Development Study on Local Industry Promotion in ARMM FINAL REPORT CHAPTER 4 ECONOMIC ANALYSIS OF LOCAL INDUSTRIES AND BUSINESSES IN THE ARMM 4-1 Local Industries in the ARMM 4-1-1 Analysis of Enterprises with more than 20 employees from NSO Business Study According to the Survey of Philippine Business and Industry by NSO, the number of enterprises with more than 20 employees in the ARMM decreased from 74 in 2006 to 67 in 2008. In particular, the number of enterprises in the industrial sector decreased from 21 to 15. By sector, the service sector has the largest number of establishments (Figures 4-1 and 4-2). Figure 4-1: Number of Enterprises with More Than 20 Employees in the ARMM Figure 4-2: Total Employment of Enterprises with More Than 20 Employees in the ARMM 107 Development Study on Local Industry Promotion in ARMM FINAL REPORT Those enterprises employ 7,689 people in total. Although the number of enterprises is the smallest, the agriculture sector employs the largest number of people of all sectors, and the average number of employment per establishment was 371 (Figure 4-3). When looking at the labor productivity measured by the value added per worker, the value of the ARMM decreased to Php 167,000, which is the lowest in the Philippines, where the value increased from Php 701,000 to 752,000. The industrial sector attained the highest value at Php 267,000 in the ARMM, although it marked a significant decrease from 2006. The value for the agricultural sector is less than half that of the industrial sector. (Figure 4-4) Figure 4-3: Number of Average Employment in the ARMM (Unit: Php 1,000) Figure 4-4: Value Added per Worker in the ARMM (Unit: Php 1,000) 108 Development Study on Local Industry Promotion in ARMM FINAL REPORT Based on the above, it can be said that in the ARMM the agricultural plantation enterprises have the greatest effect on employment generation. However, the industrial sector should be promoted to increase the total value added, leading to more income for the region (Figure 4-4). Overall, all the sectors have to improve their productivity. 4-1-2 Current Status of Businesses Registered at RBOI As explained in Chapter 2-2-3, 23 enterprises are registered at RBOI with total investment of Php 9.6 billion, out of which 14 were operational as of December 2010. Since the reported project cost of the active enterprises is Php 3.3 billion, the remaining Php 6.4 billion has not been fully utilized or not actually invested. This section will analyze the current situation of active enterprises and the reasons why nine businesses are not operational. Table 4-1 shows the current status of the active enterprises. Table 4-1: Current Status of Active Enterprises Registered at RBOI Product/ Cost No Location Current Status as of Nov-Dec. 2010 Service (Php mil) Fruit 5 Lanao del 2,040 Exporting to Middle East, Japan, Korea & China. Plantations Sur, Two large exporters outside of the ARMM send (banana & Maguindanao management staff and conduct quality control and pineapples) marketing. One of them plans further expansion. Palm Oil 1 Maguindanao 361 Under the network of a large company in Manila. Milling Started operations in 2009 and has not yet reached the maximum operation capacity due to material shortages. Coconut 3 Sulu, 155 Crude oil sold to San-Miguel Corporation, a joint processing Maguindanao business partner at the start-up. Coconut oil/lip cream sold to Hong Kong & Manila. Coconut vinegar/brandy are sold to specific clients in Manila. Corn/ 3 Maguindanao, 434 No information on corn starch processing, but one cassava Lanao del Sur enterprise is said to have been expanding facilities. starch Cassava starch is sold to Manila. Shortage of cassava is a challenge in meeting demand. Wood 1 Maguindanao 61 Providing seedlings to residents to secure material processing trees. Recent information is not available. Bus 1 Davao - 234 No information available. Operator Maguindanao Source: RBOI and interviews with the enterprises 109 Development Study on Local Industry Promotion in ARMM FINAL REPORT There are several common characteristics among the above enterprises. - Location – Good security and local leaders are favorable for industry promotion: Investments are concentrated in several municipalities. In Maguindanao, three are in Sultan Kudarat, two in Datu Paglas, two in Datu Odin Sinsuat, one in Buluan. In Lanao, there are two in Wao and two in Bumbaran. These municipalities have relatively stable peace and order and political leaders are said to be more proactive in promoting industry. It is well-known that the former mayor of Datu Paglas was very active in encouraging development, and his family established “Datu Paglas Corporation,” which owns transportation, security service, and insurance companies as well as the Rural Bank. In the case of Sulu, the owner is from the prominent political clan in the area and they were given a guarantee from the military to protect the project, which also has its own “security force51”. The company even constructed its own private port for shipping outside of the ARMM. - Utilize local natural resources Twelve enterprises, 86% of the total 14, are engaged in agriculture-related businesses, and six of them operate plantations such as banana, pineapples, and cassava, utilizing the fertile soil and local resources. Uni-Fruiti, the largest investor in the ARMM, reported that the bananas and pineapples grown in Maguindanao and Lanao del Sur were the highest quality among the bananas grown on their plantations. - Strong management partner/secured market All the five plantation businesses and palm oil processing are under the network of large exporters or a processing company. These companies send a management team for management, quality control and marketing and/or trained the staff and control financial management, including budget allocation. The crude oil processor has a large client in San Miguel who was a former partner, and their manager has experience in the same business. They have less concern about markets. - Open to outsiders or investment from outside of ARMM or non-Muslim community In addition to the above case of networking with large private partners outside of the ARMM, two enterprises were started by businessmen outside of the ARMM and three are owned and managed by Chinese residents. While these enterprises are expanding operations or sustaining the business under increasing competition in the world market, several challenges were reported, which include: 51 “Assessment of the Business and Investment Climate in the ARMM and Strategies to Address the Problems” for USAID GEM Program, Peter Wallace, AYC Consultants, 2003. 110 Development Study on Local Industry Promotion in ARMM FINAL REPORT - Shortages or unstable supply of material: This problem was reported for palm, cassava, corn and wood. The palm oil processor plans to expand its plantation outside the ARMM to Sultan Kudarat Province because of land ownership problems in the neighboring area in the ARMM. The cassava starch processor emphasized the need to train cassava farmers to improve their farming technology. - Price competition with other processors or in the world market: For crude coconut oil, cassava starch, wood processing, and coconut processing. - Insufficient infrastructure such as roads and electricity: The enterprises in Datu Paglas and in DOS improved or provided necessary utilities and improved the roads by themselves when their businesses were started. Several enterprises also claimed that the rough roads affect their businesses, such as damaged bananas and difficulties encountered by farmers delivering their products. - High transportation costs: High costs and infrequent operation of Port Polloc forced several enterprises to transport their products by roads to Davao for further shipping to Manila or Cebu or other countries. However, it is reported that oligopoly transport business between Cotabato and outside the ARMM via Davao lead to high land transport costs, too52. - Need for support to find new market: The enterprises without a large scale business partner are struggling to find a new market, including export for their expansion. On the other hand, the reported reasons why nine enterprises stopped operation or could not implement the registered projects are summarized in Table 4-2. As indicated above, several enterprises could not sustain or implement operations due to management problems. It is also thought that the feasibility studies were not sufficient. According to the USAID GEM Report, “Assessment of the Business and Investment Climate in the ARMM and Strategies to Address the Problems” in 2003, which examined the non-operational enterprises registered at RBOI, including four of the above nine enterprises, major reasons for the failure of investments are stated as: i) unpreparedness of ARMM businessmen for the demands of the proposed joint ventures and ii) insufficient knowledge in the local ARMM community on how to prepare feasibility studies or sound business proposals. The problems with land titles forced the suspension of the large-scale palm oil plantation in Lanao del Sur, but the same problem was also raised by the existing palm oil processor in Maguindanao as constraints in expanding their operations. 52 Based on the interviews with several enterprises and stakeholders. The issue of an oligopoly in transport between Cotabato and outside of ARMM will be verified. 111 Development Study on Local Industry Promotion in ARMM FINAL REPORT Table 4-2: Reasons for Non-Operation of Enterprises Registered at RBOI Cost Reasons for suspension or non-implementation Product/Service No Location (Php mil) of the enterprises Garment Making 1 Maguindanao 111 Suspended in 2009 due to lower competitiveness in the world market affected by the export quota system of the US, and caused by high transportation costs and labor disputes. Palm Oil 1 Lanao del 5,170 Pulled out of the project after planning a 1,000 ha Sur investment due to problems with the land title.