, as well as foreign employment possibilities for a burgeoning and increasingly mobile Filipino population.

IMPORTANCE OF SERVICES IN THE ECONOMY: SOME FACTS AND FIGURES Services sector is now the dominant source of growth in the Philippines and in the ASEAN economies. ASEAN’s share of services to GDP has dominated manufacturing and agriculture for more than a decade. Since 2000, it has averaged close to 50 percent of GDP and showed the fastest growth compared to agriculture and manufacturing. In the Philippines, services have been the fastest growing sector, bagging the greatest share in GDP since the 1990s (Table 1). This share, though large at 53 percent of GDP in 2004, still pales in comparison to the share of services in the economy of developed markets.

Table 1. Sector share to GDP (in percent) 1990-1994 1995-1999 2000-2004

OECD (average) Agriculture 5.3 4.5 3.7 Industry 32.3 30.5 29.5 Services 62.4 65.0 66.8

ASEAN 5 (average) Agriculture 16.3 11.7 10.1 Industry 38.3 38.9 40.8 Services 45.3 49.4 49.1

Philippines (average) Agriculture 21.7 19.0 15.0 Industry 33.3 31.7 32.4 Services 45.0 49.3 52.6 In nominal terms. Source: World Bank (2005). Chapter 1: Overview 3

In terms of employment, the services sector has also contributed a substantial number of jobs and is the biggest source of employment in the Philippines and ASEAN. In the Philippines, about 50 percent of the labor force is employed in services sector, one-third of which are in wholesale and retail trade, another third in community, social, and personal services, and the rest in other services sectors. In developed countries, 65 percent are in services (Table 2).

Table 2. Sector share in employment (in percent) 1990-1994 1995-1999 2000-2004

OECD (average) Agriculture 9.9 8.4 7.4 Industry 29.7 28.1 27.5 Services 60.0 63.0 64.8

ASEAN 5 (average) Agriculture 36.0 30.8 29.9 Industry 22.3 23.1 22.8 Services 41.6 46.0 47.1

Philippines (average) Agriculture 45.3 40.8 37.4 Industry 15.7 16.2 15.8 Services 39.0 43.0 46.8 Source: World Bank (2005).

Foreign direct investments (FDIs) have also markedly shifted from manufacturing to services. UNCTAD (2004) reports that in 2002, services account for 60 percent of total inward FDI stock, 66 percent of FDI inflows, and 70 percent of FDI outflows. Selected countries in the Asia-Pacific also show an increased share of FDI stock in services, except for China, where manufacturing retains the lion share of FDI. In the Philippines, manufacturing and services take 55 and 28 percent of FDI, respectively, in 1995, but in 2002, their respective shares have changed to 39 and 44 percent (Table 3). In the spending pattern of Philippine households, services hold the second- to-the-largest share in average expenditures. Although food remains the biggest single expenditure of most households, services come next, with 23 percent of expenditures. For wealthier families, the share of food is less than the country average of 44 percent while that of services is markedly higher. Of the services expenditures, education, telecommunication and transportation, and fuel and energy expenditures take the greatest chunk of household expenses (Table 4). But how important is services as a growth driver? The analysis of Pasadilla and Liao (2006) indicates that manufacturing, not services, remains the most important growth-inducing sector of the economy. Analyzing forward and 4 The Global Challenge in Services Trade

Table 3. Distribution of FDI stock by industry (in percent) 1995 2002 Economy Primary Manufacturing Services Unspecified Primary Manufacturing Services Unspecified

Chinaa 1.6b 58.5b 36.1b 3.8b 1.9 63.3 31.4 3.4 Hong Kong, China - 8.3 91.7 - - 2.8 93.0 4.3 India 7.9 83.4 8.7 - - - - - Indonesia 18.2 64.5 17.2 - - - .. - Macao, Chinac - - - - - 12.6 87.4 - Malaysiad 4.5 52.7 33.5 9.3 24.0 38.0 38.0 - Pakistane 2.1 24.5 73.4 - 6.1 22.2 71.7 - Philippines 17.0 55.0 28.0 - 10.9 39.3 43.9 5.9 Republic of Korea 0.2 62.2 35.2 2.4 0.5 57.4 42.0 0.1 Singaporef - 38.2 61.7 - - 36.1 63.8 - Sri Lankag - 56.8 43.2 - - 41.0 59.0 - Thailand 6.0 36.6 57.4 -0.9 2.4 37.7 56.8 3.1 Source: UNCTAD (2004). a Based on cumulative approved FDI flows since 1979. b Based on cumulative approved FDI flows during 1979-1997. c Based on stock of 2001. d Based on application of the proportion of gross FDI stock by sector for the period 1998-2002 to 2002. e 2001 data are 1995 stock values plus cumulative flows during 1996-2001. f Data for 1995 comprise equity investment (i.e.paid-up shares and reserves) only. Data for 2001 and 2002 incorporate net lending from foreign investors to their affiliates in Singapore. Data for 2002 are preliminary. g Data refer to estimated foreign investments in projects approved by the BOI since 1978.

Table 4. Average family expenditures by income class in the Philippines, 2000 Expenditure group All income Under P20,000- P30,000- P40,000- P50,000- P60,000- P80,000- P100,000- P250,000- and area class P20,000 P29,999 P39,999 P49,999 P59,999 P79,999 P99,999 P249,999 and over

Total no. of families (‘000) 15,270 365 837 1,171 1,389 1,196 1,983 1,496 4,813 2,021 Percent of families (%) 100.0 2.4 5.5 7.7 9.1 7.8 13.0 9.8 31.5 13.2 Average expenditures (PhP) 118,002 16,955 27,173 36,559 45,514 53,602 65,555 81,671 132,779 352,146 Percent of expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Food 43.6 65.5 64.0 63.5 61.9 60.4 57.8 54.4 46.8 31.2 Alcoholic beverages 0.7 1.1 1.2 1.2 1.1 1.2 1.1 1.0 0.7 0.4 Tobacco 1.1 1.5 1.7 1.8 1.8 2.0 1.9 1.8 1.2 0.5 Services 22.9 14.0 14.0 14.1 14.6 15.2 16.7 17.9 21.6 28.5 Fuel, light and water 6.3 7.3 7.2 6.6 6.5 6.5 6.7 6.9 6.8 5.5 Transportation and communications 6.8 2.2 2.2 2.6 2.7 2.9 3.6 4.2 6.0 9.8 Household operations 2.3 2.2 2.1 1.9 1.7 1.7 1.6 1.5 1.7 3.3 Education 4.2 0.7 0.9 1.2 1.6 1.9 2.3 2.6 4.0 5.8 Recreation 0.5 0.1 0.1 0.1 0.1 0.2 0.2 0.3 0.4 0.7 Medical care 1.9 1.1 1.0 1.1 1.3 1.3 1.5 1.6 1.9 2.3 House maintenance and minor repairs 0.9 0.4 0.5 0.6 0.7 0.7 0.8 0.8 0.8 1.1 Personal care and effects 3.6 2.3 2.8 3.0 3.3 3.6 3.8 4.0 4.0 3.3 Clothing, footwear and other wear 2.7 1.5 2.0 2.2 2.4 2.6 2.7 2.7 2.8 2.7 Nondurable furnishings 0.2 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 Durable furniture and equipment 2.5 - 0.1 0.3 0.7 0.6 1.1 1.6 2.2 3.6 Rent/rental value of occupied dwelling unit 14.2 8.0 7.8 8.1 8.3 8.7 9.7 11.4 13.2 18.2 Taxes paid 2.1 0.3 0.2 0.2 0.2 0.2 0.2 0.4 1.4 4.1 Miscellaneous expenditures 3.3 1.3 1.8 1.9 2.1 2.4 2.6 2.9 3.5 3.8 Other expenditures 2.9 4.3 4.4 3.7 3.2 2.8 2.1 1.8 2.6 3.5 Source: D0LE (2000). Chapter 1: Overview 5 backward linkages and multipliers from the 1994 Philippine input-output table, manufacturing shows greater links to the economy and can create more direct and indirect effects. Table 5 shows that for every unit change in final demand in manufacturing, overall output increases by 2.5, while in the case of a unit change in services demand, economic output increases by only 1.8. These linkages and multipliers, however, may change as a new input-output table that would presumably incorporate the change in economic structure and the growth in the services sector throughout the 1990s comes out soon. To summarize, services has grown in importance in terms of its share to GDP, employment, FDI, and even average expenditures of Philippine households. But based on a somewhat dated input-output table, it has not yet edged out manufacturing in terms of its linkages in the economy and of its direct and indirect effects.

Table 5. Services as growth driver? Forward Backward Multipliers Linkages Linkages Agriculture 0.8461 0.9778 1.7277 Manufacturing 1.8011 1.6867 2.5333 Services 1.1313 1.1461 1.8119 Source: Pasadilla and Liao (2006). Note: Based on 1994 Philippine input-output table.

PROSPECTS OF SERVICES AS DOLLAR EARNER For developing countries like the Philippines, the exciting aspect of growth in services is its strong potential as a major dollar earner. Globalization of services and advances in telecommunications technology have made many erstwhile nontradable activities like accounting services, medical consultation, education, or architecture services, to cite but a few, tradable. To the extent that service activities rely on a huge number of skilled manpower, developing economies endowed with these resources possess some comparative advantage. This explains the huge shift of FDI on services described above, owing partly to the outsourcing activities from developed countries. Besides technological development, the huge wage gap between professionals, say in the medical field, and in the cost of certain services (e.g., surgery), is fuelling a new trend called medical tourism, whereby citizens from developed countries travel to a middle-income country to undergo surgeries/ treatments where cost is usually a bare fraction of what they would have to pay in their home countries. Finally, the demographic trend in most developed countries is likewise leading to new demands for retirement and recreational facilities that are friendly to retirees. Most often, these entail the availability of trained caregivers and medical professionals to cater to the needs of the elderly. 6 The Global Challenge in Services Trade

Of the developing countries in the Asia-Pacific, India has been most successful, particularly in bagging technology-related service business, while China and the Philippines are actively seeking to emulate India’s example. Thailand and other middle-income countries are also trying to lure more tourists into medical tourism and retirement communities. The advantages of these countries are their large educated population and good infrastructure support services like telecommunications facilities, and medical and recreational facilities. Receipts and economic contributions from these relatively new services export activities are, unfortunately, hard to compute. First, the reporting mechanism of many central banks, including that of the Philippines, which tracks down BOP flows, does not specify business process outsourced (BPO) activities but rather lumps these together with the “other business services” category along with other foreign exchange flows. Second, the World Trade Organization (WTO) General Agreement on Trade in Services (GATS) stipulates different trade in services by mode of supply. In most countries, the services trade that gets reported in the BOP are only those supplied by mode 1 (cross- border exports) and mode 2 (consumption of services abroad). Figures for mode 4 services supply or payment for services rendered by Filipino professionals working abroad are available but are reported elsewhere in the BOP or in other economic accounts, and would require some reclassification to add up total services trade. The more difficult figure to capture is services supply by mode 3 (service activities in the domestic market by foreign-owned establishments) because these are not currently collected by statistics agencies in the developing world. Because of the importance of the GATS, we briefly discuss next the WTO agreement governing trade in services.

GATS and Measurement of Services Trade The GATS is the set of multilateral rules that govern international trade in services (excluding governmental services). The agreement defines four modes of delivering services. Mode 1 or cross-border supply is akin to trade in goods where services are supplied from one country to another. Examples are services by call centers in the Philippines attending to consumers abroad via telecommunication or internet. Mode 2 (consumption abroad) is when consumers use services outside their own country. Examples are hotel and accommodation expenses by tourists in the Philippines. Mode 3 (commercial presence) is when a foreign company establishes subsidiaries or branches in another country. Examples are banking services by foreign-owned banks in the Philippines. Mode 4 (movement of natural persons) is when a service provider moves temporarily into the territory of the consumer to provide the service. Example is the short- term employment of construction workers and domestic helpers in Hong Kong. The way the GATS defines services differs from how BOP statistics are collected and reported. First, as previously mentioned, most of services trade data derived from the BOP of countries cover only those of modes 1 and 2, and Chapter 1: Overview 7 exclude those of modes 3 and 4. Usually, the trade in commercial services takes the form of cross-border trade (mode 1), except for receipts from tourism which is mode 2. Besides, the methodologies and definitions of commercial services employed by countries varied in the past, making the comparability of these data across countries difficult. Second, service supply using mode 3 is not recorded in the BOP, and, to date, only a handful of countries are able to collect data on the sales of foreign affiliates in the host economy. These mode 3 types of activities, if collected, nevertheless, remain outside of the BOP, but are rather reported as a mere supplement to gain a better picture of a country’s international trade in services according to the GATS typology. Currently, in the Philippines, construction services are classified under mode 3 receipts in so far as this usually requires commercial presence (establishment of a subsidiary or branch) in the host countries. This is thoroughly inadequate, especially considering that more and more Filipino food and retail companies are opening franchise operations in other countries like the US, China, and the Middle East. These franchise operations are a form of FDI outward flows, but whose sales activities abroad should be considered receipts under mode 3. This type of data is not available, however. Third, remittances of workers abroad are captured in the current account, but the definitions somewhat differ between the BOP manual and the GATS. For example, temporary workers, according to the GATS, can be those working abroad for up to five years, while as per the residency rule of the International Monetary Fund (IMF) BOP Manual, temporary workers are those employed for a year or less. Beyond this, earnings abroad no longer appear as part of the current account transactions in the BOP. Moreover, the record of remittances in the BOP does not distinguish between remittances from Filipino workers abroad and emigrants. The latter, according to the GATS, are not supposed to be considered part of international services trade. Finally, some services trade transactions can be carried out by using different modes. For example, many computer-related services may deliver their program codes through mode 1, yet a portion of that might have used mode 4 service supply, as in the case of computer engineers doing on-site analysis of computer software needs of clients abroad before doing the program codes back in the home country. The new Manual on Statistics of International Trade in Services (MSITS) proposes a simple approach in these cases by allocating the service to the most important mode in terms of time and resources associated with it. In the example above, almost always, computer-related services are classified under mode 1.

Trade in Services

Preliminary estimates A look at the commercial services trade statistics and the reclassified GATS- compatible statistics provides some interesting observations (Table 6). While in total services exports, there is no discrepancy between the two when only modes 8 The Global Challenge in Services Trade

Table 6. Exports of services (balance of payments), 1999-2004

Mode of Supply 1999 2000 2001 2002 2003 2004

Mode 1: Cross-border supply 1428 1650 1645 1749 1809 2062 Transportation 862 1018 976 928 951 1090 Communication services 142 182 328 427 433 487 Insurance services 12 12 12 12 12 12 Financial services 67 80 33 32 38 43 Computer and information services 57 76 22 37 28 33 Royalties and license fees 6 7 1 1 4 11 Other business services 271 263 258 305 334 379 Personal, cultural and recreational services 11 12 15 7 9 7

Mode 2: Consumption abroad Travel 2578 2156 1742 1761 1544 2017

Mode 3: Commercial presence Construction services 58 97 64 30 48 71

Mode 4: Presence of natural persons 7599 8625 9214 10102 10643 11013 Compensation of employees (M4)a 1442 1976 2472 2606 2624 2763 Workers’ remittances (M4) 6157 6649 6742 7496 8019 8250

Total services exports (TSE) 4064 3903 3451 3540 3401 4150 Total services exports (TSE M4) 11663 12528 12665 13642 14044 15163

% Share to TSE

Mode 1: Cross-border supply 12.24 13.17 12.99 12.82 12.88 13.6 Transportation 21.21 26.08 28.28 26.21 27.96 26.27 Communication services 3.49 4.66 9.5 12.06 12.73 11.73 Insurance services 0.30 0.31 0.35 0.34 0.35 0.29 Financial services 1.65 2.05 0.96 0.9 1.12 1.04 Computer and information services 1.40 1.95 0.64 1.05 0.82 0.80 Royalties and license fees 0.15 0.18 0.03 0.03 0.12 0.27 Other business services 6.67 6.74 7.48 8.62 9.82 9.13 Personal, cultural and recreational services 0.27 0.31 0.43 0.2 0.26 0.17

Mode 2: Consumption abroad Travel 63.44 55.24 50.48 49.75 45.4 48.6

Mode 3: Commercial presence Construction services 1.43 2.49 1.85 0.85 1.41 1.71

Mode 4: Presence of natural personsa 65.15 68.85 72.75 74.05 75.78 72.63 Compensation of employees (M4) 12.36 15.77 19.52 19.1 18.68 18.22 Workers’ remittances (M4) 52.79 53.07 53.23 54.95 57.1 54.41

Total services exports (TSE) 100.00 100.00 100.00 100.00 100.00 100.00 Chapter 1: Overview 9

Table 6. (continued) Mode of Supply Coverage 1999 2000 2001 2002 2003 2004

Growth Rate (in %)

Mode 1: Cross-border supply 15.55 -0.3 6.32 3.43 13.99 Transportation 18.10 -4.13 -4.92 2.48 14.62 Communication services 28.17 80.22 30.18 1.41 12.47 Insurance services 0.00 0.00 0.00 0.00 0.00 Financial services 19.40 -58.75 -3.03 18.75 13.16 Computer and information services 33.33 -71.05 68.18 -24.32 17.86 Royalties and license fees 16.67 -85.71 0.00 300.00 175.00 Other business services -2.95 -1.9 18.22 9.51 13.47 Personal, cultural and recreational services 9.09 25 -53.33 28.57 -22.22

Mode 2: Consumption abroad Travel -16.37 -19.2 1.09 -12.32 30.63

Mode 3: Commercial presence Construction services 67.24 -34.02 -53.13 30 47.92

Mode 4: Presence of natural persons 13.50 6.83 9.64 5.36 3.48 Compensation of employees (M4) 37.03 25.1 5.42 0.69 5.3 Workers’ remittances (M4) 7.99 1.4 11.18 6.98 2.88

Total services exports (TSE) -3.96 -11.58 2.58 -3.93 22.02 Total services exports (TSE M4) 7.42 1.09 7.71 2.95 7.97 Source: BSP (2005). a Share to TSE M4.

1 to 3 are considered, this total increases by almost fivefold when mode 4 is added. In 2004, total services exports without mode 4 amount to four billion US dollars, but with mode 4, it shoots up to more than 15 billion US dollars. This implies that the BOP statistics under-reports the economic contribution of services trade without receipts from mode 4 service supply which, alone, constitutes more than 70 percent of total exports of services, dwarfing the contribution of travel receipts and transportation and communication. Moreover, growth in services exports has not been consistently positive since 1999, but when mode 4 is included in the reckoning, growth has been positive since 2000. Almost half of commercial services exports come from travel receipts1 which is a mode 2 services export. Transportation and communication constitute almost a third of commercial services exports, while other business services (where IT-enabled services presumably fall under) is less than 10 percent.

1 The BSP, howerever, does not distinguish between goods and services purchased by travelers. Hence, this entry may be overestimated (BSP 2005). . 10 The Global Challenge in Services Trade

Contribution to services exports receipts from mode 3 is expected to be small in the case of the Philippines. As of now, included in the BOP accounts for mode 3 are only construction services, not the sales activities of Filipino-owned branches or franchises abroad. These estimates may still change as the BOP data-gathering methodology of services transactions improves.

Goods vs. services In other countries, services exports2 have increased faster than goods trade. For instance, both in Japan and Korea, and in most advanced economies, growth index of services exports in the 1990s exceeds that of goods (Figure 1a). Because of poor and developing countries’ influence, global trade in services has grown only apace with trade in goods, not exceeding it, unlike the picture in the richer countries. In the Philippines, despite the perceived potential of services exports, growth has, so far, not gone beyond growth of exports of goods (Figure 1b), and, in fact, seems to have declined after 1997. This may be partly due to poor accounting or underestimation of trade in services in the BOP accounts, and partly due to the fact that when it comes to services, except for a few niche areas like call centers, the comparative advantage of the country does not generally lie in services.

Figure 1a. BOP growth index for goods and services, Japan and Korea, 1991-2003 (1991=100)

Source: IMF Balance of Payments Statistics, various years.

2 In the foregoing discussion, services trade means only commercial services trade as reported in the BOP. Chapter 1: Overview 11

Figure 1b. Growth index for goods and services, Philippines and World, 1996-2003 (1996=100)

Source: IMF Balance of Payments Statistics, various years.

Table 7. Revealed comparative advantage of the Philippines, 2000 and 2003 2000 2003

Services 0.48 0.39 Transportation 0.47 0.35 Travel 0.88 0.68 Other Services 0.29 0.32 Communication 0.97 3.09 Construction 0.89 0.41 Insurance 0.45 0.29 Financial 0.16 0.19 Computer and information 0.33 0.09 Royalties 0.06 0.02 Other business services 0.20 0.15 Personal, etc. 0.47 0.13

Source: Author’s own computation based on IMF Balance of Payments Statistics, various years.

Table 7 shows a computed revealed comparative advantage (RCA)3 index for services in the Philippines for 2000 and 2003. Except for communication services, which exceeded 1.0 in 2003, perhaps reflecting the call service centers

3 RCA was computed as RCAij = (Xij / Xit) / (Xwj / Xwt) where Xij is the values of country i’s exports of product j and Xwj is the world exports of product j while Xit and Xwt is the country’s total exports and world total exports, respectively. 12 The Global Challenge in Services Trade operations, all the other services sectors show RCA index below 1.0, indicating that the Philippines has no comparative advantage in these sectors. That the Philippines’ comparative advantage does not lie in services is not a surprise, if you think of services as financial and insurance services, communications, and transportations, where huge capital investments are usually required and which, historically, have been dominated by multinationals based in developed countries. But in certain niches of services that require huge skilled manpower requirement, the Philippines might, indeed, have comparative advantage, as the RCA for communication services sector perhaps indicates.

Embodied and disembodied services trade Another type of service trade may be indirect, in the form of embodied services trade. This is because export goods use producer services as inputs, for example, garment exports use design and engineering services, advertising, as well as accounting services, to name a few. In developed economies, the share of services in export goods production has risen, adding to the types of services traded internationally, although this time, in the form of goods trade. The computation of disembodied and embodied (or direct and indirect) services trade using the input-output table4 data is shown in Table 8. In other countries that have huge manufactured goods exports like Japan, embodied services exports exceed that of direct (disembodied) services exports, but not so with the Philippines. Direct trade in services, based on 1994 data, is almost double

Table 8. Embodied and disembodied service trade (in thousand PhP) Disembodied service trade Embodied service trade Export Import Net export Export Import Net export

Construction 1,430,789 -4,622,060 -3,191,271 2,240,736 -4531,795 -2,291,059 Electricity, steam and water 1,037,766 0 1,037,766 18,368,831 -32,779,089 -14,410,258 Transportation, communication, storage 28,509,229 -5,312,438 23,196,791 20,191,506 -34,657,033 -14,465,527 Trade 76,643,759 0 76,643,759 29,243,159 -50,210,602 -20,967,443 Finance 30,691,155 -27,926,586 2,764,569 11,588,655 -20,045,771 -8,457,116 Real estate 1,565,536 -100,616 1,464,920 2,957,278 -5,154,434 -2,197,156 Private services 43,724,343 -18,231,459 25,492,884 15,045,009 -27,048,380 -12,003,371 Government services 0 0 0 0 0 0

Service total 183,602,577 -56,193,159 127,409,418 99,635,172 -174,427,103 -74,791,931 Source: Author’s own computation based on 1994 input-output table of the Philippines.

4 -1 -1 The formula for embodied services trade is QE’ = (I-A) E’ where (I-A) is the Leontief inverse matrix and E’ is the export vector of goods, i.e. E’ = (e1’, e2’,…ei’, 0, 0, …,0) where the zeros correspond to all the services sectors (Urata and Kiyota 2000). Chapter 1: Overview 13 that of indirect service trade, partly because the goods exports of the Philippines is not that large. Furthermore, considering that many of the imported goods come from developed countries where services value added already dominates the economy, the embodied (indirect) service import is more than triple the disembodied (direct) services import. Thus, the Philippines is a net importer of embodied services, but a net exporter of disembodied services. Embodied services exports constitute 35 percent of total services exports (direct plus indirect), while embodied services imports comprise 76 percent of total imports of services.

Movement of Workers As discussed above, services, not including mode 4 receipts, has not outpaced the growth of goods exports and that, furthermore, the Philippines does not have comparative advantage in many services sectors. Nevertheless, the Philippines is competitive in certain service activities that require huge skilled manpower and is already a significant player in manpower exports. Mode 4 receipts or remittances from abroad had outpaced receipts from garments exports, the second highest export earner in the Philippines next to semiconductor. In 2003, the garments sector earned more than US$2 billion, compared to close to US$8 billion of remittances from workers abroad5. In 2005, total remittances exceeded US$10 billion, which dwarfs the combined FDI and aid flows to the Philippine economy. If imported materials are deducted from exports of semiconductors, its net export receipts contribution is actually not much higher than OFW remittances (Table 9). Of the hundreds of thousands of Filipinos deployed annually to different countries, approximately 60-75 percent can be considered engaged in services or service-related tasks, while the rest are agriculture or production workers. Because of the huge number of service workers, the exodus of many Filipino workers is an issue within the ambit of services trade or GATS coverage. In 2002, about one-third of the newly deployed Filipino workers work as service workers, another third as professional and technical workers, a few percentage work in service-related jobs, while less than one percent work as managers (Table 10). Yet, while the OFWs have contributed significantly to foreign exchange earnings, warning signs are being raised, especially in the medical services sector. From a developmental standpoint, the loss of a huge portion of the educated labor force can lead a country to a low level economic equilibrium characterized as ‘poverty trap’. Indeed, many countries find it hard to grow out of their economic situation because of the inadequacy of human capital (read: skilled human resources). With the existing trend of huge out-migration, the Philippines is running the risk of being trapped in poverty, especially because even though the stereotypical Filipino migrant may be a domestic helper or nanny in Singapore or

5 The usual caveat that this figure might include remittances from Filipino emigrants abroad applies. 14 The Global Challenge in Services Trade

Table 9. Comparison of OFW remittances with other BOP flows (in million US$) 1985 1990 1995 2000 2003 2005 Foreign direct investment 105 550 1,459 1,345 319 319

Official development assistance and official aid 460 1,277 890 578

Overseas Filipino worker’s remittances 6,050 7,578 10,689

Total exports * 4,629 8,186 17,447 38,078 35,751

Manufactured goods 2,539 5,706 13,868 33,988 31,182 Electric and electrical equipment/parts 1,056 1,964 7,413 22,179 18,255 and telecom Garments 623 1,776 2,570 2,563 2,269 Textile yarns/fabrics 39 93 208 249 243

Total imports * 5,111 12,206 26,391 34,491 33,057

Manufactured goods 508 1,794 3,572 3,151 3,245 Mat/acc for the manufacture of electrical 584 1,106 3,772 7,309 6,363 equipment Textile yarn, fabrics and made-up arts 140 547 872 804 727 Sources: Bangko Sentral ng Pilipinas and World Bank (2005). Note: Official development assistance data came from World Bank (2003). * Per National Statistics Office’s total.

Table 10. Percentage share of newly deployed OFWs by skill category

Skill Category 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Total deployment (thousand) 686,457 696,457 719,602 653,574 660,122 747,696 831,643 837,020 841,628 867,599 891,908

Newly hired OFWs 260,594 256,197 214,157 214,157 205,791 221,241 219,215 237,260 253,030 258,204 288,155

Professional and technical workers 28 25 20 20 18 23 25 26 31 38 35 Managerial workers 11 0.13 0.16 0.16 0.15 0.26 0.18 0.14 0.11 0.15 0.13 Clerical workers 2 2 2 2 2 2 1 1 1 1 1 Sales workers 1 1 1 1 1 1 1 1 1 1 1 Service workers 32 35 38 38 41 35 37 35 36 36 34 Agricultural workers 1 1 0.46 0.46 0.40 0.25 0.18 0.19 0.21 0.21 0.21 Production workers 37 36 39 39 37 39 34 34 23 22 24 For reclassification 0.03 0.03 0.05 0.09 1 0 1 2 8 2 4

Source: Philippine Overseas Employment Administration. Chapter 1: Overview 15

Hong Kong, professional and technical workers that include medical professionals have actually grown to be the majority of departing OFWs. In 2002, more than one-third of the OFWs that left are from this educated category. The yearly deployment of OFWs dwarfs the number of alien workers permitted to come into the country. Based on alien employment permits (AEP) issued to foreigners, the number of foreign workers allowed into the country has not exceeded 10,000, majority of these ranging between 54 and 74 percent are engaged in the services sectors. And, quite expectedly, because of strict regulations of mode 4 entry into the domestic market, majority of the AEPs are for high-ranked individuals, normally managers, presidents or vice-presidents, or directors of foreign-owned subsidiaries or branches (Table 11). In summary, even though the Philippines has no comparative advantage for services as a whole, a niche market exists for manpower exports, or mode 4 type of export service supply. Yet, while the remittances of OFWs are helping prop up the Philippine economy, the huge out-migration, especially of large portions of the educated class, also poses a threat to the economy in the long run. In the meantime, however, because of lack of sufficient work opportunities in the country, this can be considered as a stop-gap measure. Besides, government officials contend that working abroad is also a way of acquiring skills and technology that could benefit the country when the OFWs eventually return home. The first-best scenario, however, is if work opportunities are expanded within the Philippines through economic growth and investments. This is where the opportunities from outsourcing service activities in the Philippines play a role.

OUTSOURCING OPPORTUNITIES, MEDICAL TOURISM, AND OTHERS Outsourcing holds more promise for the Philippines, a medium player in the global outsourcing business, especially in voice-related services, because of its huge English-speaking population and cultural affinity with the US. Aside from call service centers, there is also an increasing number of outsourced business processes or shared services, especially accounting and finance services, though they are currently mostly housed within multinational firms. Animation, medical transcription, architectural services, and other IT-enabled services in which the Philippines has a minor presence in the international market hold great possibilities for exploiting. Outsourcing service activities can mitigate the employment problem in the country by providing an alternative to overseas employment. Considering the huge social problem associated with overseas employment, like family breakups, youth delinquencies, etc., the employment prospects from outsourcing are a welcome development. Another services sector that, like outsourcing, encourages educated professionals, especially medical professionals, to stay in the country, is the medical/health tourism and medical services sector. This sector can take 16 The Global Challenge in Services Trade

0.2

0.3

3.6

2.4

6.3

19.7

67.6

% Share

611

110

195

Total

2,092

3,094

2.9

3.3

6.5

18.7

68.5

0.05

% Share

1992 1994

400

140

Total

1,469

2,144

0.1

0.7

6.5

1.9

6.9

21.8

62.0

1990

112

352

105

1,001

1,614

Total %

0.1

0.6

7.2

1.7

21.2

57.6

11.7

1988

117

346

942

191

1,634

Total %

group

Selected occupational

Professional, technical, and related workers

Administrative, executive, and managerial workers

Clerical and related workers

Sales workers

Service workers

Agricultural, animal husbandry and forestry workers, fishermen and hunters

Production and related workers, transport equipment operators and laborers

Occupation not adequately defined

All occupations

8.2

7.4

3.7

54.0

13.0

13.8

1985

204

378

Total %

7.7

43.9

11.7

21.1

15.6

1980

375

100

180

133

854

Total %

Alien employment permits issued by selected occupational group, Philippines: selected years

group

Selected occupational

Managers, executives, presidents, heads, and directors

Advisers, consultants, and technical workers

Other professional workers

Chefs, cooks, and related Workers

Craftsmen, technicians, and semi- professional workers

Occupation not adequately defined

All selected occupations

Source: DOLE (2000).

Table 11. Chapter 1: Overview 17 different forms: medical treatment of foreigners in the Philippines, spa or tourism industry, and retirement villages. The advantage of the Philippines is again due to a good number of educated professionals in health-related fields as well as the Filipinos’ token sense of hospitality. Unlike IT-enabled services sectors and medical tourism where the Philippines has had some positive and highly successful experiences to cite, many possibilities in other services sectors in the global market remain to be explored. In particular, the Philippines has hardly made a dent in the audiovisual services, unlike India and China, which had cracked into the entertainment taste of the West. Even Mexico and South Korea have had enormous global success with their telenovelas, which are avidly watched by a significant number of Filipinos and have displaced the popularity of many locally produced shows. The education services industry is another sector where the Philippines may find some niche opportunities. It is worth noting that Singapore and Hong Kong have been actively attracting educational investments and tie-ups with major universities abroad. The Philippines is belatedly waking up to this export prospects, particularly in teaching English to cost-conscious Asian students who want proficiency in the language, or in giving nursing training to Chinese or Indonesian students to cater to the large expatriate communities in their countries. The opportunities and challenges that accompany these ‘unchartered’ services exports are addressed in the papers in this volume. While strictly not a services export sector, telecommunications in the country provides the necessary infrastructure support for all the services exports of the Philippines. Hence, the volume has a chapter on the study of the information and communication technology (ICT) and the competition policy issue arising from the few operators in the market. Finally, although it may look like an ‘odd man out’ among studies on services sectors, the paper on the institutional study for a possible trade representative office in the Philippines actually complements the rest of the book. This is because we have commissioned the sectoral studies supposedly in service to GATS negotiations—to provide a better understanding of services sectors that are of potential export interests to the country and how the WTO or regional trading arrangements (RTA) negotiations process could be used to assist these sectors. Along the way, we need to understand how the negotiations work, and more importantly, how the local consultation mechanism and decisionmaking process go. Alas, we discover an existing institutional framework that leaves so much to be desired, compared to those of other countries, not the least of which is the lack of adequate reliance on solid research to back up their trade positions. The paper therefore proposes some measures to improve the institutional framework and design to make our engagement in trade negotiations more effective.

CONTRIBUTION OF THIS VOLUME The above services sectors, which hold strong potential for foreign exchange earnings, are studied in greater depth in this volume on services. For most of 18 The Global Challenge in Services Trade these sectors, information were scattered here and there, so this volume is one of the first attempts to have a more comprehensive look, particularly highlighting their export potential. The idea at the PIDS is to have a ‘source book’ for services industries that would give a preliminary introduction to the structure, prospects, and nature of competition in these sectors. We would have wanted to provide a better view of trade barriers in services, both in the domestic and foreign markets, as well as cover more service industries, particularly professional services, but time and resources were not on our side. For a sector that is so little known, we hope we have made a contribution toward greater understanding of an increasingly important economic sector. Our hope is that other research work would pick up from where we leave off.

REFERENCES Bangko Sentral ng Pilipinas (BSP). 2005. Measuring international trade in services. Paper prepared for the 3rd Development Policy Research Month Seminar on Services, September 27-28, 2005, Dusit Hotel Nikko, Makati City, Philippines. Department of Labor and Employment (DOLE). 2000. Yearbook of Labor Statistics. Manila, Philippines: Department of Labor and Employment Pasadilla, G. and M. Liao. 2006. Contribution of services to output growth and productivity in Philippine manufacturing. Working Paper. Forthcoming. International Monetary Fund (IMF). Balance of payment statistics. Various issues. United Nations Conference on Trade and Development (UNCTAD). 2004. World investment report. New York, USA: United Nations Conference on Trade and Development. Urata, S. and K. Kiyota. 2000. Services trade in East Asia. In Trade in services in the Asia- Pacific region, edited by T. Ito and A. Krueger. NBER-EASE Vol. 11. University of Chicago Press. World Bank. 2005. World development indicators. Washington, D.C., USA: World Bank. Chapter 2: Cross-border Transactions in Higher Education 19 22

Cross-border Transactions in Higher Education: Philippine Competitiveness1

Andrea L. Santiago

ABSTRACT The international education service sector is undoubtedly growing. The movement of students across nations is expected to grow fourfold in the next quarter of a century. Undaunted by the current domination of English-speaking providers, countries in Asia particularly Singapore, Mainland China, Malaysia, and recently, Hong Kong, have taken big steps to become centers of education in the region. Their single-mindedness in the pursuit of this vision has already made them countries to contend with. The Philippines is actually strategically located and may ride the wave of west-to-east or even east-to-east student flows. However, the current state of Philippine higher education when compared to its Asian neighbors is discouraging. This paper shows that concerted effort is required of policymakers, academic institutions, and the Commission on Higher Education to enhance the quality of education at least of specific degree programs where the country can niche. A unified voice is essential and should be backed by appropriate fund allocation, enactment of relevant laws, as well as establishment of an independent and credible higher education body that may

1 Hearfelt thanks to the following for their assistance: Ms. Editha Abergas, National Economic Development Authority; Dr. Antonette Angeles, Ateneo De Manila University; Dr. Paz Diaz, University of the Philippines Open University; Mr. Teodullo Estrada, Bureau of Immigration and Deportation; Dr. Ester Garcia, former Chair, Commission on Higher Education (CHED) ; Bro. Andrew Gonzalez, FSC, former Secretary, Department of Education, Culture and Sports, De La Salle University-Manila; Ms. Elizabeth King, World Bank East-West-Pacific Region; Dr. Ricardo Lim, Dean, Asian Institute of Management; Mr. Tomas Lopez, Chair, iAcademy; Bro. Armin Luistro, De La Salle University-Manila; Dr. Francisco Nemenzo, University of the Philippines; Dr. Cristina Padolina, CHED Commissioner; Dr. Robert Padua, former CHED Commissioner, Mindanao Polytechnic University; Dr. Ely Santos, Chair, Southeast Asian Interdisciplinary Studies Institute; Ms. Nelia Sarcol, Center for International Education; Dr. Edita Tan, University of the Philippines; Dr. Tereso Tullao Jr., De La Salle University-Manila; Dr. Editha Agnes Valenzuela, CHED; Dr. Mona Dumlao-Valisno, Office of the President of the Philippines; and Dr. Bernie Villegas, University of Asia and the Pacific. 20 The Global Challenge in Services Trade

enforce higher standards without compromise. Only then can the Philippines take advantage of its competitive edge in English, combined with cost-effective education in a tourist-laden environment.

BACKGROUND Globalization and internationalization in higher education is inevitable. While economists still argue whether globalization serves to equalize the disparity between rich and poor countries, or whether it serves to further disadvantage the already disadvantaged, the moves toward lowering trade barriers and allowing free flow of resources, especially for goods, has long begun. Where education is concerned, however, the pace is much slower. Commitments to liberalize trade in education is said to be present but not substantive, perhaps owing to the debate whether such moves would infringe on a nation’s rights over social policy objectives and affect national identity, or if education can be treated as a commodity, thus should be governed by the rules of competition. In general, despite hesitations to make explicit commitments to the General Agreement on Trade in Services (GATS), players in the global trade of education services are open to simple agreements between countries as well as universities. The scholarship and exchange programs for faculty and students of the Ford Foundation, Fulbright, Rockefeller Foundation, Reinhard-Mohn- Fellowship, East West Center, ASEAN University Network, and Japan International Cooperation Agency, to name a few, prove that trade in the area of student mobility has been ongoing way before the fuss over globalization and liberalization commitments. It has, of course, intensified during the last decade due to the developments in information and communication technologies (ICTs) as well as the dynamics experienced by providing and consuming countries. The commotion over cross-border education continues to build up as major international education agencies predict a tremendous growth in unmet higher education needs most especially in the Asian region. By 2025, it is projected that worldwide learners would reach close to 200 million, four times greater than the present figures, and foreign exports, even at the same proportions it is today, would hit 8 million. The inflow of revenues has helped the economies of traditional English providers of foreign education such as the United States (US), the United Kingdom (UK), Canada, and Australia, as public spending on education decreases and the proportion of private higher education institutions (HEIs) increases. The popular destination countries, however, are faced with the small but definite moves of Singapore, Malaysia, and China that are positioning themselves to become knowledge hubs in the Asia-Pacific region. If successful, the popular sources of foreign students would be lost. The developed countries are obviously looked upon as providers of education services. Among them, the most notable are the US, UK, Germany, France, and Australia. The World Bank reports that developed countries can boast of producing the most number of scientists per capita as well as producing a greater portion of scientific articles and patents. These quality indicators serve as a strong attraction for developing countries believing that improved Chapter 2: Cross-border Transactions in Higher Education 21 education, especially at the tertiary and post-tertiary levels, can help boost their own economies. After all, educated people are said to be more productive in society. Concomitantly, the limited resources of many developing countries in Asia, Africa, and Latin America prevent them from meeting the growing demands for higher education. Not only is there a financial toss among the different sectors in society, there is also a dilemma on whether limited financial resources should be allocated to basic education as against higher education. Thus, many have looked toward the private sector to meet the gaps in the area. But even if the private sector has been moving toward an international curriculum in higher education, the limited spaces and the question of quality still make foreign education attractive. As developing countries are driven to seek better level of quality education to fulfill its unserved demand, the competitiveness and pride of developed countries act as a magnet that further draws more foreign consumers toward them. In effect, trade in services of exporting countries improves. With continued interest in education service provided by developed countries, the inevitable issue of cost effectiveness comes in. Consequently, other forms of service delivery are being explored especially in areas where well-established local HEIs tie up with foreign institutions—both at the regional and global levels—even to the extent of commercial presence. Thus, the future in higher education would see the continued growth of alliances and consortia between and among universities in different countries, where English would be the second language. This scenario is expected, notwithstanding trade negotiations brought about by the GATS. Denman (as cited in Chan 2004) points out that there has been a dramatic increase in the creation of international university organizations, hitting close to 180 in 2000 from just only 90 two decades earlier. Amid the excitement over cross-border education is the Philippines, the largest English-speaking country in Asia. Positioned as a cost-effective alternative to acquiring higher and advanced education degrees in a tourist-laden environment, the Philippine government hopes to further attract students primarily from China, Taiwan, South Korea, and Thailand. Efforts in the past year have increased the intake of foreign students, most likely offsetting the number of students who go abroad to take further studies. But can the Philippines compete with its Asian neighbors in the realm of cross-border education? It would appear that the Philippines had lost its competitiveness in the trade of many goods and services. Neighboring countries have been able to surpass its gains due to the strong and focused commitment of their governments. In education, the Philippines has long been known to be the largest English- speaking country outside of the US, UK, Australia, and New Zealand. Yet even this advantage is currently threatened. However, the potential for the Philippines in the education services trade is tremendous. It has the cost-effective advantage of attracting students in the region to take further studies in its schools instead of pursuing them in Western 22 The Global Challenge in Services Trade countries. But the country has not been able to harness this potential to the fullest unlike Singapore, Malaysia, and China that are singlemindedly pursuing cross-border transactions. Their governments currently use available modes of supply to build their capacities in teaching and research. To quickly build world- class institutions, they have allowed the entry of foreign academics, programs, and institutions, albeit in a controlled manner. For instance, Singapore and Hong Kong have partnered with such universities as Harvard, Wharton, and Northwestern Kellogg to strengthen their higher education sector. At the same time, they have developed incentives to attract locals pursing their degrees abroad to return and work for national development. This focus and determination is not present in the Philippines, which is characterized by an unusually high dependence on the private sector to meet the growing demands for education. Marred by a highly politicized setting and inadequate resources, the education sector struggles in its aim to provide education for the growing population at an affordable rate and still maintain a decent level of quality. With these conditions, the Philippines can only hope to find a niche and attract foreign students and academics into specific programs and institutions, hopefully with the concerted support of government. If the government is serious in its desire to compete internationally, policymakers must address squarely the barriers to achieving this, including the enactment of laws to facilitate the influx of education services trade.

PRINCIPAL ISSUES AND CONCERNS IN EDUCATION SERVICES Education is one of the services sectors where negotiations under the GATS have been deliberately slow. The 1994 Uruguay Round of Multilateral Trade Negotiations yielded commitments from 42 World Trade Organization (WTO) members and more than 80 percent of the 30 member-countries of the Organisation for Economic Co-operation and Development (OECD) (OECD/CERI 2002). The snail pace progress in the education services trade is attributed to many factors and could be best explained by the modes of supply. Trade in education services essentially looks at the mobility of people, programs, and institutions. In the GATS, these three occur in four modes though not necessarily in exclusivity. These modes are cross-border supply, consumption abroad, commercial presence, and presence of natural persons (OECD/CERI 2002). A major concern with respect to cross-border supply or distance education has to do with intellectual property rights since some countries may disregard international agreements regarding this matter (Atkinson 2001; Lenn 2001; Larsen et al. 2002; Salmi 2002). The question of quality of education comes into play since there is uncertainty about the level of involvement a faculty would have in ensuring that its students understand concepts, a task that may be more evident in the traditional classroom setting (Atkinson 2001). Other concerns have to do with restrictions on the use and importation of educational materials, considered tools of the trade (Copeland 2002; Sauve 2002). For Chapter 2: Cross-border Transactions in Higher Education 23 instance, Lenn (2001) disclosed that some countries with strong religious influence restrict the entry of medical or health materials that show the naked body. On the technology side, another hurdle would be the barriers of access to ICTs such as national telecommunications laws that restrict the use of satellites and receiving dishes to transmit educational content (Lenn 2001; Salmi 2002). Finally, on the consuming end, is the unreliable access of potential students to the Internet. Consumption abroad or student mobility also has its share of setbacks. The easier ones to hurdle would involve the granting of student visas in the light of the tightening security measures adapted especially by the US. Others refer to funding opportunities and foreign exchange requirements for the students to cover expenses such as tuition, accommodation, and travel (Hirsch 2002; Bernardo 2003). There is also a concern whether the credits earned or the degree obtained would be recognized by the home country institutions (Atkinson 2001; Lenn 2001; Sauve 2002; Tullao 2003). Finally, many countries have had to deal with the issue of brain drain. This is a tricky concern as there are sometimes more university graduates than there are opportunities in the local market (The Futures Project 2000). Some argue that work experience in a foreign country actually contributes to brain gain as skills and networks acquired outside can be useful upon the return of these individuals to their home country (OECD 2004a). Of all four modes, commercial presence offers the greatest concern in the trade of education services. There is the fear of consuming countries that higher education provided by developed countries, particularly in their local territory, may interfere with their social objective of educating their citizens on local values and content (Altbach 2001). It is also feared that the profit- maximization objectives of “for-profit” institutions, especially those that are not university based, may lead to the commercialization and massification of education that, in turn, may lead to lower quality. Consequently, these questions arise: Who determines the quality of education? Which body should accredit global education institutions, if such is necessary to maintain world-class standards in education (Altbach 2001; Van Damme 2002; UNESCO 2003)? Already, the Hong Kong Council of Academic Accreditation has helped organize with 50 member-countries the International Network of Quality Assurance Agencies in Higher Education. Other concerns on commercial presence have to do with the desire of some national governments to impose tighter control over foreign HEIs. Such controls can come in the form of local partnership requirement, minimum number of local seats in the board, and limited foreign ownership (Tullao 2003). Apparently, some providing countries have experienced or expressed apprehensions regarding limitations on ownership and foreign equity, discrimination in tax treatment for foreign institutions, restrictive policies on the repatriation of earnings, as well as excessive fees imposed on licensing or royalty payments (Sauve 2002). It is these countries that look toward the GATS commitment to improve their level of competitiveness. 24 The Global Challenge in Services Trade

The fourth mode of supply, also known as the presence of natural persons, has similar concerns with student mobility and a little more. There are the usual visa regulation issues that restrict the free flow of academics (Lenn 2001). From the point of view of the providing country, there is risk that these academics may seek more permanent employment given the more attractive salaries and work conditions in the host country (Altbach 2003). On the part of the consuming country, this would mean a loss of local capacity in education thereby defeating the purpose of utilizing the gains of cross-border education for national development (Pillay 2003; Sauve 2002; Salmi 2002). Altbach (2003) notes, however, that academics generally maintain scientific and academic relationships, granting them opportunities to return to their host country, thus they do not desire for a permanent stay after an exchange program. For all modes of supply, the value of international education lies in mutual recognition. This recognition allows for mobility of students so that studies may be pursued in foreign countries even partially. This would entail that foreign institutions recognize units already taken in local HEIs as partial credits to a course, and that units taken in foreign HEIs are also recognized by local HEIs. The pursuit of higher education degrees, started and completed abroad, also entails recognition by the home country. Other forms of international and mutual recognition call for countries and their institutions to recognize degrees offered by HEIs in other countries as comparable to their own. This would mean that graduates from a local university may qualify for advanced degrees in a foreign institution without the need to take bridging units prior to being accepted in another institution. This would also mean that graduates with local degrees may qualify for employment in other countries and their diplomas likewise recognized as full credentials. Similarly, recognition entails that professional credentials that result from meeting the requirements of local professional regulation commissions are also considered comparable with foreign countries’ own standards for professionals. This also applies to scientists and academics, who seek to work in a foreign university in a visiting capacity. In many instances, however, there is lack of international comparability and mutual recognition of credentials between developed and developing countries, with the latter having to constantly negotiate for recognition. In the Asia-Pacific region, Philippine education officials observed that it has taken time for Japan to recognize credit units, degrees, and professional credentials taken abroad, whether from a developed or a developing country, as comparable to their own. However, progress has been made with the efforts of the Asia- Pacific Economic Cooperation (APEC) Human Resource Working Group that has sought for recognition of qualifications within the region. The quality of education seems to be at the core of internationalization and trade in higher education. The issues of recognition of academic and professional qualifications stem from the perceived difference in quality standards. This difference in quality standards compels students from one country to seek their education in another. But should this be an exercise of the Chapter 2: Cross-border Transactions in Higher Education 25 individual? Shouldn’t governments be more proactive on the issue of cross- border transactions? OECD (2004a) presents four approaches to cross-border education that countries may adapt. The first is the mutual understanding approach whereby international mobility is supported through scholarships, exchange programs, and academic partnerships between institutions. The second approach calls not only for promoting the education sector but goes a step further by encouraging talented students to work in the host country. This is called the skilled migration approach. For the producing countries, the revenue-generating approach to cross-border education looks at international mobility as an additional source of income. In some institutions especially in the UK, the tuition fee structure for international students is much higher. Finally, from the point of view of the consuming country, international education can be looked upon as a means to build capacity quickly. Thus, scholarships are channeled to academics and civil servants who are expected to transfer the knowledge they obtained from another country to their home country. Twinning programs aimed at students that transfer knowledge from a foreign to a local university also help the capacity-building process. Governments should decide how they intend to participate in the higher education trade. While the approaches mentioned are not mutually exclusive, these require resources. Consequently, knowing full well where to channel limited resources allows a country to better position itself. In the Philippines, there are two primary restrictions that may impede cross- border trade in the area of commercial presence and movement of natural persons. First, the 1987 constitution disallows a foreign entity from having 100 percent ownership of a business in the country. Second, there are restrictions in the practice of foreign professionals in the country. This stems from Republic Act 5181, which prescribes permanent residency and reciprocity in the practice of a profession (Tullao 2003). It should also be noted that under Executive Order No. 285, only authorized HEIs are allowed to admit foreign students. These include schools with programs accredited by the Federation of Accrediting Associations in the Philippines (FAAP) or declared by the Commission on Higher Education (CHED) as Centers of Excellence or Centers of Development. Also authorized to admit foreign students are schools allowed by the Bureau of Immigration, including the Standard of Training, Certification, and Watch-Keeping for Seafarers (STCW)-compliant maritime schools. Finally, to operate abroad, a CHED endorsement is necessary. It is given only to institutions that have at least a Level 2 accreditation.

STATE OF PHILIPPINE HIGHER EDUCATION The Philippine higher education system, unlike in most other countries, has been helped greatly by the private sector. To date, CHED databases reveal more than 2.5 million students enrolled in the 1,526 HEIs in the country, of which 1,353 are privately held. The country has the highest proportion of private institutions in higher education in the world, followed by Japan and Korea (Guruz 2003; UNESCO/OECD 2003). 26 The Global Challenge in Services Trade

The higher education sector is under the jurisdiction of the CHED, created in 1994 in response to the need for education reforms. It is composed of a set of commissioners duly appointed by the President of the Philippines using specific criteria set forth in its enacting law. The daily operations are managed by an executive director who supervises the offices of program and standards, student services, policy, planning, research, and information; 15 regional field offices; the finance, administration, and legal divisions; and a special unit on international affairs services (IAS). As mentioned in CHED’s website, it is the IAS that promotes the country’s higher education sector in the international sphere and seeks recognition of academic and professional qualifications. Upon its creation, CHED began to establish its information systems and monitoring mechanisms. It identified degree programs with exceptional quality standards and dubbed the programs as either Centers of Excellence (COE) or Centers of Development (COD), with the commitment of the selected universities to help upgrade the standards of other HEIs. CHED records 275 programs of 85 HEIs declared either COEs or CODs. Quality assurance mechanisms were also set in place. There are four accrediting bodies and one superbody—the Federation of Accrediting Associations in the Philippines (FAAP). The agencies that accredit private HEIs are the Philippine Accrediting Association of Schools, Colleges, and Universities (PAASCU) for Catholic schools, the Philippine Association of Colleges and Universities–Commission on Accreditation (PACU-COA) for nonsectarian schools, and the Association of Christian Schools and Colleges-Accrediting Agency, Inc. (ACSC-AAI). For public HEIs, there is the Accrediting Agency of Chartered Colleges and Universities in the Philippines (AACCUP). The accrediting agencies use a combination of self-report, peer evaluation, and on-site visit to determine the quality of programs, faculty, staff, and facilities. In addition, the PAASCU solicits the views of students, alumni, and the society at large on their perception of quality, and ties all output with statistical information on graduation rate, performance on licensure examination, and the like. On the other hand, the AACCUP, in its 10 years of existence, has revised its instrumentation four times to ensure relevance and improve standards. However, in a system where the members are also its owners, credibility is an issue. It should be noted that accreditation is voluntary and sought by institutions for the prestige and privileges attached to it, such as autonomy from supervision for higher level accreditation. However, while there are accrediting bodies, three of which are members of the International Network for Quality Assurance in Higher Education, not all HEIs and their programs have gone through accreditation. For instance, of the 10,240 baccalaureate programs offered by the 1,526 HEIs in the country, only 11.32 percent has been accredited as of 2002-2003. The public sector has a higher accreditation rate of 16.81 percent compared with the 9.36 percent in the private sector. Most of the programs (76%) were accredited at Level 2. At the masteral level, the accreditation rate is lower at 9.62 percent, with the public sector again showing higher accreditation rates. Chapter 2: Cross-border Transactions in Higher Education 27

The summary of accredited programs by sector is shown in Table 1. In terms of HEIs, only 11 percent have baccalaureate programs that are accredited by the FAAP and AACCUP. The public sector HEIs also show better accreditation rates with 17 percent compared with only 9 percent in the private sector.

Table 1. Number of FAAP - and AACCUP-accredited programs, SY 2002-2003 Sector Programs Baccalaureate Masteral Doctoral

Public No. of programs 2,695 1,312 266 No. of accredited programs 453 121 49 Accreditation rate 16.81% 9.22% 18.42%

Private No. of programs 7,545 1,660 265 No. of accredited programs 706 99 9 Accreditation rate 9.36% 5.96% 3.40%

Total HEIs No. of programs 10,240 2,972 531 No. of accredited programs 1,159 220 58 Accreditation rate 11.32% 7.40% 10.92%

Source: Compiled by CHED MIS from reports of the FAAP and AACCUP.

On the average, there is a student population per HEI of only 1,700 (Table 2). At this level, private HEIs have complained about the competition with public HEIs. Consequently, many HEIs had to forego investments in research so that the teachers’ hours may be spent in the classroom. For the public HEIs,

Table 2. Average number of students per HEI, SY1 1994-1995 to 2001-2002

Year Student enrollment No. of HEIs Average enrollment

1994-1995 1,871,647 1,185 1,579 1995-1996 2,017,972 1,287 1,568 1996-1997 2,061,300 1,316 1,566 1997-1998 2,067,965 1,374 1,505 1998-1999 2,279,314 1,382 1,649 1999-2000 2,373,486 1,404 1,691 2000-2001 2,430,842 1,380 1,761 2001-2002 2,466,056 1,428 1,727 Source: CHED (2003). 28 The Global Challenge in Services Trade research is also compromised due to limited government funds for research. On the average, 80 percent of the budget of state universities and colleges (SUCs) is allocated for personnel services, 17 percent for operating expenses, and only 3 percent for equipment/capital investment. This is in contrast to private HEIs that allot 60 percent of their budget to personnel services, 30 percent to operating expenses, and the rest to improvement of facilities. For both private and public sectors, however, there is little allocation for research (Tullao 2000). Despite the growing number of public HEIs, the 15 billion budget for CHED has remained quite steady. This effectively decreases the amount allocated to each HEI. Concerned about the equity of distribution, CHED commissioned a study on the costs of degree programs as its initial step to adapt a normative financing approach to budget allocation. The study revealed the range of costs required to educate a single student up to the completion of a particular degree given the size of the institution and its accreditation level, or the lack thereof (Santiago et al. 2004). Historically, the most popular course is business administration. Due to its large enrollment, it would cost an HEI anywhere from PhP85,000 to PhP110,000 to educate one student through the entire four-year course. Teaching agribusiness raises this cost by PhP70,000 per student. On the other hand, less populated courses like BS Fishery cost an HEI PhP600,000 to educate one student. Thus, in many institutions, there are cross-subsidies. In general, one could expect course delivery to be between PhP20,000 and PhP25,000 per student per year (Santiago et al. 2004). The study of the higher education system remains meaningless without a corresponding study of the labor market. Orbeta (2003) presents a comprehensive model that clearly shows the relationship among education, labor market, and the countries’ own development objectives. In his book, Orbeta confirms the high enrollment rates in higher education, even at the tertiary level, and the corresponding increase in the qualifications of the labor force. However, it should be pointed out that even college graduates are not spared from unemployment and underemployment. The proportion rose to 16 percent in 2000 from 12 percent in 1976 for unemployment, and 37 percent from 23 percent for underemployment. Consequently, many nationals have opted to seek employment in other countries. For employability purposes, however, their professional qualifications must first be recognized. It is the Professional Regulation Commission (PRC) that issues the certificates of registration to professionals. Under the PRC Modernization Act of 2000, the body is tasked to administer, implement, coordinate, and supervise various boards of examiners. It is consequently the role of the PRC to seek recognition of Philippine professionals abroad. Unfortunately, with the removal of the Continuing Professional Education (CPE), the country’s professionals have become less competitive (Tullao 2003; Udano 2003). Chapter 2: Cross-border Transactions in Higher Education 29

MEASURING PHILIPPINE COMPETITIVENESS IN HIGHER EDUCATION TRADE In its brochure, CHED has positioned the Philippines as a cost-effective alternative for securing higher education. Primarily, the tuition fees and living expenses are considered reasonable, and travel to and from the country is affordable. Higher education is also primarily taught in English. The country is also a tourist haven, with Asians, most expecially Chinese, as the target market. How the Philippines positions itself should, however, be taken in context with factors that influence the choice of international students. A study by Follari (2004) has shown that while international students have largely chosen English- speaking countries as their study destination, their primary consideration in their choice of institution is the perceived quality of education. Consequently, they look for world-recognized institutions, safe environment, affordable cost of living, and employment prospects overseas. While the study was limited to Australia as the country of destination, the chief factor of quality is universally applied as emphasized by international organizations in their reports on higher education.

Quality of Education In the 2004 higher education supplement of the Times of London, the top universities in the world still come from the US, UK, Germany, and Australia. In the same list, Asian institutions belonging to the top 50 include the National University of Singapore (18), Kyoto University (29), Hong Kong University (39), Indian Institute of Technology (41), Hong Kong University of Science and Technology (42), and Nangyang University (50). Evidently, in terms of world-class recognition, the Philippines is not yet a player. Indeed, CHED’s reports reveal that the country is able to attract only 2,000 to 4,000 foreign students each year compared to the two million students studying abroad (Table 3). This performance is similar to Thailand (Table 4).

Table 3. Number of foreign students studying in Philippine HEIs per school year

School Total Increase/decrease year number (%)

1994-1995 4,791 1995-1996 5,284 10.29 1996-1997 4,864 -7.95 1997-1998 4,419 -9.15 1998-1999 3,516 -20.43 1999-2000 2,602 -26.00 2000-2001 2,323 -10.72 2001-2002 2,836 22.08 2002-2003 4,667 64.56 Sources: CHED (2003); CHED Office of Student Services. 30 The Global Challenge in Services Trade

Table 4. Foreign students enrolled in selected Asia-Pacific countries, 2001

North South Asia Oceania Africa America America Europe Unknown Total

OECD nations Australia 77,849 6,534 3,837 5,477 920 12,763 3,409 110,789 Japan 58,170 443 676 1,474 761 2,106 7 63,637 Korea 3,299 28 44 220 41 135 83 3,850 New Zealand 7,971 1,200 143 648 106 998 3 11,069

Non-OECD nations India 4,004 31 2,558 275 0 120 6,988 Indonesia 266 31 3 26 0 51 377 Malaysia 16,217 57 1,552 67 24 553 422 18,892 Philippines 1,656 28 69 503 4 63 2,323 Thailand 1,445 30 19 113 4 147 750 2,508 Source: OECD (2004a).

Narrowing down the top universities in Asia in terms of number of foreign students, the 2000 Asiaweek list included only three Philippine schools, namely, De La Salle University (ranked 70), Ateneo de Manila University (74), and the University of Sto. Tomas (75). These three schools had the largest number of foreign students in school year 2002-2003. There were more than 300 foreign students at the De La Salle schools, 280 in Ateneo, and 250 in UST (Table 5). The University of the Philippines (UP)-Diliman was also able to attract about 225 international students. Other HEIs, even if they were not considered top universities in Asia or in the world, were able to attract a good number of foreign students as well.

Table 5. HEIs with the most number of foreign students, SY 2002-2003

Number Name of HEI Region of foreign students

Lyceum-Northwestern 1 112 Virgen Milagrosa University Foundation 1 188 Adventist University of the Philippines 4 180 Cebu Doctors College 7 207 Silliman University 7 112 Adamson University NCR2 119 AMA Computer College NCR 153 Ateneo De Manila University NCR 288 Chapter 2: Cross-border Transactions in Higher Education 31

Table 5. (continued)

Number Name of HEI Region of foreign students

De La Salle University-College of St. Benilde NCR 232 De La Salle University-Manila3 NCR 100 Fatima Medical Science Foundation NCR 217 University of Manila NCR 157 University of Santo Tomas NCR 252 University of the East-Manila NCR 170 University of the Philippines-Diliman NCR 225 Saint Louis University CAR 203 University of Baguio CAR 195 All Others 1,557 Total 87 4,667 Source: CHED Office of Student Services.

Similar to other destination countries, most of the international students in the Philippines come from other Asian countries. Over a six-year period, the largest delegation came from Korea (4,000), followed by China (2,800) and Taiwan (1,600). However, as shown in Table 6, over the same period, the Philippines was also able to attract a sizeable number of American students although records by the Open Doors (1997, 1998, 1999, 2000, 2001, 2002, 2003) show disparate figures (Table 7). Of the top 10 courses enrolled by foreign students in the Philippines, the most popular are undergraduate courses in arts and sciences, followed by medicine, business administration, computer studies, and dentistry (Table 8). Education accounts for only four percent of the foreign students enrolled in the top 10 courses. At DLSU-Manila, for instance, education is not a popular choice among foreign students in the undergraduate level but a master’s degree in education is the most popular advanced degree in that university. In the US, the most popular courses studied by international students are business, engineering, mathematics, and computer science. At the graduate level, the institution reputed to attract the most number of foreign students is the Asian Institute of Management (AIM). While the AIM was not recognized by the Financial Times as belonging to the top 100 MBA schools in the world, the Asiaweek ranked it as third in terms of reputation among Master of Business Administration (MBA) schools in Asia. It was also recognized as having the best executive MBA in Asia. In addition, the AIM holds the prestige of being the only educational institution in the Philippines to have gained recognition from the European Quality Improvement System (EQUIS) and the Association to Advance College Schools of Business (AACSB). It has 30,000 alumni. 32 The Global Challenge in Services Trade

Table 6. Number of foreign students in Philippines HEIs by national origin

Nationality 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 Total

American 1,111 860 764 452 454 748 4,389 Bangladesh 36 92 52 74 61 89 404 British 87 67 27 29 25 48 283 Canadian 80 49 48 43 33 60 313 Chinese 729 575 337 243 300 630 2,814 Indian 112 83 57 66 97 184 599 Indonesian 217 128 70 127 122 256 920 Iranian 109 63 81 54 122 185 614 Japanese 89 51 27 29 34 97 327 Korean 823 676 558 394 604 1,069 4,124 Malaysian 35 25 19 20 18 22 139 Nepalese 108 117 138 97 113 138 711 Sudanese 46 39 54 31 49 81 300 Taiwanese 221 265 144 325 434 474 1,863 Thai 124 107 38 32 83 108 492 Vietnamese 16 22 13 54 36 82 223 All Others 476 297 175 253 253 396 1,850 Total 4,419 3,516 2,602 2,323 2,838 4,667 20,365 Source: CHED (2003).

Table 7. Number of Americans in Philippine HEIs, SY 1997-2002

Number of School Year Americans

1993-1994 57 1994-1995 44 1995-1994 60 1996-1997 71 1997-1998 108 1998-1999 129 1999-2000 107 2000-2001 108 2001-2002 102 Source: Extracted from Open Doors (2000, 2001, 2002, 2003). Chapter 2: Cross-border Transactions in Higher Education 33

Table 8. Top 10 courses enrolled in Philippine HEIs by foreign students, SY 2002-2003

Top 10 Courses Level Percentage Doctorate Advance 7 Master in Business Administration Advance 4 Master of Arts Advance 6 Medicine Advance 11 Master of Science Advance 4 Arts and Sciences Higher 30 Business Administration Higher 10 Computer Studies Higher 9 Dentistry Higher 9 Education Higher 4 Engineering Higher 6 Source: CHED Office of Student Services.

In the last five years, the AIM was able to attract 618 foreigners for its three major degree programs, which is approximately 38 percent of the total student enrollment. The full tuition fee rate is US$12,000. While some of the foreign students are financed through scholarships grants, it is estimated that revenues from payment of tuition fees and use of dormitory facilities by foreign students reach over US$2 million annually. Table 9 shows the breakdown of foreign students at the AIM per sending country. As can be seen, the proportion of students from India is unparalleled. Further inquiry into this phenomenon reveals that Indian students who go to the AIM are those who wish to pursue advanced degrees but cannot enter the prestigious Institute of International Management in India. They see the AIM as the next best choice especially given the exchange program component of its MBA course that allows the best students to attend top universities in the US and Europe for a term while paying the lower tuition fees at the AIM. AIM’s student exchange program began in 1997 when it was invited to become a member of the Program in International Management (PIM). This paved the way for the signing of about 60 memoranda of understanding/ agreement on student exchange with member-institutions and other foreign HEIs. There are about 30 active affiliated institutions where about 40 percent of MBA students are allowed to take one semester for credit. Besides the AIM, other HEIs also have cooperative alliances with foreign institutions for both their undergraduate and graduate programs. The international cooperation programs are in the areas of faculty and student exchange, joint-research, and offshore education. There are also active twinning and joint degree programs. In a 1998 CHED survey, it was found that there were 107 Philippine HEIs with ongoing collaborative programs with 487 foreign institutions of higher learning in 28 countries in 33 fields or disciplines (UNESCO 34 The Global Challenge in Services Trade

Table 9. Number of foreign students at AIM’s major degree programs

Countries 1999 2000 2001 2002 2003 2004 Total

Bangladesh 3 2 2 1 8 Bhutan 3 6 2 4 3 18 Cambodia 1 5 3 2 3 1 15 Canada 1 1 China 11 6 6 2 1 2 28 Czech Republic 1 1 France 1 1 India 26 48 59 46 49 81 309 Indonesia 22 17 21 7 5 5 77 Japan 1 2 3 6 Lao PDR 3 3 4 1 11 Malaysia 4 4 2 1 11 Maldives 1 1 Mongolia 1 1 2 Myanmar 2 4 1 7 Nepal 2 3 2 1 38 4 50 Russia 1 1 Singapore 1 1 Taiwan 1 1 Thailand 3 5 4 12 United Kingdom 1 1 United States 2 2 2 6 Vietnam 7 6 11 7 12 5 48 Others 1 1 2 Total 90 109 121 76 120 102 618 Source: AIM Office of Admissions.

2000). UP-Diliman alone has alliances with over 50 institutions in more than a dozen countries (CHED undated). If recognition by other universities is a measure of the quality of education, it can be assumed that the Philippines, through its recognized institutions, can be considered a potential study destination for Asians.

Safe Environment Hurdling the quality factor, the Philippines still has to contend with providing a safe environment for international students. Safety has been a major concern considering the sensationalized crime reports and the incidents of terrorism in the Philippines. Many attribute the poor safety environment to the unstable economic and political condition. Seemingly, the weakness in the education sector is parallel to the weakness of the country as a whole. The IMD World Competitiveness Yearbook of 2004 Chapter 2: Cross-border Transactions in Higher Education 35 shows the Philippine’s overall performance to be declining. Previously ranked at 35 in 2000, the 2004 report puts the country at 52. The 2003 report of the Asian Development Bank (ADB) also shows the Philippines not to be faring well. There are two general measures of national competitiveness used by the World Economic Forum. The first refers to the growth competitiveness index (GCI), which is determined by technological capacity, quality of public institutions, and quality of macroeconomic environment. The GCI measures the ability of a nation to sustain its growth. The second measure is the current competitiveness index (CCI) that looks at the microeconomic foundation of a country’s gross domestic product (GDP) and determines if the GDP per capita can be sustained in the long run. The scores and ranking of selected countries in Asia for the GCI and CCI are found in Tables 10 and 11, respectively. Using these indices, the data show that the Philippines has continually been outperformed by Korea, Malaysia, Thailand, and China. A better educated society would lead to a stronger economic base, and investments in science and technology are paths to a better economy (ADB 2003a). In more industrialized societies, anywhere from 1.5 percent to 3.8 percent of the GDP is spent on research and development (InterAcademy Council 2003). This is not the case for developing countries that have to spread their budgets quite thinly. If safety is tied to the conditions of a country, it would appear that the Philippines cannot assure international students that it is a safe study destination. This is in contrast to Singapore where the economy is stable and the crime rate is low.

Table 10. Growth competitiveness index and components, 2001 Public Macro GCI Technology institution economic Economy GCI rank score index rank Score index Score environment Score rank index rank

Singapore 4 5.84 18 5.44 6 6.27 1 5.52 Taipei 7 5.59 4 6.19 24 5.3 15 4.69 Hong Kong 13 5.47 33 4.93 30 6.01 4 5.12 Korea 23 5.13 9 5.66 44 4.25 8 4.94 Malaysia 30 4.83 22 5.36 39 4.53 20 4.59 Thailand 33 4.53 39 4.54 42 4.36 16 4.68 China 39 4.4 53 4.05 50 4.1 6 5.04 Philippines 48 4.16 40 4.53 64 3.53 28 4.42 India 57 3.84 66 3.54 49 4.11 45 3.88 Viet Nam 60 3.77 65 3.56 63 3.58 37 4.15 Sri Lanka 61 3.74 59 3.82 58 3.84 60 3.56 Indonesia 64 3.69 61 3.76 66 3.35 41 3.96 Bangladesh 71 3.04 74 2.83 75 2.48 48 3.81 Source: ADB (2003a). 36 The Global Challenge in Services Trade

Table 11. Current competitiveness index and components, 2001

Current Company Quality of national 2001 GDP Economy competitiveness index operations and business environment per capita rank strategy rank rank (PPP adj.) 2001 2000 1999 2001 2000 1999 2001 2000 1999 Singapore 10 9 12 15 15 14 9 5 12 23,000 Hong Kong 18 16 21 21 23 24 16 14 18 24,448 Taipei 21 21 19 20 18 17 21 21 22 17,223 Koea 28 27 28 26 25 27 30 28 30 17,311 India 36 37 42 43 40 48 34 37 43 2,403 Malaysia 37 30 27 37 30 25 38 30 31 8,924 Thailand 38 40 39 42 47 43 39 40 39 6,489 China 47 44 49 39 38 31 47 45 50 3,953 Philippines 54 46 44 45 43 34 54 46 46 3,956 Indonesia 55 47 53 50 51 47 57 47 52 3,014 Sri Lanka 57 58 55 3,512 Viet Nam 62 53 50 64 50 51 64 52 49 1,974 Bangladesh 73 72 73 1,561 Source: ADB (2003a).

Affordable Tuition Fees and Cost of Living In brochures prepared by the CHED, the Philippines is being positioned as a relatively inexpensive destination alternative to securing a degree in higher education taught primarily in English. At today’s exchange rate, it would cost annually anywhere from US$1,000 to US$3,000 to pay the tuition and other incidental expenses at the undergraduate level. At the AIM, tuition fee alone costs US$12,000. However, in computations made by the International Comparative Higher Education Finance and Accessibility Project (ICHEFAP) of the Graduate School of Buffalo University using 1998 purchasing power parity (PPP; US$1 to PhP12.13 for 1998), these expenses could range from US$3,870 to US$12,877 (Table 12). Using the computed PPP, the cost of education in the Philippines is higher than that in Singapore, both in the low and in the high ends (Tables 13 and 14). Using 2001 data, it is costliest to study in Hong Kong, with tuition and living expenses ranging from US$10,000 to US$25,000. Higher end schools in Korea also reached the US$20,000 mark. A recent study by the International Development Programme (IDP) of Australia (Follari 2004) computed the total cost that international students would have to pay to complete various degree programs. Despite the expensive degrees in the US, it is still the most popular destination for both undergraduate and graduate levels (Table 15). This implies that costs alone do not determine student mobility. In countries where tuition is relatively low or nonexistent, the number of international students is not necessarily large (OECD 2004a). Chapter 2: Cross-border Transactions in Higher Education 37

Table 12. Tuition and living costs in the Philippines, 1999, in PhP and US$

Public Low Private High Expenses PhP US$ (at PPP PhP US$ (at PPP US$1=PhP12.13) US$1=PhP12.13)

Upfront fee 200 16 500 41 Tuition fee 8,400 692 50,000 4,122 Other fees 4,850 400 24,000 1,979 Books and incidentals 2,000 165 4,000 330 Subtotal 15,450 1,273 78,500 6,472 Lodging 7,200 594 36,000 2,968 Food 8,000 660 26,000 2,143 Transportation 7,500 618 2,500 206 Other personal expenditures 8,800 725 13,200 1,088 Subtotal 31,500 2,597 77,700 6,405 Total 46,950 3,870 156,200 12,877 Source: ICHEFAP Web site (www.gse.buffalo.edu.org).

Table 13. Tuition and living costs in selected Asian countries, low-end in US$, 2001

Expenses Philippines1 Singapore2 Korea3 Japan4 India5 Hong China7 Kong6

Upfront fee 16 0 23 1,916 3 62 0 Tuition fee 692 1,023 195 2,974 20 5,048 518 Other fees 400 57 1,945 39 9 12 Books and incidentals 165 114 305 295 73 180 104 Subtotal 1,273 1,194 2,468 5,224 105 5,302 622 Lodging 594 227 71 37 1,166 259 Food 660 341 735 552 1,199 1,936 Transportation 618 136 293 697 116 1,101 52 Other personal expenditures 725 682 1,220 1,701 24 1,484 258 Subtotal 2,597 1,386 1,513 3,204 729 4,950 2,505 Total 3,870 2,580 3,981 8,428 834 10,252 3,127 Source: ICHEFAP Web site (www.gse.buffalo.edu.org). 11998 PPP US$1= PhP12.13; 21999 PPP US$1= S$1.76; 31999 PPP US$1= won 656; 41999 PPP US$1= ¥161; 52001 PPP US$1= Indian rupees 11.78; 61999 PPP US$1= HK$8.34; 71999 PPP $1= Y1.93.

Employment Prospects Orbeta (2003) noted that despite an increasing number of educated Filipinos, the rates of unemployment and underemployment are still high. Providing jobs to international students after they have obtained their degrees in the country may displace local job seekers. Consequently, there can be no promise of employment in the country. Indeed, the employee profile of companies in the 38 The Global Challenge in Services Trade

Table 14. Tuition and living costs in selected Asian countries, high-end in US$, 2001 Expenses Philippines Singapore Korea Japan India Hong China Kong

Upfront fee 41 0 1,537 1,840 17 90 0 Tuition fee 4,122 8,778 10,136 5,283 37 5,048 4,145 Other fees 1,979 80 2,173 50 17 Books and incidentals 330 227 1,524 492 51 719 518 Subtotal 6,472 9,085 13,197 9,788 155 5,874 4,663 Lodging 2,968 773 2,741 4,208 255 10,162 2,591 Food 2,143 818 1,372 2,102 1,019 5,600 2,072 Transportation 206 455 293 294 39 612 518 Other personal expenditures 1,088 1,420 3,659 2,601 19 2,777 1,554 Subtotal 6,405 3,466 8,065 9,205 1,332 19,151 6,735 Total 12,877 12,551 21,262 18,993 1,487 25,025 11,398 Source: ICHEFAP Web site (www.gse.buffalo.edu.org).

Table 15. Tuition and living costs across major programs in selected countries, in US$

Bachelor Bachelor Bachelor of Master of Master Mater of of of Information Business of Information Business Engineering Technology Administration Engineering Technology Australia 60,464 90,019 61,818 33,856 46,013 45,296 Canada 71,039 81,037 59,909 39,844 40,215 35,364 China 31,731 32,812 32,836 16,901 24,167 24,242 Hong Kong 38,192 38,202 38,198 30,506 New Zealand 59,331 88,699 62,745 32,268 23,884 46,338 Singapore 54,938 77,962 77,962 22,599 UK 77,890 91,670 91,208 42,870 42,429 31,136 US-Private 167,828 167,828 92,580 41,771 US-Public 119,882 119,882 110,292 69,085 64,249 30,052 Source: Follari (2004).

Philippines shows a lack of diversity especially when compared to places like Singapore and Hong Kong.

THE ASIAN CONTEXT The OECD (2004a) has categorized Asia-Pacific countries according to their cross-border capability (Table 16). Expectedly, Australia and New Zealand belong to one end of the spectrum that shows great export potential. On the other end are countries like Lao PDR, Myanmar, and Bangladesh that are net importers of Chapter 2: Cross-border Transactions in Higher Education 39

Table 16. An Asia-Pacific Regional Typology of Cross-Border Education1

Level 1 Level 2 Level 3 Level 4 Level 5

Developed Developed Developed or Intermediate Undeveloped exporter nations nations with a intermediate nations with nations, with low with strong strong domestic nations with inadequate domestic domestic capacity but also inadequate domestic participation and capacity and active as domestic capacity; globally relatively weak minor role as importers. capacity; active active as demand for importers. in both import and importers only. education export. imports. Autralia, New Japan, Korea Singapore, China, Vietnam, Laos, Cambodia Zealand (Taiwan) Hong Kong Philippines, Myanmar, Papua (Taiwan) Thailand, New Guinea, (Malaysia, India) Indonesia, Sri small island Lanka, Pakistan nations (Malaysia, India) (Bangladesh, Fiji) (Bangladesh, Fiji)

Trade focus. Language base Major markets for Major markets for As they develop, English language limits exporter provider nations. provider nations, these nations will education creates function though Import and export especially join Level 4. market potential Japan is a large is mostly English- English language as exporters. exporter. Non- language education. Policy trade objectives education. dilemmas: import dominate policy Mixture of trade or build domestic approach. and other capcity? policies. Focus on building knowledge economy. Source: OECD (2004a). 1Intermediate cases are indicated in parentheses.

cross-border education, although their demand for foreign education is quite insignificant. In this typology, the Philippines is categorized together with China, Vietnam, Thailand, and Indonesia, in level four, indicating a need for foreign education to compensate for the inadequacy of the domestic environment to meet the demand for higher education. Moreover, it is perceived that the countries in this category should resolve on how best to improve their capability to provide quality education. The typology also shows that Malaysia and India, while belonging to the same category, are building their capacity and investing heavily in English education to remain competitive. These two countries are 40 The Global Challenge in Services Trade expected to become active consumers and providers of foreign education services so as to parallel the efforts of Singapore and Hong Kong. University education in Singapore had always been offered by two state universities—the National University of Singapore (NUS) and the Nanyang Technological University (NTU). However, driven by the desire to be recognized as knowledge hub in the Asia-Pacific region, the government decided to build the capacity of its academe in the shortest time possible to immediately gain from the education trade. Thus, in the last decade, the Singaporean government has allowed the collaboration with only the best schools in the world. Its first alliance was in the area of research with the Massachusetts Institute of Technology (MIT). MIT professors intensively reviewed the engineering curricula of the NUS and NTU (Tan 1999). Five years later, the three decided to bring engineering education and research to the next level by offering graduate distance education programs. In 1998, the Wharton School of Business of the University of Pennsylvania partnered with the Singaporean government through the Singapore Institute of Management to establish the Singapore Management University (SMU). SMU opened its doors in 2000. It was the first university that followed an American education model (Glasner 1998) and the first private university funded by the government (SMU website). In 1999, the Wharton-SMU Research Center was established. SMU’s latest collaborator is the Carnegie Mellon, which has agreed to develop an undergraduate business program using its expertise in information technology systems. The School of Information Systems shall be the fourth school under the SMU. It attracts foreign academics by paying them at competitive rates. In 2000, INSEAD, recognized as one of the world’s top-tier business schools with base in Fontainebleau, France, offered its first MBA class in Singapore. In the same year, the University of Chicago-Graduate School of Business also began to offer an international executive MBA program. Likewise, the Duke University Medical Center has partnered with the NUS to establish the country’s first graduate medical school (PR Newswire 2004). There is also a joint master’s program in hospitality management between Cornell University and NTU, which will be offered at the latter’s campus by 2006. Clearly, Singapore has been very singleminded in its desire to become a hub of international higher education in Asia. In 1997, the government purposely invited academics from prestigious universities abroad to make recommendations on how to elevate the status of their university education to world-class level. Simultaneously, Singapore has been active in the recruitment of Singaporeans working overseas as well as foreigners to participate actively in research in line with its goal to become a“science hub.” Singapore is currently building a so-called “country brand.” Unlike the traditional foreign providers that strongly rely on the efforts of individual universities, the Singaporean government is promoting the country’s education sector as a whole. At the onset, it has been able to attract students from nearby neighbors such as Malaysia and Indonesia. Chapter 2: Cross-border Transactions in Higher Education 41

Like Singapore, Hong Kong also aims to become a knowledge hub. To build local capacity, the Hong Kong government has allowed countries like Australia to provide courses in Hong Kong. For a time, overseas institutions were unregulated until the government received complaints on the quality of education. Thus, an ordinance came into operation in 1997 to regulate the provision of nonlocal courses (Evans and Tregenza 2001). Private education in Malaysia is a recent development. It has grown from 100 institutions to 600 in just five years (UNESCO 2003). The education system of Malaysia was inherited from Britain although the current system has a large local flavor (Middlehurst and Woodfield 2004). The quality of education is under the purview of the National Accreditation Board. Malaysia is one of the first Asian countries that quickly opened its doors to foreign institutions beginning in 1996 after realizing it may not be able to educate over five percent of its population on its own (Lenn 2001). To date, the country has six foreign institutions in its soil, four of which come from Australia. The government has also partnered with several international universities particularly for its International Medical University established in 1992 (OECD 2004a). OECD (2004a) reports that in 2001, Malaysia spent over half a million dollars on education imports, representing 3.5 percent of the services sector. The country was able to generate US$65 million in export revenues from students coming mostly from China and Indonesia. It had over 18,000 foreign students, from only 3,500 in the previous year. Striving to improve its capacity, India’s commitment to education is taken from its 1950 constitution that mandates free education for all children up to 14 years old (Lin 2001). This is supported by the 1986 National Policy on Education as well as the 1992 Plan of Action. The sector is regulated by the University Grants Commission. The higher education system began with 25 universities in 1947 (Lin 2001). It has since grown to 300 universities and more than 10,000 colleges to support the enrollment of 6.5 million (DAIIE 2001). Other estimates place the figure of student enrollment at 9.3 million (UNESCO 2003). The Indian higher education system is greatly influenced by its British colonizers. Two of its most prestigious undergraduate institutions are the St. Stephens College in Delhi and the Presidency College in Calcutta (DAIIE 2001). Notwithstanding this affiliation, India was able to establish ties with US institutions in the formation of the Indian Institutes of Technology and the Indian Institutes of Management. On distance education, one of the largest open universities in the world can be found in India. Established in 1985, the Indira Gandhi National Open University (IGNOU) was conferred the status of excellence in distance education by the Commonwealth of Learning (Joshi 1998). Despite the establishment of these institutions, India is principally an importer of education services. In 1998-1999, for instance, there were 42,000 Indians who studied in the US while only 709 Americans studied in India. The increase in Indians studying abroad resulted from the liberalization of the Indian 42 The Global Challenge in Services Trade economy that spurred the rise of the new middle class (DAIIE 2001). Most of these students, however, look toward foreign countries for advanced education. Despite its large imports, India is looking toward developing a regional market for education, targeting Arab countries and other countries situated in the Indian Ocean region (UNESCO 2003). For China, the government believes that education is the key to its development. Consequently, it enacted the Education Law of 1995 and, in this regard, presented its education reforms up to 2010. In higher education, the government aims to attain a student enrollment of 9.5 million, with the education financed primarily through tuition fees. The government intends to help students through scholarship grants, student loans, and work-study programs (Lin 2001). By 2002, actual student enrollment hit 15.1 million (UNESCO 2003). China has also set a national objective of “Invigorating Nation Through Science and Education” (NIER). Project 211 aims to establish 100 world-class universities (OECD 2004a). Its strategy is to fast-track the country’s capabilities by sending Chinese nationals abroad and utilizing their talents when they return. While the Chinese have the highest stay rates in a study by Finn (2003), the government has began to set mechanisms in place to encourage the return of Chinese nationals, most especially those who have been sponsored by the Chinese government. These mechanisms include attaching conditions to scholarships and setting career prospects for the scholars. China has also opened its doors not only to joint programs with foreign institutions but also to the entry of foreign institutions and academics. It has cooperative relations with over 600 institutions worldwide (Table 17). As of May 2003, it has 425 programs or part-programs with Australia alone, in all levels including English language and vocational studies. Meanwhile, Indonesia continues to be a net importer of foreign education services. It has the largest unmet demand for higher education (OECD 2004a).

Table 17. China’s cooperative relations with foreign institutions Country Number of institutions United States 154 Australia 146 Canada 74 Japan 58 Hong Kong 56 Singapore 46 United Kingdom 40 Taipei 31 France 24 Germany 14 Korea 12 Total 655 Source: OECD (2004a). Chapter 2: Cross-border Transactions in Higher Education 43

With continued low national expenditures on education, the country is expected to remain a net importer. It has, however, taken steps to improve the quality of its higher education by legally allowing the partnership of Indonesian institutes with foreign universities. Indonesia’s higher education sector is monitored by the Accreditation Board for Higher Education and the Directorate General of Higher Education of the Ministry of Education (UNESCO 2003).

EXPERTS’ VIEWS ON CROSS-BORDER TRANSACTIONS Given the OECD’s classification (Table 16), it would appear that the Philippines is an importer in the education trade. Does this mean it cannot compete with its neighbors? To assess whether the Philippines has a comparative advantage in the education services trade, one should look at the following: • Can Philippine HEIs offer distance education programs to nationals of other countries? • Can Philippine HEIs attract foreign students to pursue their studies in the country? • Can Philippine HEIs establish branch campuses and programs abroad?

The views on whether the Philippines should market itself as an education hub in Asia or open its doors to foreign students, academics, programs, and institutions is as wide as the continuing debate on whether an economy should protect its industries or allow free market forces to govern. However, there has been a lot of pragmatism in the response of experts interviewed2 when asked whether the Philippines should develop itself as an education hub. Admittedly, the country is in a poor economic state. Education experts believe the situation constantly challenges the ability of HEIs to deliver quality programs. Both the public and private sectors have limited resources for education. With the limited paying ability of students, HEIs are forced to compromise some of their standards to sustain their operations. Public HEIs have to contend with national government subsidies that are barely sufficient to meet their needs. Private HEIs, on the other hand, rely on endowments and donations from their alumni, but even these are limited. Hopefully, business owners such as John Gokongwei, Henry Sy, and Alfonso Yuchengco will continue to include the education sector as beneficiary of their social responsibility programs. Notwithstanding, HEIs that have been recognized as top educational institutions in the country continually strive to improve the quality of education delivery. Administrators encourage their faculty to pursue further studies abroad and undertake collaborative research with international academics. They also seek to improve their curriculum by benchmarking with international HEIs and partnering with institutions in the delivery of their program. But all of these are efforts of individual faculty, departments, and colleges. While HEIs maintain

2 Names of those interviewed appear on page 1 (footnote). 44 The Global Challenge in Services Trade institutional linkages, the responsibility to provide an international environment rests, at best, at the college level. In terms of international recognition, the top HEIs in the country have ambitions to be accredited internationally. However, the accreditation process is costly and is viewed by some as biased toward international HEIs with large financial resources. Consequently, even if a program is considered of high quality, if an HEI does not have a large endowment, then the chances of getting accredited is perceived to have been drastically cut. So far, only the AIM has had international accreditation by an American and a European accrediting body. Moving to the modes of cross-border transactions, one form is online education. In the Philippines, there are very few HEIs offering this form of education and most of them target only the local market. Education leaders who were interviewed do not believe that this is an area for education trade since many of the programs are still in the exploratory stage. Moreover, there is poor access to ICT facilities either due to their limited number, expensive access, or poor connectivity. On the aspect of attracting foreign students, there are two basic considerations. Initially, there are simply limited student places. If an HEI has to accommodate a foreign student, this would mean displacing a local student. For instance, at UP-Manila, where medicine is taught, there are limited slots available, as the residency program can accommodate only 160 students. Institution leaders at UP and other HEIs have indicated a preference to serve its domestic market first. Consequently, while there are HEIs that have a good number of foreign students, there is no active campaign to attract more. In the argument that foreign students could bring in more revenues, the usual response was the unattractiveness of the Philippines as an education destination due to high security risks, lack of campus environment expected of international schools, and limited number of quality programs supported by state-of-the-art technology. Interviewees acknowledge that unless the Philippines can market itself in a total package, then it does not make sense to position itself as an education hub. There is simply no way to compete with Singapore and Malaysia that have a very high per capita and thus could afford to invest in education infrastructure and facilities, and pay for good quality academics. Except for a few HEIs, the move to offer local degrees abroad, as another form of export trade, has been quite slow. Previously, the AIM had offered short- term executive programs in India and Malaysia, but these have been sparse. The top HEIs are not too excited about offering their programs abroad because this entails too much resources that could be better utilized in the undergraduate programs in the country. Consequently, only schools like the AMA Education System hope to target the Asian market abroad. With respect to the entry of foreign institutions, the interviewees do not feel threatened at all. Some education experts, however, expressed resistance to commercial presence because it could draw away students who could afford to pay. Nonetheless, they do not believe that a foreign institution can sustain “for-profit” operations in the country since there are very few students who could actually afford the expected higher tuition fees. Also, locals carry a Chapter 2: Cross-border Transactions in Higher Education 45 mentality that if they can pay, they might as well get the real thing by studying abroad. In the aspect that foreign institutions could bring in students from neighboring countries, it is again countered by the argument that the country is economically and politically unstable. However, some interviewees actually look forward to the entry of foreign institutions in the hope that it may drive local HEIs to improve the quality of their education delivery. But they cast doubts on the interest of world-renowned universities to establish branch campuses in the country. They also fear that mediocre HEIs would be allowed to come in. Since the service is paid and consumed before one reaps the benefits, then it may be possible that some locals may be defrauded of quality of education. In this aspect, they look toward a regulatory body to ensure that only quality HEIs are allowed to enter. To reap the benefits of international presence, there are administrators who believe that foreign institutions should be allowed to enter but on a partnership basis. This means that existing local HEIs will seek to maintain strong ties with preselected international institutions. Obviously, there is still a constitutional prohibition against the entry of foreign entities in education and, for this reason, the aspect of commercial presence is not seriously considered by some HEIs. Also, there are those that expressed wariness on the idea because of perceived poor marketability resulting from the expected higher tuition fees. Thus, a strong partnership with the objective of capacity building rather than profit maximization is needed. Due to the aforementioned articulations, one gets the impression that many educators would rather be inward looking and would prefer to channel their resources to meet local demands. However, they recognize that with globalization, they have to be more open in their outlook. Thus, an increasing number of HEIs are seeking recognition and accreditation of their courses to help their graduates pursue advanced degrees or practice their profession abroad. Indeed, internationalization has intensified since the turn of the century, causing educators to revisit their views on the education trade. All things being said, it was a consensus that English still remains as the country’s competitive advantage, in addition to its relatively inexpensive education. English courses are attractive as evidenced by the 60,000 students who enrolled in Australian institutes in the past year just to study the language (IDP website), and the 50,000 students who enroll in intensive English courses in America yearly (Open Doors 2003). However, local educators are looking for serious students who intend to use the acquired English facility for further studies and not simply as a past-time endeavor of tourists who are just wishing to extend their stay in the country. Finally, the educators agree that the Philippines should continually harness programs that have gained worldwide acceptability. These are in the areas of dentistry, health-related services, maritime education, and even engineering and teacher-training. Schools like UP Los Baños should also be continually funded so that the gains in agricultural education and research can continually attract international recognition. 46 The Global Challenge in Services Trade

SUMMARY The competitiveness of the Philippines in the area of education exports is greatly impeded by a number of factors. First, there is a lack of focus by the Philippine government in determining the position of the Philippines in export education. Unlike its neighbors that have taken giant steps to improve their education systems and reverse the trends in the education trade, the Philippines appears to plod along. Consequently, limited financial resources are spread too thinly without sufficient mass to support quality education. If there is poor financial support for local higher education, then one cannot expect any significant support for international education. Even the private sector finds difficulty in providing financial assistance for faculty and student exchanges or in paying foreign professors to share their expertise. Much is dependent on foreign scholarship grants to encourage the flow of academics into the country and outward to other countries. The Philippines also works within a highly politicized environment. Currently, there are over 100 bills in Congress for the conversion of arts and trade schools into state colleges, and state colleges into state universities. This further strains the limited resources for higher education, thereby affecting service delivery. The strong influence of politicians on the CHED also restricts its ability to impose strict sanctions for the inability of HEIs to provide quality education. Quality education is essential for the recognition of degrees as well as professional qualifications of Filipinos wanting to pursue advanced degrees or practice their profession abroad. The recognition has been quite limited and is a continuing negotiating effort between countries. Apparently, there is a lack of credibility on the ability of accrediting agencies to impartially grant accreditation levels. If accrediting agencies cannot ensure the quality of education of local HEIs, who should? Given this perception, who should likewise accredit the programs of foreign institutions? Furthermore, true to the Filipino territorial nature, there is a lack of cohesiveness and cooperative behavior among Philippine HEIs so that higher education can be marketed on a national level rather than on the level of individual HEIs. Singapore, for instance, is more focused on coming up with a country brand, thus channels resources to this endeavor. However, given that there are only few recognized Philippine institutions in Asia, perhaps it also makes sense to concentrate resources on these institutions, rather than trying to market the Philippines as a whole. After all, the country also fairs poorly in the perception that it is a safe environment. Highly sensationalized crimes deter the entry of foreign students, academics, and institutions. Despite these weaknesses, the Philippines still has its strong points. The proficiency in the English language remains a competitive advantage. Its proximity to the major consumers of the education trade is still a plus factor. Moreover, its reputed expertise in customer-oriented fields like nursing, caregiving, dentistry, medicine, maritime services, and even its popularity in the arts and sciences can be harnessed. Finally, it is a cost-effective alternative to other countries given its more affordable tuition fees and living expenses. Chapter 2: Cross-border Transactions in Higher Education 47

INSIGHTS AND RECOMMENDATIONS The potential for cross-border transactions is overwhelming. Based on statistics presented by the UNESCO, OECD, IDP, and the World Bank, foreign student enrollment is expected to continually grow and reach eight million by 2025, four times more than what it is today. This is attributed to globalization and the sheer increase in the adult population seeking for higher and advanced education. Many view China, India, and Indonesia as large sources of foreign students in Asia. Due to the expected growth in cross-border education, governments are interested to become major providers of post-secondary education. Traditional providers are the recognized English-speaking countries—Australia, US, and UK. But there is now the entry of other countries that believe they can be the center of higher education specifically in the Asia-Pacific region. These countries are Singapore, Malaysia, and China. At the same time, there are countries like India and Indonesia that are strengthening their education systems so that many of their nationals could continue their education in their home country. This research shows the competitiveness level of various countries with respect to cross-border education. At the forefront is the US, which has about half a million international students, followed by countries belonging to the Commonwealth, which tend to attract students from member-countries. Members of the Commonwealth that are positioned to become active providers of foreign education are Australia, Canada, India, Malaysia, New Zealand, Singapore, and the UK. They are likely to attract students from Brunei, Pakistan, Sri Lanka, and the African continent, which have a predisposition to the British education system. European countries would also tend to attract their colonized countries, targeting Indonesia, Vietnam, and Cambodia, including Thailand. This leaves parts of China and the United Arab Emirates as free-for-all markets. Notwithstanding, the end-user view of international higher education is that students can improve their living standards by getting the best possible education. Thus, it is important that the educational institutions from where the students receive their degrees are recognized not only locally but in other countries as well. This, together with reasonable tuition and living costs, determines the country and the institute that potential students will choose. Clearly, if recognition is of prime importance to students, then there must be perceived quality. An institution must be recognized worldwide as a center of excellence at least for particular degrees that they would like to be known for. Unfortunately, each HEI in the Philippines strives to be good in all of its course offerings, spreading its resources quite thinly. Then, there are the public HEIs that compete with private HEIs for student enrollment but whose limited financial resources make them ill-equipped to provide quality education. CHED’s creation a decade ago was a welcome move to arrest the deteriorating quality of higher education. It was envisioned that the commission would provide the vision, structure, and resources needed to ensure that the Philippines regains its reputation for excellence. However, it is beset by many challenges that greatly hamper its ability to be effective. First, it is a government agency and, as such, is governed by laws, policies, and guidelines with respect 48 The Global Challenge in Services Trade to the acquisition and use of resources. Next, the commissioners are appointed by Malacañang. While certain criteria are used in their selection, it cannot be helped that political influence would determine the selection of commissioners. Problems arise, too, with the hiring of personnel whose tenure is protected by law. Many of the employees of the defunct Bureau of Higher Education were transferred to the CHED, even if they have lost their usefulness. Thus, processes are slow and bureaucratic, despite the CHED’s dictum for excellence. Another challenge is securing and utilizing financial resources for its operations. Like other government agencies, the CHED has had to tough it out with Congress and Senate even just to maintain its budget at current levels. Once it has an approved budget, the untimely fund releases greatly affects the pace and effectiveness of its programs and projects. The commission has undertaken several researches (i.e., normative financing, corporatization, typologies, CHED tracer study) that looked into the Philippine higher education system. Such studies include a review of state universities and colleges’ charters and enabling laws, typologies of Philippine HEIs, comprehensive cost analysis of degree programs, access of the poor to higher education, models of amalgamation, corporatization of selected SUCs in the Philippines, and quality performance indicators in higher education. Millions of pesos were spent tapping the best researchers in the country to recommend higher education reforms. There are policy recommendations and changes, but implementation is slow. Legislators have been warned that the creation of more SUCs would mean lesser resources and lower quality of education. Yet, bills are continually being presented in the legislative branch that, if passed, would result in even more public HEIs. It had also recommended the closure of certain HEIs and programs due to their inability to meet the standards of excellence. There is great resistance, as stakeholders use all possible means to prevent its implementation. Fr. De La Rosa, chair of the CHED, was decisive to stop the offering of nursing courses by 23 HEIs. Can this police power be exercised consistently? The decreasing budget allocation for public HEIs has triggered the need to find other financing sources. Naturally, this would redound to tuition fee hikes. Raising tuition fees either in the public or in the private sector is not politically advisable. The rate of PhP25-PhP100 per unit is one of the lowest in the region. Increasing the tuition fees would deprive many Filipinos of higher education. Consequently, this could widen the gap between the rich and the poor. Currently, the Philippines has one of the highest gross enrollment rates at the tertiary level. Unemployment rates double due to the poor economy that cannot support the number of college graduates each year. Another policy recommendation expecting great resistance from politicians is the use of the normative financing model in allocating budget for public HEIs. Under this scheme, heads of HEIs no longer need to defend their budget requests since each HEI is given an allocation based on the number of student places. This is a critical issue since some HEIs may receive lesser budgetary allocations because the number of student places is determined by the ability of the HEI to Chapter 2: Cross-border Transactions in Higher Education 49 provide quality education. The number of student places is then multiplied by a standard cost per degree. These are some of the challenges that the CHED faces in its quest to improve the state of Philippine higher education. If international recognition is granted only to the COE/COD HEIs, which represent only six percent of total HEIs in the country, there is clearly a need to improve the quality of higher education to improve the chances of competing in the world market. Does the Philippines aspire to become a major player in education trade at least in the Asian region? During the 1997 World Congress on Higher Education held in Manila, then President Fidel V. Ramos mentioned the “pole-vaulting” strategy intended to diminish the gap between this country and its neighbors (Ramos 1997). He envisioned the Philippines as a knowledge center in the Asia-Pacific region in maritime and medical services. Yet, the Philippines is not any closer to its aim of diminishing that gap. The recent dissolution of the CHED’s Office of International Affairs in favor of an Internal Audit group sends mixed signals as to the priorities of the commission. Seemingly, the education sector’s priority at the moment is the efficient managemetn of its resources. Only when this is settled can the sector move to address the competition in the international market for education. Prior to undertaking any changes in leadership and organization, policies, and programs, the national government has to be more definite about its plans for the education sector. A number of issues need to be addressed. Should the government maintain its aspirations for “education for all”? If so, up to what level of education is it ambitioning for? What kind of support is the government willing to provide to meet its objectives? Does the government have the will power to pursue its objectives at all costs? What role will the private sector play in the government’s master plan? Moreover, the national government must determine the extent of the country’s participation in cross-border transactions. Should the Philippines continue to be a net importer of education services? What is the government’s viewpoint on the brain drain issue? Is the government more interested in the dollar remittances of domestic students who study abroad and eventually work there, or is it interested in attracting these foreign-educated Filipinos to work in the Philippines and contribute to the development of the nation? Can the Philippines be an exporter of education services? What price is the government willing to pay to attract foreign students, academics, programs, and institutions? How can the government build the local capacity so it can become a credible alternative? There are many strategies the government can undertake to improve the quality of higher education. Previous recommendations include the corporatization of universities and the establishment of a single university system or regional universities. It is possible, too, that resources are set aside for HEIs already recognized for quality education, with strict provisions that the benefits should trickle down to other HEIs. International scholarship allocations can be rationed to academics rather than to students for the improvement of teaching and research abilities. The national government may also invite foreign institutions for capacity-building purposes instead of for-profit activities. If the government would like to improve the 50 The Global Challenge in Services Trade capabilities of its adult population without necessarily resulting in brain drain, then scholarship grants can be diverted to distance education. Regardless of the choices the government makes, it is clear that the level of education must be raised. To be successful in this endeavor, there should be a concerted effort between the executive and the legislative branches. If the CHED is the superbody that governs higher education, it should be allowed to carry its function without interference from legislators. As a matter of wishful thinking, it is hoped that individuals chosen to be in the CHED are selected objectively and held accountable for their actions, with operations supported by lump sum funds and managed with integrity. An independent auditor can thus ensure that the funds are properly utilized and accounted for. Notwithstanding, the government must be more purposive. Given the present position of the Philippines in global education services, it is folly to compete on the basis of providing quality education across all fields. The best strategy perhaps is to niche and claim excellence in the fields of nursing, dentistry, medicine, caregiving, language education, and information technology. Engineering and science cannot be an area of competitive advantage unless the government is willing to invest in laboratories, equipment, and talent, which are needed to establish world-class institutions and academics. Alternatively, they can strengthen partnerships with industry and foreign institutions so that engineers, scientists, and researchers can utilize their skills more effectively. The peace and order situation has to be addressed so as to attract foreigners. The government may consider building an apolitical university city outside of Metro Manila. Here, foreign institutions may situate themselves together with other centers of excellence. This may be a way of circumventing the constitutional provision prohibiting foreign investment in education and the practice of profession by academics. More importantly, foreigners expect to see world-class campuses with credible professors delivering relevant curricula. Infrastructure and laws to support this are necessary, including provisions for the mutual recognition of degrees. The legislative branch in the Twelfth Congress and Third Regular Session already issued Resolution No. 73, Concurring in the Ratification of the Regional Convention on the Recognition of Studies, Diplomas, and Degrees in Higher Education in Asia and the Pacific. Additionally, the Philippine government must be more definite in its position on cross-border education. Should quality of education be improved internally or with the help of foreign academics and institutions? If quality is to be enhanced internally, then there is a need for a stronger CHED capable of implementing policy changes without interference from politicians. Moreover, the government should establish a more credible accrediting agency, whose standards are uniformly adapted, privately owned and managed, or otherwise. If quality is to be enhanced with foreign assistance, then the government must review its laws, and address issues such as ownership and repatriation. Finally, Internet access to education needs to be widened to facilitate exchange of programs. The enactment of laws on intellectual property rights has been quite helpful and is a good direction toward the support for e-learning. Chapter 2: Cross-border Transactions in Higher Education 51

CONCLUSION The study of cross-border education invariably redounds to the study of a country’s higher education system. In most Asian countries, the quality level of education had been low. However, countries like Hong Kong, China, Singapore, and Malaysia have been serious in improving their education sector. They have been quite aggressive in building capacity using the fastest means possible, that is, importing the services of foreign academics and institutions. They have looked toward the importation of education services only as it serves their end purpose of establishing themselves to become knowledge hubs. Indeed, these countries have cross-border transactions significant enough to be part of world statistics. Compared to its Asian counterparts, the Philippines presents both advantages and disadvantages. On the positive side, cost of living in the Philippines is low, and its courses are taught in English. Thus, the country is able to offer cost-effective options especially to those who need to learn English. Also, the country is known to be a major supplier of nurses, caregivers, and seafarers. Consequently, this lends credibility to HEIs that offer these courses. On the negative side, the Philippines ranks “average” in the competitive measures presented by the World Economic Forum and the United Nations Industrial Development Organization (UNIDO). In terms of GDP per capita, data show that the Philippines has been overtaken by Thailand, Taiwan, Korea, and Hong Kong. Because of this, investments in education have been wanting. Quality of education is of great emphasis in cross-border education. In a 2002 Asiaweek survey, only three local universities made it to the list of top Asian universities in terms of number of foreign student enrollees. This shows that the Philippines is not perceived as provider of quality education, thus not considered a prime destination of foreign students. Reviewing the higher education system and considering the selection criteria used by international students, quality of education emerged as a primary concern in the choice of institution. Apparently, the Philippines cannot compete with the more progressive Asian countries. It struggles internally, saddled by a poor economy and a highly politicized environment. These realities affect the CHED in performing its functions well. This inability thereby allows mediocrity to persist among HEIs. To be competitive in the education services sector entails a strong political vision for the country. With clear focus, Hong Kong, China, and Singapore have strengthened the capabilities of their local universities by engaging in cross- border transactions. Unfortunately, this clear focus, as well as the cooperative relationship between and among the lawmakers, the executive branch, and the best academic minds, is missing in the Philippines. Finally, regardless of the choice the government makes and the organization it hopes to maintain, efforts on higher education will be wasted if population growth is not abated. There are just too little financial resources to sufficiently meet the requirements of a growing population. Although it can be argued that many of the country’s resources are actually lost to graft and corruption, it cannot be denied that the growing population only serves to further shrink the already shrunk higher education budget. 52 The Global Challenge in Services Trade

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Salmi, J. 2002. New challenges for tertiary education. The World Bank report . International Higher Education Spring [online]. http://www.bc.edu/bc_org/ avp/soe/cihe/ newsletter/News28/text003.htm. [Accessed July 2004]. Santiago, A., G. Largoza, M. Conchada, P. Intal, M. Alba and C. Rufino. 2004. A comprehensive cost analysis of degree programs: National integration report. Manila, Philippines: Commission on Higher Education. Sauve, P. 2002. Trade, education and the GATS: What’s in, what’s out, what’s all the fuss about? [online]. Paper presented at the OECD/US Forum on Trade in Educational Services, Washington, D.C. USA. http://www.uscsi.org/ publications/ GATS/ 6TESauveH.pdf. [Accessed July 2004]. Tan, J. 1999. Recent developments in higher education in Singapore. International Higher Education [online]. http://www.bc.edu/bc_org/avp/spe/cihe/newsletter/ News14.text7.html. The Futures Project. 2000. The universal impact of competition and globalization in higher education [online]. http://www.futuresproject.org/publications/ universal_impact.pdf. [Accessed July 2004]. Tullao, T. 2000. An evaluation on the readiness of the Filipino professionals to meet international standards. PASCN Discussion Paper No. 2000-01. Makati City: Philipine APEC Study Center Network. ————. 2003. Domestic regulation and trade in service: The role of the Commission on Higher Education (CHED) and the Professional Regulation Commission (PRC), p. 17- 161. In Education and Globalization, edited by T.S. Tullao, Jr. Makati City: Philippine APEC Study Center Network and Philippine Institute for Development Studies. Udani, Z. 2003. Continuing professional education: Training and developing Filipino professionals amidst globalization, p. 163-212. In Education and Globalization, edited by T.S. Tullao, Jr. Makati City: Philippine APEC Study Center Network and Philippine Institute for Development Studies. United Nations Educational, Scientific and Cultural Organisation (UNESCO). 2000. The reform and development of higher education in the Philippines, edited by M.D. Valisno. Manila: UNESCO Philippines. ————. 2003. Higher education in Asia and the Pacific 1998-2003 [online]. Paper presented for the Meeting of Higher Education Partners. Paris: UNESCO. http:// unesdoc.unesco.org/images/0013/001303/130338e.pdf. [Accessed May 2004]. United Nations Educational, Scientific and Cultural Organisation/Organisation for Economic Co-operation and Development (UNESCO/OECD). 2003. Financing education– investments and returns: Analysis of the world education indicators [online]. http:// www.oecd.org/dataoecd/ 27/8/2494749.pdf. [Accessed July 2004]. United Nations. 2004. Economic and social survey of Asia and the Pacific 2004. New York: United Nations. Van Damme, D. 2002. Trends and models in international quality assurance and accreditation in higher education in relation to trade in education services [online]. Paper presented at the OECD/US Forum on Trade in Educational Services, Washington, D.C., USA. http://www.esib.org/calendar/tneseminar/ Readercontent.pdf. [Accessed July 2004].

Institutions’ Web sites: AMA International University (Bahrain), http://www.amaiub.com Commission on Higher Education (Philippines), http://www.ched.gov.ph The International Comparative Higher Education Finance and Accessibility Project (ICHEFAP), Graduate School of Buffalo, http://www.gse.buffalo.edu.org. Chapter 3: Health Services Trade 55 33

Challenges in Health Services Trade: Philippine Case1

Maria Cherry Lyn S. Rodolfo and Jovi C. Dacanay

ABSTRACT There is a growing emphasis on the role of trade in health services (telehealth, health tourism and retirement, investments and deployment of medical professionals) in easing fiscal constraints, generating jobs and income, improving infrastructure and financing, and upgrading the capacities of health professionals. This paper seeks to identify the opportunities, barriers, and risks for the Philippines in participating in global trade in health services. It examines the country’s capabilities in engaging in trade and identifies strategic directions that the Philippines can pursue. It also presents the different market niches that can be tapped relative to the opportunities—the aging populations of the Organisation for Economic Co-operation and Development (OECD) countries, the shortage of medical professionals in those countries, the long waiting lines in hospital facilities, the Health Insurance Portability and Accountability Act of the United States, and the poor healthcare systems in other countries. It also addresses the weaknesses in the supply capabilities of the Philippines—the lack of a policy framework to develop the healthcare services sector in a globalized environment, the lack of human resources planning, and the lack of alignment in the initiatives of the government and the private sector.

INTRODUCTION The Philippines has been a major supplier of healthcare workers, particularly nurses to the world. The growth in the demand for nurses and the economic incentives offered by developed countries have triggered rapid migration in recent years. There are fears of the local healthcare system collapsing due to a number of reasons: migration of doctors to work as nurses abroad; closure of private hospitals due to lack of patients and manpower; decline in enrollment in medicine and allied courses (except nursing); and meager budget for public

1 Abridged version of the full report, September 2005. 56 The Global Challenge in Services Trade healthcare. The sustainability of the local healthcare industry will depend to a great extent on how migration is managed and how healthcare delivery and financing are improved. There is a growing interest among developing countries on the role of exportable health services in easing fiscal constraints, generating jobs and income, improving infrastructure (number and quality of health facilities) and financing, and upgrading the capabilities of health professionals. Countries like Thailand, India, Chile, Singapore, and Malaysia are embarking on aggressive health tourism programs. For India and Pakistan, business process outsourcing (e.g., medical transcription, backroom operations) is proving to be another growth area. For developed countries, investments in health facilities abroad tend to expand income streams. The United States (US) and Singapore are aggressive in establishing their presence in foreign shores through their healthcare brands (e.g., John Hopkins and Mayo Clinic for the US and Gleneagles International for Singapore). On the other hand, developed countries are importing healthcare professionals in order to sustain their own healthcare systems. Indeed, these evidences reveal that trade is being used to enhance a country’s strengths and make weaknesses irrelevant in the field of healthcare services. Given this background, this paper is an initial attempt to map out the issues related to tradable health services for the Philippines. It will: 1. assess the trends, market opportunities and challenges in global healthcare services trade; 2. examine the current state of healthcare delivery and financing (e.g., strengths and weaknesses) in the Philippines that will affect the ability to explore the market opportunities; and 3. explore strategic directions to enhance competitiveness in healthcare services.

The following section maps out the changes in global healthcare that are driving the trends in tradable health services. The barriers and risks to strategic directions are likewise discussed. Another section defines the health services industry and examines the current healthcare situation in the country. The paper concludes with some next steps for further research and the actions that may be considered by the public and private stakeholders. GLOBAL TRENDS IN HEALTH SERVICES TRADE This section maps out the opportunities in the global healthcare market that can be tapped to manage migration and sustain the local healthcare delivery and financing.

Healthcare Spending on the Rise In 2000, global healthcare spending reached US$3 trillion—a 14 percent growth from the 1990 level. Asia’s healthcare market accounts for US$390 billion. Japan’s per capita healthcare spending alone is US$1,314-US$2,400 annually, comprising 77 percent of the regional market. By 2010, the Asian healthcare Chapter 3: Health Services Trade 57 market is expected to be valued at US$600 billion, with Japan spending US$422 billion. Other Asian countries are projected to spend at least US$190 billion by 2013. The Centers for Medicare and Medicaid Services report that in the US, the overall cost of healthcare—from hospital and doctor bills to the cost of pharmaceuticals, medical equipment, insurance and nursing home—doubled from 1993 to 2004. In 2004, the US spent almost US$140 billion more for healthcare than in the previous year. From the demand side, the growth is driven by the aging populations, expanded reach of mandatory insurance schemes, emergence and/or discovery of new diseases, and lack of incentives for patients to economize since healthcare is covered by most insurance schemes. From the supply side, the growth is driven by the lack of incentives to relate the cost of treatment with benefits, introduction of more expensive technologies, shortage of health professionals, insufficient healthcare planning, and unfocused treatment by doctors (WTO 1998). These factors have contributed to the high cost of healthcare delivery and have forced governments to consider reforming their financing schemes and explore ways to reduce the costs and/or increase the revenue streams by engaging in health services trade. At least four major trends impact either positively or negatively on the healthcare system of a developing country that has a relatively abundant supply of human resources such as the Philippines.

Aging populations The number of persons aged 60 years and older is projected to grow to almost 2 billion by 2050 in which the population of older persons will be larger than the population of children for the first time in history (World Bank 1998). Today, the majority of the world’s older persons reside in Asia (54%) while Europe has the next share (24%). Japan is the only developed country that is aging at a very fast rate. In 2025, the proportion of the population aged 65 years and above will be highest in Japan, followed by Italy and Hong Kong. Although the US is also aging, in relative terms, its population will be much younger than Japan’s. The OECD countries are increasing healthcare spending allocation for elderly people—from one-third to one-half. Japan spends the largest proportion (47%), while Germany spends the least (34%). The US is near the middle (38%). In looking at the ratio of per capita spending for people 65 years and older compared with those under 65 years, Japan spends proportionally the most (4.8 times), while Germany spends the least (2.7 times). In most OECD countries, the aging population is forcing them to open their doors to healthcare workers particularly from developing countries. In some cases like Japan, the government has been encouraging their citizens to consider retirement in foreign shores.

Shortage of healthcare professionals and long waiting times More people are living longer but the number of healthcare workers available to take care of the aging populations is declining in countries such as the US, 58 The Global Challenge in Services Trade

Canada, and the United Kingdom (UK) due to low birth rates and the decline in interest in the healthcare profession (particularly nursing and caregiving). In developing countries, health professionals are needed not just to take care of the elderly but also to provide healthcare services for the general population. In 14 sub-Saharan countries in South Africa, for instance, there are no radiologists. Rural areas hardly have access to doctors. In addition, the waiting times for treatment are quite long. In the UK, for instance, the average waiting time for kidney transplantation is eight months to three years. In Canada, there are 352 patients waiting for organ transplants in British Columbia alone. Table 1 presents the waiting time in British Columbia, Canada.

Table 1. Median wait time and waitlists for British Columbia, as of 31 March 2005

Surgical specialty Median wait time (in weeks) No. of waitlisted patients Dental surgery 7.1 1,673 Ear, nose and throat surgery 5.4 5,111 Eye surgery 8.6 13,836 General surgery 3.4 12,314 Gynecology 4.3 5,860 Neurosurgery 4.0 1,293 Orthopedic surgery 9.3 20,101 Plastic surgery 6.6 4,541 Urology 4.7 5,689 Vascular surgery 2.7 932 Cardiac surgery 8.6 301 Corneal transplant 17.6 603 Cancer services (Radiotherapy) 0.6 268 Organ transplant N/A 352 Total 72,784 Specific procedures (included in totals above) Endarterectomy head/neck 3.0 121 Cataract surgery 9.4 12,850 Gall bladder 5.1 1,571 Hip replacement 21.8 3,044 Knee replacement 28.3 5,464 Source: www.health.gov.bc.ca/cpa/mediasite/waitlist/median.html

High cost of medical services in OECD countries People are moving abroad to seek treatment at lower costs. Table 2 gives some indicative figures on certain treatments in countries like Thailand, Singapore and Malaysia that are aggressively positioning themselves as medical hubs. Chapter 3: Health Services Trade 59

Table 2. Comparative costs of treatment (in US$) Treatment USA Singapore Malaysia Thailand Philippines

Cataract Surgery 2,500-3,500 1,749 1,014 950 1,424 Total knee replacement 5,000 6,207 4,342 5,500 5,639 Liposuction 2,800 –5,700 3,221 1,711 1,365 1,400

Poor access to healthcare facilities and services Apart from lack of healthcare workers, developing countries do not have sufficient facilities to provide quality healthcare to their local population. There are only 140,000 hospitals in Asia that are currently serving a population of 3.5 billion. The wealthy and the middle class of Asia are willing to pay for quality healthcare services. It is estimated that at least 130 million Asians can afford private services (Singapore Healthcare Services Working Group 2002). These trends have changed the landscape of health services delivery. The high cost of medical services, for instance, has stimulated the application of technology to reduce transaction costs and address the shortage of professionals through telemedicine. Thus, there are increasing discussions on the use of telehealth as an effective way of providing healthcare access. The high cost of healthcare and the long waiting times have also been driving consumers to seek these services in other countries. The next section explores how countries use trade to take advantage of these opportunities and threats.

How Countries Export Health-Related Services There are four possible ways based on the General Agreement on Trade in Services (GATS) by which the Philippines can explore these opportunities (Table 3). The following discussion explores each of these modes and identifies the opportunities and threats that exist and how to make the four modes work for the Philippines’ advantage.

Mode 1: Telehealth Under Mode 1, trade in health services is aided by telecommunications (so- called “telehealth”). Trade is aided by the use of computer-assisted telecommunications to support the functions for clinical (e.g, telemedicine) and nonclinical purposes (e.g., medical transcription, business process outsourcing, management, surveillance, literature and access to knowledge). Two market niches to be considered are telemedicine and medical transcription. Telemedicine. There is a relatively wide spectrum of telemedicine services such as teleconsultations, telepathology, teleradiology, telepsychiatry, teledermatology, and telecardiology. The European Commission’s Healthcare Telematics Program in 1996 defines telemedicine (“medicine at a distance”) as the rapid access to shared and remote medical expertise by means of 60 The Global Challenge in Services Trade

Table 3. GATS modes of supply Treatment Description Examples in the healthcare services 1 Cross-border trade in The possibility for nonresident Telehealth (e-health) services service suppliers to supply o All forms of telemedicine services cross-border into the o For nonclinical purposes: Member’s territory. (a) shared medical services (medical transcription), laboratory services or claims processing; (b) hospital management functions; data collection for statistical or educational purposes, back-up advisory facilities for local staff abroad. 2 Consumption of health The freedom for the Member’s o Consumers who travel services abroad residents to purchase services abroad for medical care in the territory of another o Tourists who incidentally need Member. medical care abroad o Retirees abroad o Temporary or migrant workers o Cross-border commuters who may have multinational coverage options o Residents of multinational areas with integrated health systems Medical and health sciences education provided to foreign students 3 Establishment of trade or The opportunities for foreign o Investments in hospitals commercial presence service suppliers to establish, o Investments in health operate, or expand a commercial insurance companies presence in the Member’s o On ad-hoc basis (under short- territory, such as a branch, term contract as an agency, or wholly owned organization) subsidiary. 4 Movement of health The possibilities offered for the o Two forms for the international professionals entry and temporary stay in the trade in health services are Member’s territory of foreign existing: (a) temporary individuals in order to supply a movement of health personnel service to provide services abroad; and, (b) short-term health consulting assignments. Source: WTO (1998); Blouin et al. (2005). Chapter 3: Health Services Trade 61 telecommunications and information technologies (e.g., telephones, fax machines, personal computers, and other forms of multimedia) no matter where the patient or relevant information is located. Information exchange takes the form of data, audio and/or visual communication between physicians and patients or between physicians and healthcare professionals in geographically separate locations to facilitate the exchange of information on medical, healthcare, research, and/or educational purposes. Although the applications are mostly within the national systems, there are evidences of cross-border trade especially in the areas of radiology and pathology. Globally, the major factor driving telemedicine is the high cost of medical services particularly for the aging populations. The flows of telemedicine exports, however, are still largely from developed to developing countries where there is poor access to healthcare. Telemedicine will be needed as the Philippines positions itself for medical tourism and retirement. A patient seeking treatment in the Philippines can consult with a Filipino doctor online and send the latter his records before actually coming to the Philippines and after his treatment. Furthermore, foreign retirees living in retirement communities in the provinces can access doctors from medical zones or city hospitals via telemedicine. Tele-education is another area where the Philippines has comparative advantage given its expertise in the study of tropical diseases. At this stage, the country can provide radiological and other medical diagnostic support to these countries through second opinion or standard reading of results in health screening programs or tests for patients. The major obstacles include the recognition of licenses and the liability issue. The practice of cross-border telemedicine, for instance, requires Filipino physicians to be licensed in the markets being served. A healthcare facility can have a pool of foreign-certified physicians working with a bigger pool of locally licensed physicians or healthcare professionals (similar to the strategy of India). There are existing disparities in standards and technology to achieve accuracy in the transmission of images, data, and electronic records. The costs can be prohibitive if the provider has other priorities in terms of equipment upgrading. On the other hand, the use of store-forward technology requires less investment costs compared to real-time telemedicine practice which is not yet integrated in everyday use of hospitals or healthcare providers. Most patients still prefer to see their physicians so the trust on the accuracy of findings generated through telemedicine needs to be built up. Partnering between a local healthcare provider and a reputable institution in the target market may help overcome this barrier. Another barrier is the lack of privacy and security regulations. In other countries, the lack of interest on the part of the providers is the main barrier. This can be due to the absence of viable business models or cases. There is a need therefore to study how telemedicine can be integrated in everyday practice and how payment schemes can be facilitated. Telemedicine can also provide opportunities for the Philippines in tapping the expertise of foreign-based institutions without its citizens having to leave the country. For instance, some Filipino patients from well-to-do families have 62 The Global Challenge in Services Trade started to secure medical services in local hospitals that have tie-ups with foreign hospitals, such as the Makati Medical Center which is affiliated with the Stanford Hospital in California, USA. Cross-border telemedicine can impose risks and imbalances on the local healthcare system. A dichotomy in healthcare delivery can exist if cross-border telemedicine develops while local access to healthcare through telemedicine lags behind. There are minimal evidences on telemedicine application even in the national health system. Engaging in cross-border practice requires some success stories or models that the private sector can use as reference to make the business case for investing in the telemedicine business. Furthermore, there is a need to articulate a national policy and strategic framework on the practice of telemedicine for the local and foreign healthcare markets. The key to a successful telemedicine initiative is to have a champion who will mobilize ready providers. What is needed is a pool of Filipino doctors who have licenses to practice in the US market. They will form part of a larger pool of practitioners who will conduct the diagnosis but the certification will be done by the licensed practitioners. The government through the Department of Health (DOH) and the University of the Philippines-Philippine General Hospital’s National Telehealth Center—having initiated a national telemedicine project on teledermatology and tele-education for regional hospitals—can be tapped to work with the private sector in developing the national framework for the practice of telemedicine (including cross-border). This framework should be able to address the logistics of telemedicine applications—from the products to be offered up to the payment or reimbursement coverage. The equity issue should likewise be articulated in the national framework. Medical transcriptiontranscription. Another exportable health-related service includes business process outsourced activities such as medical transcription and backroom operations (e.g., insurance claims and bills processing). In medical transcription, a doctor in another country, say the US, sends his recording via the Internet to a transcriptionist in the Philippines. The transcription is then sent back to the doctor within 3 to 24 hours depending on the urgency of the need. The major driver for the growth of the medical transcription industry in developed countries is the need by healthcare professionals to document patients’ records (e.g., diagnosis, treatment procedures, findings) to facilitate processing of claims and avoid malpractice suits. In the US, healthcare providers need to comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Also, the need of hospitals to restructure their operations and costs has increased the demand for business process outsourcing in the form of insurance claims and bills processing. This offshore medical transcription industry is estimated at US$17 billion for the US alone. Based on the Department of Trade and Industry - Information and Communication Technology (DTI-ICT) Report, about 6,700 US hospitals have yet to convert their medical records into electronic format. This is in compliance with the Federal Certification, a US law requiring all medical records to be computerized. The figure represents about 42 percent of US demand that requires outsourcing. India has already captured Chapter 3: Health Services Trade 63

80 percent of the market while the rest are being shared by Pakistan, Philippines, Sri Lanka, and Australia. To meet the demand, the US market alone needs about 230,000 medical transcriptionists. The Philippines has tapped only around 1 percent of the outsourcing demand of the US. The bigger portion of the demand is being served by India, which is recognized as the market leader today. Its outsourcing industry has around 200,000 employees. India has the first mover advantage. On market access, the lack of a data protection and privacy law is a major concern of the industry. As experienced by India in the early 1990s, companies could easily lose customers due to lack of data protection. US clients require that their providers are HIPAA compliant. Rodolfo (this volume) elaborated on these issues.

Mode 2: Consumption abroad One way to manage the migration of healthcare workers and generate economic contributions for the country is by bringing the consumers of healthcare and related services (tourists, patients, students) to the Philippines. Health tourismtourism. The categories of consumers moving abroad include (Table 4): • Consumers who travel abroad for wellness purposes and medical care; • Tourists who incidentally need medical care abroad; • Retirees abroad; • Temporary or migrant workers; • Cross-border commuters who may have multinational coverage options; and • Residents of multinational areas with integrated health systems.

Health tourists are usually motivated by factors such as higher quality, lower cost, reduced waiting time in the availment of treatments, and availability of services that are either unavailable or illegal in their country of residence (Blouin et al. 2005). For a long time, the US has been a major health hub given its established expertise in medical care through its well-known brand names such as Mayo Clinic, Johns Hopkins, and Stanford Hospital. Recently, however, a growing number of countries such as Thailand, Malaysia, Jordan, Singapore and India have started to offer medical services at relatively lower costs and sometimes bundled with leisure or tourism-related services (Appendix A). Table 5 presents a profile of the health tourism activities in these destinations. Retirement. Retirees move to another country because of the high costs of retirement in their own country, which their pension money may not sustain. Their governments’ fiscal resources are not sufficient to support their needs. They move to destinations such as Florida, the Caribbean, Panama, and emerging ones such as Dubai, Malaysia, and Thailand that offer a wide range of incentives (e.g., political, financial, health and social security) and choices of care (e.g., independent living, assisted living and continuing care). These countries generate employment and income in a number of service-oriented industries (e.g., private and personal, community, manufacturing, tourism) outside of healthcare 64 The Global Challenge in Services Trade Singapore Thailand India US Malaysia Australia United States Canada Germany Thailand Singapore Indonesia Austria Major Players No Importance of Yes (currently Yes consultations are not covered by insurance and patients are willing to pay in cash) insurance coverage Overseas Filipinos USA China South Korea Australia All tourists who visit the Philippines the Philippines Target markets for Capacity Specialist skills Skilled support groups (e.g. tour operations) Language and cultural affinities Good facilities Skilled manpower (i.e., therapists, tour operators) requirements Upper middle to high income Healthy Low health risk All ages Upper middle to high income Healthy enough to travel All ages Potential market for repeat visits to seek further medical information Client group Sample Spas Lifestyle/Healthy vacations Nature tourism Ecotourism Community tourism Resorts Herbal treatments Complementary healing Diagnostic market Health tourism to specific places to benefit from natural endowments such as hot springs and spas. Those who travel abroad for leisure but incorporate consultations for second opinion or diagnostics Products Categories/

Spa Wellness Spa Those who travel Medical Wellness Health Tourism Health Table 4. Categories of consumers moving abroad Chapter 3: Health Services Trade 65 Singapore India Thailand Cuba Malaysia United States Singapore Great Britain Australia India Major Players Importance of Yes (Cosmetic Yes treatments are not covered by insurance and patients tent to be willng to pay on their own as long the costs are competitive relative to those in their country of residence) (nonportability of Yes public and private insurance is a major barrier but some private insurance companies are starting to accredit some facilities that meet their standards) insurance coverage Guam Micronesia the Philippines All tourists who visit the Philippines Target markets for Target markets Capacity Specialist skills Broad range needed for intervention and backup Higher level of technology Skilled manpower (e.g., nurses, therapists, etc.) Specialist skills Broad range needed for intervention and backup Higher level of Technology Skilled manpower (e.g. nurses, therapists, etc.) Language and cultural affinities requirements Upper middle to high income Healthy enough to travel Specific surgical or medical requirements health Variable risk All ages Upper middle to high income Healthy enough to travel Specific surgical or medical requirements health risk Variable Middle age to elderly Elective surgery Cosmetic surgery Joint replacement Cardiothoracic services Eye surgery Cancer treatment that they treatments clients. Usually aesthetic other related cal, dental, cosmetic, Those who travel abroad looking for specialized (invasive) surgical treatments that employ advanced technology which may not be available at home or from prestigious health institutions. Those who travel for medi eye and outpatient pursuit for (noninvasive procedures), similar quality to can receive at home, but less expensive or for specific services not available in the country of origin. Emigrants living abroad and border patients are important groups of purposes rather than for recuperation Health tourism market Sample Client group

Products

Categories/

Health Tourism Health Health Tourism Health Table 4. (continued) 66 The Global Challenge in Services Trade Thailand Malaysia Florida Carribbean economies Thailand Malaysia Carribbean economies Major Players Yes Yes Importance of insurance coverage Japan USA the Philippines All tourists who visit the Philippines Target markets for Capacity More therapeutic intervention than medical Language and cultural affinities Skilled manpower (e.g., nurses, therapists, etc.) Language and cultural affinities requirements Client group Higher income Specific needs Other health conditions Low to medium health risk Elderly substance abusers Higher income health Variable risks Potential market for retirement Recuperation from cancer treatment Therapy Dialysis Addiction programs Elderly care programs Those who travel for convalescence and not necessarily retirees. Retirees who travel abroad to spend long holidays (at least 6 months) or escape from the cold winter months and may seek medical attention during their stay. Health tourism market Sample a Products

Categories/

Rehabilitation/ Long stay Long stay/ Migrant retirees

Retirement Health Tourism Health Table 4. (continued) Chapter 3: Health Services Trade 67 Florida Panama Spain Canada Australia Thailand, Carribbean economies Major Players Yes Importance of insurance coverage n be the potential market for long stay. Retired n be the potential market for long stay. Overseas Filipinos the Philippines All tourists who visit the Philippines Target markets for Target markets Capacity Skilled manpower (e.g., nurses, therapists, etc.) Specialist skills Language and cultural affinities requirements Upper middle to higher income Specific needs Middle to elderly age Those who travel abroad to retire permanently in countries where the costs of living are lower or where the climate is favorable among other things. They can live in three different types of retirement communities: (a) independent living; (b) assisted living; and (c) continuing care. Health tourism market Sample Client group Products

Categories/

Immigrants Retirement There are three segments of the retiree market: retiring individuals, retired, and the retired eldery. Retiring individuals ca There are three segments of the retiree market: retiring individuals, retired, and retired eldery. and retired elderly are for the retirement industry. Sources: Adapted from Gonzales et al. (2001); authors. a Table 4. (continued) 68 The Global Challenge in Services Trade

Table 5. Major health tourism destinations in Asia Country Estimated market size Current markets Target markets for Target revenues Volume Value expansion

Singapore 150,000- US$915 M Indonesian and Ma- Affluent Asian mar- 1 million interna- 200,000 laysians account for ket--residents and tional patients per 70-85% expatriates (including year contributing Philippines) US$3 B by 2012 Thailand 1.1 M US$470 M Japanese 130,000 Japan US$2 B (2012) Americans 59,000 Rest of Southeast British 14,000 Asia Malaysia 122,000 US$94 M 60% of foreigners Middle East and US$1 B by 2010 who seek treatment China, Vietnam, are from Indonesia, Myanmar, Cambo- another 10% are dia and Brunei. from Brunei, Viet- nam, Singapore and Thailand. The rest are from West Asia, South Asia (Bangladesh and In- dia) and Japan. India 150,000 US$333 M Middle East (Kuwait, Southeast Asia, US$2.2 B (2010) Qatar, Saudi Arabia) West Asia, Africa, and South Asia UK and USA (particularly Bangladesh) Philippines ? ? Micronesia, Indone- USA, Japan, South ?: sia, USA (primarily Korea, China, Overseas Filipinos), Micronesian States South Korea, Japan

services. Some governments encourage their citizens to travel and consider retirement (long stay and/or permanent) abroad. In Japan, for instance, the government has encouraged its citizens to seek retirement in other countries such as Costa del Sol in Spain during the 1980s under the Columbia Plan. Because of Japan’s increasing silver market, it has become a major target of countries positioning themselves in the retirement business. As of 2003, a total of 911,000 Japanese are living abroad either as long stayers or permanent residents (Table 6). A number of those living in the Philippines are married to locals. The development of the retirement industry is closely tied to tourism, which serves as a pull factor for attracting retirees to consider other destinations. Chapter 3: Health Services Trade 69

Table 6. Japanese residents overseas: long stayers and permanent retirees Country/Region Long-term Permanent stayersa residentsb Totalc Asia 199,122 7,399 206,521 ASEAN 83,231 5,076 88,307 Brunei 73 8 81 Cambodia 727 6 733 Indonesia 10,867 741 11,608 Laos 384 2 386 Malaysia 9,959 810 10,769 Myanmar 606 34 640 Philippnes 8,981 1,669 10,650 Singapore 19,987 1,117 21,104 Thailand 28,181 595 28,776 Vietnam 3,466 94 3,560 China (incl. Hong Kong, Macau) 76,168 1,016 77,184 Oceania 35,152 27,866 63,018 North America 240,033 129,606 369,639 Central America, Caribbean 5,056 2,528 7,584 South America 5,491 88,819 94,310 West Europe 119,293 33,540 152,833 Central and East Europe, NIS 5,260 455 5,715 Middle East 4,749 1,108 5,857 Africa 5,069 472 5,541 South Pole 44 0 44 World 619,269 291,793 911,062 Source: Website of Ministry of Foreign Affairs, Japan. Note: As of April 2004 a Permanent residents: Japanese nationals with permanent residence status of the country of residence. b Long-term stayers: Japanese nationals staying overseas for more than 3 months with no permanent resident status. c Total: Total of long-term stayers and permanent residents.

For the Philippines, the natural markets are the US and Northeast Asia and some European countries such as Germany and the UK. At this stage, there is still a need to define the health tourism and retirement products of the Philippines. There are bits and pieces of initiatives being undertaken but there is no concrete program for positioning the country as a whole. The product or service offering should translate into a brand of Philippine health services (e.g. similar to Singapore Medicine). By virtue of Executive Order No. 1037 of 1985, the Philippine Retirement Authority (PRA) was mandated to develop and promote the country as a retirement haven. To date, however, the industry has not yet taken off due to several barriers. 70 The Global Challenge in Services Trade

The major barrier to movement of consumers for health tourism and retirement is the lack of insurance portability, particularly public insurance. US citizens who wish to seek medical treatment or even retire in the Philippines cannot use their Medicare insurance in the country (Table 7). To some extent,

Table 7. Summary of how US health plans treat healthcare received abroad Plan US population Heathcare received overseas covered in Year 2004 Covered or not? Emergency Care Non-emergency Care Medicare and 26% of US population Not covered, except when Not covered. Medicaid (mainly retirees, low- beneficiary is a border income families and resident, and lives closer disabled families) to the foreign provider than the US provider. Tricare 3.5% of US population Covered, with Covered, if beneficiary is (active duty and retired overseas network stationed or retired US military personnel provider handling the overseas, until the age of and their families) claim filling. 65. HMO plans 25% of all employees in Covered but as an out- Not covered. the US with employer- of-network benefit sponsored health requiring higher insurance consumer cost-sharing. Initially beneficiary pays entire cost out of pocket but qualifies for reimbursement only when claim form and itemized bill are submitted to insurer upon return to the US. Port of Service 15% of all employees in Same as HMO. Not covered. Plan (POS) the US with employer- sponsored health insurance Preferred 55% of all employees in Same as HMO. Not covered by most plans. Provider the US with employer- However, some plans When covered (e.g., World Organizations sponsored health have a network of Bank employee health plan) (PPOs) insurance overseas providers it is treated as an out-of- who accept US network benefit requiring insurance (e.g., Blue higher consumer cost Cross Blue Shield) and sharing. would handle claim filing on consumer’s behalf. Source: Adapted from Matto and Rathindran (2005). Chapter 3: Health Services Trade 71 private insurance is already portable as long as the healthcare provider in another country is accredited by the insurance company or the health maintenance organization (HMO). In the case of the Japanese market, patients can seek partial reimbursement of their medical cost outside Japan. However, long-term care insurance, which is more relevant in the movement of retirees, is not yet portable. Emotional insecurities can also slow down the movement of patients or retirees. Language and cultural barriers may hinder them from seeking treatment abroad. This is particularly true for the Japanese market. Even if a retiree has already been staying for some time in the Philippines, he still goes back to Japan to seek medical treatment because of language concerns and the issue of cultural differences (Rodolfo and Padojinog 2004). Beginning 2005, the government embarked on a bold move to position the Philippines as a medical services hub in Asia (Mode 2). The Arroyo administration issued EO 372 that created the Public-Private Partnership Task Force on Globally Competitive Industries. The Task Force is mandated to pursue strategic directions for three sectors—health and wellness, IT-enabled services, and logistics. The Committee on Health and Wellness designated the Department of Health’s Office of Undersecretary for Special Concerns to mobilize hospitals and clinics. This program is likewise intended to encourage local healthcare workers to stay in the country. The DTI’s Board of Investments (BOI) identified health and wellness (including retirement villages) as a priority sector in the 2005 Investments Priorities Plan (IPP) and incorporated incentive schemes for pioneer and nonpioneer investment projects (Mode 3). To date, the Philippine Economic Zone Authority (PEZA) is working with the Department of Tourism (DOT) and the DOH in defining the incentives for health tourism and retirement villages. However, the policy framework on the development of health tourism and retirement in relation to the local healthcare situation has yet to be developed. In the meantime, hospitals, clinics, and physicians are steadily attracting foreign patients while some real estate projects are serving as hosts to foreign retirees. There are still unresolved issues related to health tourism and retirement. These include the following: • How will foreign direct investments (FDIs) help improve equity in healthcare services? • How will the government address the incentive structure for FDIs and for local healthcare providers that are starting to export health services? • Will the entry of foreign healthcare professionals matter in the country’s bid to become a medical services hub? If yes, to what extent will the Philippines allow foreign healthcare professionals to practice in its soil? • To what extent will the government give incentives to foreign retirees to consider the Philippines for their retirement? • To what extent will public healthcare workers be given incentives to participate in medical tourism and retirement without causing internal brain drain? 72 The Global Challenge in Services Trade

• How will the Philippines sustain these export initiatives given the weaknesses in the local healthcare delivery and financing? • How will the revenues from health tourism and retirement be channelled to the health services, tourism, and allied sectors? What mechanisms can be used?

Movement of studentsstudents. Students are another group moving abroad to consume health-related services. There are incentives for students to pursue undergraduate and postgraduate medical education (e.g., traditional and nontraditional) abroad. First, specific programs may not be available in their home country. Second, scholarships on medical education require students to pursue the program in another country and not in their home country. Third, foreign institutions have a good reputation in their desired fields of specialization. Among the medical education hubs are the US, Australia, and Singapore (and China for traditional Chinese medicine). Fourth, due to cost considerations, students from more developed countries go to lesser developed ones with a good reputation in medical education. The establishment of satellite or affiliate schools by developed countries in developing ones through joint venture agreements has encouraged medical students to study in their home country. Some universities in the Philippines have started to strengthen their marketing efforts to attract foreign students in order to address the decline in enrollment and encourage investments in their educational system. For instance, St. Paul University of Tuguegarao has partnered with the Yan Jing Overseas Chinese University of the Peoples Republic of China for the delivery of a Bachelor of Science in Nursing program. There are also hospitals (e.g., St. Luke’s Medical Center, Capitol Medical Center, University of Santo Tomas, and Cebu Doctors Hospital) that provide postgraduate training to foreign doctors for specialization. One barrier that schools and hospitals face in their drive to develop this niche market is the lack of government guidelines on the scope of responsibilities of foreign doctors who are training in the Philippines. Santiago (this volume) discusses further the issues related to the movement of students. The major barriers faced by foreign students when they move to another country for their education are the lack of mutual recognition of diplomas or certificates between countries and the visa regulation and processing. The possibility of these students not returning to their home country is another major concern among developing countries. The application of new technologies in education delivery via teleconferencing could encourage students to pursue their degrees in their home country since it could give them access to expert education without having to go abroad.

Mode 3: Foreign commercial presence This mode includes the establishment of commercial presence in a foreign market to provide health-related services to clients. It is categorized as follows: Hospital operation/management sector. Hospital management companies usually enter foreign markets through joint ventures with local Chapter 3: Health Services Trade 73 partners or triad ventures with local and third country investors. Specifically, it concerns the acquisition of facilities, management contracts and licensing, and local partnerships to gain access to certified and qualified medical personnel as well as local markets. The presence of foreigners in the industry is relatively strong in developing countries such as Indonesia and Thailand. A number of investments came at the height of the Asian crisis, when most hospitals either declared bankruptcy or failed to become profitable. Major investors in hospital services come from Australia and Singapore; some are from Malaysia and Japan. Even hospital management is a common practice in cities like Jakarta (where at least five hospitals are owned or managed by foreign firms and individuals), Surabaya, Java, and Bali. In Dubai, a medical zone was constructed to house the famous clinics of Mayo Clinic and Harvard Medical Center. These are currently patronized by the rich citizens of Arab countries. The Singapore-based Parkway Group Healthcare Pte. has developed the Gleneagles International as its brand in acquiring or investing in hospital facilities. It has acquired so far 11 hospitals, 10 in Asia and one in Britain. A majority share in a dental surgery chain is operating throughout Southeast Asia. Health insurance sectoror. Some countries have opened up their health insurance markets with some restrictions imposed on foreign insurance companies investing in hospitals. Managed care operations (a combination of managed care and insurance) have been used as a means to penetrate foreign markets to circumvent foreign equity and nationality restrictions. They are expected to reduce the total medical costs by requiring participating physicians to provide the lowest cost treatment. Patients have raised concerns over the discrimination by physicians between HMO patients and non-HMO patients. Education sector. Some well-known medical schools are establishing themselves in foreign countries (as in the case of the John Hopkins School in Singapore), including developing countries, usually through joint ventures with local schools. This kind of foreign commercial presence is often accompanied by movement of providers (e.g., professors) and movement of consumers (e.g., students moving from headquarters to subsidiaries and vice-versa). The interest for the recipient country is to differentiate and upgrade the curricula available to its students or medical personnel. On the other hand, the interest for the exporting institution is to have access to new sources of revenue, spread its reputation abroad, and avoid overcrowding in its headquarters. This move encourages students in developing countries to pursue medical studies in their home country. On an ad-hoc basis. To upgrade facilities, some companies expand abroad through contract-based activities under multilateral funding. Since it is time limited, the exporting country provides opportunities for its medical professionals without burdening the local healthcare system. Contracts can be renewed depending on the needs of the importing countries and the resources of multilateral agencies. The exporting companies can likewise develop a pool of personnel to be deployed thereby upgrading the quality of the healthcare workers. 74 The Global Challenge in Services Trade

In this context, health service providers can face government policies that discriminate against overseas entrants into the marketplace. These can include limits on foreign equity ownership (Table 8), discriminatory tax arrangements, restrictive competition policies (including the lack of competitive neutrality), clearance requirement of health ministries, quantitative limits on the number,

Table 8. Investment rules on hospital and insurance companies Countries Rules / Policies France, Italy, Luxembourg, The construction or expansion of hospital facilities is limited by a health the Netherlands, and Spain services plan that identifies local needs. Austria Foreign commercial presence commitments affecting all 27 healthcare sectors require authorities to consider local interests before authorizing foreign persons or companies to acquire property and before allowing foreign concerns to invest in corporate entities. Sweden Maintains economic-need limitations on the number of private medical service practices that may be subsidized through its social security healthcare reimbursement system Finland Foreign commercial presence is allowed only through incorporation with a foreign equity ceiling of 51 per cent. France Foreign acquisitions of the stock of newly privatized companies may be limited if total foreign investment exceeds one third of total investment or 20 percent of total equity. European Union Some form of economic-need limitations on the establishment of new hospital facilities. United States The establishment of hospitals or other healthcare facilities may be subject to needs-based quantitative limits. Japan Limits ownership of hospitals and clinics to national-licensed physicians or groups of persons of whom at least one member is a Japanese- licensed doctor. Investor-owned hospitals that are operated for profit are prohibited. Regulations are less strict in the nursing home sector where foreign companies are benefiting from a dramatic increase in the over-65- year-old population in Japan and a shortage of nursing homes and other long-term care facilities in that country. Brazil Foreign companies cannot own hospitals or clinics. India Foreign companies can establish themselves only through incorporation, with a foreign equity ceiling of 51 percent. Mexico Foreign investment is allowed up to 49 percent of the registered capital of enterprises. Malaysia Economic needs tests. Foreign companies have to set up joint-venture corporations with Malaysian individuals or Malaysian-controlled corporation or both. Source: WTO (1998). Chapter 3: Health Services Trade 75 location, staffing and management of foreign establishments, and pre-emptory political decisions. Changes to these policies generally require high-level negotiations with the relevant foreign governments. The Philippines has not explored commercial presence of healthcare facilities abroad. What the government is pursuing is the establishment of foreign presence in the country in order to build the capabilities in modes 1 and 2.

Mode 4: Movement of natural persons There are two types of movement defined under Mode 4 of the GATS. These are short-term consulting arrangements and intracorporate transfers. As mentioned under Mode 2, the aging populations of the OECD countries present an opportunity to ease unemployment problems and augment income generation in developing countries through the deployment of medical workers. Among health professionals, nurses have been in great demand in recent years. This is evidenced by the rapid movement of thousands of nurses from developing countries including the Philippines. The major importing countries so far are Saudi Arabia, US, UK, and Canada due to the shortage of nurses in these countries (Calma 2005; Galvez-Tan et al. 2005). Furthermore, there are new openings for nursing aides and caregivers for the elderly and those with disabilities. The major sources are the Caribbean nations, Philippines, and South African countries. There are many reasons why health professionals move out of their home country. Primarily, they are attracted to the more improved living and working conditions and the more lucrative remuneration that employers in other countries could offer, which is about five to six times more than what they would receive locally. This is a tremendous help for their families back home. In addition, they want to upgrade their skills, which they could pursue by working in more advanced healthcare institutions. Cultural affinity and geographical proximity facilitate the movement of health personnel abroad. From a national perspective, the remittances of these health workers will help finance the healthcare needs of the domestic population. In a way, migration also tends to ease the unemployment problems in the country. The temporary movement of health professionals is also beneficial at some point. The risk of brain drain starts to happen when these professionals get married and decide to live in other countries. It is aggravated when doctors leave their home country to work as nurses abroad. The relevant barriers to the movement of healthcare professionals or workers include the economic needs test requirements, discriminatory licensing, difficulties with accreditation or recognition of foreign professional qualifications, and the nationality and residency requirements. Other barriers include immigration regulations, examinations for completion of qualifications and foreign exchange controls affecting the repatriation of earning, and discriminatory regulation of fees and expenses. The movement of Filipino healthcare workers will continue with the globalization of healthcare. How can brain drain be addressed? One is to explore the export opportunities 76 The Global Challenge in Services Trade under Mode 1 (particularly business process outsourcing) and Mode 2. At the same time, the government (and even private institutions) can negotiate for equity or compensation for the costs of training or the provision of scholarships to sustain the local healthcare workforce.

ASSESSMENT OF CAPABILITIES There are two areas that need to be examined in relation to the Philippine’s capabilities to explore the opportunities presented earlier. These are infrastructure (facilities and services, cost structure, differentiated standards) and human resource pool (availability and quality). The presence of networks and business linkages enhance these two integral components of the healthcare delivery.

Infrastructure The Philippines offers competitive prices in health-related services. One reason is the relatively low cost of labor in the country. In telemedicine, for example, a radiologist in the US is paid US$30-50 per plate read. Compare this to US$5-10 being paid to a radiologist in the Philippines per plate read. In medical transcription, the main advantages of the Philippines are its telecommunications infrastructure, labor, and reasonable office rental fees (see Rodolfo, this volume). These are the three main cost items that matter in the competitiveness of medical transcription companies. The Philippines also has a good track record— a minimum accuracy rate of 98 percent and a turnaround time of 24 hours. It normally charges 10-12 cents per line—a rate that is competitive with India’s. While labor cost in the Philippines is higher than in India, it is very competitive relative to the US. The average salary of a full-fledged transcriptionist in the Philippines is US$2,500-US$4,000 per year, depending on level of skills. In India, it is US$2,700 while in the US, the rate is US$25,000 to US$30,000. The cost of telecommunications lines is also lower by 30-50 percent in the Philippines than in India. Furthermore, procurement times are shorter (3 weeks as opposed to 3 months) and there is less transmission delay. The bandwidth cost has declined by 70 percent during the past four years, according to local IT service and contact center providers. Other major advantages include the benefits of the country’s deregulated telecommunications sector (see Rodolfo, this volume). There are 29 medical transcription organizations and 10 medical transcription schools under the Medical Transcription Industry Association of the Philippines. Furthermore, the association worked with the Technical Education Skills and Development Authority (TESDA) in developing a curriculum for medical transcription, which is currently being offered in some schools in the country. As far as the retirement industry is concerned, the cost of living in the Philippines is lower than in developed countries. The Filipino-American community in the US is a major market that should be tapped. Another is Japan, although it is relatively more difficult to uproot the Japanese retirees from their homeland unless their government will strongly support and recommend the Philippines as a retirement destination. Japan has a dollar per capita income of over US$30,000—30 times more than that of the Philippines. The daily cost of Chapter 3: Health Services Trade 77 hospitalization in the Philippines is also 30 times lower than in Japan while medical charges in the Philippines are nine times lower (Padojinog and Rodolfo 2004). The dwelling units in the Philippines also cost less. At the same time, they provide more living space for the household. At present, there is no need to construct new settlements just to serve the retirees. The soft property market currently prevailing in the Philippines has caught many developers of both subdivisions and condominiums with large inventories of unsold units. With some adjustments in the standard of construction and amenities, many of these housing developments can be relaunched or remarketed as retirement villages or clusters or lifestyle communities. Active retirees prefer to still live in the metropolis and simply spend some activities in the countryside. The Philippines takes pride in its archipelagic nature and relatively abundant tourism resources, including its network of hospitals, clinics, retirement facilities, and medical schools. The major healthcare providers in the country consist of 1,723 licensed private and public hospitals that have a combined bed capacity of 85,040. The 1,069 private hospitals account for 47 percent of total bed capacity. Out of the 654 government owned and operated hospitals, the 72 retained DOH hospitals have a total of 23,755 beds or 28 percent of the total beds of government hospitals. A profile of the hospital industry in the Philippines is given in Appendix B. Additionally, there are government specialty hospitals that have become known for providing quality medical care. These are the National Kidney and Transplant Institute, Philippine Heart Center, and the Lung Center of the Philippines. There are private clinics (e.g. Asian Eye Institute, American Eye Center, Makati Laser Eye Center, Eye Republic, Belo Medical Clinic, and Calayan Center) and individual practitioners who have gained expertise and reputation in their field (Dacanay and Rodolfo 2005). The network has its own weaknesses that can affect the country’s ability to service the demand of the health tourism and retirement markets. First, there are only about four destination spas in the Philippines compared to Thailand and Indonesia that have more. This can limit the economic opportunities for the industry. Second, there are no clear directions yet on the accreditation system for the health tourism and retirement programs. International accreditation has been cited as an important requirement for insurance portability. To date, only St. Luke’s Hospital is accredited by the Joint Commission International, an accrediting body based in the US. Nevertheless, there are already some ISO- accredited hospitals and this accreditation is what matters to the European and Asian markets (particularly Japan). Some providers are already able to attract markets in Guam and other Micronesian states, the US, Australia, and India, even without international accreditation. Needless to say, international accreditation is needed to expand the market base. In the short term, while providers are beefing up their financial resources, a high-quality local accreditation scheme can be applied. 78 The Global Challenge in Services Trade

Third, the network lags behind in terms of health information infrastructure and management systems (e.g. information documentation, processing and dissemination). This is one reason why most facilities are not yet ready for international accreditation and integration of telemedicine in everyday practice. Fourth, there is a maldistribution of bed capacity (Dacanay and Rodolfo 2005). In the National Capital Region (NCR), the ratio is 371 patients per bed while in the Autonomous Region of Muslim Mindanao, the ratio is 3,872 patients per bed. Fifth, private hospitals are closing down due to lack of patients and fast turnover of healthcare workers. The social healthcare financing has not significantly improved compared to the targets of the Health Sector Reform Agenda (Appendix C). Healthcare delivery and financing are interdependent. Healthcare financing does not only reduce the cost of healthcare, it also increases the ability of individuals to secure health services. The benefits and services offered by the healthcare financiers also impact on the providers. With the additional financial support from healthcare financing, people have greater access to healthcare providers. Moreover, because one is dependent on the other, policies that are directed to one part of the system also affects the others in terms of costs and benefits. Lastly, there is still a lot of work to be done—from the airport infrastructure side to providing ease of entry and exit to consumers from abroad.

Human Resources The Philippines’ greatest strength is people. Its healthcare professionals have earned the global reputation of providing competent and compassionate care to patients. Two important questions have to be considered, however. Does it have the manpower to serve its own people as well as the foreign markets? How can it sustain the quality of care? Data from the Professional Regulatory Commission (PRC) reveal that there are almost 100,000 licensed physicians in the country (Table 9). This is supported by a network of schools that produce medical and health sciences graduates— a total of 30,000 per year. The Philippines has a pool of health professionals but as mentioned earlier, there is maldistribution (Galvez-Tan and Rodolfo 2005). For instance, around half of the surgeons are highly concentrated in the NCR. Enrollment in medicine and allied courses, except for nursing, has declined in the previous years (Table 10). Thus, lesser number of medical graduates is expected in three to four years’ time. The number of National Medical Admission Test examinees has also dipped from 6,245 in 2000 to 2,912 in 2005. Doctors are leaving the country to work as nurses abroad primarily for economic reasons. Registered nurses earn an average of US$150 per month in the Philippines (Galvez-Tan 2005) whereas nurses in the US earn about US$4,000 per month and has the opportunity to bring their families. Any move to increase the salary scale of registered nurses by at least three to four times its current level may help abate the increasing migration. A government subsidy or grant could encourage trained nurses to stay. A fourfold salary increase equates to human capital investment Chapter 3: Health Services Trade 79

Table 9. Supply of health professionals PROFESSION Total as of 10 February 2006 Dentists 47,758 Midwives 146,296 Nurses 390,059 Nutritionists/Dieticians 12,374 Optometrists 9,636 Occupational therapist 2,286 Physical therapists 19,454 Physicians 98,240 Source: Professional Regulatory Commission.

Table 10. Enrollment in medical schools Schools Quota 2001-02 2004-05 % Increase Angeles University Foundation 150 72 30 -58.3 Bicol Christian College of Medicine 160 25 19 -24.0 Cebu Doctors College of Medicine 200 120 99 -17.5 Cebu Institute of Medicine 260 115 77 -33.0 Cagayan State University 80 33 19 -42.4 Davao Medical School Foundation 160 88 100 13.6 De La Salle University - EAC 200 257 117 -54.5 Far Eastern University 360 379 248 -34.6 Iloilo Doctors College of Medicine 160 78 20 -74.4 Lyceum Northwestern 160 57 19 -66.7 Manila Central University 210 148 54 -63.5 Mindanao State University 80 42 54 28.6 Pamantasan ng Lungsod ng Maynila 160 160 135 -15.6 Remedios Romuladez Memorial Foundation 80 73 30 -58.9 St. Louis University 160 112 64 -42.9 St. Luke’s College of Medicine 120 128 76 -40.6 South Western university 210 138 78 -43.5 UERM-MMC 360 309 200 -35.3 University of Sto. Tomas 410 421 440 4.5 University of the Philippines 167 160 -4.2 University of Visayas 160 80 40 -50.0 Virgen Milagrosa University Foundation 160 68 24 -64.7 West Visayas State University 160 99 100 1.0 Xavier University 100 55 63 14.5 Zamboanga Medical School Foundation 80 30 33 10.0 Source: Association of Philippine Medical Colleges. 80 The Global Challenge in Services Trade that would convey huge marginal benefits for the smooth functioning of the healthcare system. There is also a concentration of medical and health science schools in the NCR, Southern Luzon, Ilocos Region, and Western and Central Visayas. Meanwhile, Mindanao suffers not only from the lack of access to healthcare facilities but also from the lack of medical schools. In medical transcription, a major concern faced by the industry is the lack of workers to service the demand. According to the MT Academy report, there are merely 5,000 professional medical transcriptionists in the Philippines from only 40 medical transcription firms, a small number compared with the 100,000 workers in the call center industry. A deterrent to the entry of graduates from the nonmedical allied courses is the opportunity cost of additional training that is usually conducted for six months.1 Some find it more worthwhile to spend on caregiving training as caregiving is an entry point to work abroad and seems to have better opportunities for their families. Even if the Philippines has the available manpower, the deteriorating quality is a concern. Seemingly, low passing marks in the board exams is becoming a trend. A number of established nursing schools are enjoying high enrollment rates but the number of graduates and board passers continue to decrease each year. There is indeed a need to improve the curriculum of these schools in order to improve the quality of nursing graduates. An alternative career path can be pursued for those who do not take and/or pass the board exams. This would improve the future pool of human resources (Galvez-Tan et al. 2005). As the Philippines positions itself in health tourism and retirement, the industry must address the tension related to the entry of foreign medical professionals in medical and retirement facilities. Again, a strategic framework is needed. In what specialty areas can foreign doctors be allowed to practice and under what arrangements? What is the spectrum of services or participation for their entry? Some conditions regarding practice can be explored such as allowing foreign doctors to stay in the country within a specific period of time only. This can be done together with a team of Filipino doctors who will be trained to specialize in relevant fields. The Philippines has some experience in setting up foreign presence abroad, particularly franchising of retail stores. In the field of health services, however, franchising has been done in services such as spas and clinics like the Belo Medical Clinic but mainly for the local market. Models for establishing the presence of hospitals and other clinics abroad are needed. Overseas franchises can start in communities with relatively large Filipino population. This is the same strategy pursued by the Apollo Clinic of India.

1 The training basically consists of three modules and costs PhP20,000 per module or a total of PhP60,000–PhP75,000 for all modules. The cost is borne by the prospective applicants. The lack of English skills also makes companies spend on English language modules. Graduates of medical and allied courses can cut short the training to three months or even less and focus on two modules only—Medical Style and Grammar, and Medical Transcription Technology. Chapter 3: Health Services Trade 81

As regards attracting investments to the Philippines, there is a network of medical schools that can be positioned for joint ventures to encourage foreign students. There is also a network of hospitals, particularly tertiary hospitals, that can be upgraded to service the health tourism and retirement markets. There is no doubt that markets exist. Demand is already high relative to the supply capabilities of the OECD countries and the developing countries in Asia. For years, the markets have been the US and the UK for the deployment of healthcare workers. But the result has been the permanent migration of health professionals along with their families, which translates to the disintegration of the local healthcare system. It is therefore critical to develop, devise, and set up a health service enterprise that takes into consideration the brain drain risks. This is where Mode 2 comes in. It is the point where citizens of OECD countries come, visit, spend time, and eventually retire in the Philippines. It would be very significant in the sense that their consumption and medical care expenditures in the country will create multiplier effects on the local economy. Tourism, for instance, has the capability to generate direct and indirect effects of around PhP2.25 for every PhP1.00 spent by a tourist. This goes with the existing tourist attractions already in place like holiday spots and malls, among others. However, it is not yet very clear which markets to tap in the short, medium, and long terms for medical tourism and retirement. The Philippines can also enhance telehealth-related products and services (Mode 1) and commercial presence (Mode 3). Telehealth is an unexplored service that can be provided to neighboring Asian countries. It can be in the form of tele-education between top hospitals and schools. Telediagnosis is also part of prehealth and posthealth tourism. Perhaps in the medium term, the top facilities in the country can consider expanding their presence abroad, set up satellite clinics or offices, and contribute to revenue generation. Such mode can be linked to telehealth of Mode 1 when these satellite offices send their diagnosis via telemedicine to their main facilities here in the Philippines. Such arrangement can likewise serve to prepare patients for health tourism. Post telediagnosis can therefore serve as another revenue source when these patients return to their country of residence. Encouraging foreign investments would help local hospitals upgrade their health facilities and services. Partnerships with healthcare providers in other countries would also provide the opportunity for technology transfer and improvement of human resource capability. Asian Hospital, for instance, has partnered with Bumrungrad International. The Philippines should also consider the strategy of Australia in medical education. To facilitate the flow of foreign patients to public and private clinics, Australia established a medical visa. Australian medical schools also created specialized international departments, set up joint ventures with foreign universities, and opened medical schools in the target markets. Incomes earned from overseas training activities have contributed up to 20 percent to the budget of Australian universities. The Philippines can explore this mode in order to increase the scholarships for Filipinos and improve the human infrastructure. 82 The Global Challenge in Services Trade

China’s strategy of forming health teams to work abroad on contract—both in the framework of aid programs or strictly on a commercial basis—may be worth pursuing as well. Under this scheme, Chinese institutions enter into agreements with foreign governments or directly with medical institutions. Furthermore, it has opened access to more than a dozen traditional Chinese medicine and medical facilities in more than 20 countries. This is the same strategy being pursued by India’s Apollo Clinic which is also looking at the Philippines for its expansion program. This strategy requires developing a brand of services to be exported abroad. Singapore’s Parkway Health Group developed the Gleneagles International brand as part of its strategy. The Raffles Medical Group is building up strategic alliances overseas by partnering with healthcare organizations from developed countries.

OTHER STRATEGIC OPTIONS There is a need for a roadmap that will address the sustainability of the health services sector under a globalized healthcare environment. A common denominator among countries that are exploiting the global opportunities of the health services sector (such as Australia, Canada, Cuba, Jordan, India, Sweden, and the UK) is the existence of a national structure to coordinate and promote participation in the global market. Their export strategies highlight the strong linkages between domestic production and external markets of healthcare services. A public-private mix is ideal for the Philippines since this will optimize scarce resources and create a forum for addressing political issues and other concerns. Such a national structure is important to bring together all sectors and networks to develop a common vision and strategies. A key concern is to increase awareness on the capabilities of the various firms and the modes of health services the country can trade. A further interest is to identify barriers and obstacles that hinder market access to local and foreign clients. Fostering cooperation in an environment of competition is essential. Developing and maintaining a database of suppliers and clients is a tool to determine business strategies. In the Philippines, related questions include the following: What is the national structure? Who is the authority behind this national structure? Is it the PPP Task Force on Globally Competitive Industries (EO 372) or the National Economic and Development Authority (NEDA)? At this stage, it is the Task Force that should align the initiatives for wellness, medical tourism, and retirement. The DOH can take the lead in addressing human resources development. Such alignment will help provide a wholistic approach and strengthen the linkages between domestic production and external markets for healthcare services and benefit the Filipinos who should be at the core of all these developments. The Philippines can consider the models of other countries. For example, in the UK, the London Medicine was created in 1993 with sponsorship and support from the national government as well as private medical and business communities. It has two main objectives: (1) to promote and develop business opportunities for London Medicine’s affiliates so as to increase the flows of Chapter 3: Health Services Trade 83 clinical, educational, and research work in London hospitals and medical schools, and (2) to attract research contracts and investment from British and international companies. Meanwhile, Australia established the National Health Industry Development Forum in 1994 and set up a program of assistance to private firms. It is geared toward bringing various health industries together and developing a common focus. The Forum is jointly convened by the ministries of industry and health, with the support of Austrade. As part of its export strategy, Australia is focusing on the modes of cross-border trade and movement of consumers. Singapore has the Singapore Medicine that has consciously repositioned the country as a medical hub by focusing on more complicated procedures that do not directly compete with Thailand. Based on the previous sections, there are four areas where strategies are needed.

Market Niching and Product Development • Strengthen domestic market base. Word-of-mouth advertising and promotion can be an effective tool to convince and encourage the more affluent segment of the local population and subsequently the foreigners to consider the healthcare services in the country. • Define the product. The private sector and the government (Department of Health, Department of Trade and Industry, Department of Foreign Affairs, Department of Tourism) should work together to define what the embassies and commercial posts can promote abroad. • Identify specific markets for telemedicine, health tourism and retirement, and medical schools, and conduct a more detailed competitor analysis so the gaps can be identified and matched with existing strengths. Development and promotion of noninvasive procedures can spearhead the health tourism program. The retirement industry can focus more on the active retirees given that there are hardly any ready and fully integrated facilities that can be promoted to more discriminating markets such as Japan and the European countries. • Acquire market intelligence. This is needed by private stakeholders. This is where the linkages with government can be exploited through the services provided by commercial and diplomatic offices abroad. Such service can reduce search costs on the part of the private sector. • Develop and strengthen global linkages. To upgrade capabilities, increase the access to medical technology and expertise, and facilitate the entry of foreign clients (e.g. students, patients, retirees), local hospitals and schools should develop strategic alliances with foreign institutions (e.g., hospitals and schools). This initiative can be pursued by the Private Hospital Association of the Philippines or the Philippine Hospital Association, with support and guidance from the DOH, the Commission on Higher Education (CHED), and the Professional Regulatory Commission (PRC) in terms of rules and guidelines. 84 The Global Challenge in Services Trade

Human Resources Development In the previous section, three main concerns related to human resource development were raised: 1. how to encourage healthcare workers to stay in the country; 2. how to provide economic opportunities to them via exportable health services; and 3. how to enable them to improve their services.

To address these, the following strategies are recommended: • Develop a national policy and a national plan on health human resources (PMA 2005). This will include a national database on human resource development as well as local health professional registries. The policy should likewise address the maldistribution in human resources and medical schools. • Adopt interventions to increase the supply of healthcare workers. One suggestion to increase the number of applicants in medical schools is to decrease the cost of medical education by tapping other sources of funds such as government (through subsidies or scholarship programs), business and philanthropic institutions, legislators through their countrywide development fund, and foreign students. Another is to actively recruit students through a coordinated marketing program with the CHED and the Department of Education. • Review the curricula for medicine and health sciences education to properly prepare the graduates to the new healthcare environment. The curricula should be able to equip students with the proper knowledge, skills, and mindset to effectively serve both local and foreign patients and retirees. Schools that have zero or very low passing rates in the board exams should be phased out. • Strengthen the linkages between the academe and the hospitals and other healthcare providers. This is to address the mismatch between skills required by the industry and the graduates of medical and health sciences schools and to improve enrollment in health sciences. • Institutionalize continuing education programs for healthcare professionals. This can be done through the PRC as requirement for license renewals. Associations and hospitals can likewise help support this program to keep the professionals up to date with the changes in economic, cultural, social and technological trends in healthcare delivery. • Manage migration of healthcare professionals. This can be done by: (a) negotiating with foreign governments or recruiting institutions for compensation schemes or equity; (b) providing economic opportunities through health tourism, retirement and telehealth activities; (c) rationalizing distribution of schools and healthcare facilities; and (d) increasing coverage and health benefits for Filipinos. Any initiative of the national government to increase health benefits would certainly Chapter 3: Health Services Trade 85

augment the incomes of healthcare professionals by at least 30 percent. A rise in healthcare spending due to additional benefits like health insurance would increase the demand for healthcare. As a whole, strengthening the capacity of the Philippine Health Insurance Corporation (PhilHealth) as a health insurer is likely to achieve a strong ripple effect for the development of other sectors in the healthcare industry, particularly among its providers.2 • Strengthen the initiatives of healthcare professionals to establish clinics or networks of professionals for group practice. This can provide economic opportunities and enhance development of clusters of providers. Some models are already observed in cosmetic surgery, eye care, and dental treatment. • Align the training standards with international standards. This is needed across all tradable health services. Workers must be continuously trained to ensure quality services to both local and foreign markets.

Industry Infrastructure The main concern is the right infrastructure the industry needs to deliver quality services to domestic and foreign markets. The following strategies should be considered: • Do an inventory of facilities and capabilities of medical providers and allied industries (e.g. schools, tourism providers, associations). This is needed to identify critical skills and gaps in healthcare services and facilitate the development of linkages and clusters of providers and expertise • Define incentive schemes for hospitals, clinics, retirement villages, wellness providers (e.g., spas), and schools to encourage them to support the local and international healthcare service industries. There are no clear incentive systems for the health services sector as a whole. The investment environment must be clearly defined under the wings of the Board of Investments and the Philippine Economic Zone Authority (PEZA). Local hospitals that are starting with their medical tourism programs are concerned about the dual incentive structure that favor institutions with larger foreign patient base.

2 The Thai government is aggressively making healthcare accessible for all starting 2002. This move is foreseen to increase the demand for healthcare services by public or private providers. The contingency fund of Baht 5.168 million for the development of hospitals facing deficits and another Baht 5.168 million for human resource development is expected to transform the Thai healthcare sector in two to three years to be at par with internationally accredited healthcare providers. The additional healthcare insurance benefit made available by the Thai government is meant to increase the utilization of existing facilities to promote medical tourism particularly for outpatient care (e.g., health promotion, primary care, and sickness prevention). This caters to both foreign and local markets. 86 The Global Challenge in Services Trade

• Map out initiatives and implementation schedule for accreditation of hospitals and retirement facilities by local and/or international accrediting bodies to promote quality healthcare services for both local and foreign clients. • Map out clusters of services that can be promoted as well as clusters of facilities that can be linked up to build an efficient referral system, which is highly needed by the retirement industry. • Improve marketing infrastructure. There is a need to increase the country’s presence in the meetings, incentives, conferences and events (MICE) market by providing competitive bids for medical meetings or congresses. This is a way by which the Philippines can expose the capabilities of its health professionals and become a health hub. Travel, medical, and educational associations can hold symposia or meetings to discuss the latest issues and propose strategies to the government. The medical sector should also participate in talks regarding the liberalization of the health services sector. There is also a need for travel agencies, medical providers, and allied services to link up their core competencies in order to focus on delivering quality service.

Trade Negotiating Issues In studying trade in health services, there are two important classification lists that should be used as reference—the UN Central Product Classification List and the GATS Classification List. The commitments of countries to liberalize the health sector are based on Section 8 of the GATS List. However, in discussing the four modes of supply defined above, there is a need to refer both to the UN CPC Division 93 and the GATS List. To illustrate, Table 11 reveals that under the GATS, health and social services are defined under Section 8. These include hospital services, other human health services, and social services. However, trade in health services also covers the export of medical professionals that is not covered in Section 8 but is in Section 1 (Professional Services) of the GATS List. As noted by the WTO Secretariat (1998), such delineation between Sections 1 and 8 tends to ignore the strong complementarities between medical services and hospital services. There are other issues related to the sectoral classification list of the GATS on health services. Consider activities such as health tourism (spas, cosmetic surgery for aesthetic purposes, convalescent care, and rehabilitation of local health services by tourists) as defined in Mode 2. Section 8 is not specific to activities aimed at providing specialized treatments to tourists. The use of spas can be categorized as professional services offered by midwives, nurses, physiotherapists, and paramedical personnel provided they involve some treatment with a medical doctor located in the premises as some wellness programs do (Gonzales et al. 2001). As far as health services are concerned, the export data are currently reflected in various accounts. In the case of medical transcription or outsourcing, the export figures are part of communication services. For health tourism, the data are part of travel and tourism. The Chapter 3: Health Services Trade 87

Table 11. Health and social services in the GATS Scheduling Guidelines and in the UN Central Product Classification (CPC) List Sectoral Classification Relevant Definition / Coverage in List under GATS UN CPC Provisional CPC No. 1. Business Services a. Professional Services h. Medical and dental services 9312 Services chiefly aimed at preventing, diagnos- ing and treating illness through consultation by individual patients without institutional nursing. i. Veterinary Services 932 Veterinary services for pet animals and animals other than pets (hospital and non-hospital, medical, surgical and dental services). J. Services provided by 93191 Services such as supervision during pregnancy midwives, nurses, physio- and childbirth… nursing without admission care, therapist s and paramedical advice and prevention for patients at home. personnel k. Other n.a. n.a. 8. Health Related and Social Services a. Hospital services 9311 Services delivered under the direction of medical doctors chiefly to inpatients aimed at curing, reactivating and maintaining the health status. b. Other Human Health 9319 Ambulance services; residential health facilities Services (other than services other than hospital services. 93191) c. Social Services 933 Social Services with accommodationa; social services without accommodationb a Welfare services delivered through residential institutions to old persons and the handicapped (PPC 93311) and children and other patients (93312); other social services with accommodation (93319). b Child daycare services including daycare services for the handicapped (93321); guidance and counseling services not elsewhere classified related to children (93322); welfare services not delivered through residential institutions (93323); vocational rehabilitation services excluding services where the education component is predominant (93324); and other social services without accommodation (CPC 93329). Sources: UN Statistical Classification System; World Trade Organization; Gonzales et al. (2001).

revenues generated by medical professionals working abroad are reflected as overseas workers’ remittances. Most of the members have unbound commitments on Mode 1, which means they are free to introduce any new measure to regulate foreign service provision in the domestic market— both in terms of market access and national treatment (Table 12). The Philippines has not made any commitments in the GATS (Table 13). To this end, the government and the private sector should work 88 The Global Challenge in Services Trade

Table 12. Overview of commitments for Modes 1, 2, and 3 on medical, health- related, and social services Sector Number of Cross border supply Consumption abroad Commercial members presence (Full commitment a for Modes 1-3) Full Limited Unbound Full Limited Unbound Full Limited Unbound Medical and dental 49 (12)b 17 6 26 38 7 4 19 24 6 services Veterinary 37 (10)c 17 2 18 33 1 3 19 14 4 services Midwives, nurses 26 (4)d 6 4 16 21 5 0 10 16 0 etc. Others 3 (1)e 2 1 0 2 1 0 1 2 0 Hospital services 39 (9)f 11 1 27 31 5 3 18 17 4 Other human 13 (6)g 6 1 6 6 5 2 8 4 1 health services Social services 19 (2)h 3 0 16 4 13 2 5 13 1 Other health and 3 (2)i 2 1 0 2 1 0 2 1 0 social services a Full commitments for both market access and national treatment and no limitations in sectoral coverage. b Brunei Darussalam, Burundi, Congo, Gambia (subject to horizontal limitations for Mode 3), Guinea, Hungary, Iceland (subject to language requirement), Malawi, Norway, Rwanda, South Africa, and Zambia. c Australia, Burundi, Congo, Finland, Gambia, Lesotho, Singapore, Qatar, South Africa, Saudi Arabia, (subject to horizontal limitations for Mode 3). d Gambia (subject to horizontal limitations for Mode 3). e Iceland. f Burundi, Ecuador, Gambia (subject to horizontal limitations for Mode 3), Hungary, Jamaica, Malawi, Saint Lucia, Sierra Leone, Zambia. g Gambia (subject to horizontal limitations for Mode 3), Hungary, Malawi, Sierra Leone, Zambia. h Hungary, Sienna Leone.

Sources: WTO (1998); ITC (2002). together to use trade to the country’s advantage by considering the linkages across all modes of supply. For example, if infrastructure investments are needed and capital is lacking, then the Philippines can explore commercial presence through incentives to foreign providers. But what should be the conditions in the establishment of commercial presence? If 100 percent foreign ownership is allowed, how can the country ensure the transfer of technology and systems, and the capability building for research and development? How can these FDIs increase equity to healthcare services and sustain human resources for health? What are the monitoring mechanisms to ensure this access? The FDIs can serve as an entry point for foreign expertise but the country should set some conditions. For instance, the government may allow foreign experts to stay for a specific period of time, or only require a certain Chapter 3: Health Services Trade 89

Table 13. Summary of specific commitments in the GATS Philippines Thailand Singapore Malaysia India Indonesia Accounting and finance X X X Advertising X X X Legal X X Architectural and engineering X X X X X Telecommunications X X X X X X Audiovisual X X X X Construction/engineering X X X X X Distribution X Education X Health X X X Travel and tourism X X X X X X Recreation/culture/sports Transportation X X Courier X Sources: ITC (2002).

percentage of the total workforce to be filled up by foreign experts. The specific fields of expertise needed can be determined by studying the critical skills required vis-à-vis current gaps. The following strategies should be considered: • Develop a framework for linking trade in international health services with the domestic healthcare system. • Pursue mutual recognition agreements (MRAs) for the healthcare professionals on a bilateral basis (or regional if possible). The proposed MRAs should be developed by the private sector, specifically associations, and the government. • Build the capacities of the health services stakeholders (e.g., government, private sector, civil society) to understand the GATS and the opportunities its offers. Capacity building will enable the stakeholders to define a position on liberalization, which may lead to improvements in the local healthcare situation. There is a need to consolidate the position of the different stakeholders in order to strengthen the overall bargaining position of the country in the health services trade and address the imbalances resulting from the rapid migration under Mode 4. • Measure the economic contributions of tradable health services for use in negotiations, policymaking, and industry and business planning. This can be initiated by the National Statistical Coordination Board and the National Statistics Office with from the DOH, Department of Tourism, Department of Trade and Industry, the National Economic and Development Authority, and various associations and private providers. 90 The Global Challenge in Services Trade

• Negotiate for public insurance portability with countries such as Japan, South Korea, Taiwan, UK, and Australia that have high or 100 percent universal coverage of social insurance. The US should also be considered because of the Fil-Am market.

APPENDICES

Appendix A. Brief Profile of Health Tourism in Selected Countries

USA The United States is a major exporter of health services as evidenced by the relatively significant flows generated by institutions such as Mayo Clinic, Johns Hopkins Medical Center, and the Massachusetts General Hospital from Mexico, Argentina, and even Arab countries (WTO 1998). It has the first mover advantage in capturing the movement of patients across borders.

Cuba The Servimed in Cuba has been tapped to generate foreign exchange earnings from the sale of health tourism packages and to establish joint ventures. Its competitive advantage lies in viable prices due to low labor costs, highly qualified health professionals, and certain exclusive treatments that are successfully drawing patients from Latin and North America. Its health tourism program is highly supported by the government.

Thailand Singapore is facing stiff competition with the Bumrungrad Hospital (now Bumrungrad International) of Thailand. Today, the Private Hospital Association, which has more than 185 members, has been supporting this health tourism project. Available treatments include dentistry, ophthalmologic surgery, and plastic surgery, among others. Services in Bangkok can be 50-70 percent cheaper than in Singapore. Around 800,000 foreign patients were treated in Thailand in 2003, generating US$470 million in revenues. The major markets of Thailand today are the Japanese, Americans, and British. The Bumrungrad Hospital treated 350,000 patients in the same year. The infrastructure and marketing investments of Bumrungrad helped increase the international patient volume by 57 percent between 1999 and 2001 while revenue contribution from international patients reached 37 percent . Bangkok’s International Medical Centre also offers services in 26 languages, recognizes cultural and religious dietary restrictions, and has a special wing for Japanese patients.

Malaysia Malaysia is another country whose stakeholders are convinced about the value of health tourism as a major growth engine. Under the 8th Malaysia Plan, the Chapter 3: Health Services Trade 91 government identified health tourism as a growth driver in 1998 and created the National Committee for the Promotion of Health Tourism in Malaysia. The Committee is tasked to spearhead the development of the medical and long- stay programs, and to promote Malaysia as a “second home” for international tourists. The Committee is composed of airlines, hospitals, travel and tourism agencies, and the Malaysian Industrial Development Authority. Five subcommittees were created to address the issues of: (a) identification of markets; (b) tax incentives; (c) fee packaging; (d) advertisement; and (e) accreditation. In 2003, there were 100,000 health tourists, an increase of 18.2 percent from 2002. Of the total number, 60 percent were from Indonesia and 10 percent were from Brunei, Vietnam, Singapore, and Thailand. The rest were from West Asia, South Asia (Bangladesh and India), and Japan. Total revenue was estimated at US$10 million. Cardiology and general surgery services have the highest demand among foreign patients. The Middle East is a major target market given the large annual medical expenditures in these countries. The government aims to generate around US$1 billion in revenues from health tourism alone by 2010.

Singapore Singapore is another aggressive player in the field serving its immediate regional markets. An estimated 150,000 foreign patients sought treatment in Singapore in 2000 and spent about S$345 million a year in healthcare. Based on figures from the Ministry of Health, most of the patients were from Malaysia and Indonesia (70-85%). Today, Singapore does not compete on the basis of price alone but is boosting its image as a destination with high standards of healthcare. Singapore is positioning itself as a center for health and wellbeing (e.g., health screening, aesthetic and antiageing therapies) and for the treatment of various illnesses. It also intends to establish one-stop centers in key regional markets to make it more convenient for foreign patients to come to Singapore. It aims for one million international patients per year by 2012 and total revenues worth US$2 billion.

Appendix B. The Private Hospital Industry in the Philippines Private hospitals are classified according to levels of complexity or specialization. The hospital system in the Philippines basically follows a three-tier mode: primary, secondary, and tertiary. Each level has well-defined roles, functions, capabilities, facilities, organizational structure, and staffing standards. This categorization allows the provision of a hierarchy of services utilizing appropriate resources at each level. Appendix Table B1 shows the distribution of hospitals by category for 1997-2003. The DOH gives a more specific classification of the three levels. The tertiary level is composed of specialty centers, specialized hospitals, medical centers, regional hospitals, and provincial or general hospitals. Tertiary hospitals have capabilities and facilities for providing medical care to cases requiring sophisticated diagnostic and therapeutic equipment and the 92 The Global Challenge in Services Trade

Appendix Table B1. Average number of beds in private hospitals Primary Secondary Tertiary TOTAL REGION 1997 1999 2003 1997 1999 2003 1997 1999 2003 1997 1999 2003 RP TOTAL 15 14 14 30 29 33 130 128 127 34 35 38 I 11 12 12 26 27 31 94 86 78 22 22 22 II 12 11 11 20 30 33 100 50 50 17 18 19 III 10 11 12 21 22 22 72 75 78 22 24 27 IV 12 12 4 25 25 48 84 84 87 28 29 29 V 13 13 20 27 28 27 61 65 62 20 21 28 VI 16 16 75 36 38 33 160 174 184 69 71 95 VII 16 17 16 39 40 40 127 126 165 56 56 73 VIII 14 14 14 26 31 28 113 113 113 25 26 26 IX 14 13 14 31 32 28 70 87 87 21 23 24 X 16 15 15 40 41 38 99 92 89 27 27 29 XI 20 19 19 50 44 36 115 110 110 31 31 32 XII 16 14 14 37 33 34 73 73 71 25 23 25 NCR 17 15 16 34 31 36 216 211 199 84 86 87 CAR 15 16 17 36 32 31 160 160 160 28 27 32 ARMM 16 17 20 15 16 17 20 CARAGA 16 17 12 32 32 42 75 82 67 24 26 22 Source: Department of Health. Note: Shaded regions are those with average number of hospital beds greater than the national average.

expertise of trained specialists in the subspecialties. In particular, specialty centers are equipped with expensive and sophisticated diagnostic and therapeutic facilities for a specific medical problem area. These are hospitals with fully departmentalized service capabilities and certified medical specialists and other licensed physicians in the field of medical science such as pediatrics, obstetrics and gynecology, surgery, and other subspecialties and ancillary services. These are large-scale hospitals with bed capacities ranging from 50 to over 700. Their medical equipment and facilities are usually the most advanced and are constantly upgraded. They are also considered as teaching and training hospitals. The secondary level consists of district hospitals with capabilities and facilities for cases requiring hospitalization. It also has the expertise of trained specialists. Like tertiary hospitals, they have the support of licensed physicians in the medical sciences and operate as admitting medical centers. They have bed capacities ranging from 10 to 69. Occupancy rates range from 30 to 60 percent. The primary level is composed of municipal and Medicare-affiliated hospitals that have facilities and capabilities for first-contact emergency care and hospitalization of simple cases. These are hospitals equipped with the service capabilities needed to support licensed physicians rendering services in medicine, pediatrics, obstetrics, and minor surgery. Bed capacity ranges from 6 Chapter 3: Health Services Trade 93 to 25. Due to the limited number of beds and facilities, hospital operations are not centered on inpatient activities. Primary hospitals operate more as outpatient clinics than as admitting medical centers. On average, medical personnel (doctors, nurses, midwives, and medical technicians) are present for every bed in a primary hospital. Doctors and nurses are employed as general practitioners or professionals. The average number of doctors for secondary hospitals is 14, mostly resident physicians. Especially in the rural areas, these hospitals experience difficulty in attracting doctors. On average, secondary hospitals maintain 1.06 medical personnel for every bed. Tertiary hospitals have an average of 145 doctors. No difficulty is experienced in attracting doctors because of the perceived prestige attached to tertiary hospitals. Many tertiary hospital administrators believe that they have a greater responsibility in providing quality healthcare. The average medical personnel-to-bed ratio maintained by tertiary hospitals is 2.28. An interview with industry participants revealed that tertiary hospitals need an initial capital of about PhP5.6 million per hospital bed. Financial viability can only be achieved upon reaching 500 beds. Breakeven point happens on the tenth year of operation. Each hospital is divided into several departments. Although the number of these departments varies according to specialization, eight departments can be distinguished: (1) cardiology department; (2) respiratory therapy; (3) laboratory; (4) surgery; (5) radiology; (6) emergency room; (7) coronary care unit; and (8) pulmonary care unit. The distribution of private hospitals by category as of 1997 can be characterized by the clustering of hospitals in areas with relatively high income level such as the National Capital Region (NCR), and Regions 3 and 4. For instance, NCR has an average of 200 beds per tertiary hospital whereas Regions 3 and 4 have an average of 100 beds per tertiary hospital. The larger, more financially viable tertiary hospitals in the NCR have about 300 to 600 beds. The financial viability of the private hospital sector is currently threatened, hampering its ability to engage in expansion programs and social services such as medical missions. This explains the marked decrease in the number of hospitals and beds from 1964 to 2003. Among the major problems besetting the sector include the increasing hospital operating expenses, high level of bad debts and uncollected accounts, increasing costs of capital expenditures (building expansion or equipment purchase), generally poor management skills and shortage in the supply of hospital management specialists, delayed reimbursements by Medicare, scarcity in long-term financing and high loan default rates, maldistribution of hospital facilities especially in urban areas, and low paying capacity for hospital services of the greater percentage of the population. Private hospitals may have improved their productivity in the past years but their capacity (in terms of number of beds per population) has not significantly increased. Private hospitals account for the majority of fixed asset investments in the healthcare industry. From 2000 to 2003, the healthcare providers that had the biggest fixed asset investments were the top three hospitals in the NCR—St. 94 The Global Challenge in Services Trade

Luke’s Medical Center, Professional Services, Inc. (Medical City), and Medical Doctors, Inc. (Makati Medical Center). These hospitals accounted for 22 percent of total book value of fixed assets in the private healthcare sector. They invested a total of PhP8 billion in fixed assets from 2000 to 2003 equivalent to 33 percent of the total amount needed to modernize government hospitals and healthcare facilities (Appendix Figure B1).

Appendix Figure B1. Total fixed assets of top private hospitals vs. total book value of fixed assets of surveyed establishments in the private healthcare industry (in PhP ‘000)

Sources: Annual Survey of Establishments (National Statistics Office) and Top 7,000 Corporations (Philippine Business Profiles).

Appendix C. Healthcare Financing in the Philippines The industry’s contributions to the gross domestic product (GDP) reached 3.4 percent in 2004. Per capita spending was US$35.3—a 24 percent increase from its 2002 level. This can be explained by the low percentage share of healthcare expenditures to an average family’s expenditures. This share amounts to only 2-3 percent of average income. In recent years, the private sector has become the major provider of health financing (Appendix Figure C1). The government has been limited by its fiscal constraints. Moreover, there is an increasing availability of private healthcare companies. In private financing, a big portion is still financed by households as revealed by the proportion of out-of-pocket expenditures to total private sector financing. External financing, however, is quite limited to donations by international agencies. Chapter 3: Health Services Trade 95

Appendix Figure C1. Distribution of healthcare spending

Source: Philippine National Health Accounts, National Statistical Coordination Board, as of July 2004.

Looking at the total health expenditures in 2004, government spending, including social insurance, accounted for 40 percent. Private and other sources were 58.6 percent and 2.8 percent, respectively. In 2003, government expenditures increased to 43.7 percent while private sources declined to 54.9 percent. Health expenditures of the private sector came from private insurance companies (1.34%), HMOs (5.7%), and individual out-of-pocket expenditures (42.8%). Almost half of the healthcare expenditures were either financed without healthcare plans or insufficiently covered by these healthcare plans. Traditionally, the healthcare industry of the Philippines has been principally financed by taxes and out-of-pocket payments of individuals. Nevertheless, various financing mechanisms, particularly insurance and prepayment schemes, are continuously increasing the contributions to health expenditures. Medicare, the compulsory health insurance, has been the most established of all insurance schemes. It has been in existence since 1972. The actual percentage share of out-of-pocket spending, which falls significantly above the targeted percentage share from the healthcare reform agenda, manifests the dependence of the healthcare system on household personal disbursements. As could be gleaned from Appendix Figure C2, the healthcare system is expected to develop the capacity of social insurance to carry the burden of healthcare financing as indicated by the target share of social insurance. There is a pressing need for the country to invest on education and healthcare to improve the quality of life and promote human development. If local financing is insufficient, the country can explore opportunities from tradable health services. Additional spending on health will generate additional output and income for a number of sectors in the economy. The wide backward output and income 96 The Global Challenge in Services Trade

Appendix Figure C2. Personal and public healthcare spending by sources of funds (actual vs. targeted based on health sector)

Source: Philippine National Health Accounts, National Statistical Coordination Board, as of July 2004.

linkages revealed in Appendix Table C1 imply that any increase in the spending for healthcare services and related industries by households, investors, or the government is beneficial to the development of the healthcare sector as a whole, not only in terms of the output but also in terms of the incomes of healthcare professionals.

Appendix Table C1. Output and income coefficients of variation in the healthcare industry and health-related sectors Output linkages Income linkages Industry description Forward Backward Forward Backward Manufacturing Drugs and medicine narrow wide wide wide Surgical, dental, medical and orthopedic narrow wide narrow narrow supplies Ophthalmic goods narrow narrow narrow narrow

Services Life and nonlife insurance wide narrow Wide narrow Private hospitals, sanitaria and similar narrow wide narrow wide institutions Private medical, dental, veterinary and narrow wide narrow narrow other health clinics and laboratories Other social and related community narrow wide narrow narrow services Public health services narrow wide narrow narrow Total medical and health-related services narrow narrow narrow narrow Sources: Authors’ estimates based on NSCB 1994 Input-Output Table (NSCB 2003). Chapter 3: Health Services Trade 97

Most industries exhibiting high income multipliers are also typically labor intensive or belonging to the services industry. The entire medical and health- related industry itself ranked sixth among all other industries in the economy. For every one unit increase in final demand in the economy, there will be a PhP0.3387 increase in income of employees in the medical and health-related industry.

REFERENCES Blouin, C., N. Drager and R. Smith, Editors. 2005. International trade in health services. Geneva, Switzerland: World Health Organization and Washington, DC, USA: World Bank. Calma, J.R. 2005. The exodus of our vital supply of nurses. Masteral thesis. Pasig City, Philippines: University of Asia and the Pacific. Galvez-Tan, J. and C.L.S. Rodolfo 2005. Competitiveness of health and wellness. Presentation during the Philippine Services Coalition Stakeholders Meeting. Makati City, Philippines. Galvez-Tan, J., F. Sanchez and V. Balanon. 2005. The brain drain phenomenon and its implications for health [online]. Paper presented at the International Conference on the Medical Workforce sponsored by the United States Educational Commission for Foreign Medical Graduates (ECFMG), UP Diliman, Quezon City, 4-7 October 2004. http://www.up.edu.ph/forum/2005/Jul-Aug05/brain_drain.htm. Gonzales, A., L. Brenzel, and J. Sancho, J. 2001. Health tourism and related services: Caribbean development and international trade. Submitted to the Regional Negotiating Machinery. Kaiser, K. 2005. The healthcare service market for the international consumer: an analysis of the Philippines. The Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP). Project No. 01.2467.7-001.00. Makati City, Philippines: European Chamber of Commerce of the Philippines and German Technical Cooperation. Mattoo, A. and R. Rathindran. 2005. Does health insurance impede trade in healthcare services?” Mimeo. Washington, D.C., USA: World Bank. National Statistical Coordination Board (NSCB). 2003. Philippine national health accounts Makati City, Philippines: National Statistical Coordination Board. Philippine Medical Association (PMA). 2005. Proceedings of the Philippine Medical Summit. Quezon City, Philippines: Philippine Medical Association. Rodolfo, M.C.L.S. and W. Padojinog. 2004. Philippine tourism’s big bold move. Staff Memos 10. Pasig City, Philippines: University of Asia and the Pacific. Rodolfo, M.C.L.S. 2004. Health tourism: widely prescribed. Staff Memos 13. Pasig City, Philippines: University of Asia and the Pacific. Singapore Healthcare Services Working Group. 2002. Developing Singapore as the compelling hub for healthcare services in Asia [online]. http://www.app.mti.gov.sg/ data/ [Accessed 30 July 2004]. World Bank. 1998. World development report 1998. Washington, DC. World Trade Organization (WTO). 1998. Health and social services: Background on health services trade [online] http//www.wto.org [Accessed 10 August 2004]. Chapter 4: Audiovisual Services Sector 99 44

Audiovisual Services Sector: Can the Philippines Follow “Bollywood”?

Gloria O. Pasadilla and Angelina M. Lantin, Jr.

ABSTRACT The paper is an industry study of the audiovisual services sector, especially the film and television industries in the Philippines. It discusses the importance of the sector in the economy and employment, its strengths and weaknesses, regulations that affect it, and the competitive forces that influence the key participants. The paper also discusses the technological developments such as digital technology that are changing the mode of delivery and consumption of audiovisual services. The paper notes its export potential given the growing Filipino population abroad that continues to crave for local movies and programs, and considers ways how the Philippines can replicate the relative success of India, China, and Korea in breaking through the global market.

GLOBAL OVERVIEW OF THE AVS SECTOR

Introduction The audiovisual services (AVS) sector, particularly the film industry, is among the fastest growing sectors in different countries. The United States (US) or “Hollywood” has dominated this sector around the globe, being the number one producer and exporter of films. However, as technology developed and markets opened, India and China are emerging as strong global players. These two countries boast not only one-third of the world’s population, but also have thriving film and television industries. For instance, India’s film industry, also known as the “Bollywood,” is one of the largest in the world in terms of film productions and admissions. It is currently worth about US$1,256 million, by far “peanuts” compared to Hollywood resources. But the industry players are expecting a growth rate of 18 percent compounded rate annually for the next five years. The box office success of movies such as Bride and Prejudice, Bend it like Beckham, and Monsoon Wedding have established a footprint for crossover films both in India as well as in the international market. The return on investment for Indian films is high due to low costs of production and high revenues. For instance, Monsoon Wedding earned US$30 million worldwide on an investment of only 100 The Global Challenge in Services Trade

US$1.5 million. In 2004 alone, it is estimated that five Bollywood releases generated more than US$2 million each in the US and the United Kingdom (UK). With the ever-increasing Indian diaspora around the world, the number of such movies with crossover themes is expected to rise substantially.1 Besides Bollywood, cinematic output and creativity are also rising in China, Iran, South Korea, Taiwan, Japan, Singapore, and Hong Kong. The Chinese film Crouching Tiger, Hidden Dragon has grossed more than US$100 million in the US—the first foreign-language film to take in that kind of cash (Plate 2002). Japanese horror movies are making waves not just in Asia but in North America as well. Hollywood is even remaking these horror films, an example of which is the American version of The Ring.2 Lastly, there are also the promising Iranian films that depict very relevant themes and show the Iranian culture. The White Balloon, The Apple, and Children of Heaven stir audiences everywhere. With the success of Bollywood and of other countries, is there a chance for the Philippines to be another “Bollywood?” Can the Philippines also penetrate the international market as what the Chinese martial arts-inspired films or Japanese horror films have done? Can Filipino films also stir the moviegoers around the world like the Iranian films? What would it take to achieve it? Answering these questions require an indepth analysis of the AVS industry. What is its scope? What are the Philippine AVS industry’s strengths and weaknesses? What are its exports potential and emerging market trends? This paper is a first attempt to comprehensively study the sector. The paper is divided into six sections. This section presents the global overview of the AVS sector that includes some statistical information, global trends and development in the sector, and trade barriers typically hoisted across various countries. The next section discusses specifically the entire Philippine AVS sector, while the third and fourth sections narrow their focus on the film industry and the television industry, respectively. In both, a simple SWOT (strengths, weaknesses, opportunities, and threats) analysis is undertaken. The last section summarizes the study and recommends some policy proposals.

Statistical Information on the AVS Sector The AVS sector consists of several subsectors. In the WTO Services Sectoral Classification List (MN.GNS/W/120), which was drawn up during the Uruguay Round based on the United Nations Provisional Central Product Classifications (CPC), AVS is only a subsector of the Communication Services. Under AVS are six subsubsectors that include the following:

1 Entertainment and Media, India Brand Equity Foundation. 2 The Ring is originally a Japanese horror movie. With the success of the film, Holywood decided to produce the same movie but employing American actors and shooting in American cities. Chapter 4: Audiovisual Services Sector 101

1. motion picture and videotape production and distribution services (CPC 9611)3; 2. motion picture projection service (CPC 9612)4; 3. radio and television services (CPC 9613)5; 4. radio and television transmission services (CPC 7524)6; 5. sound recording (CPC not applicable); and 6. others.7

In the Philippines, film and television industries are its biggest subsectors, contributing significantly in the gross income of the total AVS sector. This paper, therefore, focuses on these two major subgroups of the Philippine AVS industry. It is extremely difficult to present comprehensive and accurate statistical information for cross-country comparisons of the AVS sector. Information about the trends and other developments in the sector is not easily available for different countries, even for developed ones. Moreover, there are issues about measurement, classification, desegregation, and coverage that make different countries’ AVS industry not easily comparable. It is, however, widely recognized that the US is the largest market for audiovisual products and services as a whole, and is also the largest producer and exporter of these services. In 1998, the US film, television, and home video industries earned over US$12 billion through exports to 105 countries (Mukharjee 2002).

Film For the film industry, various coproduction arrangements, definitional differences, and other related factors make it difficult to determine the overall number of productions and the nationality of the films produced. Based on the main producers’ nationality, however, US films have been dominating the film industry of the different countries in the world, taking the lion share of income derived from movies. In countries with greater trade barriers in the AVS sector like South Korea and France, the United States takes a slightly lower, though still significant, share in the domestic markets (Table 1).

3 This category includes: (a) promotion or advertising services (CPC 96111); (b) motion picture or videotape production services (CPC 96112); (c) motion picture or videotape distribution services (CPC 96113); and (d) other services in connection with motion picture and videotape production and distribution (CPC 96114). 4 This category includes: (a) Motion picture projection services (CPC 96121) and (b) videotape projection services (CPC 96122). 5 This category includes: (a) radio services (CPC 96131); (b) television services (CPC 96132); and (c) combined program making and broadcasting services (CPC 96133). 6 This category includes: (a) television broadcast transmission services (CPC 75241); and (b) radio broadcast transmission services (CPC 75242). 7 No CPC category specified, but could cover, for example, the contents of multimedia products. 102 The Global Challenge in Services Trade

Table 1. Market share of US films in different countries, 2000-2003 Country 2000 2001 2002 2003 US 93.3 93.1 93.9 95.1 Canada - - 85 87.5 Australia 83 80.6 83.2 89.3 European Union (EU) 73 65.4 71.2 72.1 Spain 81.6 67 75 72 France 61.9 51 56 53 Italy 69.6 59.7 63.46 67 United Kingdom 75.32 81.41 82.5 73.5 Russia - - 75 89.5 South Korea - - 48.9 43.2 Source: Focus: World Film Market Trends, European Audiovisual Observatory, various years.

In addition, the top 10 films from 1900 to 2005 in the world are produced and distributed by American film companies. Seven of these films solely originated from the US and were solely produced by an American company. The remaining three movies were coproduced by foreign companies that originated in New Zealand. Titanic (released in 1997), Lord of the Rings: Return of the King (released in 2003), and Harry Potter and the Sorcerer’s Stone (released in 2001) are the top three films of the 20th century (Table 2). While the United States dominates the world film market in terms of revenue, India beats the United States in terms of number of film production. In 2003, for instance, India produced 1,200 films while the United States produced less than half of that (Table 3). Other countries like Japan, France, and Spain are far behind.

Table 2. Top 10 world box office films, 1900-2005 (in millions US$) Original title Nationality Producer/ US box International Total Distributor office box office 1. Titanic U S Paramount Pictures/ 600.8 1234.6 1835.4 Twentieth Century Fox 2. Lord of the Rings US/NZ New Line 377 752.2 1129.2 Return of the King 2003 3. Harry Potter and U S Warner Brothers 317.6 658.2 975.8 the Sorcerer’s Stone, 2001 4. Star Wars: The Phantom US Twentieth Century Fox 431.1 494.4 925.5 Menace, 1999 5. Lord of the Rings US/NZ New Line 341.7 583 924.7 The Two Towers, 2002 6. Jurassic Park, 1993 US Universal Pictures 357.1 563 920.1 7. Shrek 2, 2004 US Dreamworks 436.5 444.4 880.9 Chapter 4: Audiovisual Services Sector 103

Table 2. (continued) Original title Nationality Producer/ US box International Total Distributor office box office 8. Lord of the Rings: US/NZ New Line 313.8 556 869.8 the Fellowship of the Ring 2001 9. Harry Potter and U S Warner Brothers 262 604.4 866.4 The Chamber of Secrets 2002 10. Finding Nemo, 2003 US Disney / Pixar 339.7 525.3 865 Source: www.worldwideboxoffice.com

Table 3. Top 10 countries producing feature films, 2002 Country Number of films India 1,200 United States 543 Japan 293 France 200 Spain 137 Italy 130 Germany 116 Philippines 109 China 100 Hong Kong 92 Source: www.mapsofworld.com/world-top-ten

One significant reason is the disparity in production and investment cost of moviemaking across countries. Film production in the US is a hundredfold costlier than in India where an average film cost less than US$500,000 to produce. American movies, on the other hand, cost an average of US$27 million, followed by those from the UK and Germany. US movie companies invest substantially in special effects, postproduction and film marketing.

Music For the music industry, the market for production of music content is highly concentrated on five companies holding around 75 percent of the world sales8: Bertelsmann Music Group or BMG (Germany), Polygram (Netherlands), Sony

8 The three European companies namely BMG, Polygram, and EMI dominate the music industry and account for 40 percent of the market. 104 The Global Challenge in Services Trade

Table 4. Top 10 countries in film investment, 2002 Country Number of films Film expenditure Average expenditure per (US$ million) film (US$ million) US 543 14661 27 Japan 293 1292 4.4 UK 84 852 10.1 France 200 813 4.1 Germany 116 687 5.9 Spain 137 304 2.2 Italy 130 247 1.9 India 1200 192 0.16 South Korea - 134 - Canada 64 133 2.1 Source: www.mapsofworld.com/world-top-ten

(Japan), Time Warner (US), and Electric and Music Industries, Ltd. or EMI (UK). Most of these companies (other than EMI) have diversified their operations, in which music revenue accounts for a smaller share of the total revenue—10 percent for Sony and 33 percent for BMG9. In spite of such financial concentration, there are many smaller players in the industry catering to niche customers. Increasingly, these companies are forging alliances with the major players. Although developing countries have significant export potential in music, trade in this sector is skewed in favor of developed countries. This is primarily because developing countries do not have large firms and financial structures necessary to invest significant capital into sophisticated marketing and distribution machinery with a global reach. Other factors affecting the growth and export of music are weak institutional support, low levels of entrepreneurial capability, massive copyright infringements, and the like.

Trends and Changes The rapid expansion of international audiovisual trade has responded to the rise in consumer demand, particularly in developed countries. Changing consumption patterns in industrial and developing countries, greater affluence, and more leisure time have helped generate higher demand for films and music, which are considered, in economic parlance, as “normal” goods. At the same time, many technological developments have helped production of even more varied and affordable products that feed the information society. This subsection discusses the supply and demand sides of the global trends in the AVS industry.

9 Recently, Sony Music and BMG merged to expand their coverage and operations. The two companies have equal sharing. Chapter 4: Audiovisual Services Sector 105

Supply side

Digital development. Over the years, the number of entertainment options has increased from radio to television to Internet. In addition to the increase in the number of entertainment options, there has been an evolution in terms of media consumption pattern (Figure 1). Before, consumers only enjoy limited television channels and radio frequencies but as digital technology developed, consumers now enjoy a wider range of choices, from digital multichannels and narrowband Internet, to on-demand television viewing.

Figure 1. Evolution of broadcasting with digital technology: the shift in the pattern of media consumption

Stage 3 Stage 1 Stage 2 On demand Limited analogue • Digital multichannels -TV anytime channels television television and radio -Broadband internet and radio • Narroband Internet (wired and wireless)

Source: Digital Strategy Group of the European Broadcasting Union.

Technological developments (i.e., Internet, satellite, and digital networks) have given consumers access to a multitude of entertainment and information services, thereby stimulating the growth of AVS products around the globe. They have also brought about a revolution in the way audiovisual contents are created, produced, and distributed. For example, electronically developed audiovisual products and services have encouraged investments in digital networks. The way the broadcasters deliver their services to the consumers has also evolved. A number of elements can act as “gateways”, including the conditional access system (CAS), the multimedia interface (API), the subscriber management system (SMS), the Electronic Program Guide (EPG), or the multiplex (MUX). In each case, the organization responsible for the element controls access to the user (Figure 2). CAS allows consumers to select the television channels of their choice and pay only for those channels. Services such as video-on-demand allow consumers to receive programs at a time that is convenient for them. Television production companies are in the process of launching entertainment portals, which enables the customers to view their favorite programs at any time in any time zones. EPG allows the viewer to take advantage of features such as program summaries, search by subject or channel, immediate access to the selected program, reminders, and parental control functions. It also enables services such as video-on-demand, which may be free or pay-per-view. SMS is the system 106 The Global Challenge in Services Trade

Figure 2. Evolution of broadcasting with digital technology: gatekeepers in the delivery chain

Broadcaster

Conditional Access System (CAS)

Digital Technology Multimedia Interface Gatekeepers or (API) Gateways Subscriber Management System (SMS) Electronic Program Guide (EPG)

Multiples (MUX) User

Source: Digital Strategy Group of the European Broadcasting Union. that creates bills for subscribers and this system is more on the convenience of the cable companies in keeping track of their subscribers. As a result of these different modes of delivery of audiovisual content, companies are restructuring their production and delivery system to target particular groups of audience. Global programming companies have oriented their products to cater to local markets. For example, the Entertainment and Sports Programming Network (ESPN) in India carries more cricket and polo events than the ESPN service in most countries. Music Television (MTV) has 28 separate channels around the world, each of which is unique, with its own programming and local identity. With these digital developments, changes in competition have also occurred in the industry. The increase in the modes of delivery of the same service, for example, results to a stiff competition between traditional service providers and new entrants, forcing the former to enhance their technology. In addition, since digital technology allows content to be used in many different formats, thus opening up a wider market for the same product, corporate alliances between companies involved in different sectors of the economy such as broadcasting and telecommunications have ensued. With the increase in the number of cross-sectoral and cross-media ownership, competition policy needs to be applied with detailed attention to market, sectoral, product and technological evolutions. Lastly, the use of computer-generated digital production and special effects technologies have changed the employment pattern in the AVS sector and increased the demand for skilled workers in the industry. InfrastructureInfrastructure. Over the years, there have been noticeable developments in audiovisual infrastructure. For example, in the case of cinema, the development of multiplexes, where both foreign and locally produced films can be viewed side by side, together with digital sound system and modern Chapter 4: Audiovisual Services Sector 107 infrastructure have made moviegoing a broader based leisure and consumption experience. In addition to digital theaters, theater owners are also innovating ways on how to attract people to get out of their houses with the advent of theater home devices. They are improving their services, thus providing not just a simple projection of films but also offering fine dining and cocktail drinks. For instance, the latest multiplexes in Florida aim for an upscale Las Vegas Hotel wherein moviegoers can watch the latest film and have fine dining at the same time. Going to a movie should be a “social outing.” Globally, the number of screens has increased while the number of seats per screen has decreased. Although there are no available data that will support the decrease in the number of seats per screen, there are available data concerning the trend in number of screens worldwide. The increase in the number of screens can be verified through the tables presented below that show a growth in cinema screen for the top three biggest audiovisual markets as well as for Asian countries. As a result of these developments, many owners/ operators of cinemas such as Village Roadshow (Australia), AMC (USA), and Golden Harvest (Hong Kong) have expanded their operations worldwide, especially in developing markets.

Table 5. Number of screens, 1990-2003 Year United Growth EU Growth EU Growht Japan Growth States rate (25 states) rate (15 states) rate rate 1991 24570 23275 17785 1804 1993 26689 9 21605 (7) 17671 (1) 1734 (4) 1995 27805 4 21862 1 18608 5 1776 2 1997 31640 14 23298 7 20487 10 1884 6 1999 37185 18 25996 12 23077 13 1993 6 2002 36764 (1) 27648 6 24835 8 2524 27 Average 9 4 7 7 Growth Rate (in %) Source: Mukharjee (2002).

In Asia, China has the highest number of cinema screens followed by India then by Japan for the year 2002. In terms of growth rate from 2001 to 2002, South Korea posted the highest growth rate of 19 percent followed by Thailand which grew by 18 percent and Iran which grew by 11 percent. Sources of revenuerevenue. There have been significant changes in the method of financing audiovisual services. Traditional broadcasting media was primarily financed by license fee and government grants, among others. When private broadcasters entered the market in the 1970s and 1980s they were mainly financed through advertisement revenues. With the proliferation of channels in the late 1980s and 1990s, audience share per channel has become 108 The Global Challenge in Services Trade

Table 6. Number of screens in Asia, 2002 Number of screens Growth rate (2002) (2001-2002) China 65500 0 India 11000 (8) Japan 2635 2 South Korea 977 19 Philippines 900 (4) Indonesia 850 (58) Taiwan 669 (3) Thailand 465 18 Iran 311 11 Malaysia 295 (2) Hong Kong 184 5 Singapore 139 6 Source: European Audiovisual Observatory, various years. fragmented. Advertisement revenue is sometimes no longer sufficient to finance many new channels. Although advertising revenue is still the highest source of income of audiovisual services, the growth rate for this component is not as high as the monthly subscription and pay-per-view. Companies have been seizing this opportunity, initiating new modes of financing particularly with the monthly subscription and pay-per-view. These changes are evident in Europe as well as in the US. As early as 1990s, the growth rate in revenue from television advertising has been below average, while “direct” income, from cable subscriptions, pay TV, pay-per-view, video, and cinema ticket sales, has grown fastest over the last 10 years. During late 1990s, subscription revenues even gained more importance. It represented about 30 percent of the industry revenues and grew to approximately 35 percent in 2000. In the case of the film industry, blockbusters are barely meeting the production costs through the sale of cinema tickets. Estimates suggest that for

Table 7. Breakdown of the television Industry’s sources of revenue (in percent) Source of World Growth United Growth Europe Growth revenue ‘94-’95 States ‘94-’95 ‘94-’95 Advertising 46.9 9.1 46.7 4.2 42.5 15.8 Video 15.6 4.2 18.6 1.3 10.9 7.8 Cable 13.1 12.2 20.6 10 7.7 23 License fees 10.7 3.5 0.4 3 21.4 2.8 Cinema 6.3 4.5 6.5 1.8 7.2 9.5 Pay TV 7.4 14.7 6.2 4.4 10.7 22.8 PPV 0.50 1 0 Source: Institut de l’Audiovisuel et des Télécommunications en Europe or IDATE (www.idate.fr). Chapter 4: Audiovisual Services Sector 109 a film to break even, it must earn at least twice as much at the box office as the total costs of development and production, a goal achieved by only two-thirds of big-budget films. However, the bulk of profits are accumulated through the sale of other goods in multiplex cinemas, and sale of associated items such as clothing, toys, and videos. An example of such situation was the movie The Lion King (1994) of Walt Disney. The movie costs US$55 million to produce and generated US$313 million in the US and US$450 million abroad in box-office receipts. These figures are dwarfed by the US$3 billion sales of The Lion King merchandise and the US$500 million video sales. Figure 3 shows the film industry’s breakdown of revenue sources.

Figure 3. Breakdown of the film industry’s sources of revenue

Source: Algemene Bank Nederland and the Amsterdamsche-Rotterdamsche Bank (ABN AMRO).

Demand side Growth rate of audiovisual services is closely related to the level of development of the country, growth of per capita income, level of urbanization, literacy level, and existence of restrictions on entertainment options, to name a few. In most developed and developing countries, the proportion of income spent on leisure and entertainment comprises a growing proportion of the average household’s budget. This is evident from different countries like the US, Korea, and Europe. In the US, growth in 2002 in the major components of spending—food, housing, apparel and services, transportation, health care, entertainment, and personal insurance and pensions—averaged 2.9 percent, but spending for entertainment rose 6.5 percent. In Korea, according to its National Statistical Office (1993), the annual average household expenditure for culture and recreation rose to US$660 million in 1992 as compared to US$14.4 million in 1972. In Europe, recent estimates point to the doubling in the medium term of the share of household expenditure for audiovisual software products. Specifically, in 1995, French households spent an average of 3.5 percent of their budget on cultural products. 110 The Global Challenge in Services Trade

Regulations and Restrictions Affecting Trade in Audiovisual Services The AVS sector is considered an important and influential medium for cultural expression. Many countries, therefore, usually appeal to cultural exemption under the WTO rules in imposing trade regulations in AVS. Many WTO member countries have raised concerns that the overwhelming presence of foreign cultural products causes the erosion of cultural values and identities in receiving societies. Regulations on audiovisual services, however, concern not only social and cultural issues, but also promotion of domestic industry and protection from foreign competition. With increased globalization, it has become difficult for local producers to compete with imports from global players, especially American studios. Many countries impose trade barriers such as import quotas, high duties, special and discriminatory taxes, foreign remittances restrictions, local ownership requirements, screen and airtime restrictions, and subsidies to local film industries. Motivations for imposing these restrictions vary from the government’s desire for profits from the activity, to a decision to subsidize the local film industry, to cultural protectionism.

Domestic programming quota and equity constraints Countries promote and protect their indigenous audiovisual industry through a variety of policy measures and institutions. The most comprehensive policy framework is usually contained in legislation concerning the broadcasting markets, content ownership, and programming. The most common restrictions in the AVS services sector are the imposition of quota on foreign programs as well as local content requirement, foreign ownership/investment requirement, and subsidies/support provided to the local industry. The imposition of a minimum quota for domestic programs is the most common restriction in the AVS sector. These restrictions are in the form of television broadcasting quotas, cinema hall exhibition quotas, and radio broadcasting quotas, among others. Many important WTO members such as the EU, Canada, Brazil, China, Malaysia, Korea, Egypt, and other countries have implemented regulations imposing such restrictions. For instance, on October 3, 1989, EU adopted the “Television Without Frontiers” (TWF) directives that allow broadcasters to reserve majority of their transmission time for European origin programs. Table 8 presents the minimum quota requirement for different countries. Several countries have imposed restrictions on foreign ownership of audiovisual services. The most common form of these restrictions includes limits on foreign equity participation, local incorporation requirements, licensing requirements, and nationality and citizenship requirements. Examples of such restrictions are presented in Table 9. Chapter 4: Audiovisual Services Sector 111

Table 8. Minimum quota requirements for different countries

France Italy Spain Canada Korea Malaysia

Forty percent Over 50% of Fifty percent Canadian Domestically Broadcasters of the the monthly of their annual programs produced are required, broadcasting transmission broadcast should cover programs through must be time, including time should 60% of the must cover a licensing exclusively of primetime be allotted to total television minimum of conditions, to French origin programming, European broadcast 50% devote 70- and additional is reserved audiovisual time and 50% (nonterrestrial) 80% of 20% must be for programs works. of the time and 80% airtime to local of EU origin. of EU origin. during (terrestrial) of programming. Spanish evening hours the Forty percent “Seat and movie (6 pm to 12 broadcasting of songs on screen” theatres are am). time. almost all quotas that required to private and require all show at a For direct-to- Upper limit for public radio multiplex minimum one home (DTH) the share of stations to be movie day of broadcast total foreign Francophone. theatres of European services, broadcasting more than films for more than half time for any 1,300 seats to every three of the foreign films, reserve 15- days of films channels animation or 20% of their from a third received must popular seats, country. show music, from a distributed Canadian single country over no fewer programs. is kept at than three 60%. screens, for showing Italian and EU films. Source: Mukharjee (2002).

Subsidy and domestic support Often various support program, tax holidays, and subsidies are used to promote the growth of domestic audiovisual industry. Increasingly these forms of assistance are replacing the direct restrictions on foreign entry. Even developed countries such as Australia, Canada, EU, and the US have a wide range of support programs. An example support program is the Media Plus Programme of Europe in 2001 to 2005. The third generation of the program entered into force in January 2001 and aims at strengthening the competitiveness of the European audiovisual industry with a series of support measures dealing with the training of 112 The Global Challenge in Services Trade

Table 9. Foreign ownership and investment requirements Japan Malaysia Korea Mexico and Philippines* China Under the Cable Foreign Foreign Foreign Foreign Television investors are investors are investment investors are not Broadcast Law, prohibited in prohibited in in broadcasting allowed to invest foreign terrestrial terrestrial is limited to in cable investment in broadcasting. broadcasting. 49%. infrastructure as satellite services well as in other is restricted to Malaysian There is a foreign mass media- 20% for program government also equity ceiling of related suppliers, 33% imposes a 20% 49% on foreign businesses. for facility limit on foreign investors in providers, and investment in cable 20% for cable and transmission suppliers of both satellite network programs and operations business and facilities. through licensing 33% in Korean agreements. satellite broadcasting.

Source: Mukharjee (2002). * 1987 Philippine Constitution professionals, development of production projects and companies, distribution of cinematographic works and audiovisual programs, promotion of cinematographic works and audiovisual programs, and support for cinematographic festivals. Equipped with a budget of 400 million euros, the program brings support both before and after production. The Media Plus Programme co-finances training initiatives for the audiovisual industry professionals, the development of production projects (i.e., feature films, television drama, documentaries, animation, and new media), as well as the distribution and promotion of European audiovisual works. Such program truly helped the sector to boost its competitiveness and deliver good-quality service in both local and international market. Through Telefilm Canada (Canadian Film Development Corporation), the Government of Canada partners with the private sector in the production of film and broadcast material at all stages—screenplay development, final production, distribution, and marketing of the finished products in Canada and abroad. Australia also has various support programs for the film industry through various organizations such as the Australian Film Commission that administers government funds to assist the development of both feature and nonfeature films and film-related organizations. Moreso, the Australian Film Finance Chapter 4: Audiovisual Services Sector 113

Corporation provides a mechanism for financing Australian features, miniseries, telemovies, and documentaries. In the US, public funding to support domestic content production is relatively low, but individual states provide a range of incentives to attract production. Federal funds are distributed for film and video art production by the National Endowment for the Arts. Other developed countries such as France, Germany, Australia, and Japan provide aids and subsidies to the domestic audiovisual industry. The French Centre National de la Cinematographie (CNC) requires the film distributors, exhibitors, and exporters to pay a levy that is used to generate subsidies for the local film industry. There are also special admission tax revenues and fees for censorship, visas, permits, and registration that are used to generate subsidies for the domestic industry. The German government provides aid for film promotion and other related activities by imposing levies on box office receipts and home video. The Australian government provides tax concessions for investments in particular formats and programs. These tax concessions are designed to encourage private investment and they allow investors to claim 100-percent tax deductions on certified films.

AN OVERVIEW OF THE PHILIPPINE AVS SECTOR This section presents an overview of the Philippine AVS sector—the market structure, performance, and its contribution to the economy. The first part deals with the industry definition and contribution to the economy, while the second part discusses the industry structure, followed by the domestic regulatory framework.

Coverage of the Philippine AVS Industry Following the WTO coverage of the AVS sector, the Philippine AVS sector constitutes the industries under division 92 of the Philippine Standard Industrial Classification (PSIC)—the recreational, cultural and sporting activities group. This division is composed of the motion picture, radio, television and other entertainment activities, and the recording or taping of sound. The motion picture, radio, television and other entertainment activities (PSIC 921) is further divided into three categories—motion picture and video production and distribution (PSIC 9211)10, motion picture projection (PSIC 9212)11, and radio and television activities (PSIC 9213)12. In addition to these industries is the recording or taping of sound (PSIC 92493).

10 The motion picture and video production and distribution includes the production of theatrical and nontheatrical motion picture, whether on film or video tape, for direct projection in theaters or for broadcasting on television; production in a motion picture studio or in special laboratories for animated films or cartoons; the products may be full- length theatrical films, documentaries, shorts, etc., for public entertainment, for advertising, education, training and news information as well as religious pictures, animated cartoons 114 The Global Challenge in Services Trade

AVS Industry and the Macroeconomy

Contribution to economy Based on the 2003 figures, the Gross Value Added (GVA) of the services sector amounts to 46.37 percent of the country’s total Gross Domestic Product (GDP) at constant 1985 prices. Out of this 46.37 percent, almost 8 percent comes from the private services sector, and in particular, recreational services contribute about one percent to GDP (Table 10). Based on available gross revenue figures of the major industry players included in the top 12,000 corporations in 2001, the recreational, cultural, and sporting activities earned PhP21.3 billion, of which PhP17.5 billion came from the AVS industry. Among the sectors in the audiovisual services, the television broadcasting and relay stations and studios contribute the highest percentage of 80.56 percent, followed by motion picture distribution and production with 8.09 percent (Table 11). From 1997 to 2001, the average growth of gross revenue of the AVS industry is 12.2 percent. In terms of growth, the services sector has an average growth rate of 4.8 percent from 1993 until 2003 as opposed to the average growth rates of 2.6 percent and 3.7 percent of agriculture and industry sectors, respectively. Among the private services sectors, recreational services rank fourth with an average growth rate of 4.4 percent (Table 12).

Contributions to employment The AVS sector is a labor intensive sector. In 2003 , there were 23,624 employees engaged in this sector (Table 13). This comprised 0.15 percent of the total employment in the services sector or 2.8 percent of the total employment in the other community, social and personal service activities (Table 14).

of any kind, etc.; auxiliary activities on a fee or contract basis such as film editing, cutting dubbing, etc.; distribution of motion pictures and video tapes to other industries but not to the general public (this involves the safe rental of movies or tapes to other industries, as well as activities allied to the distribution of films and video tapes such as film and tape booking, delivery, storage, etc.). The PSIC code of motion picture and video production is PSIC 92111 while the PSIC code of motion picture and video distribution is PSIC 92112. 11 The motion picture projection includes motion picture or video tape projection in theaters or in open air and in private screening rooms or other projection facilities. Excluded in this sector are those involving renting of space in theaters as well as the agency and casting activities. 12 The radio and television activities involve the production of radio and television programs, whether live or tape or other recording medium and whether or not combined with broadcasting. The programs produced and broadcasted may be for entertainment, for promotion, education or training or news dissemination; production of programs generally results in a permanent tape which may be sold, rented, or stored for broadcast or rebroadcast; production such as sports covering, whether forecasting, interviews, etc. This industry is further divided into three—radio broadcasting and relay station and studios (PSIC 92131), television broadcasting and relay stations and studios including closed circuit television services (PSIC 92132), and radio and television program production (PSIC 92133). Chapter 4: Audiovisual Services Sector 115

Table 10. Gross domestic product by industrial origin (in million PhP at constant 1985 prices and at current prices) Industry At constant prices At current prices 2003 Percentages 2003 Percentages to total to total 1. Agriculture, fishery and forestry 214,327 19.60 632,007 14.50 2. Industry sector 372,048 34.03 1,409,553 32.34 3. Service sector 506,942 46.37 2,317,485 53.16 a. Transportation, communication and storage 87,748 8.03 313,178 7.18 b. Trade 180,768 16.53 603,305 13.84 c. Finance 52,312 4.78 187,826 4.31 d. Ownership of dwellings and real estate 50,804 4.65 269,603 6.18 e. Private services 82,161 7.51 539,203 12.37 Educational 9,068 0.83 116,076 2.66 Medical and health 13,824 1.26 69,364 1.59 Business 10,713 0.98 85,721 1.97 Recreational 10,969 1.00 46,894 1.08 Personal 21,136 1.93 131,403 3.01 Hotel and restaurant 13,764 1.26 78,826 1.81 Others 2,687 0.25 10,919 0.25 f. Government services 53,149 4.86 404,370 9.28

Gross domestic product 1,093,317 100 4,359,045 100 Source: National Statistical Coordination Board.

Table 11. Gross revenue of the audiovisual services sector as of 2001 (in thousand PhP) AVS sector 2001 Percentages to total

A. Motion picture and video production 1,417,744 8.09 B. Motion picture projection 342,878 1.96 C.Radio and television program production 428,666 2.45 D. Radio broadcasting and relay station and studios 787,143 4.49 E. Recording or taping of sound 431,024 2.46 F. Television broadcasting and relay stations and 14,122,579 80.56 studios including closed circuit television services Total gross revenue 17,530,034 100 Source: Top 7,000 and 5,000 Corporations (2002-2003). 116 The Global Challenge in Services Trade

Table 12. Growth rate of GDP and major sectors, 1994-2003 (based on constant prices with 1985 as the base year) Industry 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Average

GDP 4.39 4.68 5.85 5.19 (0.58) 3.40 5.97 2.96 3.12 4.70 3.97 1. Agriculture, fishery and forestry 2.60 0.85 3.82 3.09 (6.38) 6.50 4.33 3.69 3.80 3.80 2.61 2. Industry sector 5.77 6.72 6.44 6.14 (2.12) 0.88 8.97 0.91 0.15 3.78 3.76 3. Services sector 4.23 5.02 6.37 5.42 3.47 4.02 4.42 4.25 5.10 5.76 4.81 Transport communication and storage 4.25 5.81 7.41 8.23 6.49 5.26 10.45 8.81 8.93 8.59 7.42 Trade 3.95 5.57 5.52 3.90 2.45 4.88 5.16 5.61 5.76 5.66 4.85 Finance 5.47 7.31 13.77 12.97 4.45 1.91 0.88 1.23 3.44 7.10 5.85 Ownership of dwellings and real estate 2.92 3.04 4.14 3.78 1.62 0.59 (0.02) (0.45) 1.72 4.00 2.13 Government services 5.46 3.74 5.90 2.54 2.27 3.09 1.69 0.94 1.46 2.89 3.00 Private services 4.27 4.33 4.99 4.82 4.66 5.79 4.84 4.40 5.49 5.13 4.87 a. Educational 3.99 4.08 4.91 6.63 6.86 5.11 4.18 4.22 4.14 4.19 4.83 b. Medical and health 3.55 4.72 5.07 4.19 6.31 5.27 8.10 5.70 7.54 6.58 5.70 c. Business 5.96 5.62 5.51 6.40 4.49 6.11 6.94 7.73 8.14 8.18 6.51 d. Recreational 3.69 3.79 4.92 4.78 3.52 7.40 3.78 2.93 3.98 5.34 4.41 e. Personal 2.53 3.13 4.42 4.03 4.23 5.83 5.16 4.91 5.54 6.19 4.60 f. Hotel and restaurant 7.33 5.69 5.76 4.69 3.47 5.16 1.69 1.72 4.09 1.56 4.12 g. Others 2.61 3.12 3.59 3.47 4.89 6.12 4.04 3.56 3.31 3.87 3.86 Source: National Statistical Coordination Board.

Table 13. Percentage distribution of employees engaged in the AVS sector, 2003 PSIC Code Description Number of Percentages Employees to Total 92111 Motion picture and video production 1,504 6.37 92112 Motion picture and video distribution 500 2.12 92120 Motion picture projection 8,015 33.93 92131 Radio broadcasting and relay station and studios 7,457 31.57 92132 Television broadcasting and relay stations and studios 3,979 16.84 including closed circuit television services 92133 Radio and television program production 962 4.07 92493 Recording or taping of sounds 1,207 5.11 Total 23,624 100 Source: National Statistics Office. Chapter 4: Audiovisual Services Sector 117

Table 14. Employed persons in major industry groups, 2003 Number Share to Total (in thousand) Employment (in %) Philippines 31,524 100 1. Agriculture 11,675 37.04 2. Industry 4,941 15.67 3. Services sector 14,904 47.28 a. Wholesale and retail trade, repair of motor vehicles, 5,672 17.99 Motorcycles, and personal and household goods b. Hotels and restaurants 786 2.49 c. Transport, storage and communication 2,363 7.50 d. Financial intermediation 332 1.05 e. Real estate, renting and business activities 720 2.28 f. Public administration and defense, compulsory social security 1,387 4.40 g. Education 906 2.87 h. Health and social work 366 1.16 i. Other community, social and personal service activities 856 2.72 Of which is AVS sector 24 0.08 j. Private households with employed persons 1,514 4.80 k. Extraterritorial organizations and bodies 2 0.01 Source: National Statistics Office.

Most of the AVS employees are based in the National Capital Region or NCR (Table 15) since almost all of the establishments are instituted in this region. The highest number of employees are engaged in the motion picture projection services (PSIC 92120) employing 8,015 (33.93%). It is followed by the radio broadcasting and relay station and studios (PSIC 92131) employing 7,457 (31.56%). Lastly, television broadcasting and relay stations and studios including closed circuit television services (PSIC 92132) employ 3,979 (16.84%).

Industry Structure The AVS sector has 2,810 establishments mostly concentrated in the NCR except for the motion picture projection. Out of this, 76.09 percent is engaged in motion picture projection service, followed by radio broadcasting and relay station and studios with 16.01 percent. Lastly, the motion picture and video production occupies the third spot with 3.17 percent (Table 16). Even if there are many audiovisual services establishments, only a few huge companies dominate the market. For instance, in the film industry, the top income earners are Studio 23 Incorporated with a 43.30 percent total share, followed by the Unitel International Picture with 16.1 percent total share, and the Roadrunner Network, Incorporated with 12.99 percent total share (Table 17). For the television industry, the top three companies have a market share of 93.11 percent. The major companies that dominate the market are ABS-CBN 118 The Global Challenge in Services Trade

Table 15. Regional distribution of employees engaged in the AVS sector, 2003 Region Motion Motion Motion Description Television Radio and Recording picture picture picture Radio broadcasting television or taping and video and video projection broadcast- and relay program of production distribution ing and station production sounds relay studios station and studios Philippines 1,504 500 8,015 7,457 3,979 962 1,207 National Capital Region 1,424 500 1,806 2,232 3,566 887 1,135 Cordillera Administrative Region - - 69 219 15 - - Ilocos Region 21 - 200 553 - - 12 Cagayan Valley 3 - 151 198 6 - - Central Luzon 12 - 443 228 - - - CALABARZON 22 - 794 289 17 - 15 Bicol Region S - 569 568 91 - - Western Visayas 15 - 299 823 37 - 33 Central Visayas 7 - 330 573 70 - 6 Eastern Visayas - - 845 217 S - - Zamboanga Peninsula - - 421 223 69 10 - Northern Mindanao - - 230 425 38 - - Davao Region S - 255 453 53 - 6 SOCCSKSARGEN S - 360 113 13 - - Autonomous Region - - 144 44 4 - - in Muslim Mindanao CARAGA - - 327 234 - 65 - MIMAROPA S - 772 65 - - - Source: National Statistics Office. Note: “S” means suppressed due to confidentiality

Table 16. Percentage distribution of establishments engaged in the AVS sector, 2003 PSIC Description Number of Percentages Code Establishments to Total O92111 Motion picture and video production 89 3.17 O92112 Motion picture and video distribution - - O92120 Motion picture projection 2,138 76.09 O92131 Radio broadcasting and relay station and studios 450 16.01 O92132 Television broadcasting and relay stations and studios including closed circuit television services 58 2.06 O92133 Radio and television program production 42 1.49 O92493 Recording or taping of sounds 33 1.17 Total 2,810 100 Source: National Statistics Office. Chapter 4: Audiovisual Services Sector 119

Table 17. Motion picture and video production gross revenue, 2001 Major industry players Gross revenue (PhP0000) 2001 Percentage to class subtotal 1. Studio 23, Incorporated 613,945 43.30 2. United International Pictures 228,225 16.10 3. Roadrunner Network, Incorporated 184,101 12.99 4. Philippine Animators Group, Incorporated 97,554 6.88 5. Film Experts, Incorporated 89,679 6.33 6. Star Cinema Productions, Incorporated 87,854 6.20 Class subtotals: 1,417,744 100 Source: Top 7,000 and Next 5,000 Corporations (2002-2003).

Table 18. Television broadcasting and relay stations and studios including closed circuit television services gross revenue, 2001 Major industry players Gross revenue (PhP0000) 2001 Percentage to class subtotal 1. ABS-CBN Broadcasting Corporation 9,229,769 65.35 2. GMA Network, Incorporated 3,496,948 24.76 3. ABC Development Corporation 508,725 3.60 4. Television and Production Exponents, Incorporated 373,122 2.64 5. Radio Mindanao Network, Incorporated 352,015 2.49 Class subtotals: 14,122,578 100 Source: Top 7,000 and Next 5,000 Corporations (2002-2003).

with a market share of 65.34 percent, followed by GMA Network with 24.76 percent market share, and ABC with 3.60 percent share (Table 18). How this concentration affects market competition is discussed further below.

Regulatory Framework Several government regulatory bodies facilitate the industry.

Department of Transportation and Communications (DOTC) As mandated by Executive Order 125 in 1987, DOTC is the main government agency tasked with the supervision and regulation of the industry. This agency formulates policies and plans for the industry’s development. In addition, the power to grant all franchises, grants, licenses, permits, and certifications to television or radio broadcast stations is conferred upon the commission and the DOTC Secretary upon the approval of the president. 120 The Global Challenge in Services Trade

National Telecommunications Commission (NTC) NTC is a DOTC-attached agency. It was created pursuant to Executive Order No. 546, promulgated on July 23, 1979. Policy implementation is handled by the NTC. The agency’s supervisory, regulatory, and control functions cover three broad areas —telecommunications, broadcast undertakings, and radio spectrum. Within the agency, the Broadcast Department is the unit directly responsible for the development of the television and radio industries. The Broadcast Department has several functions, which include the granting of permits for the use of frequencies for radio and television stations and undertaking the registration of transmitters; regulating ownership and operation of radio and television stations; and supervising and inspecting the operation of radio and television stations, including auxiliary stations. Furthermore, the Broadcast Department is divided into two divisions— Program Division and Technical Division. The Program Division is tasked with the implementation of guidelines and directions enacted and instituted by the NTC for purposes of regulating radio and television broadcasting programs. Program development, market viability, and other related studies with the end in view of promoting public interest and protecting public welfare have also been entrusted to the division. On the other hand, the Technical Division is responsible for the implementation of guidelines and directions of the NTC related to the technical operations of radio and television broadcasting station. Furthermore, it undertakes developmental and improvement studies, recommend standards and rule setting as well as the provision of services to enhance technical capabilities of radio and television broadcasting stations.

Movie and Television Review and Classification Board (MTRCB) The MTRCB was instituted through the implementation of Presidential Decree No. 1986. The board has several functions that include the following: (1) screen, review, and examine all motion pictures for theatrical or nontheatrical distribution, television programs, including publicity materials such as advertisements, trailers, and stills; (2) approve or disapprove, delete objectionable portions from and/or prohibit the importation, exportation, production, copying, distribution, sale, lease, exhibition and/or television broadcast of the motion pictures, television programs and publicity materials which are objectionable for being immoral and indecent; and (3) classify motion pictures, television programs and similar shows into categories such as “G” or “For General Patronage” (all ages admitted), “P” or “Parental Guidance Suggested”, “R” or “Restricted” (for adults only), “X” or “Not for Public Viewing.” The proliferation and unregulated circulation of videograms have greatly prejudiced the operations of movie houses and theaters. These have caused a sharp decline in theatrical attendance by at least 40 percent and a tremendous drop in the collection of sales, contractor’s specific, amusement and other taxes consequently, resulting in substantial losses estimated at Chapter 4: Audiovisual Services Sector 121

PhP450 million annually in government revenues (Presidential Decree No. 1987). In order to combat the said problem, the government instituted the Videogram Regulatory Board (VRB). The VRB is now called the Optical Media Board (OMB). The main function of the Board is to supervise, regulate, grant, deny, or cancel permits for the importation, exportation, production, copying, sale, lease, exhibition, or showing of videograms. Also, the Board requires the registration of all business establishments engaged in the importation, exportation, production, reproduction, exhibition, showing, sale, lease, or disposition of videograms in order to operate. For reproduction purposes, no one is allowed to copy or reproduce any cinematographic art without the written consent or approval of the producer, importer, or licensee of the cinematographic art to be copied.

THE PHILIPPINE FILM INDUSTRY

Industry Definition and Contribution to the Economy Based on the 1994 PSIC Code, the industry is classified under PSIC 92111 for motion picture production; PSIC 92112 for motion picture distribution; and PSIC 9120 for motion picture projection. Based on the latest data (Table 19), the gross value added (GVA) or output of the local film industry amounted to PhP8.7 billion in 1998 versus PhP7.3 billion in 1994. The industry’s percentage share on the gross domestic product (GDP) is only 0.98 percent while its percentage share on the gross national product (GNP) is 0.94 percent. These figures are negligible, which indicates that the film industry has yet to contribute a significant share to the Philippine economy based on absolute data. Its employment of 15,517 in 1994, excluding actors and actresses, was only 0.06 percent of the total number of employment. On the other hand, the industry’s GVA is growing much faster at 18.12 percent compared to GDP growth of 15.99 percent. This suggests that the sector has relatively better prospects than other economic sectors. The growth of total employment of film personnel is at 13.81 percent.

Table 19. Film contribution to the Philippine economy Economic indicators 1994 1998 Growth Value % Share of Value % Share of (in million film (in million film PhP) industry PhP) industry

GVA (Film industry) 7,390 - 8,729 - 18.12 GDP 766,368 0.96 888,875 0.98 15.99 GNP 786,136 0.94 931,127 0.94 18.44 Number of employees 15,517 0.06 - - Source: 1994 Census of Establishments. 122 The Global Challenge in Services Trade

Industry Associations The movie industry is organized along sectoral and guild interests. There are guilds for movie producers, artists, directors, and other creative talents and craftsmen—all of which have federated under a self-policing organization called the Film Academy of the Philippines (FAP) established through Presidential Decree in 1982 in order for the government to have a closer supervision over, and extend assistance to, the industry. Under its umbrella are the different organizations and guilds of the industry’s working forces such as Katipunan ng mga Artista ng Pelikulang Pilipino (KAPP), Kapisanan ng mga Director ng Pelikulang Pilipino (KDPP), Philippine Motion Picture Producers Association (PMPPA), Movie Producers and Distributors Association of the Philippines (MPDAP), and others. In addition to the FAP, there is a newly organized Film Development Council of the Philippines (FDCP). FDCP has a major objective of uplifting the art and craft of film making and encouraging the production of films for commercial purposes that seek to enhance the quality of life, examine the human and social conditions, and contribute to the dignity and nobility of the human spirit. The council has the following functions as stated in Republic Act 9167: 1. develop and implement an incentive and reward system for the producers based on merit to encourage the production of quality films; 2. establish, organize, operate and maintain local and international film festivals, exhibitions and similar activities that will promote the growth and development of the local film industry; 3. develop and promote programs to enhance the skills and expertise of Filipino talents necessary for quality film production; and 4. ensure the establishment of a film archive in order to conserve and protect film negatives and/or prints as part of the nation’s historical, cultural, and artistic heritage.

The FDCP has the Cinema Evaluation Board that will evaluate and grade films. The Board will also formulate and establish a set of standards, criteria, and procedures for the Cinema Evaluation System, primarily based on, but not limited to, direction, screenplay, cinematography, editing, production design, music scoring, and acting performances. The grading of films by the Board is subject to different criteria and the films can have a grade of either “A” or “B” that will be entitled to privileges such as amusement tax13 rebates. Grade “A” films will have 100 percent amusement tax rebate while Grade “B” films will

13 A 30 percent amusement tax on gross receipts for theters is imposed and collected by cities and municipalities in Metro Manila and other highly urbanized and independent component cities in the Philippines pursuant to Sections 140 and 151 of Republic Act No. 7160. Chapter 4: Audiovisual Services Sector 123 have 65 percent amusement tax rebate. The remaining 35 percent shall accrue to the funds of the Council.14

Industry Players The film industry is composed of three important business lines that are interdependent with each other. These are the producers, distributors, and exhibitors (Figure 4).

Figure 4. Flow of business in the film industry

Source: “How Movie Distribution Works” in http://entertainment. howstuffworks.com/movie-distribution.htm

The flow of product in the film industry is as follows: a film property is produced by the production company, which then sells the distribution rights to the distributor. These rights are often bid for by distributors through film markets or through sales agents. Often, the distributor will bid for the distribution rights before production is finished and the distributor pays an advance to the production company. The rights to show the film property are then bid for by exhibitors. The types of agreements made between the producer, distributor,

14 The Cinema Evaluation Board differs from the MTRCB in that the former evaluates largely on the basis of artistic and technical merit, while the MTRCB provides guidance on the ethical/moral suitability of the film content for various groups of movie viewers. 124 The Global Challenge in Services Trade and exhibitor, as well as the share of revenue allocated to the distributor will vary, depending on the channel of distribution.

Producers Producers are those who make the film by arranging for the finances, casting, and technical production. They are responsible for creating varieties of films that will suit people’s preferences and tastes, and sell the films to various distributors. The Philippines used to be the third biggest producer of films in the world, but this film production ability had since waned. In addition, during the late 1980s to mid-1990s, there used to be 24 domestic film producers but this was reduced to 14 producers in 1998. Furthermore, consolidation to four production houses is widely expected. Some of the known local producers are Regal Entertainment, Viva Films, Star Cinema, Seiko Films, Solar Films, OctoArts Films, Neo Films, and Premier Entertainment.

Distributors The film distributor is not merely a middleman, between the production company and the exhibitor, limited only to buying and selling the product. Essentially, film distribution is the marketing activity for films. In addition to formulating and implementing promotional and advertising strategies, the distributor will liaise with the media, produce all necessary promotional materials, provide advice on all aspects of production, and provide financing for productions through advances and buying of rights. Some distributors have even backward-integrated into production to ensure a continuous stream of marketable product. The major Filipino film distribution companies are also those of production companies. These local production companies, more often than not, distribute their own movies in the local market. Foreign films, on the other hand, use their own distribution sytem network. These include Buena Vista Pictures Distribution, Sony Pictures Entertainment Inc., Metro-Goldwyn-Mayer Studios Inc., Paramount Pictures Corporation, Twentieth Century Fox Film Corporation, Universal City Studios LLLP, and Warner Bros. Entertainment Inc. The major distributors have several advantages compared to local competitors. They have access to different markets worldwide most especially in the US. They also enjoy economies of scale in access to financing capital. The capital will be used in their extensive marketing and promotion of films. The reputation of a distributor serves a competitive advantage. Since film producers are interested in maximizing returns, they would seek to allocate distribution rights to a distributor with past performance for successful promotion. Furthermore, some producers may be willing to accept less favorable terms (i.e., lower percentage of the box office gross) from an established distributor for the possibility of higher aggregate revenues. This ‘reputation’ also serves as a competitive advantage on the exhibitor side. Since exhibitors want to fill seats, and bookings for theatres are usually made in advance (especially during the busier summer and holiday seasons), exhibitors will rely on a distributor’s reputation and presumed ability to market the film that maximizes box office draw. Likewise, an exhibitor may give more favorable terms to an established Chapter 4: Audiovisual Services Sector 125 distributor with the expectation of higher aggregate earnings. Again, because of their size and portfolio of film offerings, the major distributors dominate the majority of screens in the country, leaving only a handful of screens available at any given time for the local distributors to exhibit their product (Leong et al. 1996).

Exhibitors Exhibitors are the last in line in the business flow of the film industry. These are the firms responsible for showing featured films in theaters. Most of the cinemas are located in Metro Manila. Out of the 373 screens in the country, 215 of 57.6 percent are found in Metro Manila and the rest are spread in areas outside the capital region (Table 20).

The Production Process The film production process is divided into two major parts—production and distribution (Figure 5). The production aspect includes the studios or shooting locations, work print,15 and the postproduction16. The studios or shooting locations are composed of the taping of films. Sound tracking17, picture elements, and editing

Table 20. Number of movie theater houses and screens Metro Manila Movie Screens Regional cinemasb Movie Screens Cinemax theater theater houses houses

Ayala Cinemas 5 23 Ayala Cebu 1 5 Robinsons Movieworld 7 45 Regional Cinemas – Robinsons 8 43 SM 10 76 Cinema 2000 – Regional 13 48 MMTAa 13 63 SM Luzon 7 34 Power Plant 1 6 SM Visayas and Mindanao 4 28 Theater Mall - Greenhills 1 2 Total 37 215 33 158 Source: Philippine Daily Inquirer Entertainment Section, September 11, 2004 pp. A-30 and A2-2. Legend: a Metro Manila Theaters Association that includes Shangri-la Plaza, Isetann, Gotesco, Berma Cinema, Lianas Cinema, Festival Cinema, Masagana Cinema, Market Place, Starmall Movies, Eastwood, and Araneta Center (Ali Mall Cineplex). b Theaters outside Metro Manila.

15 Work print is any positive duplicate picture, sound track print, or magnetic duplicate intended for use in the film editing process. 16 Postproduction is the period in a project’s development that takes place after the picture is delivered, or “after the production.” This term might also be applied to video/film editing or refer to audio postproduction. 17 Sound tracking generically refers to the music contained in a film, although it literally means the entire audio portion of a film, video, or television production, including effects and dialogue. 126 The Global Challenge in Services Trade

Figure 5. The film production process

Source: McDaniel (2004)

are under the work print. Moreover, postproduction is concerned with editing computer graphics, audio, and picture processing as well as the prescreening. The processes in the work print and postproduction will continue until the film is finally ready for storage. Thereafter, distribution and mass production come next. In the distribution process, the film undergoes two processes—(1) film production for the showing in the different cinemas and (2) VHS/VCD/DVD production for the rental houses, retail stores, as well as for screening purposes.

Industry Performance: SWOT Analysis

Strengths Some Filipino films are putting up a gallant performance at international film festivals and even earning a few awards along the way. This is despite the fact that the invasion of more Hollywood and Asian films, constantly escalating production costs, widespread film piracy, general impression of hackneyed plotlines, local audience’s colonial mentality and preference to foreign films, lack of education on film appreciation, and exorbitant taxation, to name a few, have slowed down the film industry. Magnifico, a film directed by Maryo J. de los Reyes, appears to be leading the charge for local productions in the international arena in 2003. Mitchiko Chapter 4: Audiovisual Services Sector 127

Yamamoto’s award-winning script tells an uplifting story of a young boy who unexpectedly tries to help his family survive their hardships through his compassion, conviction, and courage. After being included in the shortlist of five nominees for the Golden Maile award for best feature film at the 2003 Hawaii International Film Festival, the Violett Films production won the Crystal Bear/ Grand Prix for Best Feature Film and Children’s Jury awards at the 27th Kinderfilmfest of the 2003 Berlin Film Festival. Perhaps, the film’s worldwide reception convinced the Filipino Academy for Movie Arts and Sciences (FAMAS) and the Philippine Movie Press Club (PMPC) Star Awards to award it their Best Picture trophies. Aside from Berlin and Hawaii, Magnifico was also in the official selection for the Crystal Globe Award at the 2003 Karlovy Vary International Film Festival, “Window in Asian Cinema” at the 2003 Pusan Film Festival, “Focus on Asia” section at the 2003 Fukuoka International Film Festival in Japan, and the “Cinema of Asia” section at the 2003 Montreal World Film Festival in Canada. The film was also invited to the 2004 Bangkok International Film Festival, Kristians and Children’s International Film Festival in Norway, Istanbul Children’s International Film Festival, Robert de Niro’s Tribecca Film Festival in New York, Cinemasia Film Festival in Amsterdam, Tiburon International Film Festival, and other festivals in Italy, Indonesia, UK, and Germany. A flop at the local box office like Magnifico, director Mario O’Hara’s Babae sa Breakwater pulls off another surprise when it earned rave reviews from international critics after it was screened last month at the Cannes International Film Festival Director’s Fortnight. Produced by new industry player Entertainment Warehouse, the film has gained the nod of European viewers for its social treatment of poverty-stricken Filipinos living around the breakwaters of Manila Bay. The Young Critics Circle earlier cited it for Best Screenplay and Best Picture during its 14th Annual Circle Citations for Distinguished Achievement in Film 2003. The film was also recently included in the French film festival line-up along with Mariami Tanangco’s short film Binyag which competed at the International Short Film Festival in Clermont-Ferrand, France. Similarly, Unitel Pictures’ Crying Ladies also manages to perform well at the tills and merit some good reviews from critics. Director Mark Meilly’s Palanca award-winning script, which centers on mourners-for-hire serving traditional Chinese families, emphasize the importance of the deceased when they were still alive. Meilly’s innovative idea and the vast experience of his Unitel production team greatly helped in securing the Best Director and Best Picture honors for his debut feature at the Metro Manila Film Festival. During the 32nd Brussels International Independent Film Festival,18 film actor Cesar Montano bags the Grand Prix Special Du Jury in the Competition International category, the third highest award. The award is in recognition of the

18 This was held from November 1-6, 2005 at the Centre Cultural Jacques Franck in Brussels, Belgium. 128 The Global Challenge in Services Trade overall performance of Mr. Montano as actor and director of the movie Panaghoy sa Suba. In addition to talented directors, actors, and scriptwriters, exhibitors are also one of the strengths of the industry since a bulk of the revenues of the producers comes from box office or from theatrical receipts. For instance, Star Cinema, one of the major production studios, earns about 60 percent of its revenue from cinema, 30 percent from video, and 10 percent from television.19 As discussed in the previous section, there are several cinemas in the country and most of the cinemas are located in Metro Manila. These cinemas are a great way for the producers to feature their films.

Weaknesses Ironically, even with these strengths, the industry’s survival is in doubt due to several problems. The industry’s problems can be divided into two major divisions. First are the problems in production and second are the problems in the distribution. Problems in production. Filipino filmmakers labor under huge production costs. To break even, a producer must gross PhP12 million from a PhP4 million film budget. Two-thirds of the gross goes to the theater owners and taxes, and the remaining one-third goes to the producer. However, with the gloomy economic situation coupled with the continuous increase in prices, film rolls and other materials, producers are facing difficulties in making films. The star system is also plaguing the production process since some superstars charge as much as PhP3-4 million in addition to ancillary rights and other fringe benefits. These eat up a big chunk of an average production budget of PhP15 million. Furthermore, these superstars, more often than not, cause delays in taping of the film, further jacking up production cost. In terms of the availability of digital facilities such as laboratories for processing and synchronizing pictures with sound and sound studio, the country has no such facilities; thus, local companies have to do these processes in other countries.20 Problems in distributiondistribution. The number one problem in distribution is film piracy. High-tech film pirates deprive legitimate producers of potential income. Piracy forms include unauthorized airing, exhibition, and distribution of films in CAT-TV networks, video theaters, buses, hotels, restaurants, ships, video reproduction stores, and retail establishments. In addition to film piracy, local movies are losing out to bigger budgeted foreign films. As presented below, the local film industry is plagued by foreign films. These foreign films are mostly produced by major producers in the US who have allocated huge amounts of money for film advertisements. Usually, trailers and other advertisements for foreign films are shown months before the showing date, thus creating greater public awareness and curiosity about the film. However, for the local films,

19 Interview with Ms. Marizel Martinez, head of video production of Star Cinema. 20 Ibid. Chapter 4: Audiovisual Services Sector 129 trailers are shown only weeks before the showing date due to the delays in the shooting of film. The entertainment industry is also among the heavily taxed business in Asia.21 Amusement taxes are imposed by local governments to theater owners. This tax amounts to 30 percent of the gross receipts from the ticket sales. Aside from the amusement tax, there are also the 10 percent VAT on film shares and postproduction costs, the PhP0.25 per ticket for cultural tax, the PhP8,000 to 10,000 classification fee per film by the MTRCB, the custom duty on imported unexposed films needed for filming and exhibition, and the 32 percent corporate tax. In addition, there are also taxes for importing equipment and machineries needed for shooting films and printing the advertisements. On the average, importing these machineries is subject to 6 percent tax rate but since these equipment cost thousands of pesos, the import costs sum up to a significant amount. To be a certified box office hit, a movie has to make more than PhP20 million in its Metro Manila run alone. If a movie costs PhP20 million to produce, it has to gross PhP60 million for the producer to at least break even. The skyrocketing production cost is one important cause for the decline in the number of domestic film productions. The downward trend of the industry is evident based on the statistics from MTRCB. In 2003, the country had only produced 109 films compared to 266 foreign films that penetrated the local market. More than half of the films reviewed were foreign-produced films. As early as 1983, local films occupied only 30.3 percent of the total films reviewed by the Board. The yearly average of local films is 157 while the yearly average of foreign films is 442 (Table 21). In addition to this downward trend in film production, the local industry also experienced deterioration of film quality. Because of high production cost, producers created low budget, low class, usually lewd films. Consequently, MTRCB classified many local films into R (Restricted) category, which means that the film is limited for adults’ viewing only. Table 22 shows that in 2003, out of the 109 films, 42 (38.53%) were rated as R. This was followed by PG-13 rating with 31 films (28.44%).

Opportunities Opportunities for the film industry lie on the moviegoers and potential markets that can be divided into two—the local and the international viewers (overseas Filipino contract workers and Filipino immigrants). Industry experts believe that a way to increase the market is to export films. Production costs are escalating,

21 Philippines is next to India that imposes 14-167 percent amusement tax depending on the location. Other Asian countries impose lower amusement tax: 3 percent in Japan and Singapore; 0 percent in Hong Kong; 7 percent in Thailand; 8 percent in Taiwan; 17 percent in Korea; and 25-30 percent in Indonesia. 130 The Global Challenge in Services Trade

Table 21. Statistics of theatrical films (prints) reviewed by the MTRCB, 1983-2003 Year Total Foreign Percentage to total Local Percentage to total

1983 465 324 69.68 141 30.32 1984 402 250 62.19 152 37.81 1985 428 270 63.08 158 36.92 1986 408 228 55.88 180 44.12 1987 426 259 60.80 167 39.20 1988 442 288 65.16 154 34.84 1989 427 285 66.74 142 33.26 1990 377 233 61.80 144 38.20 1991 358 226 63.13 132 36.87 1992 415 294 70.84 121 29.16 1993 425 293 68.94 132 31.06 1994 454 317 69.82 137 30.18 1995 456 299 65.57 157 34.43 1996 443 269 60.72 174 39.28 1997 456 236 51.75 220 48.25 1998 425 234 55.06 191 44.94 1999 565 379 67.08 186 32.92 2000 591 411 69.54 180 30.46 2001 520 374 71.92 146 28.08 2002 429 253 58.97 176 41.03 2003 375 266 70.93 109 29.07 Total 9,287 5,988 3,299 Average 442 285 64.27 157 35.73 Source: Movie and Television Review and Classification Board (MTRCB).

Table 22. Statistical distribution of local films based on rating, 2003 Rating No. of films Percentage to total G* 19 17.43 PG – 13 31 28.44 R – 13 9 8.26 R 42 38.53 X 8 7.34 Total 109 100.00 Source: Movie and Television Review and Classification Board (MTRCB). * G = General Patronage; PG = Parental Guidance; Recommended; R = Restricted. Chapter 4: Audiovisual Services Sector 131 but the local market remains stagnant. In addition, film companies can also grab the opportunity in increasing their revenues that can be brought about by the breakthrough in the Internet connections as well as telephones. Philippine demographic profileprofile. The domestic market has a large consumer market based on the sheer size of its population, which stood around 76.5 million in 2000 with a growth rate of 2.36 percent. The country’s population is predominantly young in which about 83.76 percent are below 45 years old. Out of the 83.76 percent, 42.44 percent are males while 41.32 percent are females. Producers target the young population who, more than other age groups, are movie patrons. International viewersviewers. The international market can be the country’s neighboring nations with similar culture and somehow can understand Asian lifestyle. Some of these countries are Taiwan, Korea, Singapore, Malaysia, or Hong Kong. In addition, the overseas contract workers (OCW) can be considered as viable target consumers of Filipino films, in the same way that overseas Indians are the main buyers of Indian films. Based on the 2000 figures of the Philippine Overseas Employment Administration (POEA), Asia has the highest number of Filipino OCW with 292,296 or 45.4 percent followed by the Middle East with 283,291 or 44 percent. These two continents, including North America, can be a feasible market for Filipino films. Lastly, the Filipino immigrants in different countries mostly in North America can also be viable viewers of Filipino films. The number of immigrants in North America since 1820 until 2003 reached 1,673,400. Filipino immigrants to the US are mostly located in California. In Canada, there are also Filipino immigrants that are potential viewers. The latest statistics showed that there are around 232,670 Filipino immigrants in 2001. Europe, especially in Italy, is also home to thousands of Filipinos. Internet connections and cellular mobile telephonetelephone. Film companies can also tap the local moviegoers through the Internet, either by dial-up or broadband connections, as well as through mobile telephone. Through Internet connections, online distribution of films is a cinch; the wireless technology enables downloading of movie clips, movie-based wallpaper, and ring tones. In these ways, film companies can have an additional income on top of the cinema ticket sales. These two connections have an increasing trend in terms of the number of subscribers. As reported by National Telecommunications Commission (NTC), the number of Internet providers reached 43 in 2004 with 1.2 million subscribers (Table 23). Broadband connection is also on its way in providing services all over the country. The increase in Internet users provides a potential upside for film viewing via the Internet, too.

Threats The general impression is that Filipino films are generally watched only by the “baduy” or low-class viewers, except for a few films that get the attention of 132 The Global Challenge in Services Trade

Table 23. Number of NTC-registered Internet services providers and estimated subscribers, 1996-2004 Year Number of NTC-registered Estimated number Growth rate Internet service providers of subscribers (in %) 1996 24 100,000 - 1997 17 200,000 100 1998 23 300,000 50 1999 31 350,000 16.7 2000 34 400,000 14.3 2001 64 500,000 25 2002 53 800,000 60 2003 41 1,000,000 25 2004 43 1,200,000 20 Source: www.ntc.gov.ph.

Class A and B viewers22. As discussed previously, many Filipino films shown in cinemas are rated R, which already limits the number of potential viewers. Also, they tend to have very similar themes, like love triangle relationships, poverty- stricken or martyr stories, etc. As such, an adage applies,”you see one, you see them all.” As a consequence, foreign film penetration is considered one of the threats facing the film industry, even though admittedly, it had been so, even in the heydays of Philippine cinema.

Conclusion How can the Philippine film industry be helped? There are several ways that can be done in order to uplift the current situation of the country’s film industry. One way is through the promotion of films in the global market: (1) having a Philippine booth in major international film festivals, and (2) ensuring that high quality Filipino films could participate in these film festivals. This way, global distributors can view Filipino films and could be interested in buying and distributing them to different countries. Coproduction with international production companies can be another option for the local industry. Coproduction will increase the investment and capital that will be allotted in making films as well as in marketing them. Recently, Sony Pictures Entertainment, a leader in coproduction of Chinese language films, is extending its coproduction in India. The partnership offers Indian producers a chance for greater exposure of their films outside the local market and to a global audience. The same may be done for Philippine films, if these sufficiently attract foreign distributors’ interest.

22 Generally, the high-income and educated class. Chapter 4: Audiovisual Services Sector 133

Trainings, seminars, and festivals for the people in the industry particularly for directors, scriptwriters, production staff, and technical people are actually being carried out. An example of these activities is the Cinemalaya Philippine Independent Film Festival. This festival aims to discover, encourage, and honor the cinematic works of Filipino filmmakers that boldly articulate and freely interpret the Filipino experience with fresh insight and artistic integrity. It also aims to invigorate the Philippine film industry by developing a new breed of Filipino filmmakers. This and other contests that discover future directors as well as scriptwriters and improve the quality of Filipino films in all cinematographic aspects should be continuously supported by the government. In addition to these options, digital technology can help solve the production problems and distribution difficulties. In particular, cost can be trimmed down using digital video than films. The raw video alone is extremely cheap. Conversion process before the editing stage is already eliminated. As soon as a digital footage has been captured, filmmakers can immediately play it back and start editing. Moreover, filmmakers on a real shoestring budget can even reuse the tape in multiple times. The flexibility of digital video is one of the benefits of the technology. For filmmakers, the most exciting element of digital technology is the ease in using it. Most filmmakers have already switched to digital editing systems because it is so much simpler to put a movie together. Image quality is maintained and cutting out some postproduction stages saves time. Likewise, using the digital technology in film making helps a director and the production crew to determine any shooting flaws and correct it right away. The most compelling concern of digital technology is distribution. Production companies spend a lot of money producing film prints of their movies. These heavy reels of film are shipped to theaters all over the world requiring pricey distribution rates. After the film’s run, these reels are shipped back to the production companies. Since distribution costs are so high, production companies have to be extremely cautious about where they play their movies. Unless they have a sure fire hit, they take a pretty big risk sending a film to a lot of theaters. If it does not sell, they might not recover their money back. However, with digital technology, distribution costs can be significantly reduced. Digital movies are basically big computer files that can easily be transmitted through broadband cable or via satellite. There are virtually no shipping costs, hence less cost in showing the movie in a hundred theaters. This kind of distribution can easily open movies in theaters all over the world on the same day. The technology does not only aid the producers and distributors but also the individual theaters. If a movie sells out, a theater could decide to show it on additional screens in the spur of the moment by simply connecting to the digital signal. To the audience, the most important aspect of digital technology is the projection system. This is the final piece of technology that controls how the movie actually looks at the end of the line. Everybody agrees that a good film projector loaded with a pristine film print produces a fantastic, vibrant picture. The problem is, every time the movie is played, the film quality drops a little. 134 The Global Challenge in Services Trade

When a movie has already been playing for weeks, a moviegoer will probably see hundreds of scratches and bits of dirt on screen. Many critics considers the projected digital movie as inferior to a pristine film print. However, they do recognize that while a film print gradually deteriorates, a digital movie looks the same every time it is shown. Going digital requires a lot of investment in equipment and machineries as well as the infrastructure that will house digital projectors. This is where government participation is mostly needed. These machineries are being imported, thus requires custom duties. The government can support the film industry in terms of tax exemption or reduction in the purchase of equipments, at least for a temporary period of time while the industry is still coping with technological changes. The government can also provide tax incentives for investors and theater owners upgrading their cinemas. The Indian government implemented these measures to help its domestic industry. With the advent of digital technology and the identification of Bollywood as a priority export sector, the Indian government reduced the basic import duties on certain digital studio equipment, benefiting the content producers and other media companies in India. The Indian government also initiated various tax incentives to investors investing in multiplexes in the rural areas. Bank and institutional funding was made available to single screen owners to upgrade their existing theatres to multiplexes. Over 100 cinema halls have been converted into digital theatres over the past 2 years.23 Additional insights and observations on the Philippine film industry by seasoned director and former FDCP chair, Ms. Laurice Guillen-Feleo, are given in Appendix D.

THE TELEVISION BROADCASTING INDUSTRY

Industry Definition and Contribution to the Economy Based on the 1994 PSIC Code, the television industry is classified under the radio and television activities (PSIC 9213), which is further divided into television broadcasting and relay stations and studios, including closed circuit television services (PSIC 92132), and radio and television program production (PSIC 92133). Based on Table 24, it can be observed that the television broadcasting industry is contributing most of the gross value added, total revenue, and total cost with 69, 64, and 58 percent share to radio and television broadcasting, respectively. In terms of the number employees, the television industry contributed 38 percent.

23 Entertainment and Media. Indian Brand Equity Foundation. Chapter 4: Audiovisual Services Sector 135

Table 24. Summary of statistics for radio and television broadcasting (in thousand PhP) Industry Number of Number of Gross value Total Total establishments employees added revenue cost Total Paid Radio and television broadcasting 300 10,036 9,951 4,715,215 7,157,999 3,028,100 Radio broadcasting 220 4,975 4,904 1,152,719 1,826,599 805,319 Television broadcasting 62 3,833 3,823 3,259,122 4,588,483 1,750,738 Radio and television production 18 1,228 1,224 303,373 742,917 472,043 Source: 1994 Census of Establishments. Note: This table only includes establishments with an average person of 10 and more.

Industry Participants and Competition

Television broadcasting firms At present, there are 21 local television stations in Metro Manila and the five pioneering broadcasting firms are: (1) Alto Broadcasting System-Chronicle Broadcasting Network (ABS-CBN 2); (2) Associated Broadcasting Network (ABC 5); (3) Republic Broadcasting System, Inc. (GMA 7); (4) Radio Philippine Network (RPN 9); and (5) Intercontinental Broadcasting Corporation, Inc. (IBC 13). However, there are only two local television companies that are vigorously competing and capturing most of the televiewers. These two companies are the ABS-CBN 2 and GMA 7 with a combined market share of 90.1 percent; ABS- CBN has a market share of 65.34 percent while GMA 7 has a market share of 24.76 percent.

Competition Basically, the competition in the television industry lies in capturing the most number of televiewers or the highest percentage of people watching the program. Increased viewership is the intermediate goal of the broadcasting companies because it is their way of strengthening viability as well as attracting advertising agencies. These agencies place advertisements in programs that have a wide base of viewers. Aside from competing with each other, broadcasting companies also have to compete with other means of advertising such as print media, radio broadcasting, and the like. While television remained to be the dominant medium of advertising, the threat of these substitutes is always imminent. FM stations have been creating alternative way of relaying advertisements to particular niches in the market and a number of magazines as well as newspapers continue to be a viable alternative for advertisements. There are four areas where television broadcasting firms compete among themselves and with other advertising media or substitutes. These areas are: (1) television programming and merchandising; (2) image building; (3) technological innovations; and (4) pricing. 136 The Global Challenge in Services Trade

Televisio programming and merchandizing. Television stations develop television programs that will entice viewers in order to increase viewership and market share. Some of these television programs are either self-produced or purchased externally—local or foreign called “merchandized” programs. Self-produced programs are developed by the network itself. Producing programs can also be done under joint ventures or coproduction. In here, there is cost-sharing agreement between parties involved. Under this agreement, the television company has either full or partial control in the production of particular programs. With this type of source, the network may directly deal with the suppliers as well as with the talents, performers, television rights, and others. Programs may also be bought from three other sources, namely, local distributors, foreign distributors, and independent producers. Some of the major suppliers of local television programs are Viva Production, Inc., Viva Television Corporation, Star Cinema Production, and Unitel Production. On the other hand, foreign suppliers include Warner Brothers, Inc. and Twentieth Century-Fox Philippines, Inc. Television programs can be classified into four basic types based on content and form. These are: 1. Foreign programs presented in their original complete form. These are programs that are imported like C.S.I., Monk, Ed, and Sex in the City, among others. These are mostly shown in foreign channels such as Star World, Action Network (AXN), Home Box Office (HBO), and others. 2. Hybrid foreign-produced programs partly modified to enhance local reception. Examples of this kind of program are the Mexican telenovelas like Marimar and Chinovelas like Meteor Garden. These are dubbed in Filipino so that the viewers can understand the story. (The success of the hybrid foreign-produced programs is explained in Box 1.) 3. Hybrid locally produced programs largely imitative of foreign formats or based on key foreign content or elements. An example of this is Tabing Ilog, which somehow copied the concept of Dawson’s Creek. Tabing Ilog is locally produced with local talents and performers but the format and the story about friendship is based on the foreign television series Dawson’s Creek. 4. Locally produced programs with local content or content espousing local values. These are teleseries and television programs that feature local talents with Filipino values.

Currently, ABS-CBN 2 is the leading television network in the country although its position is being challenged by GMA 7, the second largest network in the country. Channel 2 has captured most of the television viewers and it has been occupying the highest television rankings. The station has also garnered several awards and recently, the KBP acknowledged ABS-CBN as the best television station for 2004. Chapter 4: Audiovisual Services Sector 137

Box 1. The success of the hybrid foreign-produced programs

The hybrid foreign-produced programs partly modified to enhance local reception has been successfully penetrating the local market. One of its archetypes is the Mexican telenovela as well as the Chinese and Korean telenovelas dubbed in Tagalog. The success of this soap opera genre can be attributed to four combined qualities of the series: (1) it is dubbed in Filipino which can easily be understood by the masses; (2) it features mestizo and mestiza actors and actresses, fulfilling the colonial fancy of Filipino viewers; (3) it depicts premodern, folk themes, and settingsa; and (4) for television companies, it costs lower to buy foreign productions than to produce its own television series; it is only the dubbing to local language that they have to shed resources into. In contrast to the story on modern themes, the Mexican, Chinese, and Korean telenovelas are attuned to the predominant Filipino folk psyche precisely because of its premodern, largely folk character. Filipinos of various classes can identify with the character of the poor peasant woman who becomes a landlord-merchant or married a super rich man in the end. Indeed, a fantasy and a happy ending in premodern social mobility and change. There is also the Japanese anime dubbed in Filipino. This anime has again captured the market in the 1990s even exceeding the 1970s’ charts. Different quality combinations can be attributed for its success. The anime, like the telenovelas, is dubbed in Filipino, facilitating audience comprehension and acceptance. The program has rich, attractive, and dynamic visuals made possible by advanced and expensive animation technology. Similarly, animes have the evocation of folk, premodern themes. These Japanese animated characters most popular among Filipino children, such as Sailor Moon and Streetfighters, are not only technologically oriented, but feature premodern themes endowed with supernatural and mystical powers. The first two types of programs imply no real competition or none at all to the Philippine-based television productions. In the first type, Philippine- based productions, even if local producers wanted to, simply cannot replicate the Caucasian actors and setting with credibility. The comparative advantage of the Mexican telenovela over Philippine television drama is the markedly mestizo features of its actors and actresses. In the case of Japanese animation, the Philippine entertainment business is still too socially underdeveloped—premodern and technologically backward—to produce any local competition.

a Programs with premodern, folk themes, and settings are those that are traditional as well as conservative. For instance, these programs still uphold the importance of family and the sanctity of marriage. 138 The Global Challenge in Services Trade

Premised on the fact that bulk of the viewers belong to the C and D income classes, ABS-CBN developed as well as purchased programs that appeal to the lower income class. Such strategy has effectively increased the viewership of ABS-CBN. Consequently, the station’s evening programs have occupied most of the top 10 programs for 2004. However, for the daytime programs, GMA has captured most of the viewers. Based on the telemonitor of AGB Nielsen Media Research, the top program for 2004 is the television series “Marina” with an audience share of 51 percent, followed closely by two more ABS-CBN telenovelas—Sana’y Wala Nang Wakas and Basta’t Kasama Kita with an audience share of 51 percent and 50 percent, respectively (Table 25).24 Out of the top 10 programs for 2004, 70 percent is produced and aired in Channel 2 and the remaining 30 percent is aired in Channel 7. By the end of 2004, on the average, ABS-CBN has captured 41 percent of the market for its evening program followed by GMA that captured 39 percent. Other networks are far behind from these two networks (Figure 6). However, a different scenario is evident for daytime. If ABS-CBN has captured most spectators for its evening program, GMA has captured most viewers for its daytime program. On the average, GMA has captured 43 percent

Table 25. Top 20 television programs (Mega Manila)a Rank Programs Channel Ratingsb Audience shareb (in %) (in %) 1 Marina (TV-Series) 2 38.6 51 2 Sana’y Wala Nang Wakas (TV-Series) 2 37.4 51 3 Basta’t Kasama Kita (TV-Series) 2 36.7 50 4 Mulawin 7 34.1 45 5 It Might be You 2 32.7 49 6 Hiram 2 31.8 45 7 Extra Challenge 7 31.8 45 8 Lovers in Paris 2 30.0 45 9 Bitoy’s Funniest Home Video 7 29.5 47 10 Imbestigador 7 29.0 45 Source: 2004 ABS-CBN Annual Report. a For Mega Manila only from January to December 2004 except Holy Week (April 4-10, 2004). This was monitored by AGB Philippines Telemonitor for Mega Manila TV households. b Ratings are the viewing statistics. It is the average number of people watching the program at any given minute. Also, ratings are the universal audience share, which is the number of people watching the program at a specific time slot. It measures the competitiveness of the program against its rivals.

24 This is done through the Television Audience Monitor (TAM) methodology of AGB Nielsen Media Research. For a more detailed discussion of this methodology, refer to Appendix B. Chapter 4: Audiovisual Services Sector 139

Figure 6. Average channel shares for evening programs, 2004

of the viewers and ABS-CBN has captured 35 percent (Figure 7). Again, other television networks are left behind. The strategy of ABS-CBN in programming is complemented by its new approach in television merchandising. The station pioneered in advertising television programs (both local and foreign) using Filipino as medium of communication. This strategy of Channel 2 was followed by other stations like ABC 5 and GMA 7. On the other hand, other television stations developed programs in order to explore market niches.

Figure 7. Average channel shares for daytime programs, 2004 140 The Global Challenge in Services Trade

Image buildingbuilding. Image is vital for every network station. Image is what the audience as well as the advertisers remembers about the station. Along with the image, the broadcasting firms also develop slogans like “In the Service of the Filipinos Worldwide” and “Kapamilya” for Channel 2 and “Where you belong” and “Kapuso” for Channel 7. Each broadcasting company tries to establish an identity by associating themselves with the social classes or by featuring a particular kind of entertainment. For instance, PTV 4 is often patronized by sports fanatics. Furthermore, they also established their image through advertising their technological capability. An example is the “Rainbow Network” of GMA 7 that signifies the wide coverage of the network. Technological innovations. Coping with technological advancements has been one of the major areas of competition in the television broadcasting industry. RPN 9 started the technological race through its domestic satellite broadcasting. This advancement was followed by GMA 7’s installation of a tower that enabled it to have the widest broadcast reach. Meanwhile, ABS-CBN is expanding its provincial facilities and has acquired satellite news gathering facilities to maintain its dominance in news and public affairs. At present, the competition is moving toward broadcasting of certain programs to Filipino communities abroad. ABS-CBN has been successful in reaching Filipino communities25 while GMA 7 is at the forefront in the exploration of business opportunities in the international market. Pricing. Television commercials are usually placed for 30 and 60 seconds. The rate charged for a commercial varies depending on the time the commercial is aired. Advertising time slots are classified into two: (1) primetime and (2) nonprimetime. Primetime slots are the most productive hours for advertisers because these are the time slots when audience level is at its peak (usually between 6:30 and 10:30 p.m.). Since viewership level is high, television stations charge higher rates. Nonprimetime slots, on the other hand, refer to the hours other than primetime. These time slots usually command a lower price because of low viewership. At present, ABS-CBN 2 and GMA 7 charge the highest ad placement rate mainly because of the high television ratings of their programs. The ad placement rate for a 30-second commercial in ABS-CBN is PhP150,000, and in GMA, PhP120,000. Apart from competing with each other in pricing, TV broadcasting firms also compete with other advertising media, i.e., radio broadcasting and print media. At present, the indicative advertising rates in these three media are as follows: PhP100,000 to PhP150,000 for a 30-second commercial in television;

25 A more detailed discussion about the success of ABS-CBN’s “The Filipino Channel” is in Industry’s Opportunities. Chapter 4: Audiovisual Services Sector 141

PhP4,000 to PhP5,000 for a 30-second commercial in radio; and PhP185 per column centimeter in newspapers.

Industry Association The major industry association is the Kapisanan ng mga Brodkaster ng Pilipinas (KBP). The association was organized on April 27, 1973 by the country’s major radio and television networks. The KBP was organized to unify broadcast practitioners to achieve common goals in relation to allied industries and government agencies. It serves as the formulator of broadcast policies and standards. In addition, KBP is like any other association representing people who engage in broadcasting on a national scale. It serves as a spokesman for the broadcast industry in policy matters, government regulation, and establishment of acceptable industry practices. Ordinarily, government plays the role of watchdog over private enterprise. However, in the case of the broadcast sector, regulations are from within, among its own rank and file which has been proven to be more effective. This type of self-regulation essentially involves a consultative process wherein the broadcasters are asked about the practicality and applicability of proposed rules and regulations. Self-regulation in KBP was reiterated by a Memorandum of Agreement dated September 24, 1991 between the Secretary of Transportation and Communications, the National Telecommunications Commissioner (NTC), and the KBP President. All three recognized “the self- regulatory principle of the KBP to police its members on matters relating to the enforcement of broadcast rules and regulations, including the KBP radio and television codes.” In order to enforce the said code, the KBP has a Standards Authority (SA) division that handles all complaints relating to violations of the Radio and Television Codes as well as program and technical standards. It regularly monitors broadcast activities and makes periodic inspection of radio and television stations. The SA decisions are enforced through a system of fines and expulsions of members as well as banning of delinquent advertising accounts. In addition, the SA determines the capabilities and sense of responsibility of all on-air personalities through an annual accreditation process, involving written examinations and performance evaluation by the station management. Advertising agencies also undergo yearly accreditation.

Industry’s Opportunities and Threats

Opportunities Like the film industry, one of the opportunities in the television industry lies on expanding their television viewers. The television viewers can be divided into two: local viewers and international viewers most especially overseas Filipino contract workers as well as Filipino immigrants. Another opportunity lies on increasing revenues through short messaging service (SMS) or famously known as “text messaging.” 142 The Global Challenge in Services Trade

Televiewers Philippine demographic profileprofile. As discussed in the previous section, the huge Philippine population, which is composed of many young people, provides a major opportunity for the film as well as the television industry. Aside from these young people, those low-income class earners (Class C, D, and E) are also viable target market. International viewersviewers. As was done by Korea with its “Hallyu”26 or “Korean Fever,” capturing the Asian market, with its similar culture and traditions, also provides another business opportunity. The same demographic features of the Filipino overseas contract workers, as discussed earlier, also provide the same opportunity for the television industry. In tapping the Filipino viewers in North America, Middle East, Asia Pacific, and Europe, ABS-CBN Global27 has been the most successful. The net sales of ABS-CBN Global has been increasing since 2000; by 2003, it reached US$43 million (Figure 8). The worldwide subscribers have also been increasing in different continents and currently, the subscribers have reached 1.39 million in March 2004 from 550,000 in 1999. Most of the subscribers are from North America and the Middle East. Furthermore, subscribers of The Filipino Channel (TFC) are also

Figure 8. Net sales of ABS-CBN global, 2000-2003

26 ‘Hallyu’ refers to the phenomenon and the impact of popularity of Korean media and cultural products—films, TV dramas, K-pop, fashion, cosmetics, accessories, electronic appliances, mobile phones, and cars. While its popularity mainly concentrates in the Asian and South East Asian region, some of the products reach as far as Europe and Latin America. 27 This company is part of the ABS-CBN Broadcasting Corporation and handles the international services of the mother company. Chapter 4: Audiovisual Services Sector 143 responsive to ABS-CBN’s interactive polls. ABS-CBN made history recently when over a million television viewers sent text messages to influence the ending of its hugely popular drama series, Sanay’ Wala Nang Wakas, a love rivalry involving four popular TV and movie idols. ABS-CBN Global offers a wide range of Filipino channels such as the 24- hour ABS-CBN News Channel, Cinema One movie channel, and Pinoy Central TV—the source of regional, travel, and sports programs. In addition to these channels, the network also offers two radio stations: DZMM for AM news and commentary, and DWRR for FM music. This bundle is known as the TFCDirect!— a direct-to-home (DTH) satellite service delivering all six channels in digital broadcast quality. In terms of the net sales and services of ABS-CBN Broadcasting Company, “ABS-CBN Global continued to be the biggest contributor having net revenues accounting for 71% of total net sales and services. ABS-CBN GlobalTM net sales and services increased by a vigorous 29 percent to PhP3,048 million from the previous year. The bulk of ABS-CBN GlobalTM revenues came from subscription revenues of its cable and direct-to-home service with an estimated viewership base of 1.6 million worldwide by the end of 2004, up to 22 percent from a year ago”(Lopez 2005). Cellular mobile telephone. In addition to expanding televiewers, broadcasting firms can also tap the millions of Filipinos who have subscribed to different cellular mobile telephone companies. Television companies can make promotional campaigns and programs involving short messaging service (SMS) or “text messaging” provided by the mobile operators. Through this, firms can increase their revenues. Based on NTC data, there are 32.9 million Filipinos subscribed to the different cellular network operators in 2004, a growth rate of 46.32 percent from the previous year (Table 26). The Cellular Mobile Telephone System (CMTS) density is 39.85, which showed a growth rate of 43.5 percent. Again, ABS-CBN is successful in capturing the mobile users through its promos and programs. ABS-CBN’s other broadcasting revenue comes from SMS amounting to PhP224 million, 8 percent higher than last year.28 The growth in SMS revenues arise from the popularity of ring tone downloads connected with the cable music channel MYX and program promos on text votes for a favorite candidate like in Star Circle Quest or a desired ending in the soap opera Sana’y Wala ng Wakas.29

Threats Like the film industry, competition from foreign programs is plaguing the television industry. Recently, more and more Mexican, Chinese, and Korean telenovelas are occupying the primetime slots of ABS-CBN 2, GMA 7, and ABC 5. This kind of

28 2004 ABS-CBN’s Annual Report 29 Star Circle Quest was an ABS-CBN reality show while Sana’s Wala ng Wakas was the same network’s soap opera. 144 The Global Challenge in Services Trade

Table 26. Number of cellular mobile telephone subscribers, 2003-2004 Operators 2003 2004 Growth rate (in %) DIGITEL 732,467 1,200,000 63.83 EXTELCOMM 29,896 13,670 (54.27) GLOBE 8,800,000 12,513,973 42.20 PILTEL 2,867,085 4,612,450 60.88 SMART 10,080,112 14,595,782 44.80 TOTAL 22,509,560 32,935,875 46.32 Population 81,054,329 82,652,033 1.97 Cellular Mobile Telephone System (CMTS) Density 27.77 39.85 43.50 Source: www.ntc.gov.ph

programming may be based on the 1997 success of the Mexican hit Marimar. Afterwards, viewers shifted to the so-called Chinovela, in which Meteor Garden is the most popular. It featured the phenomenal Taiwanese boy group named F4. As compared to producing local telenovelas or teleserye, airing foreign programs involves a low budget for Tagalog translation and dubbing. For ABS- CBN, foreign programs are shown 27-29 hours a week, which is about 19-21 percent of the total air time of the station. On the other hand, GMA 7 airs foreign programs for 30-32 hours a week, which is about 25-27 percent of the station’s total airtime. For ABC 5, less than 10 hours a week are allotted to foreign programs but the station shows the popular American series Friends, Lizzie McGuire, and the reality show Fear Factor. More often than not, these foreign television shows are shown during primetime.30 Both ABS-CBN and GMA allot about an hour of foreign television series during primetime from Mondays to Fridays. Besides competition from foreign programs, there are also threats from substitutes to television viewing. These substitutes include the following: Home theaters and devicesdevices. Through the video storage media, information can now be found on videocassette recorders (VCRs) and prerecorded video discs such as VCD or DVD. More often for upscale type of viewers, television broadcasts are hardly watched except for news reporting and sports coverage. They would rather watch movies in VCDs and DVDs. Through these devices, consumers have the opportunity to self-program in their most convenient time movies they want to watch, leaving out commercials and advertisements. Video games and other computerized entertainment software offeringoffering. These video games and other computer games have been diverting the attention of televiewers from watching television programs. They rather play

30 Primetime is from 6 until 10 in the evening. Chapter 4: Audiovisual Services Sector 145 games than watch television since playing gives more satisfaction and entertainment. Cable television and other distribution media. Cable television is another innovation for the industry. It is an alternative distribution system that has the ability to carry over-the-air signals to customers on its own wires. Cable companies import the television program in the form of a VHS tape or what they call decoder, and feed the program to their subscribers via satellite. Currently, there are 1,421 cable operators in the country where 5 percent or 69 cable companies are located in Metro Manila.31 Foreign investors venturing into cable television is attracted to the Philippines since the country is the third largest English speaking country in the world. The Lopez family has once again taken the lead in investing and venturing into cable television business and created the Sky Cable, the largest cable company in Metro Manila. The company has captured 60,000 cable subscribers in Metro Manila. The cable system offers more than 50 channels including the five STAR TV channels, Asian Business News, Australian TV, several non-English and non-Tagalog channels, and six local channels. This “basic package” costs subscribers about PhP800 pesos per month. Sky Cable also offers a “premium package” of channels, such as STAR Movie Channel, HBO Asia, ESPN Asia, and the Discovery Channel. Although most of the cable channels appeal to upscale market, the company also targets the middle-income group with their Tagalog movies channel. This programming strategy is first done by its sister company, ABS-CBN which has won the network a huge share of television audience. With the broadening of the traditional definition of cable services, categories of cable TV include: basic, pay, pay-per-view, and home shopping. Basic cable channels earn income from advertising and subscriptions. On the other hand, pay cable offers premium program services such as uncut commercial-free movies, sports, made-for-cable music, and other special features. Thus, pay cable services are more expensive than basic cable because it carries no advertisements and solely relies on a portion of the monthly fees to finance their programming. In the pay-per-view category, subscribers pay for airing of individual programs rather than a monthly subscription fee. For the home shopping channels, viewers watch on product demonstrations and telephone numbers are flashed on screen where orders can be placed. In addition to these kinds of services, cable channels have developed the so-called “narrowcasting” aimed for airing a particular type of entertainment and targeting specific televiewers as well as advertisers. Examples are ESPN, Star Sports, Solar Sports, and MTV. Other forms include the broadly based programming.

31 For a regional distribution of cable television companies, please refer to Appendix C. 146 The Global Challenge in Services Trade

Conclusion As discussed earlier, the Korean drama success is making waves in the international market. This accomplishment was made possible by the cooperation of the government and industry players. This is evident in the Korean government’s sophisticated political setup strengthening its cultural industries. The Ministry of Culture and Tourism’s different divisions oversee the various aspects involved in the development of media and culture. This covers policy, technology and technical logistics, development of cultural contents, and strategic promotion. There is a special section elaborating the intensity of government effort in fostering cultural industries, specifically pledges to strengthen capacities for cultural creativity and promotion of information and knowledge worldwide. Also, the Korean National Tourism Organization (KNTO), in association with the different travel agencies, offers tour packages that focus on soap opera shooting locations. Travel agencies were successful in doing this strategy and were able to attract tourists mainly from Taiwan, Hong Kong, and Singapore. For the industry players, they make sure that television programs being produced have both local and international appeal. Companies deliberately develop good storylines, hire famous actors, and produce good-quality programs through their high-technology cameras and other modern equipment. Consequently, there are several factors why Korean dramas are successful in the international market. Its urban appeal as seen in city location shots are beautiful settings along with the soothing background music. For instance, Endless Love was commended for the luscious or lavish use of music, including Western classics such as Romance d’amour, which makes the drama even more unforgettable. The more poetic and imaginative ways of expressing love also makes Korean romance dramas outstand. Mostly, Korean romance stories are circulated in the overseas market. Romance themes have been a universal genre in TV dramas. The appeal of fantasized love relationship in everyday life easily makes a connection to the viewers. This viewer preference sustains the popularity of Korean dramas from other counterparts. The melodramatic effect of the Korean dramas also captured the viewers. Whereas other romance dramas tend to spoil the audience with happy ending, many Korean dramas are infused with unrequited love, rivalries between families, and failed romance. Tragedy seems to be a defining feature especially in Korean dramas, in which the male and female leads often suffer from sickness and even death. Taking into account the success of Koreans through the help of their government, what effort can the Philippine government together with the network companies offer? Considering that the main weakness of Philippine TV shows is its lack of cultural content and taste, the government and concerned private sector may provide incentives for good scripts, or sponsor trainings and scriptwriting contests. This is vital in the development of creative programs and sensible storylines that depict Filipino characteristics, culture, and daily realities. This idea can project to other countries a more favorable impression about Filipinos, just what few excellent Iranian films had done. By far, there are Chapter 4: Audiovisual Services Sector 147 scriptwriting contests for films. To conduct it annually will be of great help for the television industry. Continuous expansion and modernization of a television network is very critical in the industry. Technology in broadcasting has been improving throughout the years, and coping with this development is vital in light of regional dispersal of economic growth. As advertisers penetrate regional markets, television stations with a wider reach have an edge in attracting advertising agencies. Also, as the television companies consider exporting their programs, these programs should be at par with foreign programs in terms of graphics, sounds, and visual effects. This entails a modern camera and other production equipments. Doing these suggestions requires a lot of investment where the intense participation and support of the government is much needed. Upgrading equipment means importation and custom duties. A government support through tax reduction or exemption, for at least a short period of time while the industry is adjusting with the developments, is surely a considerable assistance. The government can also allow foreign investors to invest in the industry. In this way, television companies will have additional capital for the modernization. Currently, no foreign investors are allowed to invest in the mass media sector including the television industry.

SUMMARY AND CONCLUSION The paper discussed the AVS sector focusing on the film and television industries. It presents the strengths and opportunities of Filipino creativity andthe continuing Filipino diaspora abroad creating potential foreign markets for Philippine shows. Weaknesses and threats are also discussed highlighting the poor storylines of many shows, growing domestic penetration of US, Mexican, Korean, and Chinese shows. In addition, there are technological changes, particularly the growing use of digital products affecting changes in consumption pattern and production process or filmmaking. Considered an opportunity as it promises to make film production easier and cheaper, the industry requires government help in the form of lower tariffs for the importation of equipment. Other government support for this sector could be in the form of more incentives to promote better storylines and scripts that are artistic and rich with edifying contents. The Iran experience of producing films that changed the perception of its own people and that of other countries is a trail that can be followed by Philippine artists. These Iranian films are counter stories to the bad newspaper publicities, a same general situation the Philippines has been experiencing with the international media. People in the industry are asking for protection so that the industry can flourish. However, protecting the industry would be a useless effort considering its minimal contribution to GDP and the lack of praiseworthy cultural content in many of its output. Instead of protecting and restricting the industry, the government could at least improve the institutional framework on incentives and development of true creative talents. The paper had already mentioned 148 The Global Challenge in Services Trade some of these in the previous sections. In addition, there are some lessons that can be learned on how other governments nurtured the cultural sector.

European Union: Media Support As illustrated in Figure 9, the European Union has the Media Plus Programme (2001-2005) that aims at strengthening the competitiveness of the European audiovisual industry through a series of support measures: 1. training of professionals; 2. financial support for development of production projects; 3. distribution support; 4. promotion of European cinematographic works and audiovisual programs through participation in international events; and 5. support for cinematographic festivals.

Figure 9. The Media Plus Programme

Source: http://europa.eu.int/com/ avpolicy/media/ta_en.pdf Chapter 4: Audiovisual Services Sector 149

The whole idea is to boost the competence and competitiveness of European audiovisual products in the global market.

India and Korea: Institutional Focus The success of Hindi films in penetrating the international market can be associated with the government support through its institutional framework. A cabinet ministry is on top of the film industry—the Ministry of Information and Broadcasting (MIB)—a proof of the importance the government gives for the industry. The MIB is the apex body of the Indian government that formulates and administers policies for the entertainment and media industry. It is also responsible for international cooperation in the field of mass media, mainly on interaction with its foreign counterparts on behalf of the Government of India. Figure 10 shows that MIB is divided into three major wings: (1) films wing; (2) broadcasting wing; and (3) information wing. The films wing is composed of the Directorate of Film Festivals (DFF), National Film Development Corporation (NFDC), and the Central Board of Film Certification (CBFC). The DFF was set up by the Government of India to organize international and national film festivals within the country. It facilitates India’s participation in festivals abroad, arranges programs of foreign films in India or of Indian films abroad, and holds the National Film Awards. On the other hand, the NFDC fosters excellence in cinema. Its main activities include financing and producing films with socially relevant themes and distributing and disseminating films through various channels. Lastly, CBFC is responsible for certifying the films produced in India as well as outside the country suitable for public exhibition. The last two are similar to the Philippines’ MTRCB and Film Development Council, respectively. The difference is that, by being put under the same government ministry, there is presumably better coordination and focus in supporting the industry in India. In addition, by being placed under a government ministry, its concerns would have easier resonance in the highest policymaking levels. This setup would be an interesting

Figure 10. Institutional framework of India

Source: PricewaterhouseCooper for the India Brand Equity Foundation. 150 The Global Challenge in Services Trade example to think about as the Philippines embarks on a spin-off Department of Information and Communications Technology from the present DOTC structure. Similarly, Korea’s efforts into strengthening its cultural industries can be seen in the sophisticated setup of its political infrastructure. The Korean government has the Ministry of Culture and Tourism to oversee the various aspects involved in the development of media and culture. Under this ministry, there is the cultural industry bureau that oversees the industry regarding policy, technology and technical logistics, development of cultural contents, and strategic promotions overseas. Korea’s strategy is a combination of both the EU and India strategies. It has a focused institutional structure and well-instituted ways of supporting their culture industries. For instance, under the Ministry of Culture and Tourism, the Cultural Industry Bureau32 concentrates on the implementation of policies aimed at enhancing national competitiveness. It also supports efforts by cultural industries to enter overseas markets, develops high value-added cultural products, and fosters specialized human resources for the cultural industries. Of these three models, the institutional focus appears a realistic and advisable one to consider further. Subsidies like EU’s Media Programme may not be very attractive nor realistic considering the current financial predicament of the government and competing areas that call for attention. But providing clear institutional focus that shows the government’s sincere intent on transforming this sector into a dollar-earning one deserves consideration for further studies.

32 This bureau is divided into six divisions and each division has its own duties and responsibilities in making the cultural industries competitive in the international market. First, the cultural industry policy division has the following responsibilities: (a) formulate policies for the promotion of cultural industries; (b) support cultural industry projects, one of which is the building of infrastructure; (c) conduct research for promotion; (d) development and popularization of Korean cultural products; and lastly, (e) handle matters of coordination and cooperation related to the cultural industry with international organizations and foreign governments. Second is the film, animation and video distribution. The division establishes and implements comprehensive plans for the visual industry, including movies, animation, and video articles. It also supports and improves production activities of visual industries and related organizations as well as the distribution structure of visual works. Third is the content promotion division. This division establishes and promotes a master plan for promoting the industries of multimedia contents, digital culture contents, characters, comics, and animation. It conducts research studies and develops new policies in response to the current environmental changes. Furthermore, the division supports the industries’ productions and related organization as well as trains the industry professionals. It supports the affairs related to design, standardization, and active distribution of the digital cultural contents; and affairs related to distribution structure improvement. Lastly, it supports the contents sales promotions and the related international exchange activities, and supervises the related cooperative activities with international commerce organizations, foreign governments, and overseas organizations. Chapter 4: Audiovisual Services Sector 151

APPENDICES

Appendix A. Gross Revenue of AVS Sector 2001 Percentage to Class Subtotal A. Motion picture and video production 1. Studio 23, Incorporated 613,945 43.30 2. United International Pictures 228,225 16.10 3. Roadrunner Network, Incorporated 184,101 12.99 4. Philippine Animators Group, Incorporated 97,554 6.88 5. Film Experts, Incorporated 89,679 6.33 6. Star Cinema Productions, Incorporated 87,854 6.20 7. Optima Digital, Incorporated 70,234 4.95 8. Magnavision, Incorporated 46,152 3.26 Class Subtotal 1,417,744 100.00

B. Motion picture projection 1. SM Cinemas, Incorporated 117,601 34.30 2. Gotesco Investments, Incorporated 104,392 30.45 3. West Avenue Theaters Corporation 64,306 18.75 4. Mayfair Theater, Incorporated 17,118 4.99 5. Ayala Theaters Management, Incorporated 13,733 4.01 6. Imperial Cinema, Incorporated 12,868 3.75 7. Rajah Broadcasting Network, Incorporated 12,860 3.75 Class Subtotal 342,878 100.00

C. Radio and television program production 1. GMA Marketing and Productions, Incorporated 171,309 39.96 2. Unitel Productions, Incorporated 143,381 33.45 3. M-Zet TV Productions, Incorporated 37,399 8.72 4. FPJ Productions, Incorporated 23,058 5.38 5. GG Productions, Incorporated 19,476 4.54 6. Program Resources and International Markets Ent. Corp. 17,432 4.07 7. Interactive Broadcast Media, Incorporated 16,611 3.88 Class Subtotal 428,666 100.00

D. Radio broadcasting and relay station and studios 1. Consolidated Broadcasting System, Incorporated 206,290 26.21 2. Newsounds Broadcasting Network, Incorporated 90,806 11.54 3. Quest Broadcasting, Incorporated 88,577 11.25 4. Mareco Broadcasting Network, Incorporated 81,825 10.40 5. Audiovisual Communicators, Incorporated 64,176 8.15 6. HM Catv, Incorporated 62,904 7.99 7. Samson Enterprises, Incorporated 50,166 6.37 8. Radio Veritas Global Broadcasting System, Incorporated 44,653 5.67 9. Advanced Media Broadcasting System, Incorporated 39,962 5.08 152 The Global Challenge in Services Trade

Appendix A (continued) 2001 Percentage to Class Subtotal 10. Supreme Broadcasting System, Incorporated 31,368 3.99 11. Cable Box Office Shows and Systems, Incorporated 26,415 3.36 Class Subtotal 787,142 100.00

E. Recording or taping of sound 1. Universal Records 161,102 37.38 2. Viva Records Corporation 107,602 24.96 3. Alta Productions Group, Incorporated 59,121 13.72 4. Alpha Records Corporation 23,275 5.40 5. Neo Records, Incorporated 23,163 5.37 6. Studio One, Incorporated 22,185 5.15 7. Matthew Film Distributor, Incorporated 20,529 4.76 8. Maximedia International, Incorporated 14,049 3.26 Class Subtotal 431,026 100.00

F. Television broadcasting and relay stations and studios including closed circuit television services 1. ABS-CBN Broadcasting Corporation 9,229,769 65.35 2. GMA Network, Incorporated 3,496,948 24.76 3. ABC Development Corporation 508,725 3.60 4. Television and Production Exponents, Incorporated 373,122 2.64 5. Radio Mindanao Network, Incorporated 352,015 2.49 6. Amcar Broadcasting Network, Incorporated 115,187 0.82 7. Southern Broadcasting Network, Incorporated 27,103 0.19 8. RJ Music City, Incorporated 19,709 0.14 Class Subtotal 14,122,578 100.00 Chapter 4: Audiovisual Services Sector 153

Appendix B. Television Audience Measurement Methodologya

Step 1 Each AGB operation begins with a large-scale study to determine the vital characteristics of the universe that affect viewing. Aptly called the Establishment Survey (ES), the results of this study will establish the composition of the viewing panel that will be eventually measured. The respondents of this study serve as a pool of possible recruits for the panel. Conducted regularly, this study is used to check the relevance of the existing panel against the universe through time.

Step 2 With the characteristics of the universe at hand, the next step is to build the panel and recruit families that are willing to collaborate. AGB then installs peoplemeters in these households and train the family members in its proper use.

Step 3 Each working TV set in a household is fixed with a peoplemeter and a remote control. Only one peoplemeter is connected to the telephone line or Global System for Mobile Communications (GSM) network for data downloading. This is the “master” peoplemeter. The rest of the peoplemeters in the household pass their data to the master, hence the name “slave” peoplemeter. AGB Philippines uses the TVM 2 peoplemeter—a modular nature device that allows for various data transmission techniques via stationary phones, radio waves, and cellular phones.

a www.agb.com. 154 The Global Challenge in Services Trade

Appendix B (continued)

Step 4 Each night, data for the day from the meters are downloaded via telephone lines or GSM lines for households without landline connection, by the Pollux located at the AGB Philippines offices.

Step 5 At the heart of the system is Pollux, AGB’s proprietary production software. Aside from assisting in panel management, Pollux prompts the retrieval of viewing data, which undergoes a series of fundamental processes of consolidating, validating, and expanding the data, thus obtaining a viewing data of the highest quality.

Step 6 The in-house TV events monitoring group takes care of this. This 24-hour operation makes sure that every event that took place in the TV is logged in the TelePad, another proprietary software for TV events monitoring. The events data are fed to Pollux for consolidation with the viewing data for a complete TV viewing behavior data.

Step 7 For viewing data analysis, a proprietary software was developed suited for users to maximize data potentials. The AGB Work Station is composed of three analysis tools: (1) TeleMonitor for viewing behavior analysis; (2) TeleSpot for Advertisement campaign and expenditure analysis; and (3) AdPlan for Advertisement campaign planning. It is supported by the expertise of AGB Media Services, the corporate division of the group, and fueled by the feedback of thousands of users worldwide. Chapter 4: Audiovisual Services Sector 155

Appendix C. List of Television Channels in Metro Manila

Company Call sign Channel Power Location (ERP) kW

ABS-CBN Bctg. Corp. DWWX 2 60 (346.2) Mother Ignacia, Q.C. People’s TV Network DWGT 4 50 (968 PIA Bldg., Visayas Ave., Q.C. ABC DEV. Corp. DWET 5 40 (320) Brgy. San Bartolome, Nov.,QC Republic Bctg. System DZBB 7 100 (1000) Brgy. Culiat, T. Sora, Q.C. Radio Phil. Network DZKB 9 50 (1000) Panay Ave., Q.C. Zoe Bctg. Network DZOE 11 60 (829.8) Antipolo City Intercontinental Bctg. Corp. DZTV 13 50 (973) SFDM, Q.C. Southern Bctg. Network DWCP 21 20 (60) Strata 200, Pasig Amcara Bctg. Network DWAC 23 50 (1126) Mo. Ignacia, Q.C. Eagle Bctg. Corp. DZEC 25 50 (3948) Bo. Sta. Cruz,Antipolo, Rizal Republic Bctg. System DWDB 27 30 (613.27) Brgy. Culiat, Q.C. Rajah Bctg. Network DZRJ 29 25 (1354.7) Antipolo, Rizal Radio Mindanao Network DWKC 31 50 (4050) Antipolo, Rizal Zoe Bctg. Network DZOE 33 10 (55) Antipolo City Delta Bctg. System PA 35 10 (100) Mandaluyong City Progressive Bctg. DWAO 37 25 (1029) Antipolo, Rizal Masawa Bctg. Corp. DWBP 39 100 (3000) Mandaluyong City Nation Bctg. Corp. P/PU 41 60 (5000) Antipolo City Mareco Bctg. DWBM 43 10 (20) Quezon City Gateway UHF Bctg. DWVN 45 5 (103) Antipolo City ABC Dev. Corp. DWTE 47 40 (1000) Brgy. Bartolome, Nov., Q.C. Total no. of TV stations in NCR 21 156 The Global Challenge in Services Trade

Appendix D. Some Insights on the Philippine Film Industry*

Laurice Guillen-Feleo Former Chairperson, Film Development Council of the Philippines

The Movie and Television Review and Classification Board (MTRCB) is only regulatory. No agency besides the FDCP was ever created to help in the development of the film industry. In the 1960s, the Philippines was second to India in film output. Today, India is still first, the United States is second, and the Philippines has slid down to eighth place. The Film Development Council of the Philippines identified the reasons for the drop, though not necessarily in the order of gravity: • Piracy; • Other entertainment options; • Heavy taxation; and • Low quality of films.

Apart from being a highly taxed industry in comparison to the rest of the the film-producing world, the other factors are not necessarily problems inclusive to the Philippines. Piracy affects the United States, India, Japan, China, and Hong Kong. They seem to have anticipated these factors by as much as 15 years compared to the Philippines, which has not acknowledged and addressed this problem in time to reverse the decline. Hence, the Philippine film industry has been overtaken by Japan, Korea, China and, in some aspects, Thailand. Still dominating the market is the United States, which has aggressively pushed its market worldwide. Although India exceeds US production output by as much as 50 percent, the latter’s budget is 22 percent more than that of India. Studies show that this budget goes to special effects, postproduction, and marketing. Here is where their development strategy is directed. By raising the bar on special effects and postproduction, the United States set the benchmark for internationally accepted standards for film entertainment. Today, there is hardly any theater in the world that does not exhibit Hollywood films. Through its competitive advantage, film audiences worldwide, which have been steadily exposed to American films, will accept only products that match American- made goods. Asian-producing countries such as Japan, Korea, and China have demonstrated, although they promote indigenous cultural content, how they try to match Hollywood-set standards in order to compete. China has the most success in penetrating the American market. The statement on the decline of Filipino films always refers to the use of the same storyline or plot. That is being addressed now.

* Comments on the present paper presented during the Seminar on Services, 27-28 September 2005, Dusit Hotel Nikko, Makati City. Chapter 4: Audiovisual Services Sector 157

The FDCP’s predecessor, the Film Development Foundation of the Philippines, conducted a scriptwriting workshop as well as a scriptwriting contest yearly. Out of these contests came scripts like Magnifico, Santa Santita, and many others. Star Cinema and ABS-CBN have also conducted similar annual contests. Even now, film producers look into the winners of Palanca Awards. They have started to recognize that they need stronger content, short of accepting that we should be making script-driven films. Cinemalaya, a festival we started this year for scriptwriting and a finished film competition, produced nine full-length features and six short films. We also have script-driven films by independent filmmakers. An indication that the content is being addressed is the renewed interest in Philippine films in the international film festivals. The budget for producing Philippine films is very, very low compared to our Asian neighbors. As mainstream cinema still maintains the “star” system, the bulk of the budget goes to the hiring of the stars and highly paid technical people. The facilities for producing films are right here but they are not accessible because they are rented out based on commercial rates. We cannot make a film unless we import the materials. We have no sound studios, thus we cannot shoot anytime at regular working hours. Films are mostly dubbed. Postproduction is likewise low budgeted. The irony is that comparatively little time is allotted to the postproduction of mainstream cinema than in production, which stretches out, because production is dependent on the availability of the stars and location. One month is not enough time to improve and correct the film. There are three film laboratories in the country. But for quality processing of celluloid, producers go to Hong Kong, Thailand, or Australia. Thailand does not produce films as much as the Philippines does but they have the infrastructure and technology. They invested in sound studios and laboratories. They have the advantage of imposing on foreign films to process films in their country before these are shown in the Southeast Asian territory. There are not enough accredited technicians. The guilds, which service mainsteam cinema, have not initiated anything to upgrade the skills of their technicians. Not one in the Kapisanan ng mga Direktor ng Pelikulang Pilipino (KDPP) is acquainted with nonlinear and digital technology. On theatrical projection (classified as movie projection in the paper), few theaters, even in Metro Manila, have facilities for Dolby digital projection. Most are in mono projection. Fewer theaters have the facilities for digital film projection. Showing digital films in theaters entails renting digital projection facilities on top of theater rentals. The SM chain of stores has announced fitting seven of their cinemas with digital projection. (At the present time, the SM Cinema chain of theaters already has 10.) The promotion of Filipino films is directed at the domestic market only. Film producers with television networks necessarily have the advantage. They tend to promote in just two weeks before actual showing. Others cannot. However, 158 The Global Challenge in Services Trade innovative producers tie up with Smart or Globe mobile communications. The marketing budget for the local market is really not sufficient. The advertising rate for television is prohibitive. The demography of film audiences have also changed. Previously, the audience for my drama films was predominantly female (and through them, you reach the male). Now, the audience consists of young people in their 20s and early 30s who regularly watch films. This is the new film audience comprising 99 percent. It is not that the quality of films declined but the audience has changed, and along with that, their preferences. Government and even private producers (except for a few with foresight) do not seem to understand the importance of maintaining film archives. This is the last in the mandate of the FDCP. The budget allocated to us is so small that it goes to operations only. We are trying to save money from the income on rebates to be able to address this problem. Films are the preeminent instrument for transmitting culture and cultural identity among Filipinos. Tagalog was rapidly learned through films. The disadvantage of not having an archive is that our identity and culture is not reinforced. People now have little or no appreciation for Filipino films. Film schools cannot depend on critics and their articles alone. Actual films are needed to train audience to be film literate. Asian countries have anticipated the development of technology and globalization in 15 years. What have they done? They have promoted their films in the global market, which is what we have not done. They have made sure that they have a presence in all the important festivals and markets in the world. In a Cannes Film Festival, all the film-producing countries in the world had a booth in the market except Vietnam and the Philippines. Korea does co-production, mostly with French producers, because they are able to promote the country and culture, and widen the scope of appeal. The tagline of the Korean Film Council says: “Promoting Korea by promoting Korean films.” It makes sense. They also have sharing of artists, production crew, and technology with French producers. They also have increased capital because of the co-production, which they need, in turn, to be competitive in the world market. They have human resource training to upgrade their skills in technology, have acquired equipment, and built infrastructure. Before, we were the favorite shooting site for American films because our crew was very good and conversant in English; and it was generally cheaper to shoot here. Since then, we had problems with peace and order, government bureaucracy, and local government units. If we want them back, we should also think seriously about film production infrastructure. There are countries that do not charge amusement taxes at all, like Japan. They all have archives. They store and restore their films. They have film museums and watch films that they hear in conversations for a small fee. They also acquire films of other countries and put these in their museums. Fukouka has an annual festival, Focus on Asia, and their programmers go all around Asia Chapter 4: Audiovisual Services Sector 159 to bring films into Fukouka so people will see what Asian films are being produced and what Asian films are saying. They buy the print they show there. [It was ironic that when I got a request from the Cannes Film Festival to send them screeners because they were inviting us to be in the Cinema du Monde as one of seven countries to show films in one day, I had to request Fukouka and Singapore to borrow our films. Our shortsightedness in this case is obvious now that there is digital technology and renewed interest in Filipino films. We have nothing to show. It’s as if we never had a history.] The last strategy of other nations is the hosting of international film festivals in their countries to promote their films in particular and the content industry in general, as well as tourism. Tikoy Aguiluz has his CineManila International Film Festival but he has difficulty getting it organized because it has a moving schedule. Participants have difficulty scheduling the festival because they do not have it at a particular time. The predominant strength of the film industry you mentioned is its world- class artists and the three films (Ang Lalaki sa Buhay ni Selya, Bata, Bata…Pano Ka Ginawa? and Dekada ’70) that figured in film festivals during that time. Since 2003, we had over 20 films that have been showing in major film festivals. We had Babae sa Breakwater at the Cannes Film Festival after 15 years. Not since Mike de Leon and Lino Brocka did we have a film invited to be presented there. We also got invited in 2004 and 2005. We had four full-length films and two short films shown at the Cannes Film Festival. That is no mean achievement as the Cannes Film Festival is the mother of all film festivals. A large population of overseas Filipino audience that craves for Filipino films is also a major strength. For example, American Adobo is a coproduction shot in America and was done like any independent film. We had all the permits. It was shown in New York, San Francisco, and Los Angeles. Twenty percent of the audience were Americans who were either walk-ins or invited by Filipinos. Crying Ladies produced by Unitel had the same demography. If we consider where the Filipinos are, we already have a potential global market. They crave for Filipino films. Their relatives buy tapes here but many of those tapes are pirated. That is a market that has never been reached before. One of the weaknesses listed is the inroads made by cable and television, which has eroded the audience for theatrical exhibition. You are looking at the film industry differently. These inroads by cable and television, what we call other entertainment options, may not necessarily be a bad thing as far as the film industry is concerned when you are thinking of productivity because the content is still in demand for those who produce films. It is interesting to note that the reverse is starting to be practiced regarding pay-per-view. I don’t know if you are aware that the recent Manny Pacquiao boxing bout was watched in two cinemas in Megamall. They have started to experiment with the pay-per-view. At first they thought that they would need only one cinema but later on, they had to open another because of the number of people who came to watch the fight on the big screen. That is certainly a development worth watching. 160 The Global Challenge in Services Trade

The biggest weaknesses to my mind are the anti-globalization attitude of many mainstream industry players and, might I add, the lack of support from government. There are people who have made it their mantra to say the film industry is dead. They say the film industry is dead without really analyzing why, much less acknowledge the real challenges that face us. They fight to retain the star system, the formula films; they compete for the diminished domestic audience, they resist technological development, and yet they wonder why the film industry is dead. If we were to catch up with our neighbors, the solution is staring at us right in the face— the development of digital technology. Why is it important to go digital? The technology is more accessible. You will not need to go to a laboratory so you will not need PhP2 million to process the prints. Shipping, storing, and subtitling are much easier. Going digital will bring down the production cost. I would like to propose seriously that tax breaks or tax holidays be considered for a given period so that theater owners and film producers would be able to acquire the equipment they need in order to make this possible. Even the Sundance, which was just doing festivals before, is now concentrating on the development of cinemas with digital projection because that is the way to the future. If we can do that, we have hope of catching up. Chapter 4: Audiovisual Services Sector 161

REFERENCES ABS-CBN. 2004. Annual Report. Quezon City, Philippines: ABS-CBN. ABN AMRO Bank. 2000. Filmspace: behind the scenes. Netherlands. Andersen, B., Z. Wright and R. Wright. 2000. Copyrights, competition and development: the case of the music industry. Discussion Paper No. 145. Geneva, Switzerland: United Nations Conference on Trade and Development . Australian Broadcasting Authority. 1999. Trade liberalisation in the audiovisual services sector and safeguarding cultural diversity. A discussion paper commissioned by the Asia-Pacific Broadcasting Union. Digital Strategy Group of the European Broadcasting Union. n.d. Media with a purpose: public service broadcasting in the digital era. Grand-Saconnex, Switzerland: European Broadcasting Union. European Audiovisual Observatory. Focus: World film market trends, various issues. European Commission. 1994. Strategy options to strengthen the European programme industry in the context of the audiovisual policy of the European Union. Green Paper. COM(94)96. Leong, A., L. Kalins, O. Levy, M. de Marcillac and A. Scholze. 1996. The film distribution industry in Canada [online]. http://www.mediacircus.net/filmdis1.html#role. Lopez, Antonio. 2005. 2004 airtime revenues up 2% to P11B; P10.13B or 93% came from Channel 2. BizNews Asia. April 4-11. pp. 30-33. Mukharjee, A. April 2002. India’s trade potential in audiovisual services and the GATS. Working Paper No. 81. New Delhi, India: Indian Council for Research on International Economic Relations. Plate, T. 2002. Hollywood faces new competition: world film industry is globalization at its best [online]. UCLA International Institute. http://www.international.ucla.edu/ article.asp?parentid=2059 [Accessed September 11, 2005]. Stephenson, S.M. 1999. Approaches to services liberalization by developing countries [online]. Organization of American States (OAS) Trade Unit Studies. http:// www.sice.oas.org/tunit/studies/srv_lib/SRVINDX.asp#uptoabstract

Web Sites National Telecommunications Commission (Philippines): http://www.ntc.gov.ph EUROPA Gateway to the European Union: http://europa.eu Institut de l’Audiovisuel et des Télécommunications en Europe (France): http://www.idate.fr http://www.worldwideboxoffice.com http://www.mapsofworld.com http://www.idate.frhttp://entertainment.howstuffworks.com/movie-distribution.htm Chapter 5: Information and Communication Technology 163 55

The Philippine Information and Communication Technology Sector: Evolving Structure and Emerging Policy Issues1

Winston Conrad B. Padojinog

ABSTRACT Narrowing the digital divide is an important goal of any information and communication technology (ICT) policy. It must promote, on one hand, a high degree of accessibility to the “infostructure” by promoting competition, interconnection, and convergence in the ICT sector. On the other hand, policies must also seek to increase the capabilities of the users to absorb or increase their usage of ICT. To respond to competitive forces and market preferences, and, at the same time, reduce costs and increase margins, telecommunications companies have adopted the twin strategies of achieving scale and scope. The pressure to forward integrate and the availability of technology resulted in the convergence of information technology and content in the Internet. If left unchecked, these integration strategies of telecommunications companies could bring back ICT into the hands of a few or into a monopoly structure. The current regulatory environment in the country does not allow firms to pursue their convergence strategies because of the limitations imposed by Philippine laws. Also, there is no general framework or policy guidelines that would help both the regulator and the industry players in addressing future issues on spectrum usage, management, and ownership. There is also a need to address the issue of users’ ability to absorb the technology. Current ICT diffusion in critical sectors like education is very low. Demand-side constraints to ICT absorption also need to be addressed.

1 The author acknowledges the comments of Mr. Jose Raul Saniel, Supervising Communications Development Officer, Commission on Information and Communications Technology. These were discussed in certain parts of the paper. 164 The Global Challenge in Services Trade

BACKGROUND

Introduction Information and communication technology (ICT) was coined to capture a new set of services that emerged from the convergence of computer hardware, software, and telecommunications, giving birth to what is popularly known as Internet. In spite of its discovery and commercialization in 1995, Internet technology can still be considered at its infancy stage because of the continuing development of new and ever-expanding applications. ICT is also commonly used as a collective term to describe the new generation of information technology spawned by the Internet (Flor 2001). However, because of its ever-expanding applications, ICT’s current definition remains broad and finds difficulty in capturing its true essence. At present, the Organisation for Economic Co-operation and Development (OECD) defines ICT as a combination of manufacturing and service industries that electronically capture, transmit, and display data and information (OECD 2002). This definition distinguishes between the manufacturing and service aspects of ICT. ICT manufacturers • office, accounting, and computing machinery • insulated wire cable • electronic valves and tubes and other electronic products • television, radio transmitters, and apparatus for line telephony and line telegraphy • television and ratio receivers, sound or video recording, or reproducing apparatus and associated goods • instruments and appliances for measuring, checking, testing, navigating, and other purposes except industrial process equipment • industrial process equipment

ICT services • wholesale of machinery, equipment, and supplies • telecommunications • renting of office machinery and equipment • computer-related activities

The current definition of ICT is so broad that it even includes, to a large extent, the electronics industry. At the rate in which the coverage and scope of the ICT industry expands, ICT can be best classified not as an industry but as a sector composed of clustered industries. The definition and coverage of ICT is under periodic review by the Committee for Information, Computer and Communications Policy of the OECD, in light of the emerging new applications and experiences of countries adapting such definition. Chapter 5: Information and Communication Technology 165

The Philippines basically adopts the same definition with a slight modification. Wholesale services are classified as an entirely separate subindustry under ICT (NSO 2002). Overall, however, it retains the rest of the OECD classification. In the Philippines, ICT refers more to its service component rather than to its manufacturing aspect. ICT in the Philippines broadly includes the following: • telecommunications industry, which includes fixed lines and wireless services that cover fixed, mobile, and satellite applications • Internet service providers (ISPs) • e-commerce models • hardware and software application for communications technology • business process outsourcing (BPO) including both independent and shared services: medical and legal transcription, finance and accounting, data encoding, animation, design, market research, and others • contact center operations also covering both independent and shared services • multimedia applications

The services of these industries are different and distinct but closely complement each other. To better understand the complementariness of each of these industries within ICT, such industries can be classified according to the roles played by each industry: • providers of connectivity, specifically telecommunications encompassing fixed lines, fixed mobile, wireless mobile, and satellite technologies. • ICT enablers that facilitate the electronic transmission of data. These include ISPs, hardware and software services, and user interfacers, among others. • providers of content like business process outsourcing, contact centers and media, and e-commerce.

Main Issue of the Study The ICT sector is considered as a sunrise industry and one of the fast-emerging growth sectors of the Philippine economy. Its emergence as the new generator of foreign exchange, investments, and jobs for the Philippine economy attests to its competitive position in what is called the New Economy. The global phenomenon that now brings economies and nations to what is now being referred to as the Knowledge Age—also popularly known as Internet Age, Information Age, or E-conomy—lends ICT an important role in improving the plight of nations. Information has evolved into a “commodity” (Flor 1986) such that a nation’s level of access to and the availability of this commodity can spell its future prosperity or doom. Recent studies have shown that developed economies that enjoy high levels of ICT adoption are better off than countries that have low adoption rates (Figure 1) (Gray 2001). 166 The Global Challenge in Services Trade

Figure 1. Relationship between Internet penetration rate per 1000 and gross national income

Sources: ITU (2000); Aldaba (2000).

Hence, in an information-driven economy, societies can either be classified as information rich or information poor. Closing the digital divide—a term that refers to the gap that separates the “haves” and the “have-nots”—can greatly help in the alleviation of poverty, now considered as “the most pressing problem confronting society, in general, and the international development assistance community, in particular” (Flor 2001). This divide is apparent in the Philippines as exhibited by the country’s low Internet penetration rate, which stands below the median for Southeast Asia (Figure 2). Such a divide is also manifested in the manner companies have invested in the regions. Mr. Jose Raul Saniel of the Commission on Information and Communications Technology (CICT) observed that private sector investments are not evenly distributed and are concentrated mainly in urban areas. He noted that as the National Telecommunications Commission (NTC) data reveal, only 54 percent of the cities/municipalities have access to basic telephone service,

Figure 2. Internet penetration rate in Southeast Asia

Source: ITU (2001). Chapter 5: Information and Communication Technology 167 and telephone dispersal is mainly focused in Metro Manila having an installed telephone density of 29.07. This is three times larger than the second highest region, Southern Tagalog (Region IV). On the other hand, the Autonomous Region of Muslim Mindanao (ARMM) and Cagayan Valley (Region 2) have the lowest installed telephone penetration rate. Any policy or recommendation to promote competition through deregulation, interconnection, and convergence in ICT must ultimately be evaluated in light of its ability to narrow the digital divide. Competition in the ICT industry induces efficiency among competing firms. For consumers, this translates to prices that are not only generally competitive but also reflective of the real opportunity cost of the resource. For producers, available services and more access to ICT infrastructure imply the removal of any entry barriers, the homogenization or standardization of the service, and the availability of full information. Any threat to competition, inaccessibility to connectivity, and convergence must be addressed. Using competition to promote welfare is viable as proven by the recent experience of the country in its telecommunications industry. The birth of ICT in the Philippines is preceded in 1992 by the successful implementation of liberalization, deregulation, and interconnection policies in the telecommunications industry. The scope of the services and competition in the telecommunications industry particularly in mobile wireless and fixed line services increased. The heightened competition has induced firms to invest heavily in capital expenditures to survive and meet their service commitments to government (Feldbaum 2000). As a result of these massive capital expenditures, the telecommunications industry was able to absorb new technologies particularly in the area of connectivity and network-enabled content like media, data, information, business processes, and contact centers. These businesses have given birth to the service industries that now comprise the ICT sector. The drastic changes within these industries and their relationships to each other have resulted in new industry structures that continue to evolve until now. However, company behavior, which can include vertical and horizontal integration strategies under a converging environment, is a major driver behind the changes in industry structures.2 The constant change that industry structures in the ICT undergo has welfare and policy implications. Under a dynamic industry landscape, existing policies intended to achieve certain welfare-enhancing goals or market-contestability objectives may not be effective anymore. In fact, if regulators do not watch out, the structure can revert back to market dominance. It is even worse when the existing policy framework has run counter to these goals and objectives. In such cases, new policy frameworks are needed to regulate possible abuses in these new industry structures and behaviors. Because of firm behavior and strategies,

2 Horizontal integration happens when the merger or acquisition is made on companies catering to the same market. Vertical integration happens when the merger or acquisition is along the upstream or downstream sectors of the industry. 168 The Global Challenge in Services Trade deregulation and liberalization alone do not guarantee effective competition. According to the World Bank Institute (cited in Aldaba 2000), it is only by creating a policy environment that encourages and sustains competition that a country can maximize the benefits from liberalization and deregulation. However, the promotion of competition alone is not sufficient to narrow the divide as this covers mainly the supply side of the market. Closing the divide also involves considering the ability of the users of ICT, which is another policy consideration. According to Gray and Minges (2002), skills are necessary for any nation to achieve high levels of ICT absorption. These skills involve the three important Ls of the Internet Age: learning, language, and literacy. Infrastructure access can be addressed by analyzing both the supply side and the demand side (affordabilty and skills) of the divide. ICT learning refers to the familiarity or ability of a country to use the technology. As English is the predominant language of the Internet, a country’s English proficiency determines its ability to absorb ICT. Likewise, countries with high proficiency in mathematics and the sciences—important foundations of ICT—are better disposed to absorb ICT. Thus, considering the capabilities of the users to adopt and absorb ICT is important as ready accessibility of infrastructure is not a guarantee of successful use and adoption of the technology. Finding ways to improve a country’s capability to adopt and absorb ICT through literacy, language, and learning is another area of concern for ICT-related policymaking. Closing the digital divide thus involves dealing with both the supply-side and the demand-side challenges of technology use and adoption.

Objectives of the Study The objectives of the study are as follows: • provide an overview of the ICT sector and its economic contribution to Philippine economy; • analyze the current and evolving industry structure of the ICT sector in relation to competition issues and the existing policy framework; • analyze the users in terms of their ability to adopt and absorb ICT services; and • identify policy issues and recommend policies to address them.

Methodology How to narrow the digital divide must be the primary goal of any ICT policy. Closing the gap between the information rich and the information poor involves a two-pronged approach: on the supply side, it means paving the way for more competition, easy access to the available infrastructure, and convergence3; on the demand side, it means improving ICT absorption and adoption through improved literacy, English language proficiency, and ICT learning.

3 Convergence refers to the close interface of the Internet and the content in the delivery of a new set of IT-enabled services. Chapter 5: Information and Communication Technology 169

This study, on one hand, evaluates the state of competition, interconnection, and convergence in the ICT sector. A high degree of competition, interconnection, and convergence ensures that ICT remains available and accessible to the market. On the other hand, the study looks into the capabilities of the country to use and support the use of ICT. High degrees of competence as well as affordability can lead to high levels of ICT penetration and utilization. Figure 3 summarizes the methodological framework of the study.

Figure 3. The methodological framework of the study

This study dwells on issues pertaining to the state of availability and accessibility of ICT, and the affordability and ability to absorb and support it. While equally critical, issues pertaining to the content providers like business process outsourcing (BPO), contact centers, and the like are not discussed. Issues involving content providers are only considered in so far as the degree of their accessibility to the infrastructure is concerned.

Significance of the Study The ICT sector is indispensable for any country that aims to benefit in the New Economy. A vibrant and growing ICT can generate jobs, foreign capital, and foreign exchange the Philippine economy badly needs. In the Information Age, ICT is a critical link in alleviating poverty as poverty reduction must necessarily consider the interventions that ICT can do. While the economy continues to benefit from the successful liberalization of the telecommunications sector over 12 years ago, new key issues have emerged. ICT-specific issues such as interconnection and convergence and the impact of vertical and horizontal integration strategies on competition have also surfaced. These issues have cast serious doubts on the sustainability of 170 The Global Challenge in Services Trade fostering a competitive environment for ICT. There is a need to appreciate the evolving industry structure to sustain the regulatory reforms needed to promote competition. Numerous studies have provided overviews and independently analyzed issues in each of the industries comprising ICT. This study has managed to gather a few of them: overview of the Philippine IT market and its various industry components (ITU 2002; OPTEL 2002), studies on the deregulation of the Philippine telecommunications industry (Feldbaum 2000), interconnection issues (Padojinog and Nuguid 2000; Nuguid 2003), issues of competition in the cellular mobile phone industry (Lim 2002), e-commerce (U and De Vera 2002), e-tailing models (Castañeda 2003; Padojinog and Castañeda 2003), IT-enabled services (Padojinog 2002; Paulino 2002), Internet and Internet consumer protection (ITU 2002; Padojinog 2003), and issues in telecommunications (Serafica 2000). Nevertheless, a study that considers ICT as an intricate but interrelated chain of industries is needed. Some studies have been conducted by institutions like the Philippine APEC Study Center Network (Serafica 2000) and the World Bank (Aldaba 2000) emphasizing the emerging issues within ICT. However, there has been no study yet that directly dealt with these issues with indepth analysis and understanding, nor analyzed the mutual interdependence between industries, their vertical integration and convergence strategies, and their implications to competition. The lack of appreciation of these issues is perhaps the reason why no significant ICT-related policies and laws have been passed except for some proposed government laws and office memoranda (like in the Department of Transportation and Communications or DOTC). Besides, these proposed laws on ICT, in order to become more effective in achieving their goals, need to be backed up with studies for more indepth understanding of issues and concerns affecting the ICT.

THE ICT SECTOR AND ITS IMPACT ON THE PHILIPPINE ECONOMY

Providers of Connectivity The most notable contribution of ICT to the Philippine economy comes from the telecommunications sector. The successful deregulation and liberalization of the industry in the early ‘90s paved the way for the entry of more telecommunications services and companies and thus spawned greater competition in the industry (Table 1). Under the Public Telecommunications Act or Republic Act (RA) 7925, there are six general classifications of telecommunications services that allow private sector involvement: (1) local exchange carrier, (2) interexchange carrier, (3) international gateway facility, (4) value-added services, (5) mobile radio operations, and (6) radio paging system. The growing competition in the industry has induced massive capital investments from telecommunications companies, with foreign investors financing a sizable chunk of these investments. From 1996 to 2002, the Chapter 5: Information and Communication Technology 171

Table 1. Telecommunications industry’s range of services and number of players Telecom service 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Local exchange carrier Service 45 49 60 67 74 76 76 76 77 74 74 Interexchange carrier Service n.d. n.d. n.d. n.d. n.d. n.d. n.d. 12 12 14 14 International gateway facility 3 5 9 9 9 11 11 11 11 11 11 Radio mobile Cellular mobile telephone system 2 5 5 5 5 5 5 5 5 7 7 Public trunk repeater service 7 8 8 10 10 10 10 10 10 11 11 Radio paging service 6 6 10 11 14 15 15 15 15 11 11 Value-added service With networks Coastal 13 13 13 12 12 12 12 12 12 12 12 Broadband n.d. n.d. n.d. n.d. n.d. n.d. n.d. 10 18 19 19 Without networks n.a. n.a. n.a. 1 27 47 70 106 156 186 156 Satelite operators n.d. n.d. n.d. n.d. n.d. n.d. n.d. 18 18 19 19 Source: NTC (2005). n.d. – No data available n.a. – Not applicable telecommunications industry has managed to attract 11 percent of the total foreign equity direct investments and 13 percent of foreign portfolio investments recorded by the Bangko Sentral ng Pilipinas (BSP) over this period (Figure 4). During the period 2000-2003 alone, IT services, on the other hand, attracted a total of US$13.89 million of foreign direct investments (FDIs) or 12 percent of the total FDIs for the period. This sector had virtually nil contribution five years ago. The investments that deregulation and liberalization have brought about increased the availability of telecommunications services and other value-added services to users. The phone users density increased especially among mobile users, who are projected to grow from 30 per 100 persons in 2004 to over 45 per 100 persons in 2010 (Figure 5). Filipinos have virtually ignored the ample supply of fixed line phones by moving to the wireless mobile platform. This left fixed line operators with only about 48 percent of their almost seven million lines being subscribed. Other downstream users like ISPs, IT- and network-enabled services are expected to benefit from having these facilities available for connectivity.

Information and Communication Technology Enablers Increased availability of telecommunications services and developments in technology paved the way for the development of other Internet-based allied industries of ICT, which in turn provided other value-added services. These 172 The Global Challenge in Services Trade

Figure 4. Share of foreign equity investments and portfolio investments in the telecommunications industry to total foreign equity direct and portfolio investments

Source: BSP (2003). Note: Comm stands for communication and FDI for foreign direct investments. Units are in million US$.

Figure 5. Fixed and mobile wireless penetration rates, 1996-2010 (in percent)

Sources: Pyramid Research (2004); NTC (2005).

enablers facilitate the transport of content and data along the channels of connectivity. These companies include the primary Internet-based data carriers and the support hardware-software providers. The so-called primary “data carriers” are necessary for content services like BPOs to utilize. These data carriers include cable Internet, satellite-based Internet, broadband, ISPs, Internet backbones, e-commerce, and Internet data centers (IDCs). The support providers—software and hardware services—include suppliers of computers and peripherals, computer software, and consultancy. Chapter 5: Information and Communication Technology 173

Cable Internet The success of cable Internet in the United States (US) has led some of the country’s largest cable TV providers to offer this service in the Philippines. However, while the venture was a hit in the US, cable Internet performance in the country was lackluster. This was largely caused by the inability of small cable companies to expand into an ISP, which could be attributed to two reasons: (1) cable Internet requires additional capital requirements that small operators find too costly, and (2) small operators are constrained by the existing Cable TV Law that limits cable Internet providers as value-added telecommunications service similar to ISPs that are allowed to build their own networks. Cable Internet providers in the Philippines include Destiny Cable, ZPDee.Net (a sister company of Sky Cable), and Home Cable. Sky Internet—the Internet service arm of Skycable—has only three percent of the market or about 15,000 subscribers in 2001.

Satellite Internet The market for Internet over satellite (IOS) has increased through the years, driven by the increasing demand for satellite facilities linking local ISPs to Internet hubs mainly based in the US. In the Philippines, Panamsat’s geosynchronous satellite or PAS-8 provides the primary IOS service. However, the launching of Agila II in 1997 has increased the use of satellite-based communications services, including IOS (OPTEL 2002). About 20 of the country’s ISPs use IOS facilities to connect to the Internet, all of which are for linking with US-based ISP backbones and hubs. The main users of IOS facilities in the country have been ISPs, of which only the Philippine Long Distance Telephone Company (PLDT) has taken initiatives to expand satellite-based Internet access. PLDT, particularly PLDT- owned ISP companies Infocom and Now@Home, use Agila II IOS facilities. Table 2 shows the progression of IOS services in the Philippines.

Broadband Internet Broadband Internet access has been available in the Philippines since the early 1990s. However, it was only in the late 1990s that service providers saw its

Table 2. Major market segments for IOS services 1998 1999 2000 2001 ISP Links to Backbone ISP Links to Backbone ISP Links to Backbone ISP Links to Backbone Hybrid Access Hybrid Access Hybrid Access Hybrid Access Caching and Usenet Caching and Usenet Caching and Usenet Feeds Feeds Feeds 2-way Access Service 2-way Access Service Voice Over IP (Trunking/VSAT) Source: Satcom Insiders (2001) as cited in OPTEL (2002). 174 The Global Challenge in Services Trade profit potential. Nonetheless, growth has not been as fast, and subscriber base remains small, largely due to high subscription and lease fees. The fees could be lowered, however, if the subscriber base is expanded. There are many broadband technologies available (Table 3). The most common is the digital subscriber line (DSL). This technology, however, is still slower than the satellite-based Internet and other high-speed cable such as T1, T3, or fiber optics, but it is much faster than the common dial-up access. There are several telecommunications companies that offer this service but PLDT is acknowledged to cater to over 90 percent of the subscribers.

Table 3. Broadband services in the Philippines, 2001 Broadband system Service provider Fixed wireless • Bell Telecom • Broadband Philippines • Meridian Telekoms • Nowires.Net (pre-operating) • Polaris Telecommunications (pre-operating) Fixed wireline • Eastern Telecoms • Globenet • PLDT • Digitel • PT&T • BayanTel Source: Collated by OPTEL (2002) from the Philippine Internet Directory and various industry sources.

Internet service providers (ISPs) ISPs are considered by the NTC as part of the value-added sector of the telecommunications industry. They also play an important role in the Internet- access-delivery supply chain and considered the fastest growing in the industry after its liberalization in 1994 (OPTEL 2002). There were only four ISPs in 1995 but a year after, NTC registered 24 ISPs with an estimated 100,000 subscribers. By 2002, ISPs increased to 53, with about 800,000 subscribers. Recently, because of the difficult operating environment, no more than 20 ISPs are believed to be active. Official statistics on the size of Internet subscribers are not available. The NTC has estimates provided by ISPs willing to share their data (Table 4). From the limited information available, PLDT-subsidiary Infocom, a company that entered the ISP market in 1995, controlled 13 percent of the market by the end of 2001 while Mozcom and Pacific Internet have the second largest market share of five percent each (Figure 6). However, the most significant subsegment of the ISP market is the prepaid Internet access, estimated to account for more than 60 percent of all Internet subscribers in 2001. However, this is still a conservative estimate—as the Chapter 5: Information and Communication Technology 175

Table 4. ISP subscription Year No. of NTC- Estimated Registered No. of ISPs Subscribers

1996 24 100,000 1997 17 200,000 1998 23 300,000 1999 31 350,000 2000 34 400,000 2001 64 500,000 2002 53 800,000* Source: NTC (2005). * Based on paying accounts, the number of dial-up subscribers is estimated at 675,000 and the number of broadband subscribers is estimated at 125,000

Figure 6. Market share of ISPs (end of 2001 estimates)

Source: OPTEL (2002).

irregularity of subscription renewals for prepaid Internet subscribers made it difficult to account for their actual number. This market niche proved to be profitable as it allowed ISPs to reach market segments that could not afford postpaid Internet access.

Internet backbones An Internet backbone is “a group of communications networks managed by several commercial companies that provide the major high speed links across the country. ISPs are either connected directly to these backbones or to a larger regional ISP that is connected to one.” These backbones, in turn, are interconnected at network access points (NAPs), also known as Internet 176 The Global Challenge in Services Trade exchanges or IXs. They are junction points where major ISPs interconnect with one another. Connection with any of these NAPs requires Internet access (OPTEL 2002). In the Philippines, there are four Internet backbones: (1) PHNet, (2) Philippine Internet Exchange (PHIX), (3) Manila Internet Exchange (MIX), and (4) I-Gate, a PLDT subsidiary. Only PLDT’s I-Gate has interconnection with Asian Internet Exchanges, while the rest are connected to US-based backbones (OPTEL 2002). PHNet, which is managed by the Philippine Network Foundation, is a free exchange, thus open to all registered ISPs. However, since PHNet does not have a backbone, ISPs that interconnect with it must have their own gateways and must provide their own links (at least 128kbit/s) to the exchange. Like I- Gate, PHIX is also operated by PLDT and has about eight ISPs using their exchange. MIX is operated by Eastern Telecoms (ETPI) and has 13 ISPs hooked on to it. As PHNet does not have its own backbone and telecommunications franchise, it is interconnected with MIX.

Internet data centers (IDCs) An IDC is a data center with “a centralized facility providing network, server, and storage resources for one or more applications being utilized by one or more ‘users’” (Coughlan 2004). IDCs provide hosting services to companies that want an online presence but do not have the capability to do so. There are about 10 companies providing this service (Table 5).

E-commerce Internet’s increasing popularity and continuous innovations have led to the phenomenon called e-commerce, or business transactions carried out over

Table 5. Initiatives of Internet data centers (IDCs), 2001 Company Status Location PLDT Infocom and Vitro IDCs began Metro Manila operating in 2001 Ayala Port Makati Inc. Began operating in August 2001 Metro Manila CyberCity Data enter (Subic) Operational since 2001 Subic Economic Zone Iphil Communications Network, Inc. Began operating in August 2000 Metro Manila Philweb Under development Metro Manila Reach Networks, Inc. Operational by the end of 2001 Metro Manila Broadband Philippines Under development Metro Manila Moscom Began operating in July 2001 Metro Manila Impact Information System Began operating in 2000 Metro Manila DataOne Asia Began operating in 2001 Eastwood Cyberpark Sources: OPTEL (2002) and various industry sources. Chapter 5: Information and Communication Technology 177 cyberspace. The emergence of e-commerce has led to the creation of many e- commerce models, normally defined by the transaction relationship between two key agents: the consumer and the business venture. Currently, there are four major types of e-commerce models: (1) business-to-consumer or B2C, (2) consumer-to-consumer or C2C, (3) consumer-to-business or C2B, and (4) business-to-business or B2B. The most common business models applied in the Philippines are B2C and B2B (Table 6).

Table 6. Sample of e-commerce models in the Philippines Business Consumer Business B2B B2C • Electronic data interchange • Bidshot.com links • eBili.com • IBM Philippines’ “supply • PinoyAuctions.com webs” • Divisoria.com • SureSeats.com • MyAyala.com Consumer C2B C2C • Bayan Trade The difficulty in indentifying distinctly clear revenue streams in C2C business models have kept Philippine investors away from this segment (OPTEL 2002).

In the Philippines, much potential is seen in the B2C and B2B segments. In 2002, online B2C transactions were estimated to reach US$390 million while B2B transactions were likely to be US$36.8 million in the same year (OPTEL 2002). Retail e-commerce is also known as e-tailing. Most e-tailers can be characterized as either high touch or low touch. High-touch e-tailers sell their products to consumers out of their own inventory, typically like Amazon.com. On the other hand, low-touch e-tailers serve only as a venue for buyers and sellers to initiate and fulfill transactions. Examples of this type of e-tailers would be eBay.com or its Philippine counterpart, Bidshot.com (Castañeda 2003). E-tailers can also be further classified into two dominant business models: • Bricks and mortars – These are normally established retailers with a traditional physical presence, such as a store or branch. They also have an online presence, which they use both as a marketing and as a transactions venue. An example would be SM Supermarket Online. • E-commerce businesses - Also known as pure plays. These are e-tailers that do not have a physical presence. An example would be Divisoria.com. 178 The Global Challenge in Services Trade

Computers and peripherals The absence of major computer manufacturing companies such as Apple and Compaq in the Philippines has allowed other players to expand in the local market (Figure 7). Meanwhile, the market segment for computer peripherals and brand name companies dominate data storage devices (Figure 8). Most of the locally manufactured computer peripherals are imported, while data storage devices such as hard disk drives and CD ROM drives are exported. Among the computer platform manufacturers, IBM Philippines controls close to half of the market, followed by Fujitsu Philippines with a 19.6 percent share. For data storage devices, Fujitsu dominates 38.7 percent of the market, followed by Toshiba Information Equipment, Inc. with 22.2 percent (OPTEL 2002).

Figure 7. Market share of computer platform companies in the Philippines

Source: ComputerWorld Philippines 1999 as cited by OPTEL (2002).

Figure 8. Market share of Philippine-based manufacturers of data storage devices

Source: ComputerWorld Philippines 1999 as cited by OPTEL (2002). Chapter 5: Information and Communication Technology 179

Computer software The packaged computer software market in the Philippines earned US$44 million in gross revenues in 1999. The segment is dominated by US-based companies such as Oracle (38.6 percent) and Microsoft (6.8 percent), which all belong to the top players in the world market (Figure 9).

Figure 9. Market share of packaged software companies in the Philippines

Source: ComputerWorld Philippines 1999 as cited by OPTEL (2002).

On the other hand, the customized software segment earned US$74 million in 1999. The dominant player is the Philippine-based Software Ventures International, which controls 29.7 percent of the market, or revenues equal to US$22 million (Figure 10).

Computer consultancy In 1999, the IT consultancy market earned US$66.7 million worth of revenues. Accenture currently dominates this segment in the Philippines, with a 52.5 percent share (Figure 11).

Content Providers The availability of these “infostructures” (e.g. connectivity and ICT enablers) in the country has paved the way for the Philippines to emerge as a major contender in the global BPO market. The study does not dwell in detail on BPOs but discusses them in broad terms. The emergence of globalization and the continuing need of many companies to lower operations costs have led to the growth of the network- enabled services (NES) or IT-enabled services (ITES). These activities are based on the principle of BPO, a strategy of contracting out a service, a function, or a part of the company’s operations to an organization, a company, or a country to achieve better performance and lower down costs. NES activities include, but are not limited to, customer contact centers (also known as call centers), medical transcription, animation, and distance 180 The Global Challenge in Services Trade

Figure 10. Market share of customized software companies in the Philippines

Source: ComputerWorld Philippines 1999 as cited by OPTEL (2002).

Figure 11. Market share of IT consultancy companies in the Philippines

Source: ComputerWorld Philippines 1999 as cited by (OPTEL) 2002. education. In the Philippines, the NES industry is considered one of the top potential growth drivers. In addition, the US-based McKinsey and Co. (2002) predicts that the demand for outsourcing services will reach US$180 billion by 2010 (Figure 12). According to the Department of Trade and Industry (DTI), the country is currently involved in the following outsourced operations: 1. customer contact centers 2. content development a. animation b. transcription, conversion, and localization c. data search, integration, and analysis d. distance education e. engineering and design services Chapter 5: Information and Communication Technology 181

Figure 12. Global BPO market by 2010

Sources: NASSCOM and McKinsey and Co (2002); www.dti.gov.ph.

3. backroom operations a. finance and accounting services b. human resource services 4. core IT services a. Web site services b. software/applications development c. systems design

The most popular NES in the country is the customer contact center, which generated an estimated US$180 million in 2003. Moreover, the DTI estimates the sector to earn US$864 in revenues by the end of 2004, while the whole BPO sector is expected to grow by 68 percent and earn US$1.6 billion in revenues by the end of the year. The country is emerging as an alternative destination to India. Its attraction lies in the quality of the labor force—highly skilled, very proficient in English, and maintains a high affinity with the Western culture, particularly the US. In addition, the country’s infrastructure is reliable, efficient, and cost competitive (San Agustin 2004).

Economic Impact Current methods of measuring the economic impact of ICT are limited solely to the employment, investments, and exports generated by the sector. At present, the BSP and the National Statistics Office (NSO) lump ICT exports under the heading “telecommunications services not elsewhere classified.” It is equally difficult to appreciate the investments in ICT as these are likewise recorded by the BSP as investments under telecommunications and IT services. Relying on the national income accounts does not help either because the gross value 182 The Global Challenge in Services Trade added for telecommunications is quantified together with storage and transportation. The most accurate data on ICT are those recorded by the Philippine Export Processing Zone (PEZA), the government office tasked to provide incentives to the ICT sector and other sectors that enjoy special fiscal and nonfiscal incentives from government. Since its establishment in 1992, PEZA has managed to attract some 60 ICT companies to locate and operate in the Philippines (Table 7). Call or contact centers and software applications are the major areas in ICT that have attracted the most investors.

Table 7. PEZA-registered companies in ICT services, as of 2002 AreaAllowed ICT Services Area No. 1 Software Applications and Development, E Commerce 23 Education, Media and Entertainment 2 Multimedia Graphics, Animation, Printing and Other 3 Services 3 Engineering, Architectural and other Design Services 4 4 Call Centers 13 5 IT Research and Development 2 6 Data Encoding, Transcribing and Related Services 4 7 Other IT Services 11 Total 60 Source: PEZA (2003).

Investments Recent records have shown that PEZA has attracted close to PhP25 billion of investments in 2003. This has already surpassed the total investments of almost PhP23 billion generated in the previous year (Table 8). The role of ICT as an important generator of investments is getting bigger. According to recent statistics from the DTI, more than a third of the investments are accounted for by ICT, with 45 percent in 2002 and 37 percent in 2003.

Table 8. Total approved foreign direct investment (in million PhP)

2002 2003 Total FDI FDI in ICT % Share Total FDI FDI in ICT % Share

BOI 8,815 2,532 29 8,349 590 7 PEZA 22,796 6,969 31 24,923 11,850 48 SBMA 747 238 32 365 26 7 CDC 13,691 11,185 82 374 5 1 Total 46,049 20,924 45 34,010 12,471 37 Source: DTI (2003). Chapter 5: Information and Communication Technology 183

A historical review of the data from the Board of Investments (BOI) clearly shows the climb of combined investments in ICT from a measly US$60 million in 1993 to over US$2.5 billion in 2002 (Figure 13).

Figure 13. Board of Investments-approved ICT investments (in million US$)

Sources: www.boi.gov.ph; www.bsp.gov.ph.

Employment Investments in ICT that went into the export processing zones alone have generated over 11,000 jobs during the first three quarters of 2004 (Figure 14). It is estimated that the figure would be higher if ICT locators outside the designated ICT zones are also included. According to the latest estimates of the DTI, the contact centers alone have employed over 60,000 agents in 2004. An additional 20,000 more were expected to be employed by the end of 2005 by contact centers. These figures exclude those employed by the telecommunications industry and other BPOs and IT-enabled industries. For example, the telecommunications industry in 2003 already employed close to 30,000.

Foreign exchange Exports and export earnings of ICT locators in the export processing zones are on an uptrend. For example, in 2002, export levels were only about US$52 million but jumped more than two folds in 2003 to US$130 million. These figures are even underestimated because they only account for exports of locators inside the PEZA zones (Figure 15) and do not consider the additional dollar earnings of telecommunications and ICT companies outside the PEZA zones.

Areas for Further Liberalization Liberalization in ICT is viewed in terms of access to foreign capital, link with the global networks, and trade in services. As discussed in the previous sections, the first two are basically in place. Foreign capital has found its way into ICT. A 184 The Global Challenge in Services Trade

Figure 14. ICT employment in export processing zones

Source: www.peza.gov.ph.

Figure 15. ICT exports of locators in processing zones

Source: www.peza.gov.ph. large chunk of the investments in ICT, particularly in telecommunications, come mostly from foreign capital in the form of debt and equity. For example, close to 60 percent or PhP149 billion of PLDT’s 2004 capital base of PhP265.5 billion was financed by foreign debt floatation, and 40 percent or PhP20 billion of its equity base close to PhP48 billion represents foreign equity. Another example is Digital Telecom’s 2004 asset base of PhP52 billion, which is 10 percent financed by foreign loans. There are already a number of foreign IT service companies in the Philippines involved in customized and packaged software, IT consultancy services, computer platforms, and data storage services. The link that the present ICT infostructure enjoys with global networks through submarine cables and wireless modes like satellite and spectrums gives the sector relative ease in the flow of information, communication, and transactions. Chapter 5: Information and Communication Technology 185

If there is an issue on liberalization that has to be considered, it centers on the limits imposed on foreign ownership of domestically oriented companies specifically utilities and the providers of content like media, and the implications of these limits on convergence.4 A provision in the E-Commerce Act was supposed to circumvent foreign equity limits especially on mass media but a single company has yet to use such provision.5 Another issue related to liberalization deals with the purchase arrangements of licensed software and hardware. Many companies purchasing or importing their hardware and software requirements are constrained to buy only from authorized distributors in the country to avail of the needed technical support. Acquiring the same software in another country or even through the Internet, even though it is less expensive, forfeits companies access to technical support and other warranties.

Summary of Impact The impact of ICT on the Philippines is both qualitative and quantitative. The qualitative dimensions come in the form of more available services and choices, easy accessibility, and ready availability of ICT services to users. No doubt, the state of connectivity and Internet-related services have made the Philippines interconnected with the emerging knowledge economy. The quantitative impact is demonstrated by the jobs, investments, and foreign exchange earnings and funds generated for the Philippine economy. The role of ICT in improving the quality of life in the Philippines is becoming more prominent. The continuing development as well as competitiveness of ICT will play a pivotal role in determining the future participation and role of the Philippines in the Information Age. Making sure the sector stays on its path

4 A 60-40 local-foreign proportion is imposed by the Philippine Constitution for foreign ownership of public utilities and mass media. Article XII Section 11 of the Constitution mandates that the operation of a public utility shall be at least 60-percent Filipino owned. In addition, Article XVI, Section 11 states that the ownership of mass media is limited to citizens of the Philippines or to corporations, cooperatives or associations wholly owned and managed by Filipino citizens. 5 Section 28 of the E-Commerce Act seemed to have redefined certain terms and made them conform to the needs of the local IT industry. For instance, the last paragraph of said section states: “The physical infrastructure of cable and wireless systems for cable TV and broadcast excluding programming and content and the management thereof shall be considered as within the activity of telecommunications for the purpose of electronic commerce and to maximize the convergence of ICT in the installation of the GII (government information infrastructure).” With this, it now appears that the physical infrastructure of mass media can be considered as “within the activity of telecommunications (public utility).” This, in effect, provided the possibility of telecom companies for “infrastructure convergence,” which is actually a vague concept. Strictly speaking, true convergence must also include ownership of content as well, which largely includes mass media. In fact, PLDT tried to purchase GMA Channel 7 indirectly through the purchase of GMA’s pension fund, which in turn would have PLDT own the channel. 186 The Global Challenge in Services Trade toward competitiveness will largely depend on how competitive forces in the Philippines emerge in the future. Technical competence and knowledge, as well as user accessibility to ICT, will ensure that the nation fully participates in the prosperity and development brought about by being part of the Information Age.

EVOLVING STRUCTURE AND BEHAVIOR To understand the shifts in industry structure particularly along the ICT value chain6, it is important to know the drivers of these structural changes. Figure 16 broadly shows the value chain of ICT.

The ICT Value Chain The ICT sector is broadly composed of the providers of connectivity (e.g., telecommunications), content creators or providers (e.g., BPOs, contact centers), and the ICT enablers (hardware and software, Internet-based data carriers). All three have to be intricately linked to each other in ICT (Figure 16). Telecommunications is a vital component in providing connectivity.

Figure 16. Broad ICT value chain

6 An industry value chain refers to the separate activities that link industries to each other either as suppliers (upstream activities) or as distributors and sellers (downstream activities). Activities can either be vertical (i.e., involved in the transformation of inputs and interface with customers, or horizontal (i.e., involved in providing the hard and soft infrastructure in which the primary activities depend on). These are intricately linked to each other in two ways: (a) through the Internet using hardware and software capabilities to incorporate and deliver content into and through connectivity structures, and (b) through convergence of different types of contents in the Internet. Chapter 5: Information and Communication Technology 187

Connectivity Telecommunications infrastructure is indispensable in ICT. The telecommunications industry provides connectivity or the backbone in which content and data are transported. Connectivity is established either through wireline or wireless means. Wires transmit the content through fixed infostructures like underground or underwater cables and optic wires. Telecommunications establish all forms of access points for a community and support the deployment of powerful broadband networks. Another possible provider of connectivity but less popular in the Philippines are the cable-TV companies that use their cable connections as access points to provide Internet services to their subscribers. Meanwhile, wireless connectivity can be established from a fixed point like an antenna or a disc (.e.g, fixed wireless), from a cellular site (wireless mobile), or through satellite (e.g., international satellites or VSATs). Practically the two other components—content and ICT enablers—totally depend on telecommunications to deliver their ICT services. Thus, accessibility to the telecommunications infrastructure is of vital importance to ICT as a whole. It is a vital part of the Internet backbone, a communication network that provides the major high-speed links across the country and the globe. Entry barriers can undermine the easy access of nontelecommunications company providers of ICT services.

ICT enablers Internet is an enabling technology that electronically captures, transmits, and displays data and information. However, it needs both the providers of software and hardware, and other user interfacers. Internet use continues to evolve and expand. One of its radical and recent applications is the IP telephony, an important area in which this study would dwell on later. IP-telephony has the ability to bypass some traditional infrastructure facilities like public switches and local exchanges provided by telecommunications companies. As Figure 17 illustrates, IP telephony, more popularly known as voice- over-Internet protocol (VOIP) can, with its Web servers and gateway computers, bypass the public switches and local exchanges using the Internet. Thus, calls and even video streams, especially in voice/Web integration protocols, can be transmitted between parties without having to go through the public switches. IP telephony or VOIP as a term can be misleading because VOIP does not only imply the transmission of voice over the Internet. It also has capabilities to transmit data electronically through fax and even video through a computer and other Internet-ready hardware. IP telephony has led to cuts in the cost of calls especially for those that have been routed over the public Internet. Telecommunications companies have started switching from having separate voice and data networks to converged Web-based networks. Now, calls to Web sites and those made especially in contact centers use VOIP technologies. In fact, voice-Web integration is found to be ideal for contact centers because of its integrated messaging capabilities for video, fax, e-mail, and voice. 188 The Global Challenge in Services Trade

Figure 17. Voice/Web integration

An ISP is a fundamental component of the distribution channel in the delivery of content and other value-added services making it a vital part of ICT. It is in the Internet that convergence occurs. This convergence has also fueled a lot of policy implications on government regulators as well as competition issues between companies. ISPs have to be interconnected at an Internet exchange (IX), an access point where all major ISPs are globally interconnected with each other. It is only by having this access to the IX can a party really be considered as “connected.” Some of the value-added services that ISPs can provide besides the traditional e-mails, chats, and the like are the following: • IDCs provide outsourced hosting services to companies planning to have their own Web presence but do not have the resources nor the expertise to put up one. • E-commerce (or e-tailing services) is a specific term for “business models” used by various companies to create value, generate revenues, and compete using the Internet as medium, and includes mobile and online services, mobile commerce, and the like.

Content providers This refers to services or solutions that are transmitted through the Internet. This is primarily composed of IT-enabled activities like BPO. BPO activities in the Philippines include, among others, contact centers, medical and legal transcription, backroom accounting and finance, design, publishing, and animation. However, as discussed earlier, analyzing content providers are outside the scope of this study.

Structural Changes in the Telecommunications Sector Government policy played a significant role in the structural changes in the telecommunications sector. The passage of RA 7925 in 1995, otherwise known Chapter 5: Information and Communication Technology 189 as the Public Telecommunications Act, provided the administrative and regulatory framework for the development not only of the telecommunications industry but also of other value-added services. Numerous studies have heralded the benefits of this law as exhibited by the entry of more industry players and the provision of additional services. Even prior to the promulgation of RA 7925, the executive department and the Department of Transportation and Communication (DOTC) have already passed laws that caused the structural shifts in the sector.7 As of a result of the deregulation and the liberalization of the telecommunications industry, the penetration rates for fixed line and wireless mobile services have increased. Fixed line teledensity jumped fivefold from 1.17 percent in 1992 to 8.7 percent in 2002. In the same period, wireless mobile subscribers increased more than 536 times from 56,000 subscribers in 1992 to over 30 million in 2004 or 35 percent of the population. The expected improvements of teledensity in the Philippines in 2003 have surpassed the achievements of Thailand but have yet to match those of Malaysia (Figure 18).

Figure 18. Number of fixed and wireless mobile subscribers in Southeast Asia

Sources: APT (2003); NTC (2003).

7 Among the relevant policies prior to RA 7925 that have initiated major structural changes are the following: DOTC 92-260, which created an open and competitive environment in the cellular phone market; DOTC 93-273 and 94-277, which led to the development of the domestic satellite services; and Executive Orders 59 and 109 of 1993, which compelled interconnection between company telecom networks and imposed the universal telephone service policy, respectively, on companies that would provide international gateway facilities (IGF) and celluar mobile services. After RA 7925, other laws followed like EO 467 of 1998, which allowed domestic carriers direct access to international fixed and mobile satelite- based technologies. 190 The Global Challenge in Services Trade

Drivers of Deeper Structural Changes Structural changes went beyond just an increase in the number of telecommunications players (refer to Table 1) and their available services. Market-driven and competitive forces are shaping the scope and degree of integration within the industry. Companies respond to these forces depending on the financial and technological resources available to them through strategies that seek to enhance their competitiveness. Unfortunately, if these strategic responses are left unchecked, it can diminish competition in the market or give rise to market dominance. These forces or drivers of structural change and their impact are the following:

Growing popularity of short message services (SMS) The Filipinos’ love affair with the SMS technology (also called “texting”) has earned for the Philippines the distinction of “texting capital of the world” (The Straight Times 2002), with over 250 million to as high as 300 million text messages sent daily. The high adoption rate of cellular mobile telephone system (CMTS) among Filipinos is the combined results of massive capital investments in technology and the advertising intensity of telecommunications companies (Lim 2002). As the study of Lim has shown, maintaining a huge market share to attain economies of scale is necessary to sustain the profit margins. The intense competition in the wireless mobile industry has triggered shifts to new technologies. Cellular phone operators have heavily promoted SMS with low rates that can be matched only by countries with large economies of scale like China. The market preference for SMS, which has become a substitute for voice communications, has triggered the adoption of GSM digital-based technologies and the death of the analog system, a dead-end technology (Figure 19).

Figure 19. Market share of digital and analog users of CMTS

Source: Various company reports. Chapter 5: Information and Communication Technology 191

The shift to digital systems is significant because it brings companies to launch general packet ratio service (GPRS)-based wireless access protocol (WAP) and multimedia services (MMS). Intense competition has forced the industry to be creative in wireless programming such that the 2G SMS-driven application has evolved to be a viable option to 2.5G or even the enhanced data rates for GSM revolution (EDGE). This makes wireless mobile communications an important platform in which a large subscriber base of over 30 million Filipinos in 2004 alone can access the Internet and other ICT services. GPRS, for one, allows for IP-based communication, making it capable for mobile Internet applications. The impacts of the growing popularity of SMS include: (1) migration of telecommunications usage from landlines to cellular-based communications; (2) widening of the addressable market as a result of the emergence of prepaid cards that reduced the average rate per user, which in turn, increased the pressure on telecommunications companies to achieve economies of scale; and (3) the lack of incentives to migrate to more powerful 2.5G and 3G applications because of the successful adoption of 2G applications for GPRS-based WAP and MMS. It is expected, however, that in the near future, telecommunications companies will be forced to adopt the 3G platform because of the need to be ahead of the competition. The 3G platform can deliver more and sophisticated content than the 2G platform. For instance, 3G handsets are capable of providing “voice messaging” and video stream services unlike 2G handsets that are limited to SMS and MMS.

Excess capacity in fixed lines RA 7925 mandated the service area scheme (SAS) in which newly licensed international gateway facilities (IGFs) were required to install 300,000 land lines, and CMTS providers, 400,000 lines in designated areas in the Philippines. This “missionary” move is similar to the concept of universal service fund (USF) of the Federal Communications Commission wherein telecommunications companies are required “to promote the availability of quality services at just, reasonable and affordable rates; increase access to advanced telecommunications services throughout the nation; [and] advance the availability of such services to all consumers including those in low income, rural, insular, and high cost areas at rates that are reasonably comparable to those charged in urban areas.” As a result of the boom in CMTS, the demand for fixed lines has remained sluggish. The cellular mobile market has grown at a spectacular rate over the years from a very low base in 1991 of 33,800 subscribers to approximately 33 million subscribers as of the end of 2004, representing a mobile density of 36 per 100 people. The country is now experiencing a decline in fixed line teledensities: 9.12 for every 100 people in 1999; 9.05 in 2000; and 7.83 in 2004. Because of the increasing popularity of cellular phones, telecommunications carriers cut back their infrastructure investments in fixed line services. 192 The Global Challenge in Services Trade

Varied broadband choices but low market adoption Broadband technologies began in the Philippines in the early 1990s in the form of DSL and fixed wireless systems. There are about 10 operators providing the service but all have been experiencing difficulty in expanding their customer base. Broadband subscription level is still low but trends point to a steady increase. For example, PLDT had 50,000 subscribers in 2004 from 25,000 in 2003 and 9,000 in 2002. Meanwhile, Globe’s broadband subscribers increased by 539 percent from 2,231 in 2004 to 14,258 in the first half of 2005. This low subscription level can be attributed to a number of factors: • The wide array of available broadband technologies left the market confused which systems would best meet their requirements (ITU 2002). • Broadband pricing in the Philippines is twice as high as in Hong Kong (Pyramid Research 2004) making it beyond the reach of average Filipino households. It is more intended for the corporate and high-end residential users. • The industry appears to be unwilling to push for a single broadband standard because the much-heralded DSL, though slow in terms of speed by international standards, makes use of the existing copper wire infrastructure. Mr. Saniel pointed out the possible reasons for this: (i) the bandwidth bottleneck that limits access to the “last mile”; (ii) large capital exposure in copper loops such that replacing them with a broadband optic fiber network would be very expensive. The long economic life of these cables is a financial burden to the company that lasts for many years. Even though this may be replaced by fiber optics, the copper depreciation charges would continue until it is fully amortized, unless a massive write-off is done; and (iii) a number of technological developments have emerged like DSL that, in fact, maximizes the utilization of the existing local (copper) loop.

Overcapacity of bandwidth and cost-cutting technology The rapid increase in bandwidth capacity has led to a reduction in the cost of bandwidth (Figure 20). Thus, margins from international calls have slid down due to pressures from US companies to reduce settlement rates, the growing popularity of IP telephony, and the alternate routing of calls. In fact, domestic carriers have reduced their settlement rates to stem the rise in illegal accounting rate bypass traffic. This reduction may have increased the volume of call minutes by over 100 percent for PLDT in 2000, but revenues from international long distance calls (ILDCs) as a percent of total revenues have significantly declined from 51 percent in 1996 to just 21 percent in 2000. These factors have led to cuts in margins from international calls, increased the attractiveness of VOIP, and further encouraged the routing of calls. Chapter 5: Information and Communication Technology 193

Figure 20. Global circuit capacity

Source: Kelly (2000).

The popularity of prepaid cards and Internet café services Over 97 percent of CMTS subscribers are prepaid users and a majority of Internet users also either use dial-up prepaid Internet cards or access the Web through Internet cafes8. The margins from prepaid services are attractive such that telecommunications companies would not shift away from this strategy. For CMTS, the use of prepaid cards deepens the addressable market to the lower income classes. For landlines, this encourages additional subscribers to tap into the excess landline capacity of the carriers. For broadband services, prepaid dial-up cards are more attractive, leaving little incentive for the telecommunications carriers to pursue more aggressive price cuts and marketing strategies. This also further cuts into the average revenue per user and increases the churn rate of CMTS.

Large overseas Filipino workers (OFWs) market and reactions of foreign carriers The over seven million OFWs create a unique market for the domestic telecommunications carriers because of the overly lopsided traffic volumes between inbound and outbound calls. For instance, of the average 2.2. billion minutes of calls handled by PLDT, close to two billion are incoming calls. This unique feature of international traffic is largely residential rather than business.

8 Internet cafes can also be considered as an important access channel for the users. For instance, Netopia, an Internet café owned by Digital Paradise (a subsidiary of ePLDT) reported that it serves over two million people a month. Users normally come to play online games, chat, apply for jobs, do research, and others. Netopia has 6,000 workstations and over 100 outlets nationwide. 194 The Global Challenge in Services Trade

Mr. Saniel commented that the incoming calls are mostly paid by customers overseas rather than by customers in the Philippines. The large number of Philippine expatriate communities and OFWs living and working abroad explains why most of the international traffic is residential rather than business. For the sheer cost of it, making international long distance calls to relatives abroad is something that Filipinos are not too eager to do. They would rather wait for their relatives abroad to call them. This may provide a high degree of market power to the domestic carriers vis-à-vis their foreign counterparts. Mr. Saniel, however, commented rather the opposite: “The exercise of market power by domestic carriers over foreign carriers seemed to have ended as detrimental to domestic carriers. One such case happened on February 7, 2003 when AT&T and MCI WorldCom filed a petition against some Philippine telecommunications companies with the Federal Communications Commission (FCC), seeking a stop payment on settlements to some Philippine carriers for the reason that Philippine carriers were “whipsawing” AT&T and MCI into agreeing to an increase in termination rate to the Philippines.9 The US FCC issued an order stopping US-based carriers from paying settlement payments to some Philippine carriers. As a result of FCC’s order, US-based carriers were prohibited from compensating the affected Philippine carriers for switched services, whether rendered before or after the date of the order.” Mr. Saniel also specified that although Philippine carriers are benefiting from the imbalanced traffic, international simple resale (ISR) operations have significantly impinged on their revenues. ISR is the routing of inbound international calls through private leased lines or IP data lines, and then terminated to a called party through a local cellular or fixed line number. As the ISR operators terminate an inbound IDD call as a local call, they are able to offer at much lower rates to foreign carriers than at current termination rates. Thus, Philippine carriers are not able to fully realize the full inbound revenues from foreign carriers.

Firm Behavior and Strategy There are various strategic responses available for companies to deal with the environment and their competitors—whether existing or potential.

Pursuit of scale and scope economies through vertical and horizontal integration strategies In response to competitive forces and market preferences, telecommunications companies have adopted the twin strategies of achieving scale and scope to reduce costs and increase margins.10

9 “Whipsawing” happens when a foreign monopoly supplier uses its market power to negotiate a more favorable agreement from one buyer and obtain the same conditions from another. 10 Economies of scale occur when, in the long run, unit cost falls as a company’s output increases. Economies of scope, on the other hand, occur when unit cost falls as a company produces two or more services using shared resources or a similar platform. Chapter 5: Information and Communication Technology 195

Achieving economies of scale and scope are natural strategies especially given the close synergy between long-haul and Internet exchange backbones, and the applications and content that use them. According to Mr. Saniel, “one consequence of convergence is that it is becoming unsustainable to maintain separate networks and business strategies for voice and data networks or for fixed and wireless networks. In the future, the same networks would carry digital bit streams between and among users and suppliers.” Forward vertical integration or getting more control of the downstream industry linkages that are part of the primary support activities provided by telecommunications companies is relatively easy as these would merely comprise putting up, acquiring, or merging with downstream industries. These downstream industries would include ISPs, Internet exchanges, IDCs, broadband wire and wireless Internet, and even content like contact centers and BPOs. For example, PLDT is now virtually present in the entire value chain of ICT through its exposure in different but complementary markets, such as: • long haul transport services by controlling one of the two major backbones that can provide local and long distance services; • mobile services through its presence in cellular mobile (Smart-Piltel that now controls over 50 percent of the mobile market), satellite services (Agila II), and fixed wireless (Netopia); • more downstream industries like ISPs (Infocom), IDCs, and Internet backbones (PHIX and I-Gate); and • content providers like wireless programming (Wolfpac Communications), contact centers (Vocativ, Parlace, ContactWorld), and other data storage and communication services (e-PLDT).

The next battleground of the industry is the 3G mobile market. The need to remain competitive and provide more services to a demanding consumer market will eventually force companies to horizontally migrate to the 3G platform. More investments on equipment, handsets, and content creation will be required. Forward integration strategies by telecommunications companies in the Philippines are a norm rather than an exception. Like PLDT, active companies in the telecommunications industry, which are actually at the most upstream portion of the ICT value chain, have no other option to generate more value but to go downstream. Table 9 shows how conglomerate companies have marked their presence in different ICT markets.

More pressure to increase content through convergence strategies As competition becomes more intense, the pressure of telecommunications and other companies in the ICT sector to go further downstream to extract more value also increases. This pressure, coupled with the availability of the technology, actually resulted in the convergence of IT and content in the Internet. Virtually anything that can be digitized can be stored, retrieved, and transmitted electronically through the Internet. Besides data, other digitized information like voice, video, print, and still 196 The Global Challenge in Services Trade

Table 9. Presence of telecommunications companies in the value chain of ICT

PLDT Globe Benpres Digital Belltel PT&T

Connectivity Fixed line x x x x x Wireless (Fixed and Mobile) x x x x x Cable x x x Satellite x x x x ICT enablers Internet x x x x x x Broadband x x x x x x Internet exchange x x x x Hardware and software x x Content Contact center x x Video/VOIP x x x x x Data storage x x x E-commerce x x Wireless programming x

images can be electronically transmitted in real time through the Internet. Thus, many ICT companies, including vertically integrated telecommunications companies, are “converging,” making the Internet another form of media to transmit, transact, and interact with data and information in real time. For instance, to have presence in the Net and to reach a wide market base as possible, broadsheet print media like the Philippine Daily Inquirer, Manila Bulletin, and Philippine Star have Web sites where these newspapers can be accessed. Another example is the desire of independent ISPs to offer VOIP or get interconnected to DSL or more powerful broadband Internet services.

Emerging market power The vertical integration strategies along the primary activities of the ICT value chain, particularly by telecommunications companies, have began to increase the concentration ratios of the industries within the sector. The strategic behavior of controlling the “access channels” while expanding the value chain has increased the market power of companies mainly that of the telecommunications industry. Except for the support activities and fixed wireless segments, the mainstream value chain activities are already showing high levels of market concentration. Activities that have high market concentration ratios include the long-haul and backbones (0.58), mobile wireless services (0.51), Internet exchanges (0.75), fixed wireless (close to 1.0), and ISPs (0.50) (Table 10). There are clear indications that the industry structure, now built along vertical integration strategies, is threatening to bring back the ICT into the hands of a few or into a monopoly structure. Chapter 5: Information and Communication Technology 197 PLDT controls about 70% and Telecphil the balance. PLDT controls about 70% and Telecphil ComputerWorld (1999) as collated by OPTEL (2002). OPTEL (2002). Based on 2002 NTC data. Estimate as of 2002. Based on 2002 NTC data but market share sourced from OPTEL (2002). OPTEL (2002). Data on ISPs interconnected come from ITU (2002) and Based on 2002 market share of fixed line subscribers. Based on 2002 NTC data. Table 10. Mainstream value chain activities showing high levels of market concentration 1 2 3 4 5 6 7 8 9 198 The Global Challenge in Services Trade

Competition along the support activities of the value chain comprised mainly by hardware and software activities remains intense. Most of the companies that compete in this segment are multinational companies that also intensely compete in the global markets.

Implications of Increasing Market Dominance

Possible price discrimination The growing importance of wireless mobile communication gives disproportionate market power to the providers of these services. Fixed line operators either lose a large chunk of incoming ILD traffic to CMTS providers that have already began operating their own international gateways or pay more to reach a large proportion of the population. Also, international carriers have to contend with the growing market power of the CMTS providers. This market power is already evident in the large disparity between the rates of fixed-to- mobile services and mobile-to-fixed services. In the Philippines, call charges from fixed-to-mobile is four times more expensive than mobile-to-fixed calls. Such large disparities are not seen in countries like Malaysia, Costa Rica, or Guatemala (Figure 21).

Figure 21. Mobile-to-fixed and fixed-to-mobile interconnection rates (in US$ per minute)

Source: ITU (2002).

Indications of strategic entry deterrence and predatory pricing strategies Highly integrated telecommunications and ICT companies with market dominance can easily employ entry deterrence strategies against new entrants or their existing rivals. Entry barriers can be put up using economies of scope and scale strategies against new entrants who will be forced to enter the market either on a large scale or be compelled to launch a broad range of product lines to keep costs lower or similar to those of the larger firms already operating in the market. Chapter 5: Information and Communication Technology 199

Also, the first mover advantage, Mr. Saniel pointed out, is also employed. “New entrants are at a disadvantage considering that they still have to construct their own network infrastructure and identify target markets while the well- entrenched market players have already created market niches and are only working on further broadening their already large subscriber bases. The huge capital requirements involved in constructing the network, building up the subscriber base, and meeting the congressional franchise requirement are very costly.11 Apart from these factors, an investor intending to provide cellular mobile service is faced with the need to secure frequencies, which at the moment is either scarce and/or unavailable, especially for GSM. New entrants will need, therefore, to have the financial resources and to be highly innovative in terms of product/service offerings, technology, and organizational efficiency to be able to effectively compete with incumbent operators.” Lastly, the control of the critical backbones by vertically integrated telecommunications companies is almost tantamount to the control of the distribution channels needed by any content or application provider. Such is the problem currently faced by the independent ISPs that lodged a complaint against PLDT. Represented by their association, the Philippine Internet Services Organization (PISO), the ISPs complained to the NTC about the anticompetitive practices of the dominant telecommunications companies like PLDT (see www.piso.org.ph). PISO observed that the “Internet strategy” of telecommunications companies has made them their direct competitors in the market. According to PISO, they resort to predatory pricing by setting “prices that no independent ISP can possibly compete with.” To top it off, telecommunications-based services (e.g., DSL and ISDN) remain only available to these companies’ affiliated ISPs. The pursuit of economies of scale and scope can make incumbents erect entry deterrence strategies against new players. A clear example, PISO said, is the higher rates of the E1/R2—a signaling standard that allows a single cable to have 30 channels—that these companies charge to nonaffiliates. Their rates to nonaffiliates is 20-45 percent higher than what they would normally charge their affiliated companies. Another strategy is by introducing new services at way below market prices. Connectivity services are also not made available to independent ISPs, only to their own sister-companies.12

11 RA 7925 requires a congressional franchise to all entities wishing to operate a telecommunications network in the country. Securing a congressional franchise is tedious, costly, and normally takes years before it can be granted. 12 A case in point is the DSL service priced at PhP2,500 for the entry level, and only available through a telecom’s own brand or its affiliated ISP. This service is a clear sign of monopolistic tendencies. What independent ISPs would like to know is how telecommunications companies can afford to resell its DSL services complete with bandwidth, support, and other services for only PhP2,500 a month when in fact they are re-selling raw (i.e., the ISPs has to provide the bandwidth plus other costs) E1R2 to ISPs at an average of PhP2,700 per channel! (www.piso.org). 200 The Global Challenge in Services Trade

The other litany of complaints PISO filed against PLDT includes the following: • Delay in processing request of PISO members for access to its DSL infrastructure. This delay is tantamount to denial of access. • Delay in processing request of PISO members for access to its VIBE service or domestic dial-up Internet service. This delay is also tantamount to denial of access.

Emerging Competition Policy Issues

Unchecked industry behavior and spectrum management While it is justifiable to pursue economies of scale and scope, unchecked antimarket behavior by incumbent telecommunications players can make the market less competitive in the long run. No inquiries have ever been made on the growing vertical and even horizontal integration strategies of telecommunications companies. Neither are there any inquiries on the extent firms can pursue such strategies. The strategic decision to integrate is obviously intended to achieve certain degrees of efficiency for the company, but the implications on competition and social welfare are not taken into account by the regulator (NTC). Meanwhile, the absence of clear guidelines on such strategies is paving the way for market dominance and monopolies to emerge. Another potential flashpoint is the emerging use of spectrums for connectivity. The absence of a regulatory framework on spectrum standards, ownership, and management in an industry that is beginning to use spectrums more and more can undermine the development of and the competition in the industry. Mr. Saniel made the following comments: “Though competition has been introduced into the market, there is an absence of robust procompetition policy objectives and commitments of the government. Despite the comprehensive policy coverage of RA 7925, there is no specific policy objective to establish, promote, or encourage competition in the communications sector per se. The Philippines does not have a legacy trade practices framework as a basis for the introduction of competition. Such a framework should establish fair trading principles and provisions to govern the relationships between competitors as well as between competitors and consumers. Typically, this would involve prohibitions on certain activities such as collusion, unfair or misleading advertising, price fixing, discriminatory supply, and pricing behavior. Without a trade practices framework, new entrants have little or no protection from abuses of market power or other anticompetitive behavior.”

Regulator capabilities to deal with emerging ICT trends The NTC must act objectively in deciding issues affecting the industry. To some extent, this can create problems in the future if the regulator does not have the competence as well as the familiarity with industry structures and behaviors, and the evolving technical aspects of the technologies. Mr. Saniel observed that the NTC has gained competence and familiarity with technological trends, Chapter 5: Information and Communication Technology 201 industry structures, and industry behaviors. Established in 1979 through Executive Order 546, the NTC is one of the oldest regulatory bodies in Asia. Mr. Saniel explained, however, “that NTC’s powers and capabilities need to be strengthened. As a regulatory body, it needs to have effective enforcement powers. The NTC also needs to enhance its technical and commercial expertise and be given sufficient budgetary resources, among others.” The objective of NTC’s competition policy must be to promote social welfare by ensuring that industries operate efficiently in allowing consumers to decide and communicate their preferences, and in allowing producers to respond to these in a complete and price-efficient manner. However, a deregulated and liberalized market’s greatest obstacle to promoting this goal is market dominance and lack of understanding of ICT issues.

Bundled services The vertical and horizontal integration strategies of the telecommunications industry have led to the bundling of services that allow for cross-subsidies, and scale and scope economies that can serve as entry barriers. This practice of cross subsidies is actually prohibited by RA 7925 (Sections 11a and 11b). However, there is no way the regulator can prove that these cross-subsidies exist unless the services are unbundled. The NTC has actually issued rules on co-location but still has not successfully forced the large carriers to unbundle their networks. What is clear is that this lack of unbundling translates to higher Internet user charges (Figure 22). According to the International Telecommunications Union (ITU), the Philippines is the only country in Southeast Asia that provides local calls for free such that dial-up Internet subscribers would only pay for the ISP charge. Thus, despite of the low ISP charges, the overall cost of Internet access remains high when the monthly subscription telephone charges, one of

Figure 22. Dial-up Internet prices in Southeast Asia (30 hours of use per month in US$, October 2001)

Source: ITU (2001) adapted from ISP and PTO data. 202 The Global Challenge in Services Trade the highest in the region, are inputted (ITU 2002). Call metering was proposed to rebalance the tariffs and remove this implied subsidy. However, the effort has met stiff opposition and was abandoned altogether. Mr. Saniel pointed out his comments on this issue. “A number of countries have opted for bundling of services and offering of flat rates, such as the US, UK, and other countries in Europe. The old saying, ‘the customer is king,’ has never been true today. Customers expect or demand from operators to offer full range of services to cater to their communications needs, including international links, high-speed Internet access, and full multimedia capacity. This is one of the reasons why operators abandoned their old business models and switched to the bundling of services and rates. There are advantages in offering flat rates, namely: (i) consumers like them; (ii) consumers tend to stay online for as long as they want; (iii) it boosts penetration; (iv) less costlier as heavier users migrate to broadband; (v) it promotes e-commerce; and (vi) it promotes content creation.”

Barriers to convergence The traditional boundaries that separated users and suppliers are vanishing. With more powerful computers and advanced software technologies, the Internet transmission of TV, video, images, data, and cable services, among others, have forced the convergence of content and the Internet. The current regulatory environment does not allow firms to pursue their convergence strategies in response to market demand because of the limitations imposed by certain laws. Convergence is constrained by specific provisions in the Philippine Constitution, RA 7925, and EO 346. These constraints relate to foreign ownership and management of communications entities and media cross-ownership. These laws, as pointed out by Mr. Saniel include the following: • Section 11 of Article XVI (General Provisions) of the Constitution prohibits foreign participation in the ownership and management of mass media. This prohibition denies the broadcasting and cable television sectors access to foreign capital and management expertise. It effectively constraints convergence of telecommunications and broadcasting as existing entities feature foreign equity participation. Thus, this constraints effective and efficient use of network infrastructure and delivery of emerging applications such as interactive television. • Section 4 (j) of RA 7925 stipulates that “no single franchise shall authorize an entity to engage in both telecommunications and broadcasting, either through the airwaves or by cable.” Though one entity is not prohibited from obtaining separate franchises each for telecommunications and broadcasting, this remains a practical constraint on convergence. • EO 436 establishes that the operation of cable television systems is separate and distinct from telecommunications and broadcast services. Chapter 5: Information and Communication Technology 203

These limitations, however, did not prevent Philippine telecommunications operators to pursue convergence strategies. Some entities sought to overcome them by adopting complicated organization and ownership structures.13 Nevertheless, these provisions have placed such companies in untenable footing when it comes to protection under the law and the exercise of commercial activities.

Scope of value-added services and access The NTC has classified ISPs as value-added service providers as defined by RA 7925 and therefore a deregulated activity that does not require a legislative franchise. All value-added service providers depend on the telecommunications companies for connectivity. However, it is worth noting that trying to make a distinction between basic services and value-added services in a converging environment could undermine any regulatory body especially with the rise of VOIP. Making the distinction between the two services and separating private and public networks is “difficult to sustain” (Feldbaum 2000). According to Feldbaum, “as value is constantly added to the telecommunications network, value-added services rapidly become standard features expected in the provision of basic telephony. The value-added characteristics of ISPs are becoming less distinct as the Internet becomes viewed as a standard offering.” Mr. Saniel adds that “in the near future, the likely situation is that IP-based traffic is indistinguishable from public switched telephone network (PSTN). It should be noted, however, that when RA 7925 was enacted in 1995, VOIP was unknown. Nobody expected that technological developments will give rise to VOIP.” After long deliberations, the NTC issued Memorandum Circular No. 05-08- 2005, recognizing that new technologies such as VOIP are blurring the traditional boundaries between computers, telecommunications, and broadcasting; and continue to disrupt structure, economics, and nature of competition. The same circular highlighted that VOIP’s widespread use and deployment is hampered by the absence of formal rules or guidelines that will clarify the legal and regulatory rules for VOIP, and govern the provision and use of VOIP by the public. Section 1 of the circular classified VOIP as a value-added service 14 and therefore a deregulated service.

13 For instance, PLDT’s acquisition of Home Cable through legal structure would be unlikely to be used if the constitutional and legislative prohibitions on foreign and cross-media were not in place. 14 Value-added services refer to enhanced services beyond those ordinarily provided for by local exchange and interexchange operators, and overseas carriers through circuit switched networks. Enhanced services refer to those services that improve upon the quality and/or functionality of services ordinarily offered by local exchange and interexchange operators and overseas carriers. VOIP service is the provision of voice communication using Internet protocol technology, instead of traditional circuit switched technology. 204 The Global Challenge in Services Trade

Free rider problem in interconnection “Interconnecting” independent ISPs and other players to offer voice services with the massive and costly networks of telecommunications involves the issue of equity or “the free rider problem.” For instance, Nuguid (2000), in her study of interconnection agreements between a dominant and a small telephone firm, showed that “interconnection allows entrants to position itself (sic) at a cost advantage against the leading network. This is so because entrants are given the opportunity to reap benefits from the economies of scale and scope that have already been established by the incumbents. The incumbents, however, are at a cost disadvantage and would perform better if they operate their own retail services rather than servicing interconnection to competitors (Nuguid 2000).” Thus, any deliberate effort of ISPs to interconnect with the incumbents would have to consider equity issues as well. However, Mr. Saniel noted that in mature markets (the Philippine telecommunications industry may be considered a mature market), interconnection is viewed as a way of generating business (commercial strategy), and experience shows that it has really significantly contributed to the revenue cash flows of Philippine telecommunications carriers.

ICT ABSORPTION AND PENETRATION Increasing the usage and penetration of ICT is the other side of the digital divide issue. Focusing on the ability of users to absorb the technology and support its use is equally critical and affected by the following factors: (a) affordability and accessibility, as well as skills, including (b) English proficiency, ICT literacy, and learning. Addressing ICT absorption and penetration barriers requires distinct yet complementary efforts to enhance competition, interconnection, and convergence in ICT. This section will look first on the state of absorption and penetration, and then on affordability and accessibility. Later, it will also discuss the degree of ICT literacy, language proficiency, and learning.

State of ICT Penetration and Absorption The intensity of ICT usage can be best gauged by measuring the degree of ICT penetration in individuals, households, businesses, and institutions.

Population and household penetration rates Official figures on Internet usage are not available, and estimates vary depending on the source (Table 11). The difficulty starts with the official number of operating ISPs. NTC data in 2002 indicated 53 registered ISPs, while the PISO counted 48 active ISPs. Many are presumed to have shut down and not all ISPs furnish information about the size of their subscriber bases. Despite the differing estimates, it is believed that the Internet penetration rate among individuals in the Philippines is low. The mobile wireless phone is the more popular platform of communication and access to ICT. If this can be considered as an indicator of ICT usage, then a large portion of the population has access to ICT. However, the present technological capabilities of the mobile wireless Internet in Chapter 5: Information and Communication Technology 205

Table 11. Estimated individual users of ICT No. Penetration rates per Source 100 persons Internet users 4.2 million 5.25 APT (2003) 800,000 1.01 NTC (2002) 1.54 million 2.00 ITU (2000) Mobile and Fixed 18.6 million 23.34 NTC (2002) line subscribers Broadband users 10,000 Nil ITU (2001)

the Philippines remain limited and cannot be compared with the volume and speed of data that a PC attached to the Internet can provide.

ICT penetration rates in business An ICT survey was undertaken by the NSO in 2002 to fill the dearth of information on the size and quality of ICT workers in the Philippines. A total of 3,579 establishments from various industries with employment size of 20 or more per establishment were surveyed. The highlights of this survey can provide insights on the degree of ICT penetration in Philippine businesses and industries. The percentage of ICT users was measured by the NSO as the proportion of the total number of establishments using any or all types of ICT resources to the total number of responding establishments. Overall, ICT user penetration among businesses based on the survey was over 88 percent (Table 12). However, the diffusion of ICT in businesses varied from industry to industry. The highlights of the study are as follows: • In 2001, the proportion of ICT users was highest in sectors with ICT industries, ranging from nearly 90 percent to as high as 100 percent. These were the ICT sectors of telecommunications, computer and related services, and motion picture, radio and TV, 100 percent usage; ICT wholesale and retail trade, 96.6 percent; ICT education, 93.7 percent; and ICT manufacturing, 88.6 percent. • The proportion of ICT users in non-ICT industries in these same sectors was also high, from nearly 80 percent to about 90 percent. • There were also non-ICT sectors that exhibited high usage of ICT resources: financial intermediation, 96.6 percent; construction, 94.8 percent; electricity, gas and water, 93.2 percent; and health and social work, 92 percent. • The proportion of ICT users was lowest in the primary sectors: agriculture, fishing, and mining and quarrying (NSO 2002).

The same survey also included the rate of Internet access of ICT users, which “is measured as the proportion of number of Internet users to the total number of PC users. Internet users are those establishments that have Internet 206 The Global Challenge in Services Trade

Table 12. Number of respondents and ICT users by major industry group, 2001 Industry No. of respondents % of users

Total respondents 3,579 88.1 ICT industries 1,699 93.5 Producer (Manufacturing) 421 88.6 Distribution (Wholesale and retail trade) 116 96.9 Services Telecommunications 129 100.0 Computer and related services 84 100.0 Education 923 93.7 Motion picture, radio and TV 26 100.0 Non-ICT Industries 1,880 83.1 Agriculture, fishery and forestry 177 58.2 Mining and quarrying 15 60.0 Manufacturing 755 86.3 Electricity, gas and water 59 96.2 Construction 77 94.8 Wholesale and retail trade 224 79.9 Hotels and restaurants 60 80.3 Transport, storage and communication 132 81.1 Financial intermediation 87 96.5 Real estate, renting and business activities 138 87.7 Education 48 89.6 Health and social work 50 92.0 Other community, social and personal services 57 75.4

access while PC users are those establishments that reported to be using PCs, the main equipment used to access the Internet” (NSO 2002). The Internet access rate of users was 88 percent, almost similar to the rate of ICT usage in each company. The survey revealed the following: • ICT industries, except those in manufacturing, had relatively higher Internet access rates compared to non-ICT industries of the same sector. • Internet access rate was highest in the ICT sector of motion picture, radio, and TV at 100 percent. This was followed by computer and related services at 95 percent. Internet access rate of wholesale and retail trade was 88 percent, while that of ICT manufacturing, telecommunications, and ICT education was slightly higher than 70 percent. • Only three non-ICT sectors had high Internet access rates: hotels and restaurants, nearly 88 percent; other personal, community and social services, 81 percent; and financial intermediation, 76 percent. The rest of the non-ICT sectors had Internet access rates ranging from 22 percent to 72.4 percent (NSO 2002). Chapter 5: Information and Communication Technology 207

The survey indicated that a significant portion of large-scale establishments have high levels of ICT diffusion. This is perhaps an alternative venue wherein the population, especially the labor force, can gain access to ICT. However, large- scale establishments are not good representatives of the total establishments in the country. Small- and medium-scale establishments represent over 90 percent of total establishments in the country and may exhibit a different landscape in terms of ICT usage or diffusion than large-scale establishments (Figure 23).

Figure 23. Internet access rate per sector, 2002

Source: NSO (2002).

ICT penetration rates in institutions High Internet usage or ICT diffusion at the level of large industries or establishments like schools and government does not necessarily translate to high levels of ICT utilization among smaller establishments or ICT utilization rates among the people within these institutions. For instance, the NSO survey may have indicated a 90 percent ICT usage rate by non-ICT educational establishments, but other surveys have shown that this does not necessarily mean a high level of ICT literacy and availability among students and teachers. A survey of 36,368 schools (78 percent of the total respondents) conducted by SEAMEO-INNOTECH in both public and private primary and secondary schools concluded that only 18 percent of schools have teachers who are computer literate and only seven percent of primary and secondary schools offer ICT- related instruction. In addition, a survey was conducted in 2001-2002 by the Foundation for IT Education and Development among 100 schools randomly chosen from 661 public secondary schools that received computer assistance packages from the Department of Education, Culture and Sports (DECS, now Department of Education or DepEd) between 1996 and 1998. The study aimed to determine the levels of and the factors that affect ICT utilization. The survey 208 The Global Challenge in Services Trade revealed that the student-computer ratios were low, ranging from 12:1 to 1,098:1, and only 15 percent of the teachers claimed to have used computers. The study also revealed the underutilization of the capabilities of computers. Based on the latest estimates of the ITU, only 31 percent of public schools have access to computers and only two percent have Internet access (ITU 2002). The government has started providing information and services online through the official government portal, http://www.gov.ph. Based on the latest inventory by the ITU of government owned and controlled corporations (GOCCs), 232 out of 415 have Internet connection and 115 have their own Web sites. It has also successfully relegated to the private sector the task of digitizing civil registries like birth, marriage, and death certificates. This is the result of efforts of the present administration to actively work on the e-services framework, which is focused on pushing for reforms on IT policies and promoting IT initiatives. Such framework has become the basis for the development plans and programs of the country and has served as the guiding light of the Information Technology and Electronic Commerce Council (ITECC) formed by virtue of EO 264 dated July 13, 2000. Another executive order paved the way for the creation of the CICT in 2003. Unlike ITECC, the CICT is tasked to implement both ICT projects along with crafting policy and also serves as the precursor to the future Department of Information and Communications Technology (DICT) of which the bill for its creation is now in Congress awaiting formal legislation. IT21 or the National IT Program (NITP) contains the strategy for promoting and developing the country’s IT industry. EO 469 dated February 23, 1998 put into action the IT21 Agenda, whose implementation is divided into three strategic stages: • consolidation period and providing an impetus for further development (1998 to 2000); • building up the momentum period based on what has been accomplished in the previous phase (2001 to 2005); and • transformation of the Philippines into a Knowledge Center of Asia.

The Philippines is currently at the first stage (consolidation). Though briefly delayed because of the abrupt change of administration in 1999, it was put back on track by the Arroyo administration. It is composed of the following strategic programs: • creating a policy environment favorable to increase investments in IT through the adoption of specific policies; • enhancing universal access to the Philippine information infrastructure; • developing the human capital base primarily composed of IT literate professionals; • installing a government organization highly responsive to the requirements of the local business and supporting IT and other technology-based industries; • enhancing the role and influence of ITECC to institute the IT agenda; and • disseminating the IT21 Agenda to the private and public sectors. Chapter 5: Information and Communication Technology 209

Affordability and accessibility The findings of the study indicate that availability and affordability are major considerations before users can “hook up” to the Internet. If the cost of Internet service to the overall purchasing power of the nation is low, the higher the penetration rates will be. This means that the household’s cost of connecting to the Internet must not take a substantial dent on its incomes (Figure 24).

Figure 24. Relationship between Internet penetration and Internet monthly price

Internet users (per 1,000 people in 2003 APT survey, population in 2002 World Bank data)

Internet total monthly price (% of monthly GNI per capita in 2003, World Development Indicators Online, World Bank) Source: APT (2003).

In the Philippines, it is difficult to distinguish between individuals and households especially in the usage of the PC and the Internet. Because of the prohibitive costs, a household of about five individuals may actually share one PC, according to the 2000 census. Thus, the number of PCs especially with Internet access may appear small, but the rest of the households have access to it. Individual penetration rates may appear less but the household penetration rates will be definitely higher. Only 3.3 million fixed lines are actually subscribed to due in part to the high upfront costs and to the growing popularity of mobile communications. Telephone distribution remains uneven and highly skewed to metropolitan areas. Access to fixed line, which is important for dial-up users, is concentrated in highly urbanized regions like the National Capital Region (NCR), Region IV, and Region VII (Table 13). This skewed concentration of landlines has implications on the accessibility and affordability of ICT. According to a 2001 study by the SEAMEO-INNOTECH entitled “Profile on Information and Communication Technology Capabilities of Elementary and Secondary Schools in the Philippines, 2000-2001,” only 13 percent of primary and secondary schools have landlines. Moreover, because 210 The Global Challenge in Services Trade

Table 13. Regional distribution of telephone lines Region Population Installed Subscribed Teledensity capacity lines Telelines Subscribed CAR 1,461,529 94,144 35,503 6.44 2.43 NCR 10,758,840 2,847,516 1,698,365 26.47 15.79 I 4,276,974 182,076 108,760 4.26 2.54 II 2,922,220 39,602 30,667 1.36 1.05 III 7,982,573 406,583 236,490 5.09 2.96 IV 11,904,461 1,118,707 513,907 9.40 4.32 V 4,919,499 135,422 66,701 2.75 1.36 VI 6,548,108 443,763 112,023 6.78 1.71 VII 5,750,685 457,709 173,355 7.96 3.01 VIII 3,899,553 165,035 43,352 4.23 1.11 IX 3,300,211 166,000 29,740 5.03 0.90 X 2,984,121 199,566 51,529 6.69 1.73 XI 5,523,366 431,541 133,497 7.81 2.42 XII 2,784,797 84,744 32,876 3.04 1.18 XIII 2,171,985 100,648 36,153 4.63 1.66 ARMM 2,287,349 41,179 8,015 1.80 0.35 Total 79,476,271 6,914,235 3,310,933 8.70 4.17 Source: NTC (2005). most ISPs are found in urban centers, those schools and other parties that have to connect to the Internet via dial-up services have to incur long distance costs. Taking the option of satellite or VSATs to interconnect is out of the question. The cost is simply too prohibitive because of the cost of installation and the service itself (ITU 2002). Compared to other countries, broadband penetration is also negligible in the Philippines (Figure 25). Broadband is too expensive and the providers employ price discrimination. According to a recent analysis on the Philippine fixed communications market by the Pyramid Research, broadband pricing in the Philippines “is nearly twice as high as in Hong Kong” (Pyramid Research 2004). As such, the identified market has been confined to corporate customers and high-end residential households. In spite of the low penetration rates, broadband providers offer services at exorbitant levels. As observed by the ITU, “… prices are around US$50 per month for residential subscribers and US$200 for business users” (ITU 2002). Major reasons why broadband services have not reached a critical mass include the prohibitive pricing, the limited broadband business applications required by SMEs, and the cash flow potentials from prepaid dial-up Internet accounts. Other reasons are the reluctance of telecommunications carriers to price ADSL below leased line and ISDN services for which they already have many customers, the absence of a regulatory requirement that forces fixed line operators to unbundle their local loop lines allowing other operators or ISPs to Chapter 5: Information and Communication Technology 211

Figure 25. Internet and broadband penetration rates in selected countries

Myanmar Bangladesh Bhutan Maldives Sri Lanka Nepal Viet Nam Pakistan Micronesia Samoa Internet users per 100 persons Mongolia Indonesia Philippines Palau China Iran Thailand Malaysia Macao New Zealand Brunei Australia Hong Kong Singapore Korea, Rep. Japan

Source: APT (2003). provide ADSL services, and the charging of flat monthly telephone rate that translates to no additional costs for dial-up users, mitigating the cost savings of changing to broadband (ITU 2002).

ICT literacy Dealing with the digital divide does not purely rely on affordability and accessibility as these do not guarantee high ICT penetration and utilization rates. Literacy, specifically on ICT skills and knowledge, is also an important factor. A high national level of “simple or functional literacy,” or the ability to read and write, is not enough to increase Internet use or penetration. In fact, ITU (2002) indicated that the number of newspaper circulation is a good indicator of Internet penetration rates in different countries than literacy (Figure 26). Perhaps, it is because readers of newspapers have the necessary skills and knowledge that go beyond functional or simple literacy. Education is the key to improving Internet use and ICT utilization among functionally literate people. Numerous studies on the Philippine educational system have been conducted. Some of them are the following: • Congressional Commission on Education in 1991-1992 • Profile on Information and Communication Technology Capabilities of Elementary and Secondary Schools in the Philippines, 2000-2001, by SEAMEO-INNOTECH 212 The Global Challenge in Services Trade

Figure 26. Comparison among simple literacy, newspaper readership, and Internet penetration rates

Note: Logarithmic scale. Source: ITU (2003) adapted from national statistical agencies.

• Philippine Education Sector Study conducted jointly by the World Bank and the Asian Development Bank in 1998 • Presidential Commission of Educational Reform in 2001 • Survey of Secondary Schools: General Information/School Profile, Profile of Science and Mathematics Teachers, and Information Technology Capabilities by the Department of Science and Technology in 2001 • Preliminary findings on a Survey of ICT Utilization in Philippine Public High School by Victoria Tinio in 2002

All these studies are unanimous in pointing out the dismal state of the Philippine educational system.

ICT learning Victoria Tinio, Director for E-Learning of the Foundation for Information Technology Education and Development (FIT-ED), a nonprofit organization based in Metro Manila, summarized the recurring themes of woe of Philippine basic education, as follows (Tinio 2002): • inadequacy of the national budgetary allocation for education • inefficient management of the educational system • poor infrastructure—lack of school buildings, laboratory facilities, libraries, etc. • lack of qualified teachers, coupled with the lack of classrooms, that results in class sizes of up to 110, with 60 being the norm • deteriorating student performance, most significantly in Science, Math, and English • need for quality assurance in teacher education institutions and improved in-service training Chapter 5: Information and Communication Technology 213

This crisis in Philippine education is reflected in the poor performance of students in national admission tests. For instance, the National Secondary Achievement Test (NSAT) administered to incoming college students showed very poor scores in Math, Science, and English—important basic foundations required in building a pool of ICT-literate population (Figure 27). This situation is not good news for a population preparing for the Information Age. Skills and knowledge in both basic and advanced ICT are necessary to maximize the benefits of integrating into the knowledge economy. But such knowledge and competencies must also meet the standards required by the job whether in ICT or non-ICT related industries.

Figure 27. NSAT mean scores in the Philippines, 1997-2000

Sources: Commission on Higher Education; Department of Education, Culture and Sports (now Department of Education or DepEd).

English language A joint survey conducted in 2004 by the Makati Business Club, the American Chamber of Commerce, and the Educational Testing Service on the Test of English for International Communication (TOEIC) showed how current professionals and universities score in English communication. The TOEIC standards are indicated in Table 14. Based on the average scores, the highest average level for the country was 948, classified under general professional proficiency, while the lowest average score was 778 or basic working proficiency (Table 15). The highest average score was found among international contact center agents while the lowest average score was found among technical and operations people. The lowest score range was likewise registered by the technical and operations personnel 214 The Global Challenge in Services Trade

Table 14. Interpretation of Test of English for International Communication (TOEIC) scores > 960 Advanced General Professional 905 – 960 General Professional Proficiency 785 – 900 Advanced Working Proficiency 605 – 780 Basic Working Proficiency 405 – 600 Intermediate 255 – 400 Elementary 10 – 250 Novice Source: Educational Testing Service.

Table 15. Average TOEIC scores by job category, 2004 Category Score range Average score General Office 465-965 838 Technical and Operations 275-975 778 Int’l Contact Center Agents 780-985 948 Sales and Marketing 770-975 894 Human Resources 805-975 916 Managerial 700-985 899 Source: TOEIC Survey 2004. at 275 while the highest minimum score range was registered by the human resource personnel at 805. The survey results have several implications on ICT. First, the low scores in English communication among the general office and technical and operations personnel—who normally constitute a large chunk of the urban-based labor force—reflects that a sizable portion of the existing labor pool may not be equipped to meet the global standards for communication skills. Second, this situation can affect even the providers of technical user support for ICT as the scores indicate the country’s limited pool of technical personnel equipped with the English communication skills necessary to provide technical user support. And third, the results reflect the poor education of the existing labor pool to prepare them for ICT. This last observation is further supported by the same survey conducted on graduating students of selected universities (Table 16). The highest average score registered by the universities surveyed was 746 (rated as having the basic working proficiency) and the lowest was 482 (rated as just intermediate). While the range can hit as high as general professional or advanced general professional, the lowest mark was 235 (rated as novice). For a nation that uses English as medium of instruction, the poor results registered by graduating university students indicate a general malaise affecting the education sector. These graduating students may be equipped with the technical or working skills but do not have the English proficiency necessary to meet the Chapter 5: Information and Communication Technology 215

Table 16. Average TOEIC scores of graduating college students of selected universities

Category Score range Average score University A 300-895 605 University B 560-905 746 University C 265-710 482 University D 235-815 546 University E 505-845 699 University F 405-870 665 AMCHAM Scholars 670-985 868 Source: TOEIC Survey 2004 standards required by ICT. The same pool of graduates may be seriously impaired to qualify for jobs in ICT services that provide close support to customers in English-speaking countries. This brings into fore the importance of certification as a tool to measure and evaluate the level of knowledge and competencies of ICT practitioners. Certifications establish the professional standards needed in the practice of ICT and determines the real level of knowledge and skills of practitioners in various levels. While certification centers accredited by the Technical Education and Skills Development Authority (TESDA) abound, accreditation is not yet an institutionalized practice or a job requirement tool in the country. According to recent TESDA statistics, the ICT sector is one of the sectors that demonstrates the lowest certification rates among the other priority sectors (Table 17). From 2002 to 2003, the successful certification rate in ICT was 18 percent, which was way below the 53 percent certification rates registered by the other TESDA-designated priority sectors. While the practice of certification is not yet widespread, the fact that the certification results show poor ratings is

Table 17. Number of persons assessed and certified by priority sector Persons assessed Persons certified Certification rate (No.) (No.) (%) Priority Sep Sep Sep Sep Sep Sep sector 2002 2003 2002 2003 2002 2003 Agri-Fishery 957 2,033 511 964 53 47 ICT 29,719 29,778 5,217 5,398 18 18 Tourism 6,268 8,396 2,793 4,051 45 48 Health 3,310 6,372 647 3,386 20 53 Maritime 58,221 20,032 53,171 18,634 91 93 Others 54,882 68,164 19,763 28,598 36 42 OPAs 31,828 20,807 16,947 12,129 53 58 Total 185,185 155,582 99,049 73,160 53 47 Source: TESDA (2004). 216 The Global Challenge in Services Trade another reflection of the level of skills and proficiency of the present pool of Filipino ICT users.

Emerging Policy Issues on User Absorption and Penetration

Gaping misalignment of the current universal service scheme The goal of the universal service is noble—to promote the availability and affordability of and access to quality and modern telecommunications services. It was designed to accelerate the provision of telecommunications services while preventing “cream-skimming” or focusing on more lucrative centers where market demand is strong. Most carriers have met their obligations but the scheme of installing fixed lines in “missionary” areas has failed to increase the level of accessibility. Many carriers were caught with excess line capacities. The low market absorption can be attributed to two major factors: (a) the high front- end cost of subscribing to fixed lines, and (b) the growing popularity of mobile communications. Dubbed as an asymmetry in regulation, Serafica (2000) observed the potential diseconomies caused by assigning service areas to one carrier and the entry barriers built by this scheme within the industry. The lack of scale and scope, the absence of market contestability, and the low market absorption have translated into high upfront and monthly subscription costs. These have led to a vicious cycle of low market absorption and high service costs. As only urban centers can afford the service, ISPs are concentrated only in these areas, which is detrimental to a market oriented toward dial-up Internet access. Not only have they to contend with high subscription costs, they also have to pay long distance rates. The rural sector suffered the most from this mechanism as its population exhibited low Internet penetration rates (Figure 28). Making ICT not available to the rural sector, which comprises a sizeable chunk of the poor population especially in developing countries, inevitably pushes the poor into deeper poverty. Meanwhile, there are already available wireless broadband technologies that can be used for voice and Internet services. Without the use of satellites, these technologies are easily installed and distributed at much lower costs using repeater networks. The fact that carriers have no incentive mechanisms to provide the service to missionary areas is important for future policy considerations.

Importance of education in closing the divide Education is a critical complementing strategy in narrowing the digital divide. Efforts by various government agencies particularly the DepEd are underway to implement an ICT strategy in education (Tinio 2002). These efforts must go beyond the provision of infrastructure and technical support. It must also include comprehensive skills and knowledge training on ICT for teachers and students. Moreover, IT must be integrated in the education curriculum at all levels. Chapter 5: Information and Communication Technology 217

Figure 28. Relationship between the size of the rural population and Internet penetration rates, 2002

Internet user (per 1,000 people in 2004, APT

Rural Population (% of total population in 2002, World Development Indicators Online, World Bank) Source: APT (2003).

IT certification There is a need to professionalize the ICT profession. The lack of a system to certify and accredit skills and knowledge would also cast doubts on the level of proficiency and skill competencies of the ICT users and providers. Meanwhile, the proliferation of certification bodies in the Philippines has created a lot of confusion. An overarching framework for a certification program and institutionalization of certification bodies is inconspicuously absent. Potential applicants of IT certifications do not know the “certification path” to take and even the future job potentials that these certifications would bring them.

POLICY FRAMEWORK TO CLOSE THE DIVIDE

General ICT Policy Framework

The Department of ICT The government has already acknowledged the necessity of separating the regulatory functions of “Communications” from the present Department of Transportation and Communications given the growing demands of information technology. A bill was filed last July 2001 creating the Department of Information and Communications Technology (DICT). However, it remains pending in the Committee on Government Reorganization of Congress since July 2004. 218 The Global Challenge in Services Trade

The DICT Bill15 This bill seeks to establish a Department of Information and Communications Technology (DICT) that will ensure the “focused execution” of a program to develop the sector and facilitate the entry of more ICT projects. Under the proposed bill, the Telecommunications Office (TELOF), the DOTC divisions dealing with communications, and the National Computer Center (NCC) will be merged. The regulatory body (NTC) will be an attached agency of the proposed DICT, thus retaining its independence. The DICT will administer all laws in the field of ICT and prescribe regulations for the operation and maintenance of ICT facilities in areas not adequately served by the private sector. It will likewise direct government research and development programs in ICT, draw up measures to promote the sector, including universal access to telecommunications and wider use of the Internet. It will also set and execute integrated and comprehensive ICT systems at the national, regional, and provincial levels.

Nature of the regulation There are two approaches to regulation: prudential approach or prescriptive approach. Prudential regulation provides standards that may be followed by the industry or the company while allowing both the regulator and the industry to exercise their judgment as to how to meet these standards depending on the situation or circumstance. In contrast, a prescriptive approach involves very detailed controls, which the regulator, the user, and the providers of ICT should use as the basis of their decisions. This includes detailed statutory provisions and regulations and close monitoring of compliance. This approach ensures a stable regulatory environment with the aim of pressuring stakeholders to exhibit high levels of conformity to set practices and standards. Many Philippine laws suffer from being overly prescriptive. Detailing the standards and code of conduct in a national law may limit constant policy shifts, and prescriptive laws may prove inflexible in dealing with the changes in the operating environment like that of ICT. This is practically true for RA 7925. For instance, the definition of value-added services or the service area schemes which are overly prescriptive have, to some extent, been rendered ineffective in the environment of convergence and industry integrations. To avoid a similar mistake and take into account the evolving nature of ICT, any national law creating policies and bodies governing the ICT must take a prudential approach, where general standards and principles can be set. An example would be on general policy declarations like avoiding antimarket

15 On 12 January 2004, President Gloria Macapagal-Arroyo signed Executive Order 269, which created the “Commission on Information and Communications Technology (CICT)” as a transitory measure for the establishment of a national body, that is, the Department of Information and Communications Technology (DICT). The CICT is the primary policy, planning, and coordinating agency of the government on ICT-related matters. Chapter 5: Information and Communication Technology 219 behavior or interference, or ensuring security and privacy. The implementing rules will then describe the details like avoiding cross-subsidies, ownership of certain downstream activities, standards on equipment, or frequencies. To limit the policy drifts or shifts emanating from the lack of specific and detailed prescriptions in this type of regulation, the implementing rules and regulations can set the prescriptive requirements. In this structure, the overarching ICT law will not be subjected to periodic reviews to accommodate the changing phenomenon of ICT, and thus can avoid going through the legislative mill with its seeming endless myriad of committees and consultations. Provided that ample consultations have been made, only the implementing rules and regulations will have to be revised to accommodate the nuances of ICT and its applications.

Equity issue of ISPs offering VOIP In a liberalized and deregulated market, ISPs are allowed to put up their own networks or provide VOIP services provided they contribute to meeting universal service access goals. The “free-rider problem” that results from the ISPs being interconnected with the networks and infrastructure of the large carriers can be resolved by this contribution to universal service.

Improving universal service The universal service scheme for the Philippines can be patterned after the 1996 ACT of the US, which states that all providers of telecommunications and ICT services “should contribute to the universal service in some equitable and nondiscriminatory manner” and wherein the state can institute “mechanisms to preserve and advance universal service” and that “all classrooms, health care providers, and libraries should generally have access to advanced telecommunications” and ICT services. The universal service scheme of the US is a good model for the Philippines. The US has already provided computers in schools and connected them to the Internet. In 2000, public schools have roughly one computer for every four students. There could be other universal service models that the Philippines can look at. It is a fact that there will be a large segment of the population, especially in the rural areas, that may not be able to afford access to ICT. Such universal schemes can make ICT accessible to the less privileged sectors of society through institutional mechanisms like public universities and libraries, and town centers. For a universal service scheme to be successful, the government must first determine a coherent and measurable plan to provide access and increase Internet usage and penetration in “unserved” and underserved areas and institutions particularly in educational establishments and rural areas. From here, the government can set clear “contributions” and timetables from the ICT sector. 220 The Global Challenge in Services Trade

Education and skills training Availability and access cannot fully address the problem of low ICT penetration and usage. A large part of the population is not computer literate. Tinio (2002) made a comprehensive analysis of the importance of diffusing ICT in the educational policy and system, and discussed the ICT Plan for Basic Education drafted by the DECS (now DepEd). At present, this plan serves as the guiding document for programs and projects being initiated by the education department. The plan focuses on the following key areas: (a) infrastructure development; (b) technical support; (c) teacher training on the design, production, and use of ICT-based instructional materials; (d) research and development; (e) technology integration in the curriculum; (f) use of innovative technologies in education and training; and (g) fund generation, particularly through nontraditional financing schemes. Operational targets by 2009 include the following: (a) provision of appropriate educational technologies to all public secondary schools; (b) provision of a computer laboratory with basic multimedia equipment to 75 percent of public secondary schools; (c) provision of electronic library systems to all public science-oriented secondary schools; (d) training of 75 percent of public secondary school teachers in basic computing and Internet skills as well as in computer-aided instruction; and (e) integration of ICT in all learning areas, when appropriate. Tinio further pointed out that “there is a need to have an institutionalized ICT Plan for Education for national circulation and implementation at all levels of DepEd. It must provide the policies and plans and other initiatives that must be implemented and achieved over a period of time.” Tinio has proposed implementing guidelines for the schools “as to what is expected of them both in relation to the curriculum and in the management of their ICT resources” (Tinio 2002). The government must expand ICT courses beyond the classrooms and must reach a broader segment of the population. In the short term, the government may have to put up subsidized basic training courses on the use of ICT not only to teach but also to broaden awareness on the importance of ICT. In the long term, the government must consider instituting and promoting IT certifications among professionals working in various ICT and non-ICT establishments.

Guidelines for horizontal and vertical mergers and acquisitions Guidelines must be put in place by the NTC before any merger and acquisition in the ICT sector is approved. The sector has enough powers under RA 7925 to exercise these prerogatives. These guidelines must ensure that the strategies do not lead to market dominance or market power. The main objective of these guidelines should be to provide the safeguards that would promote contestability and facilitate regulation of antimarket behavior. RA 7925 has explicitly spelled out provisions on anticompetitive behavior but the current implementing rules and regulations do not have any clear-cut policy guidelines for mergers and acquisitions. Chapter 5: Information and Communication Technology 221

Policy framework for spectrum regulation With spectrum usage and coverage expected to drastically increase in the near future, new issues like spectrum ownership, interference, and security will arise. A regulatory framework and policy guidelines for spectrum standards, ownership, and management are direly needed soon.

System of measurement for ICT The present practice of making ICT part of telecommunications- or communications-related statistics can lead to inaccurate measurements, assuming that ICT transactions are actually covered in the statistics. Reliable data and information on ICT are lacking, and the current system of measurement can even make what is scarcely available even incomplete or misleading. The NSO and the NTC (and perhaps the future DICT) can coordinate to generate the kind of data and information required to accurately measure the ICT sector’s economic contribution and performance.

Conclusions and Recommendations Any policy tool or recommendation dwelling on the promotion of competition through deregulation, liberalization, interconnection, and convergence in ICT must ultimately be evaluated in light of its ability to close or narrow the digital divide. This consideration involves looking at the users of ICT and their capacity to access and use ICT. Policies must promote, on one hand, a high degree of accessibility to the infostructure by promoting competition, interconnection, and convergence. Unchecked behavior of ICT firms can diminish market contestability and consequenly, competition. On the other hand, policies must also seek to increase the capabilities of the users to absorb or increase their usage of ICT. Promoting skills on language, literacy, and learning as well as improving access and affordability can lead to high levels of ICT penetration and utilization. The study was quite exhaustive in its analysis of the supply-side constraints. However,it did not delve deeper into the demand-side issues and the strategies to address them. These are points for future studies to look into, including the programs to improve user knowledge and accessibility to ICT.

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Pyramid Research. 2004. Communications markets in the Philippines [online]. http: www.pyramidresearch.com. Serafica, R. 2000. Competition in Philippine telecommunications: a survey of the critical issues. PASCN Discussion Paper No. 2000-15. Makati City, Philippines: Philippine APEC Study Center Network. Tinio, V. L. 2002. Survey of ICT utilization in Philippine high schools: preliminary findings [online].http://www.comcentrum.ph/observatory/pfd%20files/ papers%20&%20Publications/educationSurvey%20of% 20ICT%20in% 20Public%20High%20Schools.pdf U, M.L. and R. de Vera. 2001. Information technology: gearing for the take-off. Industry Monitor January. Pasig City, Philippines: University of Asia and the Pacific. Zimmerman, J. 2004. IT spending predictions roundup. Bitpipe Analyst Views [online]. http:/ /wp.bitpipe.com/resource/org_973204426_74/Analyst_Views_Roundup_bitpipe.pdf. Padojinog, W.C. 2003. Consumer protection in the Internet: The Internet’s social and moral dimensions. Staff memo. Pasig City, Philippines: University of Asia and the Pacific. San Agustin, K. 2004. Business process outsourcing: A Blunted Advantage. Staff memo. Pasig City, Philippines: University of Asia and the Pacific. SEAMEO-INNOTECH. 2001. Profile on information and communication technology Capabilities of elementary and secondary schools in the Philippines, 2000-2001.Quezon City, Philippines: SEAMEO-INNOTECH.

Institutions’ Web sites Bangko Sental ng Pilipinas (Philippines): http://www.bsp.gov.ph Congress of the Philippines: http://www.congress.gov.ph National Statistics Office (Philippines): http://www.census.gov.ph Philippine Economic Zone Authority: http://www.peza.gov.ph Phlippine Internet Services Organization: http://www.piso.org.ph Chapter 6: Business Process Outsourcing 225 66

Sustaining Philippine Advantage in Business Process Outsourcing

Ceferino S. Rodolfo

ABSTRACT This study looked at the sustainability of the growth and development of business process outsourcing (BPO) in the Philippines. It was prompted by the sector’s spectacular growth in several of its subsectors, mainly contact call centers, medical transcription, animation, and software development. Doubts about the sustainability of this hypergrowth situation are increasingly being felt, as the industry experiences difficulties in meeting the demands of the markets, specifically the country’s ability to supply the skilled workforce. In addressing sustainability, the government will have to grapple with several important issues—the main drivers of the BPO phenomenon, the size of the global BPO market, and the competiveness of the Philippines as a BPO location. These questions were directly addressed by the study. Only after these issues have been addressed can policymakers provide broader and longer term directions for the industry, specifically: (1) whether the present level of priority given to BPOs is appropriate and consistent with national economic goals or should the government prioritize other sectors instead, and (2) whether the country’s educational system should be aligned with the goals of enhancing the competitiveness of the BPO industry, and the consequences of this educational thrust on other strategic sectors of the economy.

INTRODUCTION The lowering of tariff barriers, together with rapid technological developments, has been continuously pushing the world to become a single marketplace. As a result, domestic companies are subjected to ever-increasing levels of competition. This has prompted organizations to look for various ways to enhance their competitiveness—in terms of lower costs or improved service and product quality.

Outsourcing In this context, outsourcing has been one of the most publicized responses of organizations. Initially, firms looked at outsourcing exclusively from the perspective of cost reduction. The United Nations Conference on Trade and 226 The Global Challenge in Services Trade

Development (UNCTAD) defines outsourcing as “contracting a service provider to completely manage, deliver and operate one or more of a client’s functions (e.g., data centers, networks, desktop computing, and software applications)” (UNCTAD 2003). Other definitions of outsourcing are given in Box 1. Outsourcing is discussed in economic literature under the concept of vertical integration—or more popularly, “make or buy” decisions. In delivering a product or a service, a firm actually has a choice of which portion(s) of its value chain of activities (i.e., raw material sourcing, transformation or production, marketing and delivery, after-sales service, and support activities such as logistics, business administration, etc.) it will perform internally—make—or source from the market— buy. The choice of whether to “make” or to “buy” depends on the firm’s appreciation of the benefits and the costs involved. Based on economic theory, the arguments for “internally undertaking” an activity (make) are the following (Besanko et al. 2003): • Coordination of production flows through the vertical chain may be compromised when an activity is purchased from an independent market rather than performed inhouse. • Private information may be leaked when an activity is performed by an independent market firm. • There may be costs of transacting with independent firms that can be avoided by performing the activity inhouse.

On the other hand, the arguments for outsourcing an activity (buy) are the following: • Market firms can achieve economies of scale that in-house departments producing for only their needs cannot attain. • Market firms are subject to the discipline of the market and must be efficient and innovative to survive. Overall corporate success may hide the inefficiencies and lack of innovativeness of inhouse departments.

Box 1. Sample definitions of outsourcing

• Accenture - “contracting with an external organization to take primary responsibility for providing a business process or function” (Linder and Cantrells 2002).

• PricewaterhouseCoopers - “the long-term contracting out of non-core business processes to an outside provider to help achieve increased shareholder value.”

• Gartner - “the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administrates and manages the selected processes based on defined and measurable performance metrics.”

Source: UNCTAD (2003). Chapter 6: Business Process Outsourcing 227

Outsourcing—as a business strategy—is not actually new. Especially in the manufacturing sector, companies have long practiced “subcontracting.” In fact, starting from domestic subcontracting, complex international supply chains are now driving highly globalized industries such as garments, electronics, and automotive parts and components. Production activities are routinely outsourced to least-cost country locations. However, it must be noted that migration of production activities to other countries, primarily developing countries, does not come in the form exclusively of “outsourcing.” Foreign direct investments (FDIs) undertaken for cost and market access considerations—to get around tariff barriers—is also a common business strategy. As shown in Figure 1, however, outsourcing has evolved beyond production and now includes virtually all activities not considered as part of a firm’s core operations.

Nuances of Service Transactions Until recently, unlike in the goods sector, outsourcing of services has been quite limited. This was due to the very nature of services and service transactions. Services are “economic output of intangible commodities that may be produced, transferred, and consumed at the same time.”1 They cover major industries such as transport, travel, communications, construction, financial, and insurance services. Unlike goods, and largely because of their intangible nature, it is hard

Figure 1. Outsourcing as a business model

1 Definition based on the Balance of Payments Manual of the International Monetary Fund (IMF). 228 The Global Challenge in Services Trade to disassociate the production and consumption of services. Thus, most service transactions require the physical proximity of both the provider and the buyer of services. For example, a patient will have to “see” a doctor for the diagnosis of his/her medical condition (i.e., health service). However, the information and communication technology (ICT) revolution has made it physically possible for certain service transactions to overcome space and time limitations. Activities and services that can be digitized and transmitted over the Internet became technically feasible to be outsourced. The phenomenon is clearly explained by the UNCTAD: “The use of ICT allows knowledge to be codified, standardized, and digitized, which in turn allows the production of more services to be split up, or “fragmented”, into smaller components that can be located elsewhere to take advantage of cost, quality, economies of scale, or other factors. This makes it possible to produce certain services in one location and consume them (or use them in further production) in another—either simultaneously (e.g., information provided via call centers) or at a different time (e.g., data entry, software development).” (UNCTAD 2004)

Offshore Outsourcing Starting initially as a domestic phenomenon, services outsourcing rapidly evolved into offshore outsourcing. Developments in ICT made services more transportable and fragmented, and simplified the tasks, thereby allowing them to be relocated more easily (UNCTAD 2004). A variety of service products were affected by this trend, from simple low- value data encoding to high-value processes such as architectural design, analysis of x-ray films, and software development. Initially, lower-cost “in-shore” or domestic locations were explored, followed by “near-shore” countries (e.g., Ireland, in the case of the United States). However, outsourcing eventually took the path of “offshoring”—or locating to low-wage countries. Typically, these countries are less developed economies with a large base of educated workforce. Low-wage skilled workers and professionals, coupled with efficient and cost-effective telecommunications infrastructure, were the main value proposition of lower income countries. International telecommunications costs declined in a number of developing countries as they liberalized their telecommunications sectors and consciously offered incentives to attract outsourced service activities.

Shifts in Cross-border Service Transactions The emerging trend in offshore services outsourcing resulted in a noticeable shift in the structure of cross-border services transactions. This shift can be understood more clearly if framed within the different modes of the General Agreement on Trade in Services (GATS) by which services are supplied in cross- border transactions. These modes are commonly referred to as: Chapter 6: Business Process Outsourcing 229

Mode 1: Cross-border supply Mode 2: Consumption abroad Mode 3: Commercial presence Mode 4: Movement of natural persons

Figure 2 and Table 1 provide illustration of these different modes of supplying services. In the past, because of physical constraints on the manner by which services can be supplied, trade in services typically involved the cross-border movement of either the buyer or the provider of the service. For example, a tourist travels to the country of destination (Mode 2) or a professional service organization (e.g., an accounting firm) establishes an affiliate office in another country (Mode 3), or an engineer goes abroad to work on a construction project (Mode 4).

Figure 2. Modes of supply under the GATS

Source: Measuring trade in services (WTO training manual). 230 The Global Challenge in Services Trade

Table 1. Modes of supplying services for cross-border transactions Modes of Description Illustration Supply Mode 1 Cross-border Digitized and processed information crosses the border through supply telecomunications or postal infrastructure (e.g., consulting or market research reports, telemedicine, and distance learning). Mode 2 Consumption Consumer crosses the border to consume the service (e.g., travel, hotel, abroad health, or training services given to nonresidents) Mode 3 Commercial Supplier of the service is a locally established affiliate, subsidiary or repre- presence sentative office of a nonresident supplier (e.g., foreign direct investments).

Mode 4 Movement of Supplier of the service is in the country on a temporary basis and remains natural persons a nonresident (e.g., service suppliers, health workers, consultants). Source: www.wto.org.

As mentioned earlier, the ICT revolution and declining telecommunications costs have drastically improved the viability of supplying services across borders (Mode 1). Thus, whereas trade in services was mostly carried out under Modes 2, 3, and 4, ICT revolution had increasingly made Mode 1 transactions both more technically feasible and financially viable. With ICT providing a real-time link, service providers and buyers, for certain transactions, no longer needed to be physically proximate to each other. As a result, the structure of services trade shifted (Figure 3). “Other commercial services,” provided mainly under Mode 1, increased its share of the total value of trade in services. It increased from 38 percent (of total value of services trade) in 1990 to about 45 percent a decade later.

Figure 3. Shift in services trade structure (in percent share)

Source of basic data: WTO website. Chapter 6: Business Process Outsourcing 231

The extent of offshore outsourcing can be gleaned more clearly from the large share of “other business services” in the total value of “other commercial services” exports (Figure 4). The “other business services” category covers service processes that are typically outsourced (e.g., legal services, accounting, auditing, business and management consulting, etc.) This trend started with the outsourcing of lower value-adding service activities, such as data encoding and processing, jumping to marketing support activities (call centers), and, at present, encompassing even strategic activities such as research and development. For instance, in health services, outsourcing began with medical transcription but now covers routine medical diagnosis (e.g., analysis of digital X-ray plates).

Figure 4. Structure of other commercial services exports (based on 1998 data)

Source of basic data: www.wto.org.

Trends in Foreign Investments in Services The same structural shift in services trade can be seen in FDIs. The share of services to inward FDI stock increased relative to the share of the primary and manufacturing sectors. From less than half of inward FDI stock in 1990, the share of services increased to 60 percent in 2002 (Figure 5). The shift is more pronounced in certain services sectors like business activities (e.g., legal services, accounting and auditing, business and management consulting, etc.). As Table 2 shows, in 1990, the share of business activities to total inward FDI stock stood only at 13 percent. By 2002, its share doubled to 26 percent. More importantly, the structure of FDI flows to developing countries shifted. In 1990, financial services accounted for more than half of the total FDIs. By 2002, business activities attracted the largest share of FDI inflows (40%). 232 The Global Challenge in Services Trade

Figure 5. Shift in the structure of inward FDI stock (in percent share)

Source: UNCTAD (2004).

Table 2. Distribution of inward FDI stock in services (in percent share) 1990 2002 Developed Developing World Developed Developing Central and World Countries Economies Countries Economies Eastern Europe

Electricity, gas and water 1 2 1 3 4 6 3 Construction 2 3 2 1 3 5 2 Trade 27 15 25 20 14 21 18 Hotels, restaurants 3 2 3 2 2 2 2 Transportation 2 8 3 11 10 24 11 Finance 37 57 40 31 22 29 29 Business activities 15 5 13 23 40 10 26 Others 13 8 13 9 5 3 9 Total 100 100 100 100 100 100 100 Source: UNCTAD (2004).

Likewise, the greater importance of service industries is evident in the changing profile of the biggest transnational companies (TNCs) in the world. In 1995, only 12 of the 100 largest TNCs in the world were in the services sector; in 2002, TNCs in the services sector totaled 31.

BUSINESS PROCESS OUTSOURCING The previous chapter highlighted the need to precisely define the scope of any study on BPO. As illustrated in Table 3, outsourcing can cover the whole spectrum of a firm’s value chain: from logistics, to manufacturing, to marketing, and to after-sales service. Moreover, there has been some confusion between two overlapping terms: outsourcing and offshoringoffshoring. Chapter 6: Business Process Outsourcing 233

Table 3. List of typical BPO services Banking services Account queries and limit Retirement investment and Account opening services enhancements benefits Account information capture Accounting and payment management Customer queries reconciliation Hiring and staffing Check clearing Recruitment screening Check payment Insurance Services Administration and relocation reconciliation Policy owner services services Statement processing Claims processing Payroll processing ATM reconciliation Transaction and re-insurance Compensation administration Investment account accounting Benefits planning management Statutory reporting Administration and regulating Management reporting Annuities processing compliance Loan administration Benefit administration Credit debits card services Customer information Sales and marketing services Check processing capture Telemarketing services Collections Risk assessment and Direct marketing and sales Customer account premium computation campaigns management Policy processing and account monitoring Web-related services Mortgage services Claims management Web site designing Application verification and Payment reconciliation Web site management processing Site personalization Disbursals and collections Asset management services Site marketing Payment reconciliation Account creation Search engine, directory Account information updates Account maintenance optimization Mortgage loan servicing Transfers and additions Positioning services Dividend payments Catalog / content Finance services Brokerage payment management Document management MIS reporting Web analytics Billing Customer service Database design Shareholder services Web security services and Claims processing Health care integration with CRM Accounts receivable Medical transcription Back-office systems for Accounts payable inventory management General ledger Customer care Web enablement of legacy Accounting services Customer service applications Treasury operations Customer analysis Electronic bill presentment management Call centers and payment services Consumer information Graphics/Animation Credit card services services Web-based email processing Applications screening and Customer relationship mgt Web-based help desk card issuance Web-based chat support Customer account Human resources services e-Learning :Web-based online management Payroll and benefits education services Collections and customer processing e-publishing follow-up Training and development Source: UNCTAD (2003). 234 The Global Challenge in Services Trade

BPO Definition This study will look at BPOs, as defined by the ICT Division of the Board of Investments (BOI), Department of Trade and Industry (DTI). The DTI is the lead agency charged with promoting BPOs in the country. The DTI defines BPOs as: “the delegation of service-type business processes to a third-party service provider.” (DTI 2003b). This was derived from Gartner Dataquest’ definition of BPOs as: “the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administrates and manages the selected process or processes based on defined and measurable performance metrics.” (DTI 2003a)

Accordingly, BPO service offerings are categorized into four: • Supply chain management - includes activities such as transportation and logistics, direct procurement, and warehouse and inventory management. • Operations - include activities such as research and development and contract manufacturing, which accounts for over 50 percent of the BPO market today. • Business administration - includes activities such as finance and accounting, human resource, billing and payment services, indirect procurement, and administration services such as claims and policy processing. • Sales, marketing, and customer care - includes activities such as customer selection, acquisition, retention, and extension.

Figure 6. Gartner’s BPO model

Source: www.outsourcingproject.com as cited by DTI (2003b). Chapter 6: Business Process Outsourcing 235

Of these four, the last two (business administration; sales, marketing, and customer care) follow more closely the DTI’s definition of BPO activities (Figure 7). There are three key elements of this BPO definition: 1. It is limited to service-type activities, specifically business support services and sales-related functions. 2. These activities should be IT intensive. 3. These activities should be outsourced.

Figure 7. Limiting BPO definitions: services-oriented and IT-enabled

Source: www.outsourcingproject.com as cited by DTI (2003b).

Specifically, BPOs, as defined by the DTI, includes the outsourcing of the following IT-intensive activities: • business administration (e.g., administration, finance, HR, billing, indirect procurement, and payment services) • sales, marketing, and customer care (e.g., contact centers, customer selection, acquisition, retention, and extension).

Outsourcing and Offshoring As domestic outsourcing developed into offshoring, the overlap has created confusion—especially with their many derivative terms (e.g., insourcing, rightsourcing, nearshoring, etc.). A large reason for the confusion can be traced to the observation that domestic outsourcing eventually also leads to offshore outsourcing. On the other hand, in the search for cost savings, not all business processes that migrate to least-cost countries are outsourced. Companies can choose to still do these service activities internally (i.e., assign these to an affiliate). This is variously referred to as offshoring, intrafirm (captive) offshoring, or captive shared service centers. 236 The Global Challenge in Services Trade

What is emerging, therefore, is a mix of choices open to companies—to outsource or to perform the activities internally, do them in their home countries, or locate these activities abroad. The UNCTAD illustrates these options clearly in Table 4. The Philippine Government is promoting the country as a destination not just for outsourced or third-party BPOs, but also for captive shared service companies. Examples of internalized offshoring in the country include the shared service centers or the regional headquarters of Proctor & Gamble, Maersk, and Flour Daniels (its design and engineering center). On the other hand, a primary example for outsourced offshore operations is generally the call center.

Table 4. Offshoring and outsourcing: some definitions

Internalized or Externalized Service Production Internalized Externalized (Outsourced)

Production kept in-house at home A computer company contracts a call center company to handle its technical Home

Country support. Call center is located in Minnesota.

Company consolidates all HR- Emerson (a US industrial company) related data encoding functions of contracts SYKES (a call center firm) to affiliates worldwide in the handle its technical support. Call center Philippines. Example: P&G and is based in Pasig City, Philippines.

(Offshore) Maersk shared service centers in Location of Service Production

Foreign Country Manila

Source: Adapted from UNCTAD (2004).

GROWTH OF BPO WORLDWIDE Figure 8 illustrates the definitional problems discussed in the previous sections, as they apply to estimating market size. Outsourced activities cover not only services. As mentioned earlier, outsourcing started in the manufacturing sector. Moreover, another problem is that not all service activities are outsourced; as discussed earlier, service activities can be done inhouse—right in the domestic premises of a particular company or in the facilities of an overseas affiliate (e.g., under the captured concept or shared services concept). As result of this definitional problem, 2 it is difficult to pinpoint exactly the actual size of the global (or even domestic) BPO market. Several other reasons account for this, including:

2 For a full discussion of these issues, please see the Manual on Statistics of International Trade in Services, prepared by the Department of Economic and Social Affairs, Statistics Division of the United Nations, Statistical Papers Series M No. 86 (2002). Chapter 6: Business Process Outsourcing 237

Figure 8. Locating BPO

• Service activities—being generally intangible products—are difficult to track (compared with goods). • There is still no central source of information for services trade. • Especially for global BPOs, services can be delivered through various modes—cross-border supply, consumption abroad, investments, or movement of natural persons.

Moreover, it must be noted that available estimates of BPO market size and growth currently originate from consultancy firms with specialty IT-related research product offerings. These include Gartner Dataquest, International Data Corporation (IDC), and McKinsey. IT-related magazines and publications, such as ComputerWorld, also monitor BPOs. In the absence of centrally reported secondary information and given the ambiguity that still surrounds BPO definition, available numbers on BPOs are generated mainly through surveys. Since most reports of consultancy companies are proprietary in nature, these reports— including sections detailing methodology—are not fully available for public scrutiny. Thus, in using currently available estimates, readers should be conscious that these generally originated from consultancy companies with products and services that also promote BPOs. Moreover, these monitoring activities follow a demand-driven calendar. These are rather expensive exercises, and sponsoring institutions recover their investments by market-based mechanisms. 238 The Global Challenge in Services Trade

Market Size and Projected Growth

Market for outsourcing Gartner Dataquest—as cited by the Information Technology and Electronic Commerce Council (ITECC)—estimated the global market for outsourcing at around US$495 billion. This figure includes both manufacturing and service activities—those that are IT-enabled and those that are not. Those that are generally considered excluded from IT-enabled services are manufacturing services (US$495 billion) and distribution and logistics (US$60 billion) (Table 5). On the other hand, service activities that can be fully enabled by IT are about US$200 billion, which include: (a) administration, finance, accounting, and human resource; (b) payment services; (c) manufacturing services; (d) distribution and logistics; and (e) sales, marketing, and customer care. The same report further highlighted the following: • Demand for outsourced services would have more than doubled, from US$208 billion in 1999 to US$543 billion in 2004. • The biggest markets are the United States (US), followed by Europe, the Asia-Pacific region, and Japan.

Table 5. Estimated market for BPOs Service line Estimated market (US$ billion)

Administration/Finance/Accounting/HR 130 Payment services 40 Manufacturing services 235 Distribution/Logistics 60 Sales/Marketing/Customer Care 30 Total 495 Source: Author’s estimates based on graphs cited by the ITECC from the Gartner Dataquest research.

Market for IT-enabled services Expectedly, to date, the Indian umbrella organization of IT and IT-related industries—the National Association of Software and Service Companies (NASSCOM)—has been the most active source information on IT-enabled services, including BPOs. NASSCOM has conducted major studies on IT and IT- enabled services with a number of consulting organizations, most notably McKinsey. Two of these studies are among the most commonly quoted in literatures about BPOs: the 1999 study “The Indian IT Industry” and the 2003 follow-up study “India IT Strategies.” Citing the 1999 NASSCOM-McKinsey study, the DTI placed the global market for IT-enabled services at around US$141.2 billion (Table 6).3 Data search,

3 2002 market size, as projected by the 1999 McKinsey Study. Chapter 6: Business Process Outsourcing 239

Table 6. Global market for IT-enabled services (2002 estimates)

Service line Estimated global market (US$ billion)

Customer interaction services 33.0 Finance and accounting services 15.0 Translation, transcription, and localization 2.0 Engineering and design 1.2 Human resource services 5.0 Data search, integration and management 44.0 Remote education 18.0 Networking consulting and management 15.0 Website services 5.0 Market research 3.0 Total 141.2 Source: NASSCOM McKinsey study, The Indian IT Industry, as cited by DTI (2003a).

Table 7. Projected 2005 market of IT-enabled services (in billion US$)

Service line Low High

Inbound call centers 70 75 Engineering and design 65 70 Credit/debit card services 45 50 Payroll services 30 35 Web sales and marketing 30 35 Benefits administration 25 30 Telesales/telemarketing 20 25 Billing services 15 20 Database marketing / customer analysis 15 20 Claims processing 10 15 Total 325 375 Source: NASSCOM-McKinsey follow-up study, Indian IT Strategies, as cited by DTI (2003a). integration, and management is the biggest segment followed by customer interaction services, remote education, network consulting and management, and finance and accounting services. However, in the follow-up report of NASSCOM-McKinsey, the global market for IT-enabled services was projected to reach between US$325 billion and US$375 billion by 2005 (Table 7). In its studies, McKinsey (2002) follows industry convention and defines the segments of BPOs or IT-enabled services as: • HR – human resource services, payroll • customer care – call centers, remote maintenance, support centers • payment services – back-office operations 240 The Global Challenge in Services Trade

• content development and others – digital content development, engineering and design, geographic information system (GIS), Web site services • administration – data processing, medical transcription, insurance claims processing • finance – revenue accounting

Market for BPOs BPOs are, strictly speaking, that subset of IT-enabled services that are outsourced (i.e., as compared to captive IT-enabled services or shared services). McKinsey & Co. projects that the global BPO market will reach US$180 billion by 2010 (DTI 2003a).

Summary of global market sizes Regardless of how BPOs are defined or how the size of the market is estimated, all the reports consistently point to the growing market for BPOs. Thus, from a policy perspective, assuming there are no regulatory changes in other countries,4 the Philippines can expect a continually growing global demand for BPOs. This is true considering that even at the low-side estimate of a US$180 billion global BPO market by 2010, the country’s present BPO size of about US$1.7 billion5 is still less than a percent of this projected market size. Based on publicly available information, Table 8 presents a summary of the market size of outsourcing, IT-enabled services, and BPOs as reported by various consulting companies.

Figure 9. Global BPO market by 2010

Source: McKInsey & Co., as cited by DTI (2003a) and San Agustin (2004).

4 For example, in the US, legislative bills have already been filed against outsourcing of federally funded projects. 5 Excludes accounting, finance and administration (including HR), and shared services. Chapter 6: Business Process Outsourcing 241

Table 8. Market size of outsourcing, IT-enabled services, and BPO

Garner Dataquest* McKinsey** Outsourcing US$208 billion in 1999; US$495 billion in 2004 IT-enabled services US$200 billion in 2004*** US$141.2 billion in 2002; US$325 billion to US$375 billion by 2005 BPOs (outsourced IT- US$180 billion by 2010 enabled services) * As cited in various reports of the DTI and ITECC. ** Based on original reports and as cited by the DTI and ITECC. *** Includes the following: (a) administration, finance, accouting, and HR; (b) payment services; and (c) sales, marketing, and customer care.

Market for offshored BPO It is important to note, however, that while the total global demand for outsourcing, IT-enabled services, and BPOs is undoubtedly large, only a portion of this is offshored. As reported in the 2003 E-commerce Development Report of the United Nations, the following are some estimates of BPO offshoring: • Only 1-2 percent of all BPOs were offshored in 2001. • Global service exports totaled US$32 billion in 2001, with Ireland accounting for over one-fourth of the total.

In terms of FDI projects in 2002-2003 on export-oriented services, 90 percent originated from developed countries.6 However, more than half of these investments went also to developed countries, with Ireland and Canada as primary destinations. All these indicate that there is still room for growth in international offshoring in services, especially to less developed countries. For example, even among the 1,000 largest firms in the world, only 30 percent have so far offshored service activities to low-cost countries. Many of the remaining 70 percent, however, have plans to follow suit. Those that took advantage of cost savings from offshoring are mainly US- based companies. However, European companies—especially those from the United Kingdom (UK)—are starting to be receptive to the idea. In a 2004 study jointly undertaken by the UNCTAD and the Roland Berger Strategy Consultants, about 83 percent of large European companies with offshoring activities were found to have been satisfied with the experience. Only 3 percent were dissatisfied

6 Firms from the US dominated, with two-thirds of all export-oriented information and telecommunication service projects, 60 percent of call center projects, and 55 percent of shared-services projects. 242 The Global Challenge in Services Trade while 44 percent of the companies interviewed planned further offshoring in the coming years. This will most likely push other firms to look into offshoring as a competitive strategy. UNCTAD expects fastest growth in offshoring IT-enabled services. It is forecasted to expand from US$1 billion in 2002 to US$24 billion in 2007 (UNCTAD 2003). The overall general conclusion is that offshoring is still far from its mature stage, thus it is still too early to predict its pattern of growth and favored country locations. One of the earliest studies on offshoring was undertaken by the World Bank in mid-1990s. The research suggested that between 1 percent and 5 percent of total jobs in G-7 countries could be affected by offshoring.7 In more recent estimates done by business research groups, the following points were arrived at (UNCTAD 2003): • About 3.4 million service jobs may shift from the US to low-income countries by 2015. • Another study said that 2 million offshored jobs could be created in the financial services industry alone, and that the total number of jobs affected for all industries could be in the area of 4 million.8

Main Drivers for Growth Many companies have decided to outsource for a number of reasons (DTI 2003b): • to improve speed-to-market and competitiveness; • to focus on core competencies; • to access intellectual capital, scarce skills, and resources with no long- term investment; and • to have more disciplined processes, shared risks, and partnerships in the transformation to e-business.

However, the main driver for offshore outsourcing remains to be related to cost considerations. In a survey done in the US by Computerworld, the following are the reasons why companies outsource to non-US locations9: (1) reduce/ control costs (44%); (2) free up internal resources (20%); (3) gain access to world-class capabilities (13%); (4) increase revenue potential (13%); (5) reduce time to market (11%); (6) increase process efficiencies (11%); (7) follow company philosophy of outsourcing noncore activities (11%); and (8) compensate for lack of appropriate skills (8%).

7 They defined such activities where long-distance provision is technically feasible and cost savings of up to 30-40 percent is possible. 8 While this figure may seem large, it should be compared with an average turnover of 4 million jobs every month in the US. 9 Based on a survey of 252 corporate IT managers in the US, respondents were asked to select the three most important reasons. Source: Computerworld and InterUnity Group Inc. (April and May 2003). Chapter 6: Business Process Outsourcing 243

Analysts’ (e.g., Neo IT) estimates, as well as the 2003 UN E-commerce Development Report, determined a cost savings of up to 40 percent for offshoring service activities. However, not all service activities can be offshored. There are several reasons cited by the report for this, including the following: • For certain services, proximity to markets, interaction with customers, and trust and confidence outweigh the possible benefits of an international division of labor. • Technological limitations cannot be discounted as it is not possible for all service functions to be digitized and/or separated from related activities. • Some businesses will continue to need localized services or person-to- person contact for exchanging highly confidential information or for adapting to rapidly changing customer needs. • Regulations and legal requirements (e.g., regarding privacy) may also raise transactions costs and limit international trade in services. Certain services, such as insurance and banking, are required by law in some countries to be provided by companies established locally. • The lack of international recognition of professional qualifications is another obstacle, as is the lack of globally agreed privacy rules. • Some international locations also lack the capacity to host offshored service activities. These include the supply of reliable telecommunications infrastructure, appropriately educated workers, rising wage costs, and high levels of attrition in the fastest growing destinations, all giving rise to shortage risks, at least in the short run. • TNCs, too, have different perceptions of the risks and benefits of offshoring services and some are reluctant to do so.

THE PHILIPPINE BPO INDUSTRY

Main Segments The Philippine Government has identified 10 export-oriented product groups that it will actively promote and assist—dubbed as “10 Priority Revenue Streams.” BPOs are lumped together under the IT-enabled services sector. Through the DTI, the government is actively pushing for the following specific subsectors: • Contact centers - A physical location where calls are placed or received in high volume for purposes of sales, customer service, technical support, research, and others. • Medical transcription - Process of interpreting/encoding electronically the oral dictation of health professionals regarding patient assessment, therapeutic procedures, diagnosis, and so forth. • Animation - The process of giving the illusion of movement to cinematographic drawings, models or inanimate objects thru 2D, 3D, etc. 244 The Global Challenge in Services Trade

• Shared financial and accounting services - System of centralization/ distribution where an independent business unit is dedicated to providing process- or knowledge-based financial services to other business units. • Software development services - Analysis and design, prototyping, programming and testing, customization, reengineering and conversion, installation and maintenance, education and training of systems software, and middleware and application software10.

In as much as these IT-enabled services can also be outsourced, these coincide with the sectors promoted under BPOs. For the Philippines, what is critical is that these are offshored service activities, regardless of whether these are captive (insourced or shared services) or the third-party (outsourced) type. The distinction may, however, be critical in certain policy decisions (i.e., the policy instruments used to attract shared service BPOs may be different from third-party BPOs). Captive offshore service activities can be attracted to the Philippines through investment policies (Mode 3: Commercial Supply), while promoting third-party offshore outsourcing will be through service export policies (Mode 1: Cross-border Supply).

Market Size and Structure According to the DTI, the Philippine BPO sector reached a size of about US$1.655 billion in 2004, up from just about US$350 million in 2001 (Figure 10). It grew

Figure 10. BPO industry structure in the Philippines

10 In recognition of the country’s advantage, the DTI is also keenly promoting the engineering design services sector (i.e., separately from software development and shared services). Chapter 6: Business Process Outsourcing 245 by an annual average of about 160 percent. The biggest subsector is customer care (call centers) at US$864 million in 2004, followed by medical transcription at US$483 million, software development at US$268 million, and animation at US$40 million (Table 9). All of the BPO sectors registered cumulative growth rates of over 25 percent from 2001 to 2004, with medical transcription growing fastest at 130 percent, followed by call centers at 50 percent, software development services at 30 percent, and animation at 25 percent.

Table 9. Summary of Philippine BPO segments

Contact Medical Animation Shared financial Software Centers transcription and accounting development services services

‘01 US$173 million US$40 million US$21 million US$115 million ‘04 US$864 million US$483 million US$40 millionNo data US$268 million Growth 50% (CAGR) 13% 25% 30% Philippines

“The Philippines $10-$16 billion Global animation Consolidation of India moving out is set to be industry, revenues backroom of legacy among markets growing at a projected from operations on a systems; e- for contact cumulative US$16 billion to regional level. business, centers in Asia annual average US$50 billion mobile Pacific in the of 20 percent. In by 2004-2005 applications. next 5-7 years.” the US, only 47 (~25 percent percent of the p.a); new China market is market for outsourced, the education, Trends rest is in-house. design, and Anticipated marketing surge as there services. are hospitals that have yet to convert their records as required by law.

37 firms Approximately Approximately Approximately Approximately 16 firms 22 fims, 5-6 Finance & 52 BOI- including 11 Administration registered firms direct exporters centers today + and 24 PEZA- other backroom registered firms

Current Players operations 246 The Global Challenge in Services Trade

Table 9. (continued)

Services ethic/ Familiarity with We are attitude (vis medical considered a India); cost, standards, competency turnover (vis terminology and center for Australia); practices of the intangibles such language (vis US; pool of as artistry, China). health-related creativity (vis skilled workers. India), ability to interpret cultural nuances (vis China, Korea, Taiwan). The Philippines’ value proposition

US, UK US a. Entertainment Regional HQs– US/India (as – US, Japan in HK/ locators/sellers), and Australia/ Singapore; Corporate US Canada/ Financial (as buyers), France Community Singapore (as b. Education/ (East Coast, partner for India/ business; Brussels) China and the Malaysia, US) Existing market China, Korea, Thailand Source: DTI (2003a).

Call centers The Philippines is widely recognized as the emerging best location for call centers, serving as a credible challenge to India and Australia. Its call center industry size, measured in terms of number of seats, is projected to have jumped by 100 percent from 20,000 in 2003 to about 40,000 in 2004. This placed the Philippines directly behind Australia, India, and China. The external market opportunities for the country, in terms of the call center industry, remains strong as offshoring gains momentum and as off-shored call centers from more costly countries, such as Ireland and Canada, are attracted to the Philippines. Chapter 6: Business Process Outsourcing 247

Table 10. Comparative call center industry sizes in Asia (in number of seats) Country 2003 2004 Growth (%) Australia 135,000 146,000 8 India 96,000 158,000 65 China 38,000 54,000 42 Philippines 20,000 40,000 100 New Zealand 12,000 13,5000 13 Thailand 11,000 13,000 18 Singapore 10,000 10,100 1 Hong Kong 10,000 10,700 7 Total 332,000 445,300 34 Source: www.callcenter.com as cited by San Agustin (2004).

Medical transcription The surge in the growth of medical transcription is, however, mainly due to a unique opportunity offered by federal regulation in the US that required hospitals to store digital copies of patients’ records. While demand will stabilize in the medium term, the Philippines’ share of about US$483 million is still very small compared with the potential market size estimated by the DTI at about US$10 billion to US$16 billion. Moreover, as the US health care system further discovers the benefits of offshoring, which will result in outsourcing other administrative aspects of their operations aside from patients’ records, it is expected that the potential market will expand. The main advantage of the Philippines is again its telecommunications infrastructure, labor, and reasonable office rental fees. For labor, the Philippines is an attractive location because of its global reputation for health professionals. A basic knowledge of medical terms is critical for medical transcription. On the downside, the technological trend is toward the development of automatic voice recording systems that could make human intervention in certain portions of the transcription process unnecessary. However, these technologies may still take several years before they can be fully applied in the context of medical transcription.

Animation, shared services, and software development Call centers and medical transcription alone account for more than 80 percent of total IT-enabled services/BPO revenues. The other 20 percent is shared by animation, shared services, and software development. The country’s creative talents are recognized globally and are well suited for computer animation. But the industry is still at the level of 2D computer animation while India is already at the 3D level. The biggest stumbling block is the high cost of computer hardware and software. It is estimated that a computer seat—hardware plus software—for 3D animation will cost from US$3,000 to US$6,000. Aside from India, Canada is also a major player in computer animation. 248 The Global Challenge in Services Trade

However, the country can exploit a particular niche in computer animation— content development for educational purposes. There is a growing market for English-based educational content materials for Asian countries such as China, Taiwan, and Korea. The Philippines has tremendous potential as a location for shared service operations in the area of finance and administration. A key reason is the educated workforce. For example, in accounting, the Philippines has been a constant source of accountants for overseas assignments. It is already host to certain shared services functions for such companies as Citibank (call center operation, systems development and support), Procter and Gamble (finance and administration, IT), Maersk (finance and administration), Caltex (finance and accounting), and Fluor Corporation (engineering design), among others. Table 11 lists all the foreign companies with shared service operations in the Philippines.

Table 11. Representative foreign companies with IT-enabled activities in the Philippines Company Activity Market

US Companies America Online (AOL) Customer relationship management/ North America Customer contact center Accenture Management consultancy, market Worldwide technology solutions Barnes and Noble Inventory management; online North America, purchasing France Caltex Finance and accounting shared Southeast Asia services Citibank Systems development and support Asia-Pacific and Asia Eastern Block Fluor Corporation Regional engineering design work for 100 percent export to (Fluor Daniel Philippines) engineering, procurement, and Japan construction (EPC) James Martin Global research and applications 80 percent exported (Headstrong Philippines) development center (finance, supply Worldwide chain management, etc.) SYKES Customer contact center North America and Asia-Pacific European firms Alitalia Business process outsourcing Asia, Middle East, Nort and South America International Red Cross Business process outsourcing Worldwide Chapter 6: Business Process Outsourcing 249

Table 11. (continued) Company Activity Market

Japanese Firms Sumitomo Group Machinery design and software for Sumitomo Heavy Industries Mitsubishi Heavy Power plant and shipbuilding design (MHI Technical Services Industries Corporation) JGC Philippines, Inc. EPC (engineering, procurement and construction) NEC Telecom Network software and telecom management systems development Fujitsu (Software) Application software and middleware; microcoding for ICs Tsukiden Group Computer software development, LSI design, R&D

Source: DTI (2003a).

RP’S ATTRACTIVENESS AS A BPO LOCATION: INDUSTRY VALUE CHAIN

Basic Value Chain Blocks Based on interviews and past studies done on BPOs, the starting point of any viable BPO industry chain, from a national perspective, include: • a sizeable pool of qualified human resource; • an efficient and cost-effective telecommunications infrastructure; and • an adequate supply of building space equipped with the required IT, telecommunications, and power infrastructure (Figure 11).

In selecting a BPO location, prospective investors place paramount importance in these industry value blocks, which represent the three biggest cost items of any BPO operation. DTI reports a similar cost structure: salaries and benefits, 50 percent; building and infrastructure, about 20 percent; and utilities and communications, 10 percent (Figure 12). Training and business trips were also cited as significant cost items for BPOs. In addition to these industry building blocks, the general environment must likewise be conducive to the operation of BPO companies (i.e., to foster the development of the needed building blocks). Critical considerations are: • cultural affinity with the target market; • continually growing educated workforce; • geographic location yielding advantages to client company operations (e.g., different and complementary time zones); and • stable political and social conditions (e.g., political stability and physical security). 250 The Global Challenge in Services Trade

Figure 11. BPO industry value blocks

Cultural, Demographic and Locational Factors

Qualified Human BPO Service Resource Pool

Technology Reputation Infrastructure Financing Expertise

Utilities and Appropriate Marketing and Promotion Office Space

Business and Political Environment

Figure 12. Structure of BPO costs

Others Utility and 5% Communication 10%

Training and Salaries and Business Trip Benefits 15% 50%

Building/ Facility/ IT Infrastructure Cost 20%

Source: DTI (2003b).

Lastly, as demonstrated by the Indian experience (i.e., through NASSCOM), a strong and well-communicated country-positioning strategy is essential in capturing international BPO projects. These industry prerequisites (human resource pool, telecommunications infrastructure, and utilities) and enabling environmental conditions (socioeconomic and political environment) attract locators to consider a country as a BPO site. Chapter 6: Business Process Outsourcing 251

Table 12. Structure of BPO costs Cost items Share to total costs (%) Salaries and wages 40-60 Rent 10-18 Telecommunications 10-25 Sources: Selected financial statements from the Securities and Exchange Commission; interviews with the following all in 2004: Mr. Cesar Tolentino, Research Analyst, XMG Asia Pacific; Mr. Raffy David, Director, Pilipinas Teleserv, Inc. and Director, Contact Center Association of the Philippines (CCAP); and Mr. Jesus M. Zulueta, Jr., Chairman, ZMG Signium Ward Howell.

In turn, the success of any BPO company, as an individual organization, depends on the presence of critical entrepreneurial resources. Most critical among these are access to financing, industry expertise, and proven track record (i.e., a good reputation among client companies).

The Philippine Advantage The sustainability of BPO growth in the Philippines can thus be looked at in three levels: 1. Broad environment. The environmental conditions that will enable the enhanced development of the industry. 2. Support industries. The presence of key industries and infrastructure that will support the BPO industry. 3. Organizational resources. A specific BPO company’s access to entrepreneurial resources that will allow it to succeed.

It must be emphasized that these three levels are dynamically interacting with each other. For instance, the ability of BPO companies to access entrepreneurial resources will be a function of the enabling conditions that foster the development of the industry.

Broad environmental conditions The broad environmental conditions facing any organization may be generalized into two aspects—social and political. While the Philippines enjoys advantage in the social aspect, it is least attractive in the political perspective. Social environment. The key advantages of the Philippines are its cultural affinity with the major market (US) and its large population base and healthy demographic structure. The country’s public education system can be considered as the most significant legacy of the US, contributing to the historically higher literacy rate in the Philippines compared to its neighbors. Most Filipinos also have a functional level of English-speaking skill and are familiar with the Western culture. Based on the 2002 estimates of the World Bank, the illiteracy rate in the Philippines is about 5 percent of the population above 15 years of age. This is 252 The Global Challenge in Services Trade significantly lower than the average for all economies in East Asia and the Pacific (13%) and for all lower-middle income countries (13%). The country is also the third largest English-speaking population in the world, next to the US and UK. The most important asset in any service-related industry is “people.” In this context, the emerging major BPO locations are those countries with a large population base—India, Philippines, and China. Should Indonesia and Vietnam eventually pursue focused programs to promote the use of English, these two countries can also attract serious attention as BPO locations. Not only is the Philippines enjoying a robust population growth and level, its demographic structure also ensures the continued flow of workers into the labor force pool. For instance, while only 4 percent of Filipinos are above 65 years old, roughly 7 percent of the total global population is at this age range (Figure 13). The situation is far worse for high-income countries, typically the source of BPO projects, where about 14 percent of their population belongs to the age group 65 years and above. A large population base, while a necessary condition for BPO development, should be complemented by a strong educational system. The Philippine public and private university systems combined produces about 360,000 graduates per year (Figure 14). Among these graduates, an estimated 30,000 to 50,000 are technically proficient workers (i.e., graduates of computer science and programming). Another 50 percent of the total graduates are knowledgeable in fields commonly required in BPO operations such as business administration, mass communication, and other related courses (Figure 15).

Figure 13. Population structure by age

Source of basic data: World Bank Development Data Group. Chapter 6: Business Process Outsourcing 253

Figure 14. Annual population of college students

Source: wwww.ched.gov.ph.

Figure 15. Graduates by discipline

Source: www.ched.gov.ph.

While the pool of university graduates remains stable, there are alarming indications that the quality of graduates has been declining. This, as will be discussed later, has already been affecting BPO companies in terms of the difficulty in getting qualified applicants. What is more worrisome is that the 254 The Global Challenge in Services Trade

Table 13. Philippine labor pool statistics Total number of graduates, 2002-2003 363,640 university graduates per year (approximate)

Business Administration and Related Courses 106,559 Engineering and Technology 45,041 Math and Computer Science 33,059 Mass Communication and Documentation 5,140 Source: www.ched.gov.ph.

declining trend will most likely persist, which will further erode the competitive advantage of the Philippines. For instance, in key disciplines such as math and science, the Philippines has been consistently placing near the bottom of international benchmark studies. Math and science subjects help prepare students for employment in higher value-added and more knowledge-based segments of IT-enabled service industries. The results of the Trends in International Mathematics and Science Study (TIMSS) of the Boston College serve as a good indicator. The TIMSS is a competitive examination to test the general level of math and science knowledge of specific grade levels of students. In the test for eighth grade students, for example, the benchmark indicators show the Philippines near the bottom (Table 14). For instance, in 1999, the country ranked 36th out of 38 countries for both math and science. In the latest study conducted in 2003 and released in

Table 14. Trends in the International Mathematics and Science Study, 1999 and 2003) 1999 2003 Math Science Math Science Rank out of Rank out of 38 Countries 45 Countries Philippines 36 36 41 42 Singapore 1 2 1 1 Korea 2 5 2 3 Taiwan 3 1 4 2 Hong Kong 4 15 3 4 Japan 5 4 5 6 Malaysia 16 22 10 20 Russia 12 16 12 17 United States 19 18 15 9 Phlippines’ score 345 345 378 377 International average 487 488 467 474 Source: Boston College (2004). Chapter 6: Business Process Outsourcing 255

December 2004, out of 45 countries, the Philippines placed 41st for math and 42nd for science. On the other hand, neighbors like Taiwan, Korea, Singapore, and Japan have consistently topped the TIMSS. It is also interesting to note that Eastern European countries, in addition to Russia (ranked 12th for math and 17th for science), are also getting high scores. For example, in 2003, for achievement in math: Belgium placed 6th; Estonia, 8th; Hungary, 9th; Latvia, 11th; Slovak Republic 13th; and Lithuania, 16th, to name a few. The same can be said of the science exams: Estonia placed 5th; Hungary, 7th; Slovenia, 12th; Lithuania, 14th; Slovak Republic, 15th; Belgium, 16th; and Latvia, 18th. These Eastern European countries will provide competition to the Philippines, especially in the higher-end BPO segments, considering that the next wave of BPO growth will most likely come from Western European countries. Eastern Europe will surely take advantage of its increasing integration into the European Community. Political environmentenvironment. While the Philippines can still cope with the negative outcomes of its deteriorating educational system, the impact of its very fluid political environment is more immediate. Potential investors in BPO services are worried about the political problems in the country, such as graft and corruption, criminality, and threats to physical security. For instance, again drawing on the Global Competitiveness Report 2004- 2005 (Porter et al. 2004), the Philippines ranked 102nd for business cost of terrorism (out of 104 countries), 83rd for business cost of crime and violence, and 96th for business cost of corruption (Table 15).

Support industries As mentioned, the key support industries for BPO services are telecommunications, office space development, and utilities. Telecommunications11. The Philippines is considered to have a relatively good telecommunications infrastructure, both voice and data, as compared to other countries in the Asia-Pacific region. There is redundant international connectivity, including fiber optic cable and satellite communication. As a result, a significant amount of trans-Pacific data communication bandwidth is easily available. There is high-quality, low-cost bandwidth that is expanding the domestic telecommunications network. Currently available are six platforms, consisting of fixed line, cellular, cable TV, over-the-air TV, radio, and the very small aperture terminal (VSAT) system. During the past four years, the bandwidth cost has declined by 70 percent, according to local IT service and contact center providers (DTI 2003a). In addition, there are a number of international carriers for telecommunications services, a solid competitive landscape for buyers.

11 Discussions on telecommunications and real estate were adapted primarily from DTI documents. 256 The Global Challenge in Services Trade

Table 15. Ranking of the Philippines in political factors Business cost Business cost Business cost of tourism of crime and of corruption violence (Ranking out of 104 countries) United States 97 21 18 China 45 51 66 Canada 68 27 20 India 71 22 54 Australia 55 19 4 Russia 92 70 100 Indonesia 88 65 72 Hong Kong 20 4 11 Ireland 13 40 17 Thailand 85 33 48 Israel 103 13 8 Malaysia 73 23 38 Singapore 76 5 10 Czech Republic 43 59 82 Hungary 14 47 63 Philippines 102 83 96 New Zealand 16 18 2 Romania 38 54 95 Vietnam 58 43 73 Source: Porter et al. (2004).

The Philippine telecommunications market, compared with India, also offers lower prices (30-50%), shorter procurement times (3 weeks as opposed to 3 months), and less transmission delay. Tables 16 and 17 provide further information on the competitiveness of the Philippine IT infrastructure in comparison with other countries. Real estateestate. The Philippines has readily available locations and infrastructure to support the IT-enabled services industry. The primary physical locations where enterprises would most likely operate are located within and around the capital city of Manila. The options are primarily focused in five physical locations: • Metro Manila, specifically the central business district of Makati, and Ortigas, Filinvest Alabang, and Fort Bonifacio; • Technology parks located within Metro Manila (i.e., predominantly suburban locations just outside Manila); • The two repurposed military bases located two or three hours outside of Manila (Subic and Clark); • Established regional growth centers, especially Cebu in the Visayas and Davao in Mindanao; and Chapter 6: Business Process Outsourcing 257

Table 16. Competitiveness of Philippine IT infrastructure Broadband Specialized Competition Gov’t online Laws on Gov’t Internet IT services in ISPs services ICT priority access on ICT Philippines 3.6 4.6 4.4 2.3 4.1 4.6 India 3.2 5.8 4.5 3.9 4.3 5.6 China 2.9 4.3 3.7 3.5 3.5 5.3 Singapore 5.8 5.2 5.3 6.4 5.4 6.2 Hong Kong 5.3 6.0 6.1 5.7 4.7 5.3 Thailand 3.9 3.9 4.9 3.2 3.5 5.1 Indonesia 3.4 4.0 4.2 2.0 2.8 3.7 Vietnam 2.7 3.4 2.7 2.2 2.8 4.7 Japan 3.3 5.7 4.8 3.2 4.2 5.3 United States 5.7 6.6 5.9 5.4 5.4 5.3 Source: World Bank Development Data Group.

Table 17. Key ICT indicators: Philippine vs. India and the United States Philippines India United States

ICT infrastructure and access Telephone lines per 1,000 people Country 42 38 667 In largest city 265 136 -- Waiting list (in ‘000) -- 1,649 -- Revenue per line ($) 721 198 1,566 Cost of local call ($ per 3 min.) -- 0.02 0.09 Mobile phones per 1,000 people 150 6 451 International telecoms Outgoing traffic (min. per subscriber) 49 14 156 Cost of call ($ per 3 min.) 4.8 3.2 --

Computers and the Internet Personal computers Per ‘000 people 21.7 5.8 625.0 Installed in schools (‘000) 77 239 16,322 Internet Users (‘000) 2,000 7,000 142,823 Monthly off-peak access charge Service provider charge ($) 23.9 10.0 5.5 Telephone usage charge ($) -- 0.2 3.5 258 The Global Challenge in Services Trade

Table 17. (continuted) Philippines India United States ICT expenditures Total ICT ($ million) 3,131 19,662 812,635 ICT as % of GDP 4.2 3.9 7.9 ICT per capita ($) 40.5 19.0 2,923.8 Source: World Bank (2004).

• Geographic centers of academic activity, such as (in addition to the locations mentioned so far) Baguio, Naga, and Dumaguete.

“Ready-to-occupy” locations are available, especially in Metro Manila. Due to the Asian economic crisis of 1997, the Philippines has an overcapacity of real estate space. As a result, the price of commercial real estate is quite low compared with equivalent options in Bombay, India. All other destinations compare favorably with the Philippines. UtilitiesUtilities. The Philippines, however, has one of the highest tariffs for electricity rates in Asia. Though not often cited, the high power rates is a source of disadvantage for BPO companies that must continuously operate all day, seven days a week, at climate-controlled environment (i.e., air conditioned). With power rates accounting for roughly 10 percent of total operating BPO cost, any improvement in this area will lead to additional cost advantages for Philippine BPOs. Possible measures, in the short term, could include “peak-load” pricing for electricity consumption. This will mean lower electricity bill for BPOs at night, coinciding with the complementary time zones of the Philippines and the US.

Organizational resources Ultimately, the success of any BPO company will depend on the firm’s access to financial and human resources. Financial resourcesresources. Investing in a BPO project requires considerable amount of capital. For instance, a call center project would need about US$10,000 per seat. Thus, a modest 100-seat call center will require an investment of about US$1 million. At an exchange rate of US$1 to PhP55, this means that a startup call center will need PhP55 million. Payback can, however, be very attractive. Based on estimates, one call center seat can earn a net income anywhere from US$1,000 to US$2,000 per month. Investments for other BPO services are much higher. Animation companies, for example, need to invest as much as US$3,000 to US$6,000 per seat. This covers both hardware and software components needed for intricate 3D designs. Given the high investment levels and risky nature of BPO projects, financing comes only from any of following: Chapter 6: Business Process Outsourcing 259

Figure 17. Venture capital availability

Source: Porter et al. (2004).

• foreign-based BPO companies wanting to establish service base in the Philippines (e.g., e-Telecare, SYKES); • global companies wanting to consolidate service activities in a regional office (e.g., Citybank, Maersk); and • venture capitalists.

For a Filipino company wanting to open a BPO business, venture capitalists can be the only source of financing. However, access to venture capital is quite difficult in the country. In contrast, India already has a number of indigenous BPO companies (e.g., Daksh was an Indian-owned company before it was bought by IBM). Entrepreneurial financing for these companies were primarily from Indian technology professionals who migrated to the US but came back to India to jumpstart the country’s entry into IT-related ventures. Human resourcesresources. The competitiveness of the Philippines in attracting BPO projects rests in its proposition of lower cost BPO professionals armed with university degrees. In fact, a call center agent’s salary (entry level) in the Philippines is one of the lowest in the region, bested only by India and matched by China (Table 18). Philippine wages are competitive not only for call center operations but for BPOs in general. In 2003, for example, among business workers, the average base wage for the Philippines is about US$234 per month—the third lowest in Asia (Figure 18). India, however, is still more competitive at US$150 per month. With salaries and wages taking anywhere from 40 percent to 60 percent of total BPO costs, savings in salaries of BPO agents are very attractive to foreign companies. The Philippines’ competitiveness rests not only on cost considerations. Overall, Philippine labor force cost and quality compare favorably with China, 260 The Global Challenge in Services Trade

Table 18. Annual average salary of call center agents, 2004-2005 Salary (in US$) % of US salary United States 25,000 1.00 Phlippines 2,828 0.11 India 1,689 0.07 China 2,804 0.11 Hong Kong 16,438 0.66 Malaysia 3,960 0.16 Singapore 11,748 0.47 Thailand 3,949 0.16 * estimates, average of entry-level agent and with experience. Source: 2003 Call Centre Benchmarking Study, as cited by Huang (2003).

Figure 18. Comparative labor costs

Source: DTI (2003b). but at a disadvantage with India—especially for the higher value-adding IT skills. San Agustin (2004) summarized the research results of three different business consulting companies and call center-specific Internet resource, namely, NeoIT, Political and Economic Risk Consultancy, Ltd., and ContactCenterWorld.com (Table 20). The only advantage of the Philippines over India is its cultural affinity with the US, currently the biggest BPO market. Thus, overall, the Philippines would be more suited for BPO activities that require customer interaction, while India would be more suited for backroom operations. However, the main factor that attracts BPO projects into the country is the very same one that defines the industry’s critical limits. The most pressing problem of BPO companies today is their ability to attract and retain qualified BPO Chapter 6: Business Process Outsourcing 261

Table 19. Philippine wage rate statistics (2003 estimates) Wage rate for contact center agent US$200-US$300 per month (i.e., entry level) US$300-US$380 per month (i.e., with some type of vertical expertise) Wage rate accountant US$300-US$500 per month Wage rate for accounting clerk US$150-US$200 per month Source: DTI (2003b).

Table 20. Overall comparison of labor force attractiveness India Philippines China Overall Highly Highly Unsuitable but labor force quality suitable suitable quality is improving Skill neoIT* Good Fair Poor PERC** Good Fair Fair CCW*** Good Good Fair English neoIT Good Good Poor proficiency PERC Good Good Poor CCW Good Good Poor Cultural neoIT Fair Good Poor affinity CCW N/A Good Poor *neoIT is a BPO consultancy company; **PERC is Political and Economic Risk Consultancy, Ltd.; ***CCW is ContactCenterWorld.com. Source: San Agustin (2004). professionals—from call center agents, to computer animation artists, to transcribers, and others. This is a common concern for the whole industry. This situation was brought about by the rapid growth of the industry, leading to supply-side bottlenecks. The demand for ICT-enabled workers, where BPO professionals belong to, had grown by 87 percent from 2003 to 2004; for 2005, it is projected to increase by another 47 percent (Table 21). Consistent with industry market growth, demand has been strongest for transcribers (including medical transcriptionists), followed by call center agents (Figure 19). The problem, however, is that the growth in demand for BPO professionals cannot be matched by the available supply of qualified applicants. In 2003, based on a 2004-2005 study by the Information Technology Association of the Philippines (ITAP), the acceptance rate among applicants for BPO positions ranged from 2 percent (for software development) to 17.3 percent (animation). These relatively low acceptance rates were aggravated by high turnover rates— ranging from 7 percent (call centers) to 19.4 percent (animation) (Table 22). More recent estimates of acceptance and turnover rates, however, paint a graver situation for BPOs—particularly for call centers. The main challenge for 262 The Global Challenge in Services Trade

Table 21. Workforce demand for IT workers Workforce demand for IT workers 2003 2004 2005 No. of workers ICT-enabled 41,800 78,351 115,324 ICT providers and non-ICT entities 70,165 82,565 92,072 Total 111,965 160,916 207,396 Growth rate (in %) ICT-enabled 87 47 ICT providers and non-ICT entities 18 12 Total 44 29 Source: ITAP (2004).

Figure 19. ICT workforce demand growth, 2004-2005

Source: ITAP (2004). the Philippines’ emergence as a regional leader in call center operation is the shortage of qualified agents. From the 7 percent acceptance rate reported by the ITAP study, early 2004 estimates point to just 2 percent acceptance rate. Toward the end of 2004, some of the biggest call centers were reporting an acceptance rate of just about 1.6 percent. A key weakness of applicants for call center positions is their English- language proficiency. Although the development of software-aided language training programs can remedy this, only those at the “high-failure” level can viably be trained at the moment. “High-failure” refers to the upper percentile of those who failed in call center application exams. Employee turnover is also becoming a problem for call centers, with some experiencing attrition rates of 2 percent per month. During the first quarter of 2005, big call centers experienced annual turnover rates of above 40 percent. Chapter 6: Business Process Outsourcing 263

Table 22. Average acceptance and turnover rates by industry, 2003 Rate ( %) Acceptance Turnover Animation 17.3 19.4 Manufacturing (ICT) 1.8 17.6 Real estate, business services 15.0 Software development 2.0 13.5 Telecoms, media and entertainment 8.9 12.1 Business process outsourcing 11.7 Systems integration 6.1 11.4 Wholesale, retail trade 11.5 10.3 Data transcription / conversion 9.5 9.0 Trade services (ICT) 6.6 9.0 Financial services 10.1 7.8 Contact center 3.3 7.0 Others (non-ICT) 3.8 7.0 Education (non-ICT) 13.8 5.5 Manufacturing (non-ICT) 8.5 4.3 Education (ICT) 5.4 2.3 Government 24.8 1.2 Source: ITAP (2004).

It must be noted, however, that even among call centers, attrition can vary greatly depending on the type of client accounts being serviced by the agents. For example, retailing companies (e.g., K-mart) and credit card accounts are high-tension assignments where agents have to deal with difficult customer complaints. In these key accounts, attrition can be higher. The main factors that cause higher labor costs are the increasing costs of recruitment, selection, hiring, and retention of qualified employees. With low acceptance rates and high turnover rates, competition among call centers for new employees and experienced ones has been bidding up industry salary and wage levels. As a result, call centers are resorting to wage premiums for “international call center experience” and to signing bonuses, having multiple locations14, conducting inhouse pre-employment training, and giving more benefits (e.g., educational opportunities).

Summary of Philippines’ attractiveness as a BPO location Based on interviews and a review of past BPO researches in the Philippines, the main criteria used to evaluate the competitiveness of the country as a BPO offshore location includes the quality and availability of human resources, cost

14 Having multiple locations increases the chance of recruiting qualified candidates or applicants from the catchment area. 264 The Global Challenge in Services Trade of doing business, infrastructure and utilities, and the business environment (DTI 2003a) (Table 23). Francis Huang of SGV’s Knowledge Institute, in a 2003 study on call centers, identified “international awareness” as a factor (Table 24). McKinsey, on the other hand, in a 2002 study, identified “country attractiveness” and “people attractiveness” as major factors.

Table 23. DTI’s factors for Philippine BPO competitiveness Factor Determinants Quality of human Availability of qualified and educated staff resource Access to multilingual skills: English and other regional languages

Cost of doing Flexibility of labor (labor laws, workforce attitude) business Labor cost

Infrastructure Property and telecommunications costs and utilities Availability and reliability (telecommunications) Office space or building with backup power supply

Business Easy access (local and international) environment Support services (recruitment, setting up, telecommunications) Stability, reliability, etc. Data protection Bureaucracy Source: DTI (2003a).

There is convergence in the assessment by analysts of the relative advantage and disadvantage of the Philippines in comparison with the leading BPO destination— India. Two assessments are presented here—one performed by a local consulting company and the other by an international consulting company. SGV’s Knowledge Institute found that the Philippines’ main attraction is based on its more developed telecommunications infrastructure, which can be attributed to previous government efforts to liberalize the industry. Meanwhile, in terms of labor, India has a higher cost advantage than the Philippines due its bigger population base (Table 25). Key technical skills—e.g., software skills—are also more developed among Indian BPO professionals. Filipinos, on the other hand, have the edge in soft or people skills, for example, its cultural compatibility and English adaptability, which are highly suited for the US market. A broadly similar assessment was arrived at by AT Kearney, a globally recognized BPO consultancy research firm. It cited the Philippines as very strong in financial structure, next to India (Table 26). Again, this can be traced to the relatively lower wages and cost-effective telecommunications infrastructure in the Philippines. The size and skill of available manpower were, however, rated much lower than India. But, by far, the biggest drawback of the country is its Chapter 6: Business Process Outsourcing 265

Table 24. SGV’s Knowledge Institute’s factors for Philippine BPO (call center) competitiveness Factor Determinants People Educational level Size / depth of labor pool English literacy / accents Retention levels Cost Cost of labor Cost of infrastructure Real estate Telecommunications facilities Government incentives Environment Country risk (peace and order) Cultural compatibility Friendliness to expats

International Trade missions / Institutional marketing awareness Presence of industry groups Track record Source: Huang (2003).

Table 25. Factors for Philippine BPO (call center) competitiveness Factor Philippines India Overall cost advantage Labor cost High Very High Size of labor pool High Very High Government support Medium Very High Telecommunications Very High Medium infrastructure

Quality (US market) Very High High Cultural compatibility Very High Medium English adaptability Very High Medium Availability of software skills Medium Very High

Overall awareness Medium Very High Source: Adapted from Huang (2003) 266 The Global Challenge in Services Trade

Table 26. Overall attractiveness of the Philippines Overall Financial Business People skills structure environment and availability Total (40%) (30%) (30%) Scale of 1 to 4 1 to 3 1 to 3 India 3.72 1.31 2.09 7.12 China 3.32 0.93 1.36 5.61 Malaysia 3.09 1.77 0.73 5.59 Czech republic 2.64 2.02 0.92 5.58 Singapore 1.47 2.63 1.36 5.46 Philippines 3.59 0.92 0.94 5.45 Brazil 3.17 1.41 0.86 5.44 Canada 1.00 2.48 1.94 5.42 Chile 2.99 1.68 0.70 5.37 Poland 2.88 1.57 0.88 5.33 Source: AT Kearney (2004). unstable business environment, broadly defined by AT Kearney to include the political situation in the country. In this particular measure, the only countries that scored lower than the Philippines were Russia (0.51), Vietnam (0.70), and Turkey (0.73). Overall, the Philippines is attractive as a BPO location for the following reasons: • Competitive wages, which are slightly higher than the wages in India but much lower than those in the US; • Generally skilled labor force (business-related and people skills), with strong cultural affinity with the US (the main market); • Advanced development of its telecommunications infrastructure, owing to deregulation and liberalization in the 1990s; and • Availability of suitable locations for BPO office space (although pressure for upward rate adjustments are building up).

On the other hand, its main drawbacks are the following: • Increasing difficulty of finding qualified employees (especially for call centers) • Deteriorating quality of education for higher level IT skills; • Undesirable political and regulatory environment, especially the unstable political situation, graft and corruption, and threats to physical security; and • High power rates, which are among the highest in the region.

Government Initiatives In spite of resource limitations, the government has been trying to address the impediments to BPO sector development by way of partnerships with the business sector and the academe. At the forefront of these efforts is the DTI, through its Chapter 6: Business Process Outsourcing 267 brand management approach to export development.13 The DTI has been the lead national government agency supporting private sector initiatives in addressing the two primary constraints of BPOs—the international promotion of the Philippines as an offshore BPO location and the enhancement of critical BPO skills among college students. The DTI, primarily through its brand manager for IT-enabled services and through the Center for International Trade Expositions and Missions (CITEM) has been assisting BPO industry associations in promoting the Philippines as a preferred offshore location for services. In addition, it has been instrumental in generating awareness among other government institutions—both at the national and local levels—about the importance and potential of BPOs. In particular, it has been active in promoting partnerships between BPOs and the academe in the development of courses that would introduce university students to the opportunities provided by BPOs and, at the same time, enhance the critical skill sets related to BPO operations. At present, several universities are already offering academic subjects related to enhancing BPO-related skills, in partnership with private BPO companies. Other agencies actively trying to address the looming shortage of qualified BPO professionals include the Technical Education Skills Development Authority (TESDA) and the Commission on Higher Education (CHED). Local government units (LGUs) have also taken a primary role in preparing their constituencies to take advantage of the employment opportunities offered by BPOs. Some have already initiated computer literacy and advanced language courses. These LGUs include the cities of Pasig, Manila, and Dumaguete. In the area of infrastructure development, the country continues to benefit from the deregulation of the telecommunications industry in the 1990s. As technology continues to evolve and converge, government response must keep pace. The regulation of telecommunications in the country is within the mandate of the National Telecommunications Commission (NTC). Unfortunately, the NTC is severely undermanned and lacks the resources to keep abreast with new developments in the sector. However, its recent decisions have indicated that it foresees the critical role of technology infrastructure in the development of user sectors. These include its policy decision on the voice-over-Internet protocol (VoIP). It is seen as a way to break the hold of bigger telecommunications players on business applications, including certain BPO activities. The policy framework for the infrastructure side of IT-related businesses is expected to be developed once the Commission on Information and Communications Technology (CICT) is elevated into a full-blown government department. A legislative bill has already been filed in Congress to this effect. However, it is not given sufficient prioritization due to resource constraints in creating a new department and the fluid environment caused by the unstable political situation.

13 The government, through the DTI, has identified 10 priority export sectors, including IT- enabled services. As defined, IT-enabled services cover BPOs. 268 The Global Challenge in Services Trade

POLICY RECOMMENDATIONS

Revisiting the Industry Value Chain Blocks Setting the Philippines’ strengths and weaknesses in terms of the BPO industry value blocks, it is strongest in cultural, demographic, and technological factors (Table 27). Meanwhile, it is weakest in political environment, human resource skills, entrepreneurial access to financing and expertise, and international marketing and promotions.

Table 27. Overall assessment of Philippine BPO value chain Value block elements Assessment of Philippine advantage vs. main competitor Cultural and demographic Stronger affinity to Western culture factors Business and political Unstable political environment; threats to peace and order environment Qualified human resource Significantly lower wages than in the United States but slightly pool higher than in India; stronger in soft skills, weaker in technical (IT) skills Technological infrastructure Well-developed, reliable and cost-effective Utilities and office space Available IT buildings Higher power rates Entrepreneurial access to Limited access to venture capitalists; India has advantage owing to financing and expertise Indian IT Professionals who migrated to the United States. International marketing and RP just starting with industry-wide efforts at country branding; promotion Indian NASSCOM is a benchmark organization.

Specific Recommendations Policy recommendations should therefore enhance the strong points in the value chain and address the weaknesses.

Cultural and demographic factors A large population base oriented toward the Western culture has been a key consideration of companies (not only of BPOs) that are establishing businesses in the Philippines. However, this is an advantage that in the future may not be easy to sustain given the globalization of culture, which is brought about by the advances in mass media and communications. What should be emphasized and further developed, therefore, are the unique traits of the Filipinos rather than their strong affinity to Western culture. These traits include customer service orientation and good work ethic. These are qualities that overseas Filipino professionals and workers have been known for. While enhancement of these Chapter 6: Business Process Outsourcing 269 cultural factors is actually not policy actionable, they can be emphasized during marketing and promotional campaigns.

Business and political environment Although this is a general weakness not peculiar to the BPO sector, it needs to be addressed since it is the main impediment to attracting BPO projects. While fully solving this problem will necessarily require a longer time frame, efforts at insulating the BPO sector—from investment promotion, to business registration, and to actual operation—are currently being undertaken through active government front offices dedicated exclusively to BPOs (e.g., ITECC, DTI’s brand management approach, etc.). Convinced of the potential offered by BPOs, LGUs are also increasingly being involved. LGUs outside Metro Manila are promoting possible locations in their towns and provinces. Telecommunications facilities are being developed as well as IT infrastructure in their localities. As support to enhance the quality of their work force, English is mandated as the medium of instruction in schools, and IT courses are also introduced in public schools. Ensuring the safety of BPO professionals (especially those working during the night shift) is also given priority. Compared with national government initiatives, local government involvement is more direct and thus envisioned to yield a more immediate impact.

Qualified human resource pool BPOs, especially call centers, have started to partner with higher education institutions in programs that aim to provide competent skills to prospective BPO professionals. This is important in developing a pool of trained BPO workers. However, these initiatives may not be able to stem the tide of the steadily declining quality of education in the Philippines, especially for critical subjects such as math and science. Government will have to provide the general direction. First, budgetary priority should be given to education, as mandated in the Constitution. Second, the government should diagnose the poor performance of schoolchildren in math and science. Third, it should review the pedagogical basis for shifting to Filipino as the medium of instruction in schools. While from the perspective of call centers there are obvious benefits of going back to English as the medium of instruction, there must have been a reason why it was changed previously. Partly, the advocates of Filipino were claiming that concepts are better learned by students when taught in their native language. If this is indeed the case, then there are strong considerations to stick to Filipino as the medium of instruction. However, the issue of which language of instruction to use should also be considered within the context of which is more effective in terms of developing higher level technical skills. This is critical if the Philippines wants to move up the BPO value chain. Currently, the country’s main area of advantage is in terms of soft skills, while India is dominant in the technical skills. This allows India to concentrate on backroom operations where there is also potential for higher 270 The Global Challenge in Services Trade value addition, while the Philippines focuses on BPO activities with greater customer interface (e.g., call centers). The 2004 ITAP Philippine ICT Workforce Demand Study provides the following recommendations: • improve primary and secondary education; • have an IT certification exam to ensure the quality of graduates; • improve the quality of teachers; • make education more affordable; • teach critical thinking, instead of memorization; and • greater industry-academe linkage, e.g., through value-adding internships or on-the-job training and industry collaboration in designing ICT curricula.

Technology infrastructure While this is the strongest advantage of the Philippines, India is fast catching up. Thus, there is a need for the country to consider further policy changes in the telecommunications industry. These may include the removal of the cap on foreign ownership of telecommunications companies (presently at 40 percent) to further introduce competition in the industry’s various segments. Another consideration is to further clarify telecommunications policies, especially as they converge with Internet service providers (ISPs). For instance, a more liberal policy on VoIP could provide an alternative, less costly (though currently, less reliable) platform for BPO operations.

Utilities and office space The 24/7 nature of BPO operations, together with the technical requirements of their equipment, requires intensive power use. Thus, efforts by the government to lower electricity rates in the country will benefit BPO companies. In the short term, however, “peak-load” pricing mechanisms could be a way to enhance the attractiveness of the Philippines, especially for BPO services that take advantage of time zone differences with the US.

Entrepreneurial access to financing and technical/market expertise As Filipino executives become more exposed to BPO operations of global companies, opportunities will develop for local professionals to set up their own BPO companies. In the meantime, special programs can be explored to provide incentives to successful foreign-based Filipino IT professionals to return to the Philippines to jumpstart entrepreneurial activity in strategic BPO areas.

International marketing and promotion Industry and government have started collaborative efforts to promote the Philippines as a regional hub for BPO operations. Key players include the DTI, ITECC, and industry associations. However, India’s NASSCOM remains to be the model. Formed in 1988, it is the umbrella association of Indian IT and IT- Chapter 6: Business Process Outsourcing 271 enabled service organizations. With about 850 members, covering 95 percent of total industry revenues, NASSCOM has been a major catalyst for the growth of the software-driven Indian IT industry. It partners with the government to actively promote the Indian IT industry abroad, providing a unified marketing approach.

AREAS FOR FURTHER STUDY

On BPOs and the National Statistical System There is a need to formally study the contribution of BPOs to the Philippine economy. Due to the problematic nature of national statistical classification systems as they apply to BPOs, there is a real possibility that the impact and importance of BPOs are currently grossly underestimated. BPOs are currently classified under “private business services” and “other business services.” Based on the Philippine Standard Industrial Classification (PSIC 1994 as amended), it is considered under: • Division 74 (Miscellaneous business activities); • Group 749 (Business activities, n.e.c..); • Class 7499 (Other business activities, n.e.c); and • Subclass 74999 (Miscellaneous business activities, n.e.c).

The National Statistical Coordination Board has recently formalized a new classification system—the Philippine Centralized Product Classification (PCPC)— that is also consistent with the new international system proposed by the United Nations. Under the PCPC, BPOs and its various subsegments will be more clearly captured. For instance, call centers will be under: • Division 85 (Support services); • Group 859 (Other support services); and • Class 8593 (Telephone-based support services) o 859310 (Telephone call center services, including taking orders for clients by telephone, soliciting contribution, or providing information to clients by telephone, telemarketing)

Though the PCPC has already been adopted, it is not yet being used by the government. There is a need to urgently implement its use and conduct studies on the actual impact of BPOs. Another problematic area for BPO research is the estimation of “trade in services.” Measuring IT-related BPOs is quite difficult because the concept of gross value added is more difficult to apply in services, since it is not represented by a tangible product. For example, as illustrated by the WTO, e-commerce covers a range of service activities: • Customer sits down at computer - computer services • Logs on to the Internet - communication services • Orders products - distribution services • Pays for it - financial services 272 The Global Challenge in Services Trade

• Downloads the product or has it mailed to home address - delivery services

There are also other items in international trade measurements and methodologies that capture IT-related business services. These include: • Royalties and license fees (computer related services that are delivered to foreign markets through cross-border software licensing agreements); • Other industries (software bundled with computer hardware); and • Services that can be delivered both electronically and physically via optical disks.

Given all these data classification and estimation problems, the Philippine System of Accounts, and the nature of BPO activities, BPO’s contribution to the economy is ambiguously captured. Most likely, its contribution is understated and its total contribution dispersed or credited to other industries.

On Population and the Philippine Educational System All other things being equal, a large population base will improve the attractiveness of a country as a BPO location. However, having a strong education sector is also an important prerequisite. These two are the emerging important drivers for BPO competitiveness. India and Russia fit this description. For example, in the 2004-2005 Global Competitiveness Report of the World Economic Forum (Figure 20), India was ranked 2nd most populous country and 11th in terms of the quality of its

Figure 20. Educated population as an advantage (math and science)

Source: Porter et al (2004). Chapter 6: Business Process Outsourcing 273 educational system. Russia, on the other hand, landed 8th in population and 23rd in education. On the other hand, Australia, Canada, and Malaysia have very advanced educational systems, with small-to-medium population base. The Philippines is grouped together with China and Thailand—countries with large population base but inadequate educational systems. Thus, if the Philippines wants to eventually graduate to higher value-added BPOs, significant attention must be devoted to improving the quality of our educational system— especially in the areas of math and science. Incidentally, these are the very same disciplines where some of the country’s biggest competitors (current and emerging) are quite good at.

REFERENCES AT Kearney. 2004. 2004 Offshore location attractiveness index: making offshore decisions [online]. http://www.atkearney.com/shared_res/pdf/Making_Offshore_S.pdf [Accessed October 25, 2004]. Besanko D., D. Dranove, M. Shanley and S. Schaeffer. 2003. Economics of strategy. John Wiley & Sons. Boston College. 2004. Trends in International Mathematics and Science Study. Report on the 2003 International Student Achievement in Mathematics and in Science [online]. TIMSS & PIRLS International Study Center, Lynch School of Education, Boston College. http://timss.bc.edu/timss2003.html [Accessed December 18, 2004]. Deloitte Research. 2004. The Titans take hold: Summary of the second annual global offshore survey [online]. http://www.deloitte.com/dtt/cda/doc/content/ DTT_DR_Titans_May2004.pdf [Accessed October 25, 2004]. Department of Trade and Industry (DTI). 2003a. Business process outsourcing (BPO) roadmap: positioning RP as global BPO hub [online]. http://www.dti.gov.ph/ contentment/9/16/119/422.jsp [Accessed December 2004]. Department of Trade and Industry (DTI ). 2003b. The Philippine business process outsourcing industry. Working Draft. Makati City, Philippines: Board of Investments, Department of Trade and Industry. Huang, F. 2003. The Philippines answers the call: call center industry 2003. The SGV Review 1(4) [online]. Knowledge Institute, SGV. http://www.ey.com/global/ download.nsf/Philippines/The_Philippines_answers_the_call/$file/ Contact%20Center%20Industry%202003.pdf. Information Technology Association of the Philippines (ITAP). 2004. ICT workforce demand study 2004. Makati City, Philippines: Information Technology Association of the Philippines. Information Technology and Electronic Commerce Council and Accelerating Growth Investment and Liberalization with Equity (ITECC and AGILE). n.d. Strategic roadmap 2003 [online]. http://www.ncc.gov.ph/files/strat_roadmapReport.pdf [Accessed November 2004]. Linder J.C. and S. Cantrell. 2002. BPO big bang: Creating value in an expanding universe [online]. http://www.cito.re.kr/bbs/data/papers/bpm_big_bang.pdf..pdf. McKinsey and Co., Inc. 2002. NASSCOM-McKinsey Report 2002: Strategies to achieve the Indian IT industry’s aspiration. New Delhi, India: NASSCOM. neoIT. 2003. The Philippine opportunity: offshore BPO. Offshore Insights, Issue 7 [online]. http://www.neoit.com/ [Accessed December 2004]. 274 The Global Challenge in Services Trade

Porter, M., K. Schwab, X. Sala-i-Martin and A. Lopez-Claros. 2004. The Global Competitiveness Report 2004-005. Geneva, Switzerland: World Economic Forum. San Agustin, K. 2004. Call center industry: a silver lining. UA &P Industry Monitor September 2004: 6-9. Pasig City, Philippines: University of Asia and the Pacific. United Nations. 2002. Manual on Statistics of International Trade in Services. Statistical Papers Series. ST/ESA/STAT/SER.M/86. Washington, D.C., USA: Statistics Division, Department of Economic and Social Affairs, United Nations. United Nations Conference on Trade and Development (UNCTAD). 2004. World investment report 2004. Geneva, Switzerland: United Nations Conference on Trade and Development. ————. 2003. E-Commerce and Development Report. Geneva, Switzerland: United Nations Conference on Trade and Development. World Bank. 2004. ICT at a Glance [online]. World Bank Development Data Group. http:// web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS World Trade Organization (WTO). 2006. Measuring trade in services: a WTO training module [online]. http://www.wto.org/english/res_e/statis_e/ services_training_module_e.pdf [Accessed November 2004].

Institutions’ Web sites Commission on Higher Education (Philippines): http://www.ched.gov.ph Department of Trade and Industry (Philippines): http://www.dti.gov.ph World Trade Organization (Switzerland): http://www.wto.org Results Matter, Inc. (Canada): http://www.itmatters.com Gartner, Inc. (USA): http://www.gartner.com Montgomery Research, Inc.: http://www.outsourcingproject.com Interactive Response Technologies (USA): http://www.callcenter.com Chapter 7: Trade Representative Office 275 77 Does the Philippines Need a Trade Representative Office?

Gloria O. Pasadilla and Christine Marie M. Liao

ABSTRACT The paper describes the current decisionmaking structure for trade policy formulation in the Philippines and compares it with the systems in selected countries. It cites difficulties in the current setup, such as: (1) turf mentality among government agencies that tends to paralyze interagency committees in coming up with an overall position that fully acknowledges trade-offs; (2) lack of appreciation and capacity for trade research that should inform negotiating positions; (3) unclear delineation of authority; and (4) lack of suitable mechanisms for consultation and feedback on negotiation progress and impact regarding not only tariffs but also other items under discussion. This paper argues that there is a need for a single agency that will handle all international trade negotiations, coordinate effectively with other government departments and agencies, and formulate final trade positions for negotiations. It proposes either: (1) the creation of an independent agency for trade negotiation, something akin to the US Trade Representative Office, or (2) considering fiscal realities in the short run, at least the strengthening of the existing Bureau of International Trade Relations (BITR) position within the Tariff and Related Matters (TRM) Committee structure. A stronger, centralized body, principally or primarily in charge of trade policy negotiations, would be able to curb the turf battles among different agencies, or, at a minimum, prevent them from stalling the realization of trade mandates for negotiators. The paper also stresses the crucial role of trade research in supporting negotiations and suggests ways to strengthen capacity in this area.

INTRODUCTION Like other Asian countries, the Philippines is involved in bilateral and regional trade negotiations because World Trade Organization (WTO) trade talks have gone into a crawl. The Philippines is part of the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (FTA) and the Asia-Pacific Economic Cooperation (APEC). It signed on the Early Harvest Program for the China-ASEAN FTA, and has concluded bilateral negotiations with Japan, the results of which 276 The Global Challenge in Services Trade are now under review. Even as it maintains commitment to multilateral discussions, it is also considering bilateral negotiations with the United States (US), Australia, Korea, and India and, perhaps, with other countries in the future. With the potential increase in the number of international negotiations, it is appropriate to ask whether the Philippines has adequate resources and capacity to enter into all these trade discussions, and more pointedly, whether it has adequate government structures that can effectively deal with presumably prepared and structurally organized foreign counterparts. To the extent that successful negotiations rest on good preparation, the paper analyzes the current system’s strengths and weaknesses and how policy formulation and preparation for negotiations are undertaken. It studies the systems and structures in selected countries, assesses their positive and negative aspects, and derives some policy recommendations for improving the current structure in the Philippines. This paper argues that there is a need for an agency—something akin to the US Trade Representative Office—that will have the decisive voice in coming up with final trade positions, handle international trade negotiations, and coordinate effectively with other branches of government. This would curb many of the difficulties in the existing system, such as turf mentality among government agencies, discussed in the following sections, and prevent final trade position formulation from being unnecessarily and lengthily stalled. It would hopefully improve the ordering of domestic and national priorities that should inform trade positions. It would be a source and depository of all information affecting international trade negotiations, disseminate information and analysis on trade impacts of new rules, provide the public with a better handle on more and more complicated agreements involving sanitary and phytosanitary and technical standards measures, intellectual property rights, environmental and labor laws, and other agreements that would eventually be multilaterally adopted. With the proliferation of bilateral and regional agreements, the central agency should be in a position to analyze and ensure their consistency with each other and with the country’s WTO commitments. The paper also stresses the crucial role of trade research that can effectively support negotiations and suggests ways this can be strengthened in the Philippines. Nevertheless, the paper underscores the fact that the improvement of the policy formulation and negotiation structure is no panacea. Because the setting of national priorities from which trade positions are derived remains the responsibility of elected politicians, much of the success in trade negotiations and its actual impact on the economy still rests on the overall quality of national polity and choices. To put it succinctly, better structure can help but good policy choices still depend on the vision of whoever is at the top. The paper is organized as follows: the next section gives an overview of the institutions and processes involved in trade policy formation and trade negotiations in the Philippines. It sheds light upon the organizational setup, consultation mechanisms, and dispute resolution mechanisms that are currently in place. The third section explores areas in which there is room for positive Chapter 7: Trade Representative Office 277 change, comparing the Philippine situation with those in other nations, specifically those that have significant influence in the world trade system. It takes the example of the US, the European Union (EU), Canada, and Japan, and delves into specific aspects of their trade policy formation and trade negotiation processes that could have benefited them and helped them in successfully concluding beneficial trade agreements. Malaysia rounds out the group as a nation that is in a situation similar to the Philippines and yet has more successfully navigated the waters of international trade negotiations. (For detailed information on the trade policy formation processes of these countries, see Appendix.) The fourth section concludes with an agenda for reform.

TRADE POLICY FORMATION IN THE PHILIPPINES The Philippines, unlike other countries, does not have a single agency that deals with the formation of trade negotiations for goods and services. While the Department of Trade and Industry (DTI) is the defacto lead agency in most international trade negotiations, it has no veto power over positions taken by other agencies. Rather, trade policymaking is done by consensus under the Tariff and Related Matters (TRM) Committee apparatus, and individual departments and agencies bring their own initiatives, research, and trade positions to the Committee. This section discusses in detail the trade policy formation process in the Philippines.

Tariff and Related Matters (TRM) Committee The TRM Committee was organized by virtue of Executive Order No. 230 (Reorganizing the National Economic and Development Authority [NEDA]) in 19871 with the following functions and responsibilities: • To advise the President and the NEDA Board2 on TRF and on the effects on the country of various international developments, • To coordinate agency positions and recommend national positions for international economic negotiations, and • To recommend to the President a continuous rationalization program for the country’s tariff structure.

1 The Executive Order amended Letter of Instructions No. 601 dated 20 September 1977 that established the National Economic Development Authority (NEDA) Board Committee on Trade, Tariff and Related Matters. 2 The NEDA Board, which the TRM falls under and to which it is responsible, is composed of the President of the Philippines as Chairman, the Secretary of Socio-Economic Planning and NEDA Director-General as Vice-Chairman, and the following as members: the Executive Secretary and the Secretaries of Finance, Trade and Industry, Agriculture, Environment and Natural Resources, Public Works and Highways, Budget and Management, Labor and Employment, and Interior and Local Government. In the years since the board was created, presidents have used their authority to add the Secretaries of Health, Foreign Affairs, Agrarian Reform, Science and Technology, Transportation and Communications and of Energy. The Deputy Governor of the Bangko Sentral ng Pilipinas was the last member added. 278 The Global Challenge in Services Trade

It was decided upon by the NEDA and the DTI that “related matters” under the purview of the TRM would include trade and investment agreements and shipping matters.3 There are three levels to the TRM: (1) the Committee Proper, which is at the Cabinet level and is theoretically composed of the different Department Secretaries; (2) the Technical Committee, traditionally populated by Undersecretaries and Directors; and (3) the four Sub-Committees on (a) Trade and Investment Agreements, (b) Economic and Technical Cooperation Agreements, (c) Shipping, and (d) Tariff and Non-tariff Measures, also known as the Technical Working Group on Tariff Review. The TRM Committee is chaired by the DTI and co-chaired by NEDA. The agencies that have seats in the Cabinet Level of the TRM are: • Department of Foreign Affairs; • Department of Agriculture; • Department of Finance; • Department of Environment and Natural Resources; • Department of Budget and Management; • Department of Agrarian Reform; • Department of Labor and Employment; • Tariff Commission; and • Central Bank.

The Executive Secretary also sits in as a representative of the Office of the President.

Figure 1. The organizational chart of the TRM

Committee Proper (Cabinet Committee)

Technical Technical Committee Committee on WTO Matters

Subcommittee Subcommittee Subcommittee on Trade and on Economic and Subcommittee on Tariff and Investment Technical Cooperation on Shipping Non-tariff Agreements Agreements Measures

3 From the NEDA briefing paper on the Committee on Trade and Related Matters (CTRM). Chapter 7: Trade Representative Office 279

In the Technical Committee, senior officials from the Department of Transportation and Communications, the Board of Investments, and the Bureau of Customs are added to the list. Representatives from the Department of Energy, the National Telecommunications Commission, the Securities and Exchange Commission, and the Department of Science and Technology are also invited to the meetings as necessary. A representative usually from the legal office of the Office of the President sits in to provide advice on legal issues as well as facilitate communication and liaise between the President and the TRM. There is a special Technical Committee on WTO Matters (TCWM) whose main function is “to discuss and recommend Philippine positions/strategies on issues with direct relevance to the country’s implementation of its WTO commitments and the continuing participation in the multilateral trading system.” Unlike the main Technical Committee, which receives support from the NEDA-based Secretariat, this group is provided with technical and administrative support by the WTO Desk of the Bureau of International Trade Relations (BITR) under the DTI. The TCWM also has its own interagency subcommittees and is divided into one for agriculture, headed by the Department of Agriculture, one for services, headed by the NEDA, one for industrial goods, headed by the DTI-Board of Investments, and one for other rules, headed by the DTI.

Figure 2. The organizational chart of the TCWM

Technical Committee on WTO Matters

Subcommittee Subcommittee Subcommittee Subcommittee for Agriculture for Services for Industrial Goods for Other Rules

The different committees of the TRM meet regularly. The traditional schedule of meetings of the Committee Proper and the Technical Committee, both of which are supported by a Secretariat composed of members of the Trade, Industry and Utilities Staff of the NEDA, is once every 45 days, although special meetings are called when necessary.

Process for Multilateral Negotiations These line agencies involved in the TRM, in theory, carry out consultations with the respective producers and service providers or their constituencies regarding trade-related issues. Acting as sponsors and defenders of their industries, they submit policy proposals to the TRM Committee. 280 The Global Challenge in Services Trade

When these officials meet, the proposals are reviewed and discussed until a consensus opinion is reached. The TRM’s decisions are not arrived at via voting. The proposals that pass muster in the Committee Proper are forwarded to the Tariff Commission, which is given the charge of holding public hearings on the matter. The Tariff Commission makes its recommendations based on the hearings, and the TRM studies these recommendations. The TRM then compiles a set of policy guidelines, which are given to the negotiators themselves and act as the latter’s mandate. After negotiations are concluded, the NEDA Board confirms the agreements before these are elevated to the President and/or the Senate.

Figure 3. The development of negotiating positions

Line agency consults with industry !

Line agency passes on a proposal to the TRM !

TRM subcommittee discusses the proposal !

TRM Technical Committee reviews the recommendations from the subcommittee and elevates them to the Cabinet committee !

Tariff Commission holds hearings !

Tariff Commission makes recommendations !

TRM Cabinet Committee reviews all recommendations, makes decisions, complies policy guidelines, and gives mandate !

TRM submits complete staff work to NEDA Board !

Representatives negotiate !

NEDA Board confirms agreements !

Other International Negotiations There are several other agencies that handle trade policy depending upon the international body or trading partner with which the Philippines is negotiating. When it comes to ASEAN and APEC matters, for example, a separate committee called the Philippine Council on ASEAN and APEC Cooperation that also has a Cabinet committee level and also falls under the NEDA, takes charge. For the Japan-Philippines Economic Partnership Agreement (JPEPA), meanwhile, the Chapter 7: Trade Representative Office 281

Philippine Coordinating Committee4, created in May 2003 by an executive order, is the lead working group. The Philippine Coordinating Committee Secretariat falls under the BITR of the DTI. Unlike interactions in the area of trade in goods, which have a common venue and a dedicated agency (such as the Tariff Commission), the consultation process when it comes to trade in services is even more decentralized. Be that as it may, the NEDA, as the head of the TCWM’s Subcommittee on Services, acts as the main coordinator, while the line agencies themselves, such as the Departments of Environment and Natural Resources, Transportation and Communication, Trade and Industry, Tourism, Labor and Employment, and Energy, as well as the Central Bank, the Professional Regulatory Commission, and the Commission on Higher Education, all handle trade issues affecting their particular industries.

Policy Administration and Dispute Resolution For dispute resolution, the DTI, as the Chair of the TRM, officially elevates the issues to the WTO. However, the respective line agencies are allowed to take the lead in the process. They coordinate with the Ambassador to the WTO who usually comes from the Department of Foreign Affairs (DFA). When complaints from other nations are directed to the Philippines, a committee of three DTI undersecretaries, specifically those for Consumer Welfare and Domestic Trade Regulation, International Trade, and Industry, conducts meetings and discusses the culpability of the country. The BITR acts as the resource institution, which clarifies WTO rules.

4 The organizations involved in the Philippine Coordinating Committee are the Department of Trade and Industry as Chair, Department of Foreign Affairs as Vice Chair, Board of Investments, Tariff Commission, Bureau of Customs, Bureau of Export Trade Promotion, Center for International Trade Expositions and Missions, National Economic and Development Authority, Department of Energy, Department of Environment and Natural Resources, Department of Agriculture, Department of Finance, Tariff Commission, Philippine Economic Zone Authority, Garments and Textile Export Board, Construction Industry Authority of the Philippines, Bangko Sentral ng Pilipinas, Department of Tourism, National Telecommunications Commission, Air Transportation Office, Civil Aeronautics Board, Securities and Exchange Commission, Commission on Higher Education, Department of Labor and Employment, Maritime Industry Authority, Technical Education and Skills Development Authority, Department of Health, Professional Regulations Commission, Bureau of Immigration, Philippine Overseas Employment Administration, Department of Budget and Management, Department of Public Works and Highways, Department of Justice, Philippine International Trading Corporation, Bureau of Domestic Trade, Bureau of Trade Regulation and Consumer Protection, Intellectual Property Office, Bureau of Food and Drugs, Department of Science and Technology, Bureau of Agriculture and Fisheries Product Standards, Development of People’s Foundation, Inc., Philippine Council for Agriculture, Forestry and Natural Resources Research and Development, Small Business Guarantee and Finance Corporation, and Bureau of Small and Medium Enterprise Development. 282 The Global Challenge in Services Trade

Again, the line agencies depend strongly upon the private sector for technical input in disputed cases. They request industry associations as well as specific firms to provide support and information. Among the pieces of legislation that exist to protect Philippine trade interests are the Anti-Dumping Act of 1999 (Republic Act No. 8752), the Countervailing Duty Act of 1999 (Republic Act No. 8751), and the Safeguard Measures Act (Republic Act No. 8800). By law, any natural person may file a complaint if he feels that a domestic industry is being materially harmed by increased imports. The President, the appropriate Senate Committee, or the appropriate House Committee may submit a request for the same. The petitioner is directed to file the necessary documents with the Secretary of Trade and Industry for all nonagricultural products and with the Secretary for Agriculture if the product is agricultural in nature. Upon confirmation of the receipt of the complete set of documents, the department has five days within which to come to a decision on whether or not an investigation should be opened. If the department decides that an investigation must be conducted, it carries this out within 30 days, requesting that interested parties submit evidence to legitimize the complaint. After this allotted period, the findings are submitted to the Tariff Commission, which also asks interested parties to submit evidence and positions over the course of 15 days. A formal investigation, including marathon public hearings, is then undertaken for 120 days. After this, a recommendation for appropriate action is made.

Figure 4. The dispute processing mechanism

Individual files a complaint with the DTI/DA!

Secretary decides whether to initiate an investigation (5 days)!

[Public notice is given] (2 days)!

Secretary makes preliminary determination (30 days)!

Secretary submits findings to Tariff Commission!

Commission undertakes formal investigation (135 days)!

Commission recommends to the Secretary an appropriate course of action Chapter 7: Trade Representative Office 283

INSTITUTIONAL INEFFICIENCIES IN THE CURRENT STRUCTURE On paper, it would appear that the institutional structure in place for the handling of trade policy development and trade negotiations is not entirely dissimilar to those of other nations. However, the system is somewhat inefficient in practice, and certain institutional failures occur, brought about by both the less-than-ideal setup and the unique political climate in the country. Interviews with officials from different agencies of the government indicate several weaknesses in the current system.

Turf Mentality The first among these is that the representatives of the different line agencies that sit in the TRM Committee tend to be caught up in a turf mentality that prevents the creation of a whole, cohesive cross-industry trade strategy. There is a spirit of competition instead of cooperation that prevails. While the TRM is perhaps meant to be a unifying mechanism, it does not always effectively function as one. Instead of aspiring to work as a team toward the formulation of a sound overall strategy for the country, the different line agencies ascribe more to an “every industry for itself” attitude, in which representatives seem to be of the mindset that the industry they are fronting for must be protected at all costs, no matter how harmful the consequences of refusal to cooperate may be on other industries and on the economy as a whole. This is ultimately counterproductive, especially in the light of the single undertaking framework of the WTO. During the formulation of negotiating positions for the country, the representatives of the different line agencies always insist upon the protection of their own sectors. This conflict leads to a less-than-optimal final proposal. A good and balanced national position is not achieved, having been sacrificed in the name of furthering sectoral agenda. Priority sectors cannot be clearly identified because everyone wants his or her industry to be it. Focus, a very important part of effective negotiations, is lost. It must be noted that even the chair of the TRM may find it difficult to have as his sole concern a unified view of trade because part of his responsibility is to pursue the good of domestic industry. It has been commented upon, not only in the Philippine context but also for other countries, that an agency that splits its focus between international trade and the domestic economy has a tendency to sacrifice sound trade strategy for the protection of local interests. Contrast this divided attention and the endless jockeying among line agencies with the experience of far more successful negotiators from the US and Canada, each of which boasts of having an efficient single agency tasked with handling trade policy, and trade policy only. 284 The Global Challenge in Services Trade

United States In 1962, the US Congress mandated, via the Trade Expansion Act, that the President needed to establish an interagency trade policy mechanism for developing and coordinating US government positions on international trade and trade-related investment issues. The Act also required the President to appoint a Special Representative for Trade Negotiations. The Congress recognized at the time that there was a need to find a way to balance domestic and international interests when it came to the formation and negotiation of trade policy. In 1963, executive orders issued by President John Kennedy established the Office of the Special Trade Representative, who was to represent the country in all negotiations under the 1962 Act as well as others that were authorized by the President. Over the next decade, the Congress continued to expand the responsibilities of the agency, giving the STR jurisdiction over an ever-greater number of trade agreement programs. A legislative charter was set up as part of the 1974 Trade Act, and soon after, the office was elevated to Cabinet level. By 1979, the renamed United States Trade Representative (USTR) had the overall responsibility of coordinating trade policy. The US had officially centralized government policymaking and negotiating functions for international trade. This was not the end of the growth of the USTR, as even presidential trade responsibilities were shifted to the agency in succeeding years. The Congress deemed that “the USTR should be the senior representative on any body the President establishes to advise him on overall economic policies in which international trade matters predominate and that the USTR should be included in all economic summits and other international meetings in which international trade is a major topic” (USTR official website). This was an unmistakable acknowledgement from the government of the significance of the body and the importance of centralization.

Canada Canada has had a similar experience in the apprehension of the importance of having a single trade agency. While special attention was given to trade issues even back when there was only the Department of Foreign Affairs and International Trade (DFAIT), the Canadian government finally acknowledged that the best course of action would be to officially create separate bodies that focused solely on each of the matters at hand. Given that one in every four jobs in Canada is linked to trade and that roughly 38 percent of its gross domestic product is sent abroad, it is no surprise that the country promulgated the Department of International Trade Act, which created the International Trade Canada (ITCan) in order “to recognize the central importance of trade and investment to the long-term growth of the economy and the prosperity of Canadians” (ITCan 2004). The entity, which was born in December 2003 and was spun off from the DFAIT, was given the charge of conducting and managing international negotiations, and coordinating Canada’s relations regarding international trade, commerce, and investment. Chapter 7: Trade Representative Office 285

Malaysia Malaysia provides another alternative. While its Ministry of International Trade and Industry (MITI) does not have the USTR and ITCan’s special nature of being focused solely on trade, MITI nevertheless remains clearly and authoritatively the point agency when it comes to the country’s international trade affairs. In Malaysia, even more than in Canada or Japan, it can be seen that the trade ministry truly has jurisdiction over the myriad aspects of trade. From the initial choice of the sectors in which liberalization ought to be pursued, to the implementation of trade agreements and the monitoring of compliance, to the handling of disputes, the MITI is able to exercise its power and deliver cohesion to the process. A virtuous cycle occurs, for as the Ministry is able to gain more experience and knowledge from all the trade-related activities it pursues, it is better able to deal with the ever-changing conditions in the trade arena.

Japan The one other nation covered in this study that has some similarities to the Philippines’ more decentralized style is Japan, which has four key players in the trade policy development field—the Ministry of Foreign Affairs (MoFA), the Ministry of Economy, Trade and Industry (METI), the Ministry of Agriculture, Fishery and Forestry (MAFF), and the Ministry of Finance (MoF). (For details on this, see Appendix.) While Japan has had more success in arriving at beneficial agreements, one can reasonably argue that its accomplishments have been achieved not because of, but despite, this flawed institutional structure. It has been observed, for example, that the jurisdictional delineation between the MAFF and the METI has left the nation handicapped in negotiating industry-wide agreements, particularly in the WTO. Since Geneva conventions lump fishery and forestry with the manufacturing sector, METI has the responsibility of negotiating for them. However, MAFF retains jurisdiction over the two sectors, one that the collegial nature of the Japanese system prevents METI from counteracting. The result is a forced protectionist bent for METI, as MAFF places strict limits upon the liberalization of those industries. Having its hands tied in the manner reduces METI’s ability to come up with the most ideal creative solutions in the barter system that exists. Interviews with academics and those who have served in the Japanese ministries, as well as books and essays on the policy formation process in the country, have hammered home the reality that the Japanese structure is problematic. For example, the insistence of the MoFA upon lording it over the line agencies who have more expertise on the particular trade areas and its practice of striking the nuances that the latter introduce into trade documents may not produce the most effective proposals. It has also been acknowledged that the split focus of a ministry like METI intermittently leads to the prioritization of the domestic industrial side over the trade aspect. Even within the ministry itself, certain divisions make requests to protect less competitive domestic industries. The move toward liberalization is thus curtailed. 286 The Global Challenge in Services Trade

Having said that, it must be noted that a trait of Japanese bureaucrats that has yet to be strongly ingrained in many of their Filipino counterparts is an ultimate willingness to rise above the interagency conflicts of interest and aim for the common good.

Unclearly Delineated and Highly Fragmented Authority Two of the practices in Japanese negotiations that allow them to overcome the natural shortcomings of the decentralized system are that authority, while divided, is clearly delineated, and that a rigorous consultation mechanism ensures a unified front. The jurisdiction of each ministry is set forth very clearly in Japan; no other ministry aside from the MoFA, for example, can draft final proposals to third countries. Negotiators are also under strict instructions to consult back when talks lead to significant changes in the Japanese proposal. The members of Philippine contingent to the JPEPA negotiations were quick to note that their counterparts frequently conferred with one another, as well as with ministry officials in their home country, before agreeing to proposed alterations. This is a far cry from the Philippine system, wherein the absence of a clear- cut hierarchy, mandate, and delineation of authority, has led to some confusion and a waste of resources, as discussed below. Even in the policy building stage, before the nation offers to enter into an agreement with a third country, the insufficiently rules-based TRM encounters difficulties. The status quo is that any two line agencies with conflicting opinions on an issue in which both are directly involved tend to dominate the discussions. The chair is left in the unenviable position of wondering how the issue is to be resolved, as the amount of authority he has is nebulous. There is difficulty in terms of overcoming the committee’s collegial nature in order to come to a decision on a hotly contested matter. Another demonstration of the insufficiency of the rules is that in the late 1990s, the BITR used to have a lead role within the TRM. While all agencies were allowed to voice their recommendations, the Bureau was there to set and clarify the nation’s general policy orientation. The BITR had the strongest voice, and, at the end of the day, if agreements could not be reached, there was a sense that the Committee could turn to the BITR for final judgment. However, this is no longer the case. Because that authority of the BITR rested on tradition rather than legal mandate, it slowly dwindled over the years. Now, the Bureau is simply another member of the Committee. The disorganization extends to the negotiating table as well. Due to limited resources, people from different line agencies sometimes end up being tasked to represent the country in bilateral talks. There are times when these assigned representatives in specific sectoral negotiations are simply not well versed enough in the language and traditions of trade talks, and, without being trained to consult, they end up agreeing to terms and conditions that put the Philippines at a distinct disadvantage without their realizing the cost. This discord was highlighted most recently in the JPEPA talks, in which less experienced negotiators were found agreeing to nontrade-related, governance-impinging demands by Chapter 7: Trade Representative Office 287 the Japanese that those more knowledgeable of its implications staunchly vetoed. This disjointed behavior can negatively impact the nation in two ways. One is that more savvy trading partners can take advantage of the ignorance of negotiators (especially on “newer” trade related issues) and make demands that go beyond what is commonly acceptable. Another is that potential trading partners may become wary of dealing with the country because the mixed signals make the negotiations unreliable. Another problematic aspect of the current delineation of authority is the fact that it is very fragmented. Wholly different interagency consultation mechanisms are in place for handling different trade organizations (e.g., TRM for WTO and other matters, and the Philippine Council on ASEAN and APEC Cooperation for APEC), and even with the existence of these bodies, the government still has to create ad hoc committees such as the Philippine Coordinating Committee when it enters into bilateral talks. Aside from leading to the unfortunate loss of institutional memory that naturally results from not having a centralized agency to handle all negotiations, this ad hoc creation of committees is a strong indication that there is no proper fit between the system and the nation’s trade activities. In contrast to the troubling stalemates in the TRM and the parceling out of responsibility over trade negotiations in the Philippines, an important feature of the USTR’s mandate as the trade department of the US is its supremacy over other agencies with regard to determining final trade positions in all negotiations. While the US system places strong emphasis on interdepartmental consultations, and certainly, lengthy debates also take place in the meetings between the different departments, the fact remains that if particular issues are not resolved and a consensus is not reached, the USTR may overrule objections by specific line agencies with regard to different international, regional, and bilateral talks. It is, by law, the lead agency on the development of trade policy, and functions as such. After considering all the tradeoffs, it has the power to table market access offers even without the unanimous agreement of the different agencies.5 Additionally, all their negotiators belong to the USTR and not other government agencies, which makes strategy coordination easier. In the fast-changing environment of trade negotiations, this adaptability is key to creative solution- finding. Because it is issued by one strong and decisive voice, the negotiating position of the US is more consistent and more likely to inspire confidence and trust from other countries looking to form trade partnerships with the nation.

5 Taking into consideration, of course, the high likelihood of approval by the US Congress of the trade package they want to table in negotiations. The USTR, in considering the trade package, have the vote count in Congress in mind, pitting the number of liberal members against those that come from districts that are going to be adversely affected and are, thereby, going to be more protectionist. 288 The Global Challenge in Services Trade

For its part, the EU would not be successful if it were not for committed national political decisions to obey the rules set forth and agreed upon by the European Council and ably interpreted and protected by the European Court of Justice. Given the complicated political setup of the community, to which belong 15 (now, 25) distinct, sovereign nations with greatly varying economic statuses and interests, it was recognized very early on that a clear set of rights and responsibilities needed to be laid out. Jurisdiction and hierarchy are specified in the treaties and the Constitution of the Union, allowing the institutions to function confidently as they go about their task of balancing these divergent stands and finding a position that the myriad governments will find acceptable.

Insufficient Resources for Trade Research As has been alluded to earlier, it is not simply the lack of coordination that threatens to undermine all efforts toward effective negotiation. Simply put, the Philippines is gravely weak in resources. The different line agencies do not have the monetary or technical capability to form the requisite in-house research teams to carry out the all-important task of preparing feasibility studies and analyses of planned adjustments to trade policy. Not only do the agencies not have enough manpower to conduct research into the actual implications of negotiating positions, they also rarely have time, proper skill, and understanding of the dynamics of international trade and negotiations. A few outsourced studies from academia and think tanks are available, usually thanks to foreign funding, and these can be useful. Yet they are also often steeped in macroeconomic analysis with little bearing on, and direct usefulness for, negotiations. Because many economic researchers do not have a clear grasp of trade laws and negotiation, their reports often need further processing and ‘translation’ by overburdened in-house staff for these to be serviceable in negotiations. Due to this lack of resources, line agencies sometimes find themselves dependent upon analyses and studies initiated by private sector lobbyists, which may not always emanate from the most accurate and objective point of view. Even with this kind of help, there is still inadequate coverage of the myriad trade issues that need to be explored. As a result, there is insufficient understanding of the ramifications of the various agreements the country is entering or has entered into. A government official notes that the TRM mechanism itself has shortcomings, being partly comprised of departments not usually involved in international trade and having representatives who do not fully grasp the ‘give and take’ dynamics of negotiations. Because of this low level of trade policy understanding in certain segments of the committee, the consensus papers that it comes up with are sometimes irrelevant to the actual issues in trade. Contrast this to a nation like India, which allocates about 10 million US dollars per year to research efforts in support of negotiations and spins this large budget out to agencies that specialize in the development of trade policy, or to Korea, whose Korean Institute for International Economic Policy is mandated to do all research for negotiations. Consultants from the Korean research and Chapter 7: Trade Representative Office 289 policy institute are given an active role and allowed to sit in during negotiations, accompanying the nation’s official negotiators throughout the process. This practice carries the double-sided benefit of helping inform the institute’s research and giving negotiators adequate technical backup. This form of participation is very helpful in negotiations, in which issues that the nation did not prepare for beforehand may crop up. With the presence of adept consultants, the negotiators can immediately process the costs and benefits of new proposals and are able to send clear, well-informed feedback to those in positions of authority back home, who can adjust the mandate as they see fit. The process is therefore greatly facilitated. Canada, for its part, prides itself upon not only using the specialized in- house research teams of the ITCan, particularly the Trade and Economic Analysis Division, which assesses the benefits and costs of certain trade commitments, but also taking full advantage of the resources of outside institutions and other federal departments, provincial and territorial governments, other intergovernmental organizations, think tanks, and other institutions. In the US, meanwhile, there is a federal agency whose main mandate is to provide trade input and information to the different departments of the government, with a special emphasis on assisting the USTR. The latter is heavily dependent on the International Trade Commission for technical input, and the International Trade Commission is always ready with reports regarding the US’s prospects and analyses of its competitiveness. Malaysia also strongly recognizes the value of technical input. Aside from MITI’s very strong in-house planning group on which the Ministry greatly relies, semi-independent research institutes such as the Malaysian Institute of Economic Research, various universities, and the Institute of Strategic and International Studies Malaysia are also invited to contribute to the preparation of policy initiatives. Clearly, the lack of resources is not a big concern for the EU. Aside from the 250 people employed by the Directorate-General Trade of the European Commission who are directly involved in the fashioning of trade policy and trade negotiations, each member state has its own able trade administration to provide technical support and manpower. Of course, the availability of resources does not automatically guarantee the wise use of them. In the case of the EU, however, there are indications of cooperation between the administrations of the member states of the Union’s institutions. The Commission also takes advantage of nongovernment resources by hiring independent researchers and analysts to conduct studies pertaining to trade issues.

Strong Political Influence on Trade Policy Yet another area of concern is the fact that there is a very strong top-down influence in policy formation in the Philippines. Lobbyists are able to take advantage of the existence of multiple power centers in different segments of the government. Instead of systematic participation in the policy planning process, it is the ‘clientelistic’ process that has become the practice of big 290 The Global Challenge in Services Trade industrialists, who exert pressure on Congress and other key officials in the executive branch of the government. The unfortunate result of the current political climate in the Philippines is that the shield that is supposed to protect policy from inordinate public influence does not hold. This is precisely the issue that the US sought to address with the creation of the USTR. The presumption is that government sectoral agencies have the tendency towards ‘sectoral policy capture,’ such that an independent, nonaligned agency capable of doing a more objective processing of economic tradeoffs is needed. Weaknesses in the political structure and the lack of discipline in the policy formation process, whereby decisions that have been processed and lengthily debated in interagency committees may be overturned by the stroke of a pen of a high-ranking politician successfully lobbied by private interests, can contribute to the lethargy of the TRM mechanism itself. When patronage rules the day and can eliminate decisions that were painstakingly arrived at by the committee, there is a sense of futility that may slow down the committee’s activities and increase its tendency to persist in deadlocks which the members feel are simply best resolved elsewhere.

Low Level of Awareness It could be proposed that the deleterious impact of political lobbying could be reduced if more numerous formal consultations were conducted across a wider range of stakeholders before, during, and after trade negotiations. Before this can be done, however, there is another concern that must be addressed: the fact that there is an alarmingly low level of awareness in practically all sectors regarding the depth of the Philippines’ involvement in trade agreements. In other countries, producers, who are naturally expected to have a vested interest in the issue of trade policy, are often eager to have their voices heard and protect their private interests by interacting with the government as much as possible. In the Philippines, however, industry players oftentimes do not have a clear idea of the concessions they would like to obtain from the nation’s trading partners.6 When consulted, they are unable to present the government agencies with well-outlined, reasonable goals and specific sets of expectations in terms of improved market access abroad. Given this experience, it is not unthinkable that the different departments would be less than enthusiastic about pursuing frequent consultations. The opportunity for the private sector to contribute constructively to trade policy formation is not taken advantage of. In addition to this, the unfortunate reality is that government officials also often find themselves grappling with condescension from the private sector. In

6 This is slowly changing, however. The big industry associations are now more aware of the possible adverse implications of trade commitments. But their orientation remains defensive, i.e., how to protect their domestic interests, rather than providing inputs on how the government should open up foreign markets for them. Chapter 7: Trade Representative Office 291

Philippine society, it is not unheard of to come across big industrialists who feel a strong sense of entitlement. The resource-weak and inadequately compensated government officials have a difficult time standing up to them and effectively pushing for the public good. Though undeserving of it, some highly qualified government officials involved in trade negotiations suffer from the public’s generally poor opinion of government service and bureaucracy. This is contrasted to other nations, in which trade officials are respected in their own right. In Japan, public servants are professionals and career people, and their work is considered a legitimate and no less illustrious alternative to working for the private sector. In the Japanese system, those who would like the privilege of working for a ministry such as the MoFA or the METI are required to take examinations to prove their qualification for the task, and this state examination bestows a certain legitimacy and prestige upon them. In Canada, a vast majority of ITCan employees have masteral or law degrees, with a good number of PhDs as well. The same goes for the US and the EU.

Summary Given these issues plaguing the institutional setup, the inadequacy of noteworthy research, and the lack of a holistic vision of domestic priorities in the Philippines, officials sometimes go to trade negotiations without a clear strategy or specific objectives. Instead, a more passive mandate, that is, “negotiate in order to achieve the policy space that our economy needs,” becomes the working rule. This partly explains why, unlike India, the Philippines seldom has “lead” trade positions that other countries could support; rather, the country satisfies itself with following and aligning with other countries’ proposals. While it is not uncommon for smaller economies to band together in multilateral talks to get a good deal, it must also be remembered that good trade policy is one that is well integrated with the development strategy of a nation. When a third country knows that trade interests and objectives are not clearly defined, it is easy for it to take advantage and push for greater concessions. In bilateral negotiations, the existence of a comprehensively studied, cohesive trade policy that ties into development strategy is even more important. In the JPEPA negotiations, for example, the Philippine negotiators brought no specific texts to the table. Instead, they were only armed with a very general idea of what the country wanted out of the agreement. As it was, all documents for the negotiation were written by Japan, that is, using templates of their previous agreement with Singapore, outlining, of course, their objectives. The Philippines was expected to merely react to these proposals. The first-mover advantage had been lost. Without having a clear idea of what concessions Philippine industries truly want from the nation’s trading partners and what concessions the country can and can absolutely not afford to offer, negotiators are already on shaky ground. Factor in inherently Filipino traits such as a desire to please others, and the nation may end up with a raw deal, giving the third country substantially more benefits than it itself is able to obtain. 292 The Global Challenge in Services Trade

Additionally, the absence of a specific mandate leads the negotiators to go for a “minimalist” approach to liberalization. Since there is no strong vision and backing from the top, no set of guidelines upon which to rely, the representatives tend to aim for the least amount of liberalization possible because it is the most ‘politically safe’ and would guarantee their not being fired from their job. Sticking closely to the status quo reduces the likelihood of protests at home, and this is appealing to a negotiator who is concerned about his job security and future retirement. Realizing that further liberalization, while possibly a good step for the economy, also has the ability to spark a huge backlash from the public, he could easily grow concerned and become inordinately cautious. Here, as in other principal-agent relationships, the personal objectives of the negotiator— naturally inclusive of a stable career path—may not be congruent with the attainment of an economically efficient outcome for the State. By giving out broad parameters, not backed by clear assessment of overall costs and benefits to the economy, the government increases the likelihood that the negotiator will fall back upon the personal objective-maximizing default position of minimum change. The full benefits of liberalization end up unrealized.

AN AGENDA FOR REFORM The major weaknesses in the Philippine system can be distilled into two important needs that must be filled. First is the need for a government body that has the prime authority to determine the final negotiating positions of the nation on trade agreements and to authoritatively represent it in front of other nations. A department that nominally has the mandate to negotiate but which finds itself subordinated to other ministries and agencies in a variety of areas shall not be optimally effective in its task. The unanimity that is virtually required from the interagency groups, albeit chaired by the lead department, invariably leads to delays in finalizing possible offers and requests because of foot-dragging by departments that are hesitant to open up their sectors. Moreover, in the actual international trade negotiations, which are broken up by sectors, the overall lead negotiator loses full control over the negotiation by his inability to keep all the ‘cards close to his chest’. Anecdotal evidence has it that sectoral agency negotiators tend to give some (conditional) commitments during the sectoral negotiations even without knowing the result of the negotiations in other sectors. This lack of coordination hampers the capacity of developing countries to exploit within- and across- sector tradeoffs. Second is the need for a strong technical support system, a research body that is able to provide up-to-date, accurate reports before, during, and after negotiations. Studies must be conducted in order to determine the appropriateness of pursuing agreements for a particular sector, as well as to better predict the short and long-term effects of recently concluded negotiations. Within the context of the negotiations themselves, a team that is well-versed on the issues on the table can provide much-needed insight to on-the-spot negotiators. Given the dynamic nature of negotiations, representatives sent to Chapter 7: Trade Representative Office 293 meetings often find themselves having to react to ever-changing proposals. There is a clear requirement for a research body, either in-house or independent- but-government-owned, that specializes in trade research that will specifically and ably back these negotiators and provide the background and support that they need in order to make informed decisions within their mandate. Even in the aspect of in-country public relations, it is valuable to have a technical group that undertakes detailed studies into particular trade areas. There is often what is termed as an “analytical deficit” in the eyes of the public that imbues the interaction between private interests or lobbyists and the government. The public is growing more and more uncertain about, and fearful of, the impact of liberalization, and the proper reaction of governments is to provide clear facts and analysis. It is only when it is apparent to the people that matters have been thoroughly examined by those in charge, and shown to be, on the whole, beneficial, will a fair majority agreement on liberalization be reached. Only when authority and proper support come together will an agency tasked with the formation and negotiation of trade policy be able to take advantage of all that the increasingly open global market has to offer. To address the need for a strong lead agency, there are few avenues of action that we propose.

Independent Trade Representative Office The first option is to carve out the trade groups from the DTI, Department of Agriculture, NEDA, and the DFA to fuse them into a single agency, akin to the USTR or ITCan, which is devoted solely to trade negotiations, be they bilateral, regional, or multilateral. It will be headed by a Cabinet Secretary and will be directly under the President. All negotiators would come from this single agency, and no longer from different line agencies of the government. Its employees would ideally be well versed not only in the economics of international trade, but also in trade law. It is envisioned that this new Philippine trade agency would have strong tie- ups with line agencies and intensely consult with them, but also have its own sectoral experts. For instance, it would have an expert with the agriculture portfolio who understands the agricultural sector and deals with the Department of Agriculture, another expert in telecommunications, and so on and so forth. These experts would be in charge of coordinating with the line agencies in the run up to trade negotiations, and will carry out the negotiations with the trading partners. This agency is expected to be fully staffed to carry out good analysis and information dissemination before, during, and after the negotiations. The interaction between this new international trade department or trade representative office and the specific line agencies is envisaged to allow for the education of those belonging to the line agencies, so that these will better understand the international trading environment. Frequent exchanges or sabbaticals from line departments to work in the International Trade Department or the Trade Representative Office have worked very well in the case of Canada, making line agencies more aware of the environment that those on the frontline 294 The Global Challenge in Services Trade of trade negotiations face. This allows them to be more supportive of trade negotiations, be it through carrying out adequate public-private sector dialogues or through providing the Trade Representative Office with adequate data, information, and feedback. Since line agencies would continue to interact with their respective industries and narrow constituencies, and would perhaps receive the most regular feedback from industrialists and other economic sectors, it is important for them to have a good understanding of how the needs of the domestic producers fit into the context of trade negotiations. It is in this way that they can be effective and responsive channels. The new agency will lead all interagency subcommittees down to the director level and will coordinate the line agencies’ positions, allowing for cross-sectoral trade-offs. Trade-off is always an important element in negotiations and particularly so in the quid pro quo system of international trade negotiations. This system means that no matter how much the country may wish to, it cannot possibly protect all its sectors if it wants to take advantage of greater access to markets abroad for the sake of other competitive sectors. For example, the country may want to negotiate better access for Philippine mangoes in exchange for lower domestic tariff for other products, say, automobiles. Necessarily, any member country that engages in negotiations has to give up ‘something for something else,’ which demands that the national polity truly understands its strategic priorities, where its competitive advantage lies, and where it wants to take the economy. There are, of course, advantages and disadvantages to this kind of setup. On the positive side, the new agency would have a clear mandate to make final decisions while coordinating with line agencies. Its existence would facilitate the development of institutional memory, as it carries out multipronged trade negotiations, and it would have the incentive to undertake or be supported by transparent trade analysis and disseminate them. In many disputes on various positions, these analyses would be the Trade Representative Office’s best defense. On the negative side, the first problem is that creating this fully functioning department would be costly, necessitating the filling of a complete staff, together with its own department Secretary and Undersecretaries. Additionally, there is the political economy issue. Will individual line agencies be willing to relinquish some of their authority and allow themselves to be overruled by this independent agency? Will they agree to have their trade-related bureaus carved out and transferred to the new department?7

7 There exists a bill in the House of Representative, numbered 4798, which proposes the creation of the Philippine Trade Representative Office (TRO). Many aspects of the bill mirror our own proposed agency and the TRO described in the bill seems at least partly fashioned after the USTR. The bill, however, is unclear about the TRO’s relationship with Congress and forgets that Services is an important component of trade negotiations. Perhaps one thing that must be clarified further is the role and extent of involvement of the recommended Advisory Committee for Trade Policy and Negotiations. Where is this committee Chapter 7: Trade Representative Office 295

Reforming the TRM Considering the budgetary and fiscal constraints of the government and other political distractions, it might not be very feasible to expect the creation of a wholly separate Cabinet-level agency dedicated solely to international trade negotiations. A second option, then, that could be successful if correctly implemented, is the strengthening of the current TRM system, particularly the role of BITR within it. The BITR must head all subcommittees (whether they relate to agriculture, industry, or services) down to the director level for the TRM’s Technical Committee and the TCWM, and not be merely one more member. It has to proactively consolidate the positions of various relevant government agencies and provide them with deadlines to submit their proposals, in the absence of which the TRM would be mandated to accept the BITR’s default trade strategy position. To effectively carry out this strengthened mandate and provide better secretariat and trade policy analysis support to the TRM system, the BITR staff, which has dwindled to below 20 from a high of 52 when it started, must, once again, be expanded. Considering the high knowledge and skill requirements, e.g., proficiency in both the economics of international trade and trade laws, for major positions in the BITR, an exemption from the salary standardization requirement would be appropriate to attract highly qualified candidates. Finally, given the difficulty of hiring highly skilled individuals for these positions, the BITR should also be exempted from the Attrition Law. Additionally, the TRM structure itself must be improved and the roles within it must be clearly delineated. Aside from solidifying the central position and the decisionmaking ability of the DTI-BITR, the potential of the DFA, especially in gathering trade-related information in export markets, e.g., regulations and trade barriers, should be better exploited. Formulating an optimal position for negotiations would not be possible without sufficient information on the country’s trading partners, and the DFA is in the best position to make this contribution. The DFA’s mission should be geared more and more toward contributing to trade policy, for a small developing country’s main foreign policy interest is, necessarily, trade. There is certainly a need for greater teamwork among the different government agencies involved in the Committee. Senior and middle officials must actively combat the tendency toward turf myopia and instead approach meetings with a view toward determining what would be good for the country overall, rather than what would be good for their sector alone. Discussions

expected to fall in the hierachy? Is it to take the place of the TRM? What kind of authority does it have? The power of the Committee to dictate the attendance of particular representatives at any trade negotiation may be a cause for concern, and might promote the kind of undue outside influence that the creation of the independent agency was meant to combat in the first place. 296 The Global Challenge in Services Trade within the Committee and disagreements between agencies are inevitable, and, in fact, can be healthy as long as they are substantial, and backed up with hard facts. At the end of the day, however, the Committee members must devote time and effort to clarifying the national development agenda and clearly outlining the Philippines’ trade priorities. They must come to an agreement in terms of defining the country’s vital interests. The presence of core cabinet personalities with a keen understanding of the workings of trade policy brought about by close study will do much to inform the dialogues within the Committee and hopefully lead it to making optimal decisions. Besides strengthening the decisionmaking structure within the TRM, its process and decisions should be respected. For instance, its recommendations, painstakingly arrived at through numerous meetings and discussions, should be made more difficult to overturn by parties that have the ears of the President or other influential politicians. The authority of the chair and his capacity to resolve deadlocks in the context of the collegial nature of the TRM must also be clarified. This option, too, has its pros and cons. On the positive side, by remaining in the DTI, the BITR can exploit the research, linkages with industry associations, and experience built up by the latter over the years. This option is also cheaper and much more realistic, especially in the short run. On the negative side, however, unless the capacity of BITR is bolstered, the TRM reform might become cosmetic.

Strengthening Trade Research Capacity Whether the BITR is merely strengthened or the government decides to create an independent trade office, the importance of allocating a sufficient budget for research cannot be stressed enough. The development of institutional capacity for analysis must be given strong emphasis. Given the knowledge-intensive nature of trade negotiations, technical analysis is the backbone of successful negotiation and can therefore not afford to be left in the hands of the unskilled. The lead agencies need to have a strong internal capacity for research, as well as links with private and foreign providers of research and information. Much capacity building should be directed to bolstering in-house research capacity because these teams are the ones always available to address, in a timely and useful manner, new issues that emerge. This can imply an increased budget allocation for an expanded research group within the lead agency to support the negotiations. The external research community should not, however, be left out of the effort to increase the country’s research capacity. There is a need to engage their services, considering the limited human capital resources that the lead agency in negotiations can afford to hire. Here, India provides an example of a deliberate use of external research organizations. The Ministry of Commerce of India, under whose jurisdiction trade policy falls, parcels out different research projects to specialized research groups and draws advice from them in crafting Chapter 7: Trade Representative Office 297 trade positions. For instance, for issues related to investment, the Agreement on Trade-Related Aspects of Intellectual Property Rights, nonagricultural market access, sanitary and phytosanitary standards (SPS), and trade facilitation, it counts on the Research and Information System for Non-Aligned and Other Developing Countries. For issues on the Agreement on Agriculture and SPS, it relies on the WTO Centre as well as the National Council on Applied Economic Research. The Indian Council for Research and International Economic Relations pursues matters relating to services. For other issues, the Ministry of Commerce also draws from research of academe and institutions and civil society other than these four major institutions. The example that should be adopted from India is the seriousness with which they carry out negotiations, and thus their recognition of the need for solid research to back up their policy positions. Can the Philippine negotiators rely on the research community in the country? Sadly, the number of researchers in the Philippines who can straddle both the economics and law of trade is small and this group can be spread very thinly when addressing the many facets of trade implications. The majority needs greater exposure to international trade issues and greater understanding of trade laws to make their contribution more directly useful for negotiations. There is a need, therefore, to provide more scholarships and to increase exposure to trade seminars dealing with trade laws and analytical techniques, in order to build research capacity for trade. Another noteworthy lesson can be gleaned from Korea. Since it is important for negotiators to be able to stay in constant contact with a technical support group, Korea, and to a limited extent, India, make their research consultants part of the negotiating team. They may not be the spokespeople during the negotiations, but they are seated close by, ready to provide advice when new issues and demands from the opposite camp crop up. The experiences of these countries have shown that the academics they brought with them helped government negotiators elevate the discussions to a higher level.

Clear Vision of Economic Priorities from the Top The strengthened TRM or, eventually, the new Trade Representative Office will definitely enhance the decisionmaking process and make it more efficient. In the final analysis, however, the quality of the trade positions they carry with them rests on the quality of vision of whoever is at the top. The point is that success in international trade rests a great deal on a strong, visionary leadership. It is only this kind of leader who will be able to fight against narrow, vested interests and bring all the key players onto the same wavelength and subscribe them to a single game plan. The President alone, not an independent Trade Representative Office or a strengthened TRM structure, has the capacity to “bang the heads of major Cabinet departments” to come to an agreement. Thus, a leader with a clear grasp of national development priorities is crucial if there is to be hope of having a truly cohesive trade policy formulation and negotiation structure. 298 The Global Challenge in Services Trade

APPENDICES INSTITUTIONAL STUDIES OF DIFFERENT COUNTRIES

Appendix A. United States of America

Organizational setup The Office of the United States Trade Representative (USTR) is the principal trade policy development body of the US. It is “responsible for developing and coordinating US international trade, commodity, and direct investment policy, and overseeing negotiations with other countries” (USTR official website). The Office is headed by the US Trade Representative, a Cabinet member whose different roles include being the principal trade advisor to and chief spokesperson for the president on trade, the primary negotiator on trade issues, and advisor on the impact of international trade on other US Government policies. “USTR is part of the Executive Office of the President. Through an interagency structure, USTR coordinates trade policy, resolves disagreements, and frames issues for presidential decision. USTR also serves as vice chairman of the Overseas Private Investment Corporation, which is a non-voting member of the Export-Import Bank, and a member of the National Advisory Council on International Monetary and Financial Policies” (USTR official website). The major areas of responsibility of the USTR include: • Bilateral, regional and multilateral trade and investment issues; • Expansion of market access for American goods and services; • International commodity agreements; • Negotiations affecting US import policies; • Oversight of the Generalized System of Preferences (GSP) and Section 301 complaints against foreign unfair trade practices, as well as Section 1377, Section 337 and import relief cases under Section 201; • Trade, commodity, and direct investment matters managed by international institutions such as the Organisation for Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD); • Trade-related intellectual property protection issues; and • World Trade Organization (WTO) issues.

Policy formation and trade negotiations Consultations between the USTR and the other agencies of the government take place via the Trade Policy Staff Committee (TPSC) and the Trade Policy Review Group (TPRG). Together, these groups are composed of 19 federal agencies and offices and form the “sub-cabinet level mechanism for developing and coordinating US Government positions on international trade and trade- related investment issues” (USTR official website). More specifically, the agencies involved in these committees are the following: Chapter 7: Trade Representative Office 299

• Council of Economic Advisors; • Council on Environmental Quality; • Department of Agriculture; • Department of Commerce; • Department of Defense; • Department of Energy; • Department of Health and Human Services; • Department of Interior; • Department of Justice; • Department of Labor; • Department of State; • Department of Transportation; • Department of Treasury; • Environmental Protection Agency • Agency for International Development; • National Economic Council; • National Security Council; • Office of Management and Budget; • Office of the United States Trade Representative (as Chairman); and • US International Trade Commission (USITC, a nonvoting member).

The TPSC is the primary operating group, with representation at the senior civil service level. Supporting the TPSC are more than 90 subcommittees responsible for specialized regions, countries, sectors and functions, and several task forces that work on particular issues. If agreement is not reached in the TPSC, or if significant policy questions are being considered, the issues are taken up by the TPRG, which functions at the Deputy USTR or undersecretary level. The final tier of the interagency trade policy mechanism is the National Economic Council, chaired by the President. The National Economic Council Deputies’ committee considers memoranda from the TPRG, as well as important or controversial trade-related issues (USTR official website). The USITC is an independent federal agency that provides trade expertise to both the legislative and executive branches of the US government. One of its stated missions is “to provide the … USTR … with independent, quality analysis, information, and support on matters of tariffs and international trade and competitiveness.” The latter is therefore heavily dependent on the ITC for technical input. There are also 33 private sector advisory committees, composed of approximately 1,000 advisors from industry, organized labor, nongovernment organizations (NGOs), and other associations. Much like their public sector counterpart, these are arranged into three tiers. There is the President’s Advisory Committee for Trade Policy and Negotiations. There are also six policy advisory committees usually appointed by the USTR, some in conjunction with related 300 The Global Challenge in Services Trade departments. Finally, there are 26 functional, technical, and sectoral groups organized into the areas of industry and agriculture. These groups provide information and advice on US negotiating objectives and bargaining positions. The general public’s opinions on a wide variety of topics are also solicited via publication in the Federal Register several times a month. Written remarks from interested parties are given consideration both in Congress and interagency meetings.

Policy administration and dispute settlement The USTR’s responsibility to “assert and protect the right of the United States under all bilateral and multilateral international trade and commodity agreements” is administered with the help of the Department of Commerce, whose International Trade Administration is in charge of monitoring compliance with international trade agreements. In decades past, the Department of State had the full responsibility of negotiating trade agreements. Since the creation of the USTR, however, there has been a division of jurisdiction between the two. The Department of State is the chief representative of the US to the OECD Committee on Investment and Multilateral Enterprises and its subgroups. Meanwhile, the USTR has lead responsibility for all negotiations under the WTO, trade and commodity issues in the OECD, and trade, commodity and direct investment issues in the UNCTAD. As part of the check-and-balance system in the US, there is a firm Congressional-Executive Partnership in the conduct of US trade policy. The Constitution vests the Congress with the ultimate authority to regulate trade with foreign nations. Five representatives from each House are officially designated as the Congressional advisors on trade policy, and the USTR provides regular and detailed briefings to the Congressional Oversight Group. Apart from these, there are, annually, hundreds of congressional conversations between the USTR and the Houses spanning the range of trade issues from tariffs to textiles. Section 301 of the Trade Act is the principal law of the US that addresses unfair trade practices. A complaint under this section may either be filed by any interested individual or be initiated by the office of the USTR itself. Once a complaint is filed, the USTR is given 45 days to decide whether it desires to initiate further investigation into the matter. Its decision on the matter is then published in the Federal Register. If the office pursues the issue, it is given one year to complete the investigation and to decide on what action to take against the offending party. In this period, the USTR provides opportunities for the public to comment on the issues and holds public hearings upon the request of either the petitioner or any interested party. An important facet of the investigation process includes consultations with the foreign government that is the target of the complaint. While Section 301 asserts that the US does not need to gain approval from any other body in order to take action, the country is committed to pursuing dispute resolution mechanisms under the auspices of the WTO and the NAFTA insofar as this is possible. Chapter 7: Trade Representative Office 301

Appendix Figure 1. Flow of trade dispute settlement in the US

Individual files a complaint with the USTR!

USTR decides whether to initiate investigation (45 days)!

[Decision published in Federal Register]!

USTR investigates the issues and decides upon appropriate action (1 year)

Appendix B. European Union

Organizational setup Based on Article 133 of the European Community Treaty, the EU has a common trade policy that is based on uniform principles. The member states have all agreed to pool their sovereignty and follow a universal policy on international trade. This Common Commercial Policy aligns the states in terms of changes in tariff rates, the conclusion of tariff and trade agreements with nonmember countries, the enactment of trade liberalization measures, export policy, and trade protection. The main aspects of trade in both goods and services thus fall into the exclusive competence of the EU, such that the responsibilities are exercised entirely by the community and are not shared with the individual states. All General Agreement on Tariff and Trade 1994 and WTO matters are clearly delineated as falling within this exclusive competence. Article 133 also spells out areas of mixed competencies, where responsibilities are shared by the Community as a whole and by the member states. Under this category fall matters pertaining to the General Agreement on Trade in Services (GATS) and to the Agreement on Trade-Related Aspects of Intellectual Property Rights. These include trade in cultural and audiovisual services, educational services, and social and human health services. Agreements on mixed competency areas must be jointly concluded by the Community and the member states. There is a balanced decisionmaking system in place when it comes to the implementation of the EU common trade policy. The EU Commissioner for External Trade, supported by the external trade administration known as the Directorate-General Trade of the European Commission (or DG Trade), has the charge of negotiating on behalf of the Member States. The primary task of the directorate, as outlined in the Treaty of the European Community, is “to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade, and the lowering of customs barriers.” Its specific responsibilities are: 302 The Global Challenge in Services Trade

• to define (and reappraise) the trade interests of the European Community in both defensive and offensive terms; • wherever the Union’s commercial policy objectives so require, to negotiate bilateral, regional, or multilateral agreements on the basis of negotiating directives proposed by the Commission and adopted by the Council; • to monitor and ensure the implementation of international agreements by using the WTO dispute settlement system and the instruments for trade promotion or defense adopted by the Community (the antidumping and antisubsidy rules and the trade barriers regulation); • to take part in devising and monitoring internal or external policies that have a bearing on the Union’s trade and external investments (single market, consumers, health, environment, technology, intellectual property, competitiveness, competition, energy, transport, agriculture, sectoral measures); • to ensure consistency within the Relex group between the commercial policy and the Union’s general external relations policy on the one hand and the contribution of the EU to global economic governance on the other; and • to provide the public, both sides of industry, civil society and professional circles with clear, comprehensive, and up-to-date information while seeking their opinions in compliance with the rules set down in the Commission’s codes of conduct.

While the Commission is officially the administrative arm of the EU and its version of a central executive body, it is the Council of the European Union, usually composed of the foreign ministers of all the member states and operating on a qualified majority vote with a one country, one vote practice, which has the final decisionmaking authority and is in charge of establishing the main objectives of the EU. The Commission, as per Article 133 of the treaty, can only conduct negotiations “within the framework of such directives as the council may issue to it.”

Policy formation and trade negotiations It is for the aforementioned reason that the DG Trade, in which roughly 250 people are involved with negotiating trade policy, works closely with the Article 133 Committee, a special permanent consultative body composed of representatives of the trade administrations from the 25 member states and the European Commission. The main function of the Committee is to coordinate trade policy. Via weekly meetings, its members are able to discuss the full range of trade policy issues affecting the Community. Specialist meetings are also conducted by the Committee in order to discuss complex issues like trade in services and textiles in greater depth. The Committee listens to the Commission’s reports on trade policy issues and examines its proposed negotiating mandate. It then makes recommendations and gives endorsements in behalf of the Chapter 7: Trade Representative Office 303 member states. The Committee’s viewpoint is reflective of the stand of the Council, so the amendments it proposes are normally accepted by the Commission and integrated into the “directives for negotiation,” which are then forwarded to the Committee of Permanent Representatives (or COREPER). The COREPER has the task of elevating the proposal to the General Affairs Council. Once the directives are adopted by the Council, they act as the Commission’s mandate and guide the latter in its work. The major formal decisions, such as the agreement to launch or conclude negotiations, are confirmed by the Council of Ministers. Even in areas where the decisionmaking power was formally delegated by the Council to the Commission, the rules generally provide for the possibility of further review by the Council, which has the power to confirm, modify or reject the Commission’s decision. Other directorates within the European Commission that have considerable input on trade policy matters are the Directorate for the Internal Market and Industrial Affairs, the Directorate for Competition, and the Directorate for Agriculture. The DG Trade has a planning unit that conducts research on any policy issue of interest to the Commissioner. In addition to this, independent external consultants are often hired to conduct Sustainability Impact Assessments (SIAs). These studies allow the Commission to examine the potential effects on sustainable development, particularly the economic, environmental, and social impacts, of its own proposals for WTO trade negotiations. The results of these SIAs are posted on the Commission’s website as soon as they are available. In order to draft policy that takes into account the concerns of all affected parties, the DG Trade conducts a Civil Society Dialogue process with a wide variety of groups, ranging from NGOs to organized labor and employers’ associations to the European Economic and Social Committee, in addition to the institutional contacts that regularly take place. Within this framework occur many plenary and ad hoc meetings. General ones are chaired by the Trade Commissioner himself, while smaller ones focusing on specific issues occur in between. Issue groups that include representatives of civil society, business, and trade unions are also intermittently formed. The current Trade Commissioner also holds regular internet chats to directly correspond with the public with regard to their views on trade policy. Member states maintain their own trade administrations for three major reasons: • For their participation in the formulation of EU common trade policy; • For the implementation of issues related to shared competence; and • For the management of issues of national competence, e.g., export promotion.

Unless there is a need to impose a new budget measure or set up a new institution, the European Parliament currently plays no formal role in the formation of trade policy in the EU and simply issues comments on Commission 304 The Global Challenge in Services Trade policies and proposals when it is briefed on such issues for transparency’s sake. However, the draft Treaty establishing a Constitution for Europe, which was adopted on 25 June 2004, gives the Parliament a stronger position. Once the Constitution is ratified and comes into effect, the Parliament will have a role similar to that of the US Congress under the fast track procedure. It will become colegislator for autonomous trade policy and will have to approve all international trade agreements. A duty will be passed onto the Commission to regularly inform the Parliament of the state of play of negotiations, similar to the treatment that the Article 133 Committee receives. The European Court of Justice, as the interpreter of the provisions of the European treaties, has also played an important role in implementing the EU’s common commercial policy. It was the ECJ that defined the competencies of the policy areas and, in the past, it denied the Commission’s requests for the expansion of its jurisdiction over trade in services in 1994.

Appendix Figure 2. Flow of trade negotiation in the European Union

Commission proposes!

133 Committee endorses/makes recommendations!

Council determines mandate!

Commission negotiates!

Council approves!

Parliament is informed

Policy administration and dispute settlement Complaints and consultations are divided according to the Article 133 competencies as well. Shared competency issues may be brought up with the individual trade administrations of the member states, while the Commission has departments to deal with broader concerns. Individual industries with a stake in policy may decide to operate either through their own national associations or via their head associations on the union level. If a particular industry feels that it is being materially harmed by dumped or subsidized imports, it can address a complaint to the Commission’s Antidumping Services group. Meanwhile, the Trade Barrier Regulation functions similarly to US Section 301, in that industries may lodge a complaint with the Commission if they feel that trade barriers restrict their access to third country markets. The DG Trade is responsible for ensuring compliance by third countries with Chapter 7: Trade Representative Office 305 international trade accords. If, upon consultation with the member states via an advisory committee, the Commission decides that a complaint merits a detailed investigation, it is bound to a strict timetable for dealing with the matter. Conclusions for or against remedial action must be made within 13 months for antisubsidy cases and within 15 months for antidumping issues. All parties to the complaint are given full opportunity to state their case and appeals are allowed by the Commission. After all disclosures and verifications have run their course, the Commission proposes definitive measures to the Council. These measures traditionally apply for five years. In general, when it comes to third countries lodging complaints against a member state, the Commission has an assisting and advising function. However, it has a direct role in antisubsidy cases in which EU subsidies are involved, and in all cases where imports from the EU as a whole are concerned.

Appendix Figure 3. Flow of trade dispute settlement in the European Union

Industry submits complaint to the Commission!

Commission consults member states via an advisory committee!

Formal investigation is undertaken (13-15 months)

Appendix C. Canada

Organizational setup Trade policy formation in Canada is characterized by strong interdepartmental consultation. International Trade Canada (ITCan) takes the lead on issues relating to international trade, commerce, and investment. Other departments such as Agriculture and Agri-Food Canada, Finance, and Industry Canada also play significant roles in the process. Any differences between departments and agencies are ironed out at the working level and elevated to deputy ministers or to ministers as appropriate. It is understood that the department with the lead responsibility over a given issue has a major say. Decisions are not reached by voting. Interdepartmental and interagency conflicts are minimized by instituting a transparent consultative process that involves relevant departments and agencies early in the process of trade policy formulation.

Policy formation and trade negotiations In the specific area of services negotiations, interdepartmental meetings involving around 15 departments and agencies are convened regularly to discuss issues relating to services negotiations, including the development of instructions for international meetings, and the preparation or revision of services requests and offers as in the case in the WTO. With some services sectors falling within 306 The Global Challenge in Services Trade provincial and territorial government jurisdictions, these governments are also consulted on a regular basis. The services community is regularly consulted by ITCan via informal emails as well as formal interdepartmental meetings. The Services Trade Policy Division (EBS) takes the lead in discussions and negotiations on services. The Director of the Division is Canada’s negotiator. It is the EBS that drafts documentation, while other departments provide input, confirmation and approval. Transport Canada, for example, is given a say in transport services issues, the Department of Finance in financial services issues, and Health Canada in health services issues. It is the provincial and territorial governments that normally have jurisdiction over the specific service sectors, so they are consulted in the process of domestically determining which sectors are to be liberalized. Municipalities, Canadian businesses, and civil society are also given the opportunity to air their thoughts, since they are also directly affected by any changes in the manner in which trade in services are conducted. Interdepartmental and interagency consultations provide supplementary material. With the information gathered from all these consultations, ITCan sets objectives and orders its priorities, formulates its negotiating positions, selects the trade interests it would like to promote or protect, and decides whether concessions may be made in particular areas in order to meet specific objectives in other areas. The Trade and Economic Analysis Division of ITCan is the in-house research group that tries to assess the benefits and costs of certain trade commitments. ITCan also takes advantage of the information provided by the WTO, the OECD, other federal departments, provincial and territorial governments, other intergovernmental organizations, think tanks, and other institutions. The agency also takes it upon itself to recommend or support proposals for specific work in other organizations such as the OECD in order to enhance the general understanding of particular issues and shore up support for trade liberalization. The mandate for negotiation is given to the Division by the Cabinet. Other departments are given the opportunity to provide advice and submit recommendations based on extensive interdepartmental consultations and domestic consultations with provincial, territorial and municipal governments,

Appendix Figure 4. Flow of trade negotiation in Canada

ITCan consults with territorial governments, business and civil society!

ITCan sets objectives and formulates negotiating positions!

Other departments give recommendations!

Cabinet gives mandate for negotiation!

ITCan negotiates Chapter 7: Trade Representative Office 307 business and academics, civil society, and other stakeholders. The outcome of parliamentary hearings may also be considered as reference points. Foreign Affairs Canada (FAC), the other half of the former Department of Foreign Affairs and International Trade, still plays some role in trade policy formation. Its geographical divisions gather information and intelligence, which the department passes onto ITCan. FAC also stays in close contact with Canada’s various embassies and missions and permanent delegates to intergovernmental organizations like the WTO and OECD; these are able to provide valuable insights that help form particular positions on different issues in service negotiations. The private sector may voice its opinions via lobbyists and national business associations or directly through mail (including electronic mail), in consultations undertaken by the government of Canada (including online surveys), or by phone. ITCan regularly prepares discussion papers delving into the different issues being considered by the agency. Considered the main “basis for its consultations both inside and outside the government apparatus” (Stairs 2000), these papers contain general background and identify the possible issues likely to come up in negotiations as well as give indications of what the resulting negotiations might be like. The papers are often provided to any interested parties via download from the official website. Feedback on these papers is highly encouraged. On occasion, notices in the Canada Gazette have been published by the department, “requesting input from any and all Canadians on the scope, content, and processes pertinent to the negotiations” (Stairs 2000). To supplement this kind of request, direct mailings to businesses and NGOs are sent and the notice is also posted on the website. Other information available online for perusal traditionally includes detailed information on pending WTO ministerial meetings and how NGOs can register for attendance, the list of official Canadian delegates, and the text of Canadian proposals tabled in Geneva. Aside from general public consultations, around the time of the negotiation of the Canada-US Free Trade Agreement, 13 specific Sectoral Advisory Groups on International Trade (SAGITs) came into being, joining the preexisting Team Canada Inc. Advisory Board in representing private sector interests. In the leadup to major negotiations, the department conducts series of roundtable with independent advisers, largely consisting of well-established experts in the competition and trade policy fields. As a representation of the involvement of the private sector, it is worthwhile to note that out the 84 delegates to the WTO conference in Seattle, 14 were designated as “Private Sector Advisers.” Additionally, 65 private Canadian organizations registered at the conference by directly getting in touch with the WTO. All Canadian delegates, independent or not, were kept as well informed as possible by the government throughout the proceedings. The public is welcome to send any services trade-related inquiries or requests to the EBS. There are officers in the division responsible for the different sectors, and whoever is in charge of the sector in question has the charge of initiating contact with the individual as well as performing interdepartmental consultation. 308 The Global Challenge in Services Trade

ITCan supports its negotiators by providing them with information and intelligence, as well as with human and financial resource necessary in their pursuit of the objectives and positions set forth by the agency. Regular meetings are organized between lead negotiators in order to ensure that developments and challenges are dealt with and appropriately responded to, and to continually clarify and explore the nation’s official position on particular issues. Most of the groundwork is laid out at the working level, but the higher officers from the Directors-General to the Ministers also get involved when it is necessary to read interdepartmental consensus or to provide political guidance.

Policy administration and dispute settlement It is the Services Council of the WTO that monitors the implementation of the GATS, and adherence to or violation of the rules is brought up at official meetings. The WTO Secretariat also conducts regular trade policy reviews on all member countries and scrutinizes their policies and practices closely on occasion. The member countries of the GATS have the responsibility of ascertaining whether their trade partners are upholding their commitments. In Canada, there is no particular department or division that monitors such affairs. Those who engage in trade, that is, the Canadian service providers themselves, are in a position to determine whether markets are being opened up to them or kept closed, if barriers to trade are being maintained or built instead of broken down. If the firms or industries feel that trade is being hampered by a third country, they can be brought to the attention of the government. EBS can then assist the complainants in terms of ascertaining the schedule of commitments by other countries and determining whether the latter’s actions constitute a breach of any agreement. In light of the information gathered, EBS can consult with the governments of other countries through bilateral discussions or demarches. The Special Import Measures Act is Canada’s antidumping and countervailing law, and it provides protection to Canadian industry. The administration of this act is jointly handled by the Canada Border Services Agency and the Canadian International Trade Tribunal (CITT). The CITT is the quasijudicial institution in charge of complaints. The CITT operates within the Canadian trade remedy system and reports to Parliament through the Minister of Finance. It has the authority to: • conduct inquiries into whether dumped or subsidized imports have caused, or are threatening to cause, material injury to a domestic industry; • hear appeals of decisions of the Canada Customs and Revenue Agency made under the Customs Act, the Excise Tax Act, and the Special Port Measures Act; • conduct inquiries and provide advice on such economic, trade, and tariff issues as referred to the Tribunal by the Governor in Council or the Minister of Finance; • conduct inquiries into complaints by potential suppliers concerning procurement by the federal government that is covered by the Chapter 7: Trade Representative Office 309

North American Free Trade Agreement, the Agreement on Internal Trade, and the WTO Agreement on Government Procurement; • conduct safeguard inquiries into complaints by domestic producers that increased imports are causing, or threatening to cause, serious injury to domestic producers; and • conduct investigations into requests from Canadian producers for tariff relief on imported textile inputs that they use in their production operations.

Simply put, the process of investigation is as follows:

Appendix Figure 5. Flow of trade dispute settlement in Canada

Producer files complaint with the Canadian Border Services Agency !

If at least 25% of Canadian production supports complaint, Canadian Border Services Agency initiates investigation !

CITT initiates independent inquiry !

CITT makes decision (7 months)

Appendix D. Japan

Organizational setup Unlike the three previous examples, there is no single ministry in Japan that has the primary charge for determining trade policy. Instead, there is what is known as the main group of four: (1) the Ministry of Economy, Trade and Industry (METI), which, until 2001, was known as the Ministry of International Trade and Industry; (2) the Ministry of Foreign Affairs (MoFA), the diplomacy-oriented ministry whose institutional mandate includes being in-charge of all international treaties and intergovernmental agreements that Japan concludes, the organizing and enabling of meetings between the negotiating parties, and the formulation of letters of agreement or treaties; (3) the Ministry of Finance (MoF), in-charge of customs affairs; and (4) the Ministry of Agriculture, Forestry and Fisheries (MAFF), which has a leading voice in the realm of the importation of sensitive agricultural goods. These four ministries often conduct coordination meetings at various levels. Aside from these, other ministries also have a say when it comes to their specific jurisdictions. The Ministry of Health, Labour and Welfare, for example, works on the mutual recognition of nurse qualification, while the Ministry of Internal Affairs and Communications plays an important role in talks concerning telecommunications liberalization. Within the METI, it is the Trade Policy Bureau, known to be one of the prime advocates of free trade in the nation, that takes primary charge of trade policies. 310 The Global Challenge in Services Trade

The Bureau has seven divisions, and one department that deals with multilateral trade issues. The seven divisions include a policy coordination division, a research division, region-specific divisions (Americas, Europe and Middle East, Northeast Asia, Southeast Asia, and Australasia), and a “regional cooperation” division dealing with bilateral Free Trade Agreements (FTAs) or Regional Trade Agreements (RTAs). Much like their ministerial counterparts, industry-specific bureaus under the METI do get involved when products under their jurisdiction is at issue. The Trade Policy Bureau coordinates the METI’s external trade policy and negotiates with the MoFA. This Bureau is also actively pursuing an integrated domestic and external economic policy with the twin objectives of maintaining the global free trade system while shaping the international business environment in such a way as to boost Japan’s industrial competitiveness. Within the MoFA, it is the Economic Affairs Bureau that takes charge of trade issues. A Free Trade Agreement/Economic Partnership Agreement Division was established under this bureau recently, and the FTA/EPA Headquarters was created. This Headquarters conducts consultations regarding the formulation of Japan’s comprehensive strategy for FTAs and EPAs, with the intention of “ensuring a unified and coordinated response and supporting negotiations with specific countries on a ministry-wide basis.” (MoFA press release).

Policy formation and trade negotiations Final decisions regarding policy are made at Cabinet meetings chaired by the Prime Minister. Decisions are made by consensus, though there is no established formal system of coordinating, integrating, and synthesizing the diverse opinions and requirements of the various government institutions. In the run-ups to negotiations, informal interministry meetings to discuss issues relating to policy are frequently held, especially between the ministries with a strong stake in the policy outcomes. These meetings take place at various levels, from Division Director to Bureau Deputy Director General. Before the formal negotiations open, however, the Cabinet Secretariat, which is formally superior to all ministries, summons representatives from all related ministries and agencies. In principle, no ministry or agency is superior to others, and “different sectors of Japan’s bureaucracy seem to exercise veto power against each other” (Funabashi 1995). During votation, however, the one with the loudest voice often prevails, as in the case of agriculture. In rare instances, the office of the Prime Minister intervenes in a limited capacity. Proposals are finalized in the form of official cables issued by the MoFA. No standardized process for this exists. Sometimes, the MoFA drafts the original text. On other occasions, depending on the area of expertise, the METI or the MoF does it. Proposals relating to agriculture, forestry, and fisheries are exclusively drafted by the MAFF. “In the process of coordination, other ministries often try to change the text, but the irony is much of the inter-ministerial negotiations is conducted in Japanese. When the MoFA translates the text into English, the subtle nuance of the original Japanese is often lost and it is often the MoFA’s stand that is most strongly represented” (Araki, interview, January 21, 2005.). Chapter 7: Trade Representative Office 311

When the METI comes up with proposals dealing with trade remedies (e.g., antidumping policies), it is given much latitude by the government. The bureaucrats are free to consult with the private sector, but can also begin the initiative for new negotiations themselves. The MAFF does not have such a privilege in agricultural issues. Instead, their mandates come from politicians and agricultural cooperatives. These are formally given out in Cabinet meetings. In major ministerial conferences, agricultural politicians and representatives of cooperatives are always present to monitor that MAFF officials (or officials of other ministries) are acting within their mandates. Ministries that oversee domestic industries are often protectionist and passive in trade negotiations. The continuing liberalization of the economy is then often a result of external pressures from trading partners. Private initiative is traditionally the more common root of Japan’s trade policy changes, although it is acknowledged in the inner circles that the government is often behind these so-called private sector moves anyway. To this end, study groups are organized, and these groups make joint recommendations that endorse particular courses of action. In response to these, the METI initiates the selection of sectors to liberalize. The MoFA has virtually no power to propose any domestic sector’s liberalization. The Research Institute of Economy, Trade and Industry, an incorporated administrative agency affiliated with the METI, has in its employ economists who can use the Global Trade Analysis Project general equilibrium model to assess the benefits and costs of certain trade commitments. Industry associations are often consulted by the government, as private funding for research is often helpful in the undertaking of more detailed studies that are often necessitated by serious moves to liberalize. The general mandate for negotiation is in the Law Establishing METI. METI has an uncontested jurisdiction over all manufacturing sectors, except for ships and pharmaceuticals. However, when it tries to assert its negotiating mandate over the services sector (be it finance or telecommunications), it is strongly objected by the relevant ministries. Some sectors, such as the agricultural sector, are more influential with the politicians and with the bureaucracy than others. In general, sectors lobby relevant ministries and agencies, the ruling Liberal Democratic Party and the so- called zoku-gin lawmakers, who lobby in behalf of and are in turn benefited by specific sectors. Some representatives are able to talk to government officials and politicians, while others protest in the streets. Public consultations are seen in Japan as more of a tool for information gathering. Advisory councils or informal discussion groups are put together by the ministries interested in getting outside expert opinions. Consultative bodies are often composed of representatives from related industries, academia, journalism, and NGOs. The results of these discussions are kept shielded from the general public, however, retaining the air of mystery that surrounds policymaking. The limited information released by the ministries can be accessed at their official internet homepages, where members of civil society can post 312 The Global Challenge in Services Trade

Appendix Figure 6. Flow of trade negotiation in Japan

Trading partners exert external pressure to liberalize !

Private sector forms study groups and makes recommendations!

METI initiates the selection of sectors !

Industrial Structure Council gives advice !

METI issues policy statement !

Cabinet discusses and decides on appropriate proposal !

Cabinet consults with the LDP !

Cabinet proposes !

Diet approves !

Cabinet gives mandate !

MoFA and co-chair negotiate

comments and questions regarding negotiations. Informal consultations with civil society are rare in Japan. Business organizations receive questionnaires on WTO negotiations in order for the Ministry to ascertain the needs of business stakeholders. Sectoral organizations such as the Central Union of Agricultural Co-operatives of Japan (JA Zenchu) who often lobby the government have more success in influencing trade policies to some extent. Interindustrial business organizations such as the Japan Business Federation (Nippon Keidanren) often issue appeals on trade policies but do not necessarily influence or drive the government’s trade policy formation a lot. Appeals are occasionally issued by NGOs, too, but influence policies even less than by business organizations. Generally speaking, NGOs interested in trade issues, which are antifree trade in many cases, are not active in Japan as in Western and Southeast Asian countries. The Industrial Structure Council, the general advisory organ on any METI policy, is composed of academics, consumer groups, and labor representatives. It is perhaps the one group with a truly notable voice. Its recommendations are given directly to the METI Minister, to whom the Industrial Structure Council reports.

Policy administration and dispute settlement There are two methods by which an agreement can be implemented. One is through the passing of a piece of legislation, which goes through the Diet. Chapter 7: Trade Representative Office 313

The parliamentary democracy that operates in Japan allows for a close relationship between the Diet and the bureaucracy to begin with, and many of the ministers are also Diet members. This results in a situation in which the policies pursued by the Cabinet are ones to which the Diet has already given tacit approval. The other method by which a trade policy is implemented is by Cabinet order, again founded upon a consensus at a Cabinet meeting. The Cabinet Legislation Bureau ensures the consistency of the implementation of laws with the WTO and regional trade agreement rules. The liberalization in the trade of goods is monitored by the METI, under whose jurisdiction falls trade in general, and the MoF, which has the charge over customs affairs. Liberalization of trade in services is monitored by the relevant ministries and agencies. For example, financial liberalization is overseen by the MoF and telecommunications liberalization by the Ministry of Internal Affairs and Communications. There is no equivalent of US Sec. 301 or EU’s Trade Barriers Regulation that deals with complaints against third countries in Japan. All the complaints are handled on an ad hoc basis. If the charge is dumping or illegal subsidy, the complainants can have recourse to the antidumping/countervailing duty process administered by MoF. The Office of the Trade and Investment Ombudsman in the Cabinet also accepts such complaints. There are specific subdivisions of the manufacturing industry bureau, which is under the Trade Policy Bureau of the METI, that deal with specific industries. Firms and industry associations are free to informally approach these subdivisions in the case of complaints. If there are complaints against a country’s exports, METI has the jurisdiction. Its Trade and Economic Cooperation Bureau, which is separate from the Trade Policy Bureau, is in charge. Violators are criminally punished through fines and imprisonment.

Appendix E. Malaysia

Organizational setup While the Federal Parliament of Malaysia has the constitutional authority over external trade policy, the task of administration has been delegated to the executive branch of the government. International trade policy in Malaysia is handled primarily by the Ministry of International Trade and Industry (MITI). The institutional objectives of this Ministry are: • to promote and safeguard Malaysian interest in the international trade arena; • to spur the development of industrial activities; and • to further enhance Malaysian economic growth toward realizing Vision 2020.

Since MITI also has under its purview industry development as a separate objective from international trade, there are agencies under the Ministry that deal with its different purposes. More specifically, the Malaysian External Trade 314 The Global Challenge in Services Trade

Corporation (MATRADE) takes care of the export promotion of goods and services. Its mission is to develop and promote Malaysia’s export to the world. The specific functions of MATRADE are: • to promote, assist, and develop Malaysia’s external trade with particular emphasis on the export of manufactured and semimanufactured products and services; • to formulate and implement export marketing strategies and trade promotion activities to promote Malaysia’s export; • to undertake commercial intelligence and market research and create a comprehensive database of information for the improvement and development of Malaysia’s trade; • to organize training programmes to improve the international marketing skills of Malaysian exporters; • to enhance and protect Malaysia’s international trade investment abroad; and • to promote, facilitate, and assist in the services areas related to trade.

Policy formation and trade negotiations While MITI is the point agency when it comes to the formation of trade policy, all policy decisions in Malaysia are ultimately made by the Cabinet. The Ministry presents its opinions and suggestions to the Cabinet and each ministry may provide feedback and air its objections to any issue or policy. If any ministry has a strong objection to a proposal, the policy cannot be passed. The Ministries of Agriculture and Health both play significant roles, especially with regard to import procedures, while the Ministry of Finance is the final arbiter as regards taxes, including tariffs. MITI has regular consultations with sectoral ministries and industry. The MITI Minister conducts a formal dialogue with all trade and industry associations in Malaysia annually. Before any policy decision is made, industry is given an opportunity to present its view. Those involved in international trade negotiations, be they made under the WTO or more narrow regional trade agreements, get their mandate, parameters, and limits via formal consultations with the sectoral ministries or agencies and with industry. Regular updates as regards negotiation developments and plans are provided to Cabinet. The Ministry of Foreign Affairs is always involved in the consultation process. Aside from handling negotiations, MITI also has the responsibility of monitoring the interactions in liberalized sectors to ensure that all parties are honoring the agreements. As part of this task, the Ministry conducts regular consultations with industry and closely observes trade and investment flows. The Ministry has an in-house research department that undertakes feasibility studies in consultation with the sectoral ministries or agencies and with industry. Semi-independent research institutes such as the Malaysian Institute of Economic Research, various universities, and the Institute of Strategic and International Studies Malaysia are also invited to contribute to the Chapter 7: Trade Representative Office 315

Appendix Figure 7. Flow of trade negotiation in Malaysia

MITI undertakes feasibility studies !

MITI gets preliminary mandate, parameters, and limits from sectoral ministries and the industry !

MITI presents proposal to Cabinet !

Cabinet decides which sectors to liberalize and bestows final mandate for negotiation !

MITI negotiates

preparation of policy initiatives. The results of these studies are presented to Cabinet for consideration before decisions as to which sectors to liberalize are made. Cabinet weighs in with its decision and is ultimately the body that bestows the mandate for negotiation on the Ministry. The negotiating officers of the Ministry are given the autonomy to consult. The necessary resources are made available upon the request of negotiators.

Policy administration and dispute settlement Individuals or firms may lobby or air their concerns by writing letters to the Minister, the Secretary-General of MITI, or directly to the officers involved with the issue. They may also approach MITI via industry associations. MITI endeavors to present a very transparent and business-friendly environment that allows those concerned to give their opinions on its policies and decisions. Once received, the Ministry considers these requests in light of national interests. When it comes to dispute resolution, subdivisions of the MITI take charge. The Trade Practices Division handles complaints against foreign imports. Representatives from the Customs Department and the Attorney-General’s Chambers assist in the investigation of the cases. Meanwhile, the Trade Services Division collaborates with the Industries Division when it comes to complaints against the country’s exports. These two work in conjunction to find resolutions to such problems. If it is proven that an exporter has violated an agreement, the exporter will be blacklisted by MITI.

REFERENCES Eurolegal Services. n.d. The EU Treaties [online]. http://www.eurolegal.org/yurp/ eutreaties.htm. [Accessed November 2004]. Funabashi, Y. 1995. Asia Pacific fusion: Japan’s role in APEC. Washington, D.C.: Institute for International Economics. Inter-American Development Bank (IADB). n.d. Report on the European Union [online]. http://www.iadb.org/INT/itd/english/periodic_notes/May02/chapter4.pdf. [Accessed January 2005] . 316 The Global Challenge in Services Trade

International Trade Canada (ITCan). 2004. Introduction of Department of International Trade Act caps successful year for ITCan [online]. http:/w01.international.gc.ca/minpub Publication.asp?publication_id=381866&Language=E.[Accessed December 2004]. Japan Ministry of Foreign Affairs (MoFA). Launching of the headquarters for the promotion of free trade agreements (FTAs) and economic partnership agreements (EPAs) and establishment of the division for FTAs and EPAs. Press release. National Economic and Development Authority (NEDA). n.d. Committee on Trade and Related Matters. Briefing paper. Pasig City, Philippines. Noland, M.1999. The new protectionists: The privatization of US trade policy [online]. London: Institute of Economic Affairs. http://www.iea.org.uk/files/upld- publication27pdf?.pdf . [Accessed January 2005]. Stairs, D. 2000. Foreign policy consultations in a globalizing world: the case of Canada, the WTO, and the Shenanigans in Seattle. Policy Matters 1(8). The European Union Online (EUROPA ). n.d. Treaty Establishing the European Community. http://europa.eu.int/eur-lex/en/treaties/selected/livre2_c.html [Accessed November 2004].

Agency Web sites Official Department of Trade and Industry website (Philippines): http://www.dti.gov.ph. [Accessed August 2004]. Official Directorate General Trade of the European Commission website (EU): http:// europa.eu.int/comm/trade/index_en.htm. [Accessed August 2004]. Official Ministry for International Trade and Industry website (Malaysia): http:// www.miti.gov.my. [Accessed November 2004]. Official Ministry of Economy, Trade and Industry website (Japan): http://www.meti.go.jp/ english/index.html. [Accessed November 2004]. Official Ministry of Foreign Affairs website (Japan): http://www.mofa.go.jp/. [Accessed November 2004]. Official National Economic and Development Authority website (Philippines): http:// www.neda.gov.ph. [Accessed December 2005]. Office of the US Trade Representative. http://www.allamericanpatriots.com/m- wfsection+article+articleid-184.html. [Accessed August 2004].

Interviews Araki, Ichiro, Associate Professor at the International Graduate School of Social Sciences, Yokohama National University. 21 January 2005. Olivier de Laroussilhe, Director General, Trade Information and Communication, European Commission. 22 November 2004. Maria Isolda P. Guevara, Services Trade Policy Division, International Trade Canada. 20 January 2005. Rebecca Fatima Sta. Maria, Director of Research and Publication, Stategic Planning Division, Ministry of International Trade and Industry, Malaysia. 24 November 2004. Representatives from the Department of Trade and Industry, Department of Foreign Affairs and National Economic and Development Authority. February to June 2005. About the Authors

Dr. Gloria O. Pasadilla is a Senior Research Fellow and the Lead Economist for research in services at PIDS. She obtained her PhD in Economics from New York University, USA. Prior to joining PIDS in 2004, she was assistant professor at the University of Asia and the Pacific and formerly Deputy Director for the Industrial Economics Program of the Center for Research and Communications (CRC; now University of Asia and the Pacific). She is a consultant for various international organizations on trade and finance issues.

Jovi C. Dacanay is an economist and a full-time faculty member at the School of Economics of the University of Asia and the Pacific (UA&P). She has a BS Statistics degree from the University of the Philippines Diliman, an MS Industrial Economics degree from the University of Asia and the Pacific, and an MA Economics degree (with PhD units) from the University of the Philippines Diliman. She currently manages Staff Memos and Industry Monitor, two research publications of the UA&P School of Economics and also acts as managing editor of Economics 101, a basic economics journal geared toward teachers and students interested in the fundamentals of economics. Her research interests include the industrial organization of healthcare markets, pharmaceuticals and entertainment economics.

Angelina M. Lantin, Jr. holds an MS Industrial Economics degree from the University of Asia and the Pacific. She is a consultant of PIDS.

Christine Marie M. Liao graduated magna cum laude from the University of Asia and the Pacific in 2004, obtaining a master’s degree in Industrial Economics. She is a consultant of PIDS. Her areas of interest are international trade and economic growth.

Winston Conrad B. Padojinog is a faculty member and economist at the School of Economics of the University of Asia and the Pacific. He obtained his master’s degree in Industrial Economics from the Center for Research and Communications and his double-major bachelor’s degree in Economics and Management from the University of the Philippines in the Visayas. As a business economist, he is a consultant to companies and industry associations in the Philippines and abroad. Prof. Padojinog’s publications and researches are in the areas of industry competition and industrial policy.

Ceferino S. Rodolfo is the Program Director of the MS Management Program of the University of Asia and the Pacific. He is a PhD candidate (Public Administration) at the University of the Philippines National College of Public Administration and Governance. He obtained his MS Industrial Economics degree from the Center for Research and Communications as a full scholar of the Hanns Seidel Foundation, Germany, and his BS Economics degree from the University of the Philippines School of Economics. His areas of expertise include trade policy, industry and services competitiveness, and strategic management. 318 The Global Challenge in Services Trade

Maria Cherry Lyn S. Rodolfo is the Program Director of the Industrial Economics Program of the University of Asia and the Pacific. She obtained her MS Industrial Economics degree from the Center for Research and Communications and her AB Management Economics degree from the Ateneo de Manila University. Her major research areas include air transport and logistics, tourism and health-related services, retirement, and garments.

Andrea L. Santiago is an Associate Professor at the Business Management Department, College of Business and Economics of De La Salle University (DLSU)- Manila. She currently holds the Cecilio Kwok Pedro Professorial Chair in Entrepreneurial Management. She is also a Senior Research Fellow at the DLSU-Angelo King Institute for Business and Economic Studies, where she heads the Family Business Studies Center. At one point, she served as the Director for the Commission on Higher Education (CHED) Zonal Research Center-NCR 1. Dr. Santiago received her Masters in Business Management degree from the Asian Institute of Management and her doctorate from the De La Salle Graduate School of Business and Economics. Among her fields of academic interest are family business management, international and higher education, and corporate social responsibility.