By Imee Charlee C. Delavin, Reporter

The next few years will be more challenging for Philippine banks amid headwinds from overseas, but the country’s sound macroeconomic fundamentals are seen fueling the local financial sector’s expansion, drawing in more foreign banks that want a piece of Asia’s rising star.

Since the start of the year, local financial markets have been buffeted by the divergence in the fortunes of the world’s biggest economies. In recent weeks, Britain’s decision to pull out of the European Union added to this uncertainty.

“With the exit of Britain from the European Union, investors right now are on a wait-and-see mode, assessing the repercussions of Britain’s decision on the health of the world economy,” Land Bank of the Philippines market economist Guian Angelo S. Dumalagan said.

“Britain could potentially undermine global growth by dampening consumer and business sentiment. Although another worldwide recession is unlikely given the steady pace of the US economy, the separation of Britain could definitely aggravate global economic divergence, resulting in increased volatility in financial markets,” he said.

The divergence among the world’s advanced economies has the US on the one hand raising interest rates to sustain its recovery from the Global Financial Crisis of 2008-2009. Japan and the Eurozone on the other hand are easing monetary policy to prevent their economies from sliding back.

Add to the mix China, which has slowed down in recent years, pulling along with it some emerging economies in Asia that rode on the export boom of the world’s second largest economy.

“Added stimulus would mean that interest rates may remain low, but very volatile, in the next few years,” Mr. Dumalagan said.

“Amid this global economic environment, Philippine banks might find themselves frequently adjusting their portfolios in response to mixed signals from abroad. Volatility offers profit opportunities, although market timing is critical. This could also mean that loan growth might remain strong, as relatively low interest rates could entice firms and households to borrow more,” he added.

Local lenders remain well-capitalized

Despite the external headwinds, Philippine banks remained well-capitalized, with a 14.91% capital adequacy ratio (CAR) at the end of last year, or well above 10% minimum set by the Bangko Sentral ng Pilipinas’ (BSP) and the 8% floor under Basel III.

Capital buffers also were of high quality, mainly composed of common equity tier 1 (CET1) instruments, which represented 12.37% and 13.33% of risk-weighted assets on solo and consolidated bases, or more than double the minimum 6% share set by the BSP. The share of Tier 1 capital — composed of common equity and qualified capital instruments — also stood at 12.55% and 13.48% at end-2015, higher than the 7.5% requirement.

The banking sector’s total resources stood at P12.52 trillion at end-March 2016, up from the year-ago level of P11.37 trillion, as the public continued to place their savings in banks, thus supporting the industry’s expansion.

Universal and commercial banks’ total resources stood at P11.25 trillion, up from the P10.24 trillion at end-March 2015. Thrift banks had P1.05 trillion at end-December, while rural banks held P213 billion.

This was despite a drop in the number of banks operating in the country. At end-December, the number of lenders declined to 632 from 648 in 2014. However, total bank branches rose to 10,124 from just 9,713the previous year.

Big banks remained profitable in 2015, posting a combined net income of P120.275 billion.

According to the BSP’s assessment, “the Philippine banking system remains resilient as it continued to support long-term economic growth, [adding that] banks’ balance sheets were marked by sustained growth in assets and deposits.”

International credit raters have said the Philippine banking system remains sound and stable, as banks remained well-capitalized against any financial shocks, having been supported by the country’s strong fundamentals and rapid economic growth.

Positive economic outlook

BSP Governor Amando M. Tetangco, Jr. agrees that the country’s solid macroeconomic fundamentals underpin the banking industry’s strength, adding that the positive outlook for the Philippine economy lends support to lenders’ resilience in the near- to medium-term.

“The projection is that the Philippine economy will continue to grow at a rate above trend over the next few years, which would indicate that there would be a need for funding increased economic activity during that period. That would augur well for the banking system,” Mr. Tetangco said.

Despite the global uncertainty, the Philippines’ gross domestic product (GDP) growth has averaged 6.3% annually since 2010. At 1.8 percentage points more than in the previous six years, the recent growth record is a bigger improvement than in any other country in the region, Capital Economics Ltd. earlier said.

Last year, GDP grew by 5.8% on the back of robust domestic demand and private investments, albeit missing a 7-8% target for 2015.

GDP grew by 6.9% in the first quarter of 2016, driven by an uptick in public disbursements, a surge in investments, and robust household consumption, which historically has contributed up to 70% of GDP. This year, the country is seen expanding by 6-7%, down from the initial target of 6.8-7.8%, but still above trend.

Boost infrastructure spending

Seen boosting economic growth in the medium term is increased infrastructure spending — by at least 5% of GDP, going by what President Rodrigo R. Duterte’s economic managers have been saying. This in turn will be a boon to the banking industry.

“It helps that the new economic team has announced that they will ratchet up infrastructure spending. This would create the conditions for more future growth,” EastWest Banking Corp. President and CEO Antonio C. Moncupa, Jr. said.

“And if the campaign against criminality starts to bear fruits and the peace processes take off, these could unleash more upbeat mood and eventually investments and hopefully translate to more job opportunities for our workers,” he said.

Ildemarc C. Bautista, assistant vice-president and head of research at Metropolitan Bank & Trust Co., described as “unprecedented” the Duterte administration’s plan to ramp up infrastructure spending to as much as 7% of GDP.

“[C]onsumer and business loans should pick up on the back of these government stimulus programs and strong consumer spending,” he said, adding that, coupled with low global inflation and high domestic liquidity, “this should prove positive for the demand side.”

Maybank ATR Kim Eng banking sector analyst Katherine Tan said the government’s emphasis on infrastructure, particularly public-private partnership (PPP) projects can address banks’ compressing margins.

“[T]hey are term loans… they are considered as project financing and project financing usually gives you higher rates so more PPPs then that should also help the banks’ margin in the long-term,” Ms. Tan said. “There would be more room for growth for the banking sector in the next six years [as] more PPPs, more project-financing type of loans then that would probably help improve your margins.”

Back to basics

Patrick D. Cheng, first vice-president at China Banking Corp., said banks “should do reasonably well” during the next few years.

The government’s PPP projects will boost the expansion of banks as “more conglomerates team up and share the risks and rewards” of such projects, giving local lenders “more capital market deals to attend to,” he said.

“If the country continues to grow by around 6% to 7% per year for the duration of the Duterte administration, then we should expect bank earnings to gain somewhere between 1 and 1.50 times GDP growth,” Mr. Cheng said.

“With interest rates much lower, bank’s trading gains will definitely be muted compared to where they were four to five years ago. It will really be a back to basics for banking. Making good loans… keeping within their respective bank’s risk appetite and generating a good balance of fee income,” he said.

Branch expansion “may be tapering off as banks and clients adapt better to technology and digital banking — non-branch banking — channels,” Mr. Cheng said, adding that this should give banks “some breathing space on operating expenses.”

“These actions if properly executed should allow banks to generate and rebuild net income levels to offset the generally lower trading gains environment,” he added.

Entry of more foreign banks

And as success attracts rivals, the Philippine banking industry will be witness to more players from abroad, aided in no small way by the government’s move to liberalize foreign ownership, and by the envisioned ASEAN Banking Integration come 2020.

“An expanding economy is always positive for the banking system,” Mr. Tetangco said, adding that the country’s “strong macroeconomic fundamentals and good economic performance” is luring more foreign banks into the system.

“Given the positive prospects of continued growth and manageable inflation, the entry of foreign investments is expected to increase further, including investments in the banking sector which has actually been liberalized through the passage of RA [Republic Act] 10641 and also the passage of the law allowing higher foreign participation in rural banks,” Mr. Tetangco said.

The BSP has approved the entry of eight foreign banks since the passage of the Act Allowing the Full Entry of Foreign Banks in July 2014. The foreign lenders that got the BSP’s green light to operate in the Philippines are Japan’s Sumitomo Mitsui Banking Corp., South Korea’s Industrial Bank of Korea and Shinhan Bank, Taiwan’s Cathay United Bank and Yuanta Commercial Bank Co. Ltd and the Singapore’s United Overseas Bank Ltd.

This year, Korea’s Woori Bank entered the local market by partnering with Gaisano-led Wealth Development Bank Corp., a thrift lender which targets to serve both Korean tourists and expats. In June, Taiwan’s First Commercial Bank also got the central bank’s approval to set up a branch in Manila.

“There are more applications that are being evaluated right now,” Mr. Tetangco said.

EastWest’s Mr. Moncupa said the outlook for the local banking industry in the next three to six years is “definitely bright,” notwithstanding greater competition.

“[M]ore intense competition… normally happens when the mood is upbeat. Everybody will try to get a piece of the action. While that puts some pressure on bank spreads, it will be good for households and businesses in terms of access to credit, better services, and more competitive pricing,” he said.

Mr. Moncupa said the lower spreads and intense competition would put pressure on mergers and acquisitions, which would create higher efficiencies and economies of scale.

“Overall, the industry will turn positive results although it could be tough for some banks.  We expect to see more interest from foreign banks to get into the country. In general, in the next few years we see retail banking to continue to be the realm of local banks.  Foreign banks will be mostly in corporate and wholesale banking. Foreign banks may try to get minority stakes in local banks,” he said.

Metrobank’s Mr. Bautista sees tighter competition playing out this way: “The big local banks will continue to leverage their national presence and create economies of scale while the smaller banks will focus on niche markets and consumer segments.”

“Although it looks like new entrants are more amenable to partnerships with local banks instead of going in solo… these foreign entrants will continue to seek partnerships with the mid-tier banks as they focus on niche markets and using technology solutions as a competitive tool,” he said.

Choice of next BSP chief

Lastly, any orderly adjustment by the banking industry to the new realities of broader competition and external volatility would require the steady hand of a central bank. Crucial to the financial sector, if not the entire economy’s mid-term prospects, is the appointment of a new BSP chief by next year when Mr. Tetangco steps down.

Nicholas Antonio T. Mapa, associate economist at Bank of the Philippine Islands (BPI) said one of Mr. Duterte’s most crucial appointees will be his choice for BSP Governor in 2017.

“President [Benigno S.C.] Aquino [III] did well in re-appointing the ace Governor who has earned international acclaim for his astute stewardship of the country’s financial system,” Mr. Mapa said.

“No doubt [Mr.] Tetangco helped keep the economy afloat in rough waters and ensured smooth and safe sailing in the times that the winds were full in our sails. Duterte would need to find a worthy successor to the outgoing Tetangco,” Mr. Mapa said.

The Philippine financial system is “one of the most resilient in the region, if not the world” as it “adheres to stringent standards of risk management to ensure that the business of public trust remains whole and viable for all stakeholders involved,” he said.

One of Mr. Tetangco’s legacies to the Philippine banking system is the implementation of an interest rate corridor system, “which is precisely the framework that can stave off financial market volatility,” Mr. Mapa said.

“Given how quickly global markets can turn from tempest to tranquil and back, the BSP’s investment in such a system affords them the flexibility to deal with rapid changes in market sentiment and to calm the waters when they do get roiled,” he said.

“Their ability to better get hold of liquidity will go a long way to deterring financial stress from the eventual [United Kingdom’s] exit from the European Union, imminent, albeit delayed Fed rate hike cycle and possible renewed concerns about crude oil prices and China’s economy,” Mr. Mapa added.

Imee Charlee C. Delavin (@charleedelavin on Twitter) covers private banks for BusinessWorld. She loves to travel.

The Duterte administration’s push to develop agriculture and areas outside Metro Manila has cast a ray of hope on smaller lenders wanting to regain their footing, if not expand.

Even while campaigning for the Presidency, then Davao City Mayor Rodrigo R. Duterte has capitalized on the disparity in economic development between what he called “Imperial Manila” and the rest of the country, especially the rural areas.

Rural banks have mirrored the countryside’s neglect, with a growing number of the industry’s members driven to bankruptcy. This forced the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corp. (PDIC) to launch a rescue package that includes tax and other incentives for third-party investors willing to avert closures, if not revive forlorn rural lenders.

Despite two extensions of the program, rural banks continue to fall by the wayside, erasing the little amount depositors had earned on their accounts, if not their trust in banks altogether.

Rural Bankers Association of the Philippines (RBAP) President Antonio O. Pasia said rural banks are hoping to participate in the financial inclusion thrust of the new government.

“We’re hopeful, we definitely would like to participate in the programs of the new administration, we would be offering the rural banks to take part in the countryside development,” said Mr. Pasia, who is also president of Batangas-based Malarayat Rural Bank Inc..

“We think the new administration is more receptive towards the needs of the farmers and fisherfolks that’s why we’re offering the services of the rural banks in those areas,” he said.

Rural banks are front liners in countryside development and in financing the needs of farmers, fisher folks and micro, small and medium enterprises (MSMEs).

These lenders serve as the platform for bigger banks to fulfill their required 25% credit quota to the farming sector, as mandated by the Agri-Agra Reform Credit Act of 2009.

The small lenders could also serve as the platform for small and medium-scale enterprises to secure funding for their business expansions through microfinance.

With stiffer competition in the banking space, rural banks would like to strengthen [their] position in [their] own areas and “hopefully compete in the delivery of credit to the countryside” by merging to build stronger lenders, upgrading technology and forging partnerships, Mr. Pasia said.

“Eventually, there will be lesser number of rural banks because of consolidations and mergers but stronger players. I think for those that will stay on, there future will be better,” he said.

Economists have welcomed the Duterte administration’s plan to hasten growth in the agriculture and fisheries sectors, which account for roughly 10% of gross domestic product (GDP) but employs almost a third of the country’s workforce.

The World Bank and the Asian Development Bank have said in previous reports that poverty can be addressed by improving the agriculture sector. Business leaders have also included in their recommendations to the administration the delivery of support services like financing, technology, and logistics to farmers and the adoption of value-chain development for rural-based enterprises.

In line with the new government’s thrust to develop the countryside, business leaders also recommended the development of regional industries.

“The Philippines’ growing middle class and the Duterte administration’s focus on promoting rural development could broaden the reach of the banking system, potentially resulting in more revenue streams,” said Land Bank of the Philippines market economist Guian Angelo S. Dumalagan.

Chamber of Thrift Banks President Rommel S. Latinazo said the sector remains “very optimistic” given the new administration’s thrust.

“I think we continue to push for inclusive growth that means when there is development in the countryside, it means more opportunities for lending activities and there’s a need for financing, credit facilities as well as consumer financing — these are the two main businesses of thrift banks,” Mr. Latinazo, who is also RCBC Savings Bank President and CEO, said.

“Of course there’s also that pronouncement from the administration that they’d like to push for the agricultural side and that’s where many thrift banks are positioned… [A]griculture means it’s not going to happen in Metro Manila, it will happen outside Metro Manila, in the provinces and that’s where most of us are positioned like the stand-alone thrift banks, so that’s also an opportunity that makes us positive,” he added.

Mr. Latinazo said consolidations among smaller banks will become more sensible amid stiffer competition in the near term.

“Consolidation remains to be the thrust of government. The BSP has been putting up incentives to encourage more integration, consolidation. That is happening [to] all sectors — rural banks, thrift banks and we see that continuing. Indications are there. A lot of foreign banks are looking at us, either by way of putting up their own or via investment in an existing bank,” Mr. Latinazo said.

Maybank ATR Kim Eng banking sector analyst Katherine Tan said mergers and acquisition “has been quite attractive because there’s a lot of growth potential, as we’re very underserved and the banking space remains underpenetrated.”

“We’ve already seen a lot of big banks acquiring rural banks for the past years and there’s been a lot and it’s still going to continue. We have over 600 bank in the Philippines and the consolidation would continue,” she said. — Imee Charlee C. Delavin

By Roy Stephen C. Canivel

The Philippines’ car industry remains in a sweet spot.

Apart from sales rising yearly, the sector also recently received government support — a multibillion dollar financial incentive to help transform the country into a regional auto manufacturing hub.

Understandably, the challenge is daunting, ambitious even.

After all, other countries such as Thailand seem to be a better choice than the Philippines as far as car manufacturing is concerned.

This much is admitted by Rommel R. Gutierrez, first vice-president for Government Affairs at Toyota Motor Philippines.

Take Toyota’s Vios and Innova models, Mr. Gutierrez said.

While both vehicles are made locally and in Thailand, “it’s cheaper to import vehicles than to produce locally,” he said.

This is because Toyota’s local unit has no choice but buy more components from abroad, unlike Toyota’s Thai assembler which sources car parts locally.

“Thailand’s localization is very high, more than 80% while ours are only at 40%,” the Toyota executive said, adding that the industry will become more competitive if it sources its parts locally.

Program seeks to make cars have more local content

Starting 2010, the Philippines found it more difficult to compete when import barriers were pulled down in member countries of the ASEAN Free Trade Area (AFTA).

Under the AFTA’s Common Effective Preferential Tariff (CEPT), taxes on imports — including those previously imposed on vehicles and components — were virtually removed.

As a result, several auto parts suppliers and some car manufacturers left the country since it was no longer competitive, Mr. Gutierrez explained.

After all, it was cheaper to import cars assembled abroad than it was to build them here.

But now, the government — through its Comprehensive Automotive Resurgence Strategy (CARS) program — plans to turn the situation around by increasing localized content to 60% from 40% by 2022.

With locally-built cars containing more parts sourced domestically, companies such as Toyota Philippines “can benefit,” Mr. Gutierrez said.

The CARS program, established by Executive Order 182 that was signed by President Benigno S. C. Aquino III on May 29 last year, provides incentives to three car makers to locally produce three car models with a production volume of at least 200,000 units respectively for up to six years, or an average of 33,333 vehicles per year.

The program also provides auto manufacturers and parts makers operating in the Philippines P4.5 billion in annual support for six years, or P27 billion in total, as well as other non-fiscal measures.

For its part, Toyota Motor Corp. plans to invest P3.22 billion ($70 million) in its Philippine division to increase local output and qualify for a new tax incentive. The Japanese automaker will build 230,000 Vios subcompact sedans.

This would help “close the cost gap” between importing and local production, he said, adding that the domestic sector needs to achieve economies of scale, bringing down cost of localization and resulting in more competitive production.

“You need to produce a lot because you need to spread the cost,” he said. “It’s not easy, but we are more than willing to take the challenge kasi (because) that’s the requirement.”

The Toyota executive, who is also president of Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), said that it has been a year since the “start of motorization,” which he said signaled a spike in total industry car sales reflecting the stronger purchasing power of the local market.

Toyota, Mitsubishi qualify for car program

Toyota has consistently reported the biggest sales in the Philippines, taking 45.12% of market share as of June this year alone, according to a monthly report issued by CAMPI together with the Truck Manufacturers Association.

By 2020, total market sales is expected to reach 500,000 units. However, this may be reached earlier than anticipated since 320,000 units were delivered last year, meeting the 2018 target of 300,000 way ahead of schedule.

As of this writing, only two companies qualified for the program: Toyota and Mitsubishi Motors Philippines. They received their certificates of recognition last June.

The fate of the third player that would help reach the program’s goal of producing 600,000 units is still unknown.

“We still don’t know if we’re going to open it up,” Trade Undersecretary Ceferino S. Rodolfo told reporters last June while at the sidelines of Mitsubishi’s groundbreaking ceremony of its Laguna stamping facility.

Manufacturers need to meet “the production volume that is needed for the Philippines to surmount the economies of scale and be regionally competitive,” he said.

“If they are accepted into the program, that does not mean that they will be already receiving the incentives. It depends on their performance,” he told reporters. Incentives would only be enjoyed by the manufacturers after they produce their first 100,000 units.

Meanwhile, as the country’s consistent top-selling car maker, Mr. Gutierrez says that the growing traffic does not necessarily post a harm on Toyota’s performance, citing increasing industry growth on the back of solid consumer demand.

“Traffic doesn’t seem to have an effect on our sales,” he said. “In fact, people would rather buy a car than suffer through our public transportation. That’s the irony of it.”

He also pointed out that car sales in the provinces — where roads are not as congested — remain substantial.

A lot of dealerships are now being put in the provinces and, as a result, sales are being dispersed across the region, he said. Sixty percent of its sales are in Metro Manila while the rest are divided among the rest of the areas.

Roy Stephen C. Canivel (@roycanivel on Twitter) covers telecommunications and trade for BusinessWorld. He likes reading a good book and occasionally checks their summaries on several Web sites.

By Julianne S. Ruizol

It’s not easy being an independent Filipino musical artist.

Most of the time fellow musicians, fans, and listeners argue about the intricacies of Original Pilipino Music (OPM). Some say OPM is dead while others insist it’s alive but only in different reincarnations. After all, the local indie music scene is a hodgepodge of genres offering different flavors for everyone’s listening preference: jazz, hip hop, electronica, alternative, industrial, metal, blues — you name it, somebody else is likely to play it.

But the debate about OPM is just one part of living the independent musician’s life.

To survive, most local indie music artists and bands live off gigs and bookings and keep their day jobs, if only to stay true to being the “indies” that they are.

However, artistic integrity has its price.

To be considered as a fully functional band, a lot of investments have to be made.

Besides setting aside cash to pay for rehearsal space — P250 an hour — independent artists also need to bankroll their own music productions with expenses shared between band manager, technical crew, and other helping hands.

“There is no support,” Clarence Garcia, lead guitarist of tide/edit, an indie band, said in an interview. “You support yourself. Gone are the golden days of the music scene wherein you find a place you will regular play at and you will be discovered.”

This is exactly the reason why members of Oh, Flamingo! — a five-piece band which plays indie rock infused with tropical styles and elements — makes themselves available after gigs.

“You don’t leave immediately after your set. Early on, during our first few gig, we made it a point to stick around and really talk to the people who invited us. We were still new and unknown so you have to stay and talk, to establish further rapport, so to speak,” drummer Fries Bersales of Oh, Flamingo! said in a separate interview.

Another technique to sell their music involves at least one member who takes a position near the bar.

“That way, you can be approachable or at the entrance or outside so they know that you [already] played. You’re already available. Your defenses are down. You don’t have friends around you. [People] can already approach you,” Howard Luistro, Oh, Flamingo!’s vocalist and guitarist said.

Limited engagement with music labels

On occasion, bands like Oh, Flamingo! sign up with labels but only for engagements involving limited production releases covered by profit sharing agreements.

“Wide Eyed Records came to us and let us release our EP (extended play) under their label, so instead of just being able to produce 100, around 750 CDs [were produced] and then we agreed on sharing the profit. Everybody’s happy. Everything went back to us. It wasn’t a lopsided deal,” Pappu de Leon, Oh, Flamingo!’s lead guitarist, said.

The label also helped the band with the copyrights of their songs and with the distribution of their album to various commercial establishments including Team Manila and Satchmi. Other local bands who have enlisted the help of Wide Eyes Records are Halik ni Gringo and Ang Bandang Shirley, to name a few.

While their EP — a recording that’s more than a single but isn’t enough for a full album — is released under a label, the band themselves remain independent and do all the work themselves. A new contract would have to be signed if the band is seeking to release another album.

“It works for independent artists because we have creative freedom as compared to being signed to [major labels], you have a six-year contract,” the band said.

Meanwhile, other groups — while striving to keep their artistic independence — also take advantage of label’s e-commerce platforms to raise awareness and attract wider audiences.
Groups such as tide/edit and Fools and Foes are affiliated with A Spur of the Moment Project, along with other local indie bands including Run Dorothy and Tom’s Story.

Fools and Foes released their debut EP “Underneath the Roots” on December 4, 2015, while tide/edit has released an EP (“Ideas,” August 2012) and two full-length albums (“Foreign Languages,” June 2014; “Lightfoot,” November 2015).

Signing up with A Spur the Moment Project allows groups to take advantage of the label’s e-commerce platform.

“The e-commerce platform is a big help for us, for a band that doesn’t do live shows too often,” Lead guitarist Clarence Garcia of tide/edit said. “We’re a band that doesn’t really play live so it’s important for us so it works. We get to ship stuff locally, provincial orders, we get to ship even in overseas. I’m not sure why not everyone is doing it. It’s a basic requirement if you have something to sell. You have to make it [products] accessible for everyone.”

Using Spotify

And speaking of going online to popularize and sell their music, Oh, Flamingo! and Fools and Foes began using the Spotify with the help of their respective labels. Both of them also revealed that putting their music up on the site was mainly for exposure and audience reach and not for a secondary or tertiary source of income.

Being self-made musicians, Oh, Flamingo! had their doubts using the platform at first saying they “thought we could do that on our own through aggregator website, but we realized maybe we won’t be able to manage that given our time constraints and resources.”

“We eventually saw Spotify as an opportunity to really exponentially spread our music because at least we can get people who not only buy the CD but [even] one with a smartphone can hear our music,” they added.

Fools and Foes said it “didn’t really upload music in Spotify to get revenue, but to get exposure. For a new indie band like us, it’s important to get our music out there.”

While members of tide/edit remain unsure whether they got traction from Spotify, they nevertheless see tweets tagging them, telling them that their listeners heard them first on Spotify.

Moreover, both Fools and Foes and Oh, Flamingo! believe that streaming and CD albums could go hand in hand with each other.

“It could go two ways. Some listeners can opt to listen to an artist via Spotify instead, while others, because they discovered the artist via Spotify, they could be encouraged to buy the artist’s physical CD. We definitely think online streaming is more rampant than listening to CDs. Technology as well is already phasing out the use of CDs,” said Fools and Foes in an email reply.

It may be too early to tell whether Spotify can help indie bands earn enough to keep them independent.

But for the moment, the music service nevertheless helps them distribute their music despite risks of related investments they’ve made.

So for now, none of them are planning to quit the day job or leave the rat race.

“Our goal is not how to make money,” tide/edit said. “Our goal is how not to lose money. It’s fun to be in a band. We enjoy the process. We enjoy what we’re doing and we want to do this over and over again.”

Julianne S. Ruizol (@sopraknows on Twitter) covers the Senate and the Department of Foreign Affairs for BusinessWorld. Her wide music preferences range from 90s MTV to current Korean pop hits.

By. Raynan F. Javil

The Duterte administration has promised to decongest “Imperial Manila” and reduce its prominence in the country’s national life. In so doing, the government — led for the first time by someone from Mindanao — vowed to bring inclusive growth to the countryside.

While businesses may be prepared to bring their operations outside the capital, are these areas ready to support industry expansion, including the information technology-business process management (IT-BPM) sector, currently the Philippines’ sunshine industry?

That remains to be a work in progress.

But it doesn’t mean that the private sector and the government aren’t working together to enhance the capacity of cities and towns outside Manila.

If the government aims to decentralize the growth, infrastructure should follow, Chermaine B. Muro, director of Premier BPO, Inc., told BusinessWorld in an interview.

“Other provinces outside Manila should be ready to be able to serve what is needed by the BPO industry, especially the connectivity,” said the executive of Premier BPO, which offers back-office processing, financial services, information technology services, among others, to its customers.

Measuring capacities of towns, cities

To this end, IT-BPM has launched road map which serves as a “prescription” for cities across the country to assess their readiness for the sector’s expansion. The IT-BPAP (Business Process Association of the Philippines) listed the criteria the industry uses to measure these towns and cities: human capital, connectivity, and community development.

“We have been publishing what we call ‘The Next Wave City Report’ for how many years now, and what it does is it helps cities across the Philippines to look at on these measures, how are they and what can you actually to improve them,” IT-BPAP Executive Committee Chairman Benedict C. Hernandez said during the initial launch of the new road map 2022, which carried the theme, “Accelerate PH.”

Mr. Hernandez added that aside from “The Next Wave City Report,” the IT-BPAP also named the top 20 emerging cities to watch out for.

In its latest report published in April, IT-BPAP announced the following as the Top 10 Next Wave Cities:

• Baguio City

• Cagayan de Oro City

• Dagupan City

• Dasmariñas City

• Dumaguete City

• Lipa City

• Malolos City

• Naga City

• Sta. Rosa City

• Laguna; and

• Taytay, Rizal

Moreover, the emerging cities seen to sustain the growth of the sector are:

• Balanga City

• Batangas City

• Iriga City

• Laoag City

• Legazpi City

• Puerto Princesa City

• Roxas City

• Tarlac City

• Tuguegarao City

• Zamboanga City

He said that the dialogues between the association and the government are under way to identify the key strengths and opportunities in an area to attract investments.

“I was involved in the last one… in Dipolog. So again looking at what’s available here, how’s the talent, how’s the infrastructure so that’s gonna keep going. So our goal is to keep promoting ten if not 20 cities,” Mr. Hernandez said.

He also expressed optimism that the IT-BPM sector is on track to meet the 1.3-million direct employment target under the 2012-2016 road map. As of 2015, the sector has directly employed some 1.2 million workers, according to its data.

Creating another million jobs

He also said that the Philippines’ IT-BPM is now about a tenth of the industry’s global size.

“Our ambition is to create another one million higher value direct jobs in IT-BPM over the next six years. There’s also an additional three to four indirect jobs created per direct job in our industry, according to research. So in total, we are looking at four to five million new jobs in the country,” Mr. Hernandez said on the new road map.

He also noted that during the past five years, the Philippine IT-BPM sector has been growing more than twice the global growth rate, and with this, the country can shift into high value services.

Part of the ambition of the industry is to diversify its services, Mr. Hernandez said, noting that the Philippines dominated the contact center industry since 2010.

Aside from contact centers, other services that have grown over the past years — and still has the potential to grow even more — are health care information, IT, and the global in-house center service, in which financial institutions establish a base in the country for mid-office operations of credit processing, among others, he said.

Mr. Hernandez noted that 300,000 jobs — roughly 30% of the industry’s total work force — were provided outside the capital and “part of focus of the new road map is how to continue to push more and more investment and job creation outside of Manila.”

Current technological trends present significant opportunities for the Philippines, he said.

Labor pool tricky outside Manila

One of the hurdles in the rapid expansion of the IT-BPM sector is the lack of qualified labor pool “that could actually work in an IT-BPO sector,” Premier BPO’s Ms. Muro also said.

Once you reach out and start expansion outside the capital, “the labor pool gets a little tricky,” Ms. Muro said.

In order to address this concern, Mr. Hernandez said that “the key is making sure human capital is able to get ready” as the landscape in the IT-BPM sector evolves through time.

Moreover, one of the reasons driving the expansion outside Manila, Ms. Muro said, is the cost of rent in the saturated central business districts in the capital.

She said that locating outside Manila is the trend right now for a BPO firm as it is the “cheaper way of expanding.”

BusinessWorld earlier reported that in Bonifacio Global City in Taguig City, rental rates are projected to increase to P1,163 per square meter (sqm) in 2020 from the P957 estimated for this year, CB Richard Ellis Philippines (CBRE) Philippines, Inc. said.

In a separate report, CBRE noted that monthly office rental rates in Metro Manila averaged P870.47 per sqm in the fourth quarter of 2015, up 2.54% from the previous quarter. These comprised rental rates in Makati, Fort Bonifacio, Ortigas, Quezon City, Alabang and the Bay Area.

New agency to help industry achieve milestones

Meanwhile, the IT-BPAP believes that the creation of the Department of Information and Communications Technology (DICT) “will help the industry achieve the new milestones as recommended” in the new road map.

Mr. Hernandez noted that the IT-BPAP was one of the first to call for the creation of the ICT department since the beginning.

Mr. Hernandez said that the DICT will particularly help them execute the provisions of the Anti-Cyber Crime Law and the Data Privacy Law – two laws seen to be critical in making the country more attractive in foreign investors.

Moreover the IT-BPAP said that it looks forward for a “strong partnership and collaboration” with the new administration.

The industry association further noted that “embracing digital trends presents a path for the Philippines to accelerate moving up to the higher value chain.”

“Disruption in technology can be considered a threat or can be embraced to take advantage of its opportunities,” IT-BPAP said.

Raynan F. Javil (@rajavil on Twitter) covers several beats — including the House of Representatives and the Office of the Vice-President — for BusinessWorld.

By Vince Alvic Alexis F. Nonato, Reporter

Within less than a month of President Rodrigo R. Duterte’s presidency, his economic managers have buckled down and began throwing around ideas to improve the flagship infrastructure program, which has been criticized for its slow pace and unenthusiastic response to unsolicited proposals.

Even before Mr. Duterte formally took office, Finance Secretary Carlos G. Dominguez III already issued a pronouncement that marked a reversal from the government’s previous stance.

“We will welcome unsolicited proposals. Government does not have a monopoly over innovative ideas,” Mr. Dominguez said in a June 29 forum organized by the Rizal Commercial Banking Corp.

This was in stark contrast to the position adopted by the government of President Benigno S.C. Aquino III, which had been unexcited about unsolicited proposals.

In fact, only one has so far been approved by the National Economic and Development Authority Board — the Metro Pacific Tollways Development Corp.’s P23.2-billion pitch to build a 13.4-kilometer, four lane road connecting the North Luzon Expressway and South Luzon Expressway.

Mr. Dominguez in the said forum also said the new administration will encourage local government units to “initiate their own development partnerships,” citing the recent inauguration of the P38.9-billion mixed-use reclamation project in Mr. Duterte’s hometown of Davao City.

The following week, National Economic and Development Authority Director-General Ernesto M. Pernia issued another pronouncement addressing the languid pace of the PPP program under the Aquino administration.

“We plan to reduce the time… from the start to bidding,”  said in a briefing after the administration’s first Development Budget Coordinating Committee meeting on July 5. “The average length of time spent from the consideration of project proposal to bidding is about 29-30 months. We will try to cut that down to a third maybe, so things will move faster,” he said.

Focusing on the expenditure aspect, Budget Secretary Benjamin E. Diokno in his first briefing on July 14 said that the government aims to eventually increase the threshold of infrastructure spending to 7% of the gross domestic output. The first Duterte budget, for one, will spend 5.2% of the GDP, or a record P891 billion in 2017.

This was in contrast to the 5% infrastructure-to-GDP ratio committed by the previous administration, which Mr. Diokno claimed was more like “around 2-3% only,” as data was “fudged” by adding capital outlay on top of “pure” infrastructure.

Mr. Diokno added that plans for 24/7 construction on major public works projects in urban centers would also boost expenditure.

Change would not likely come at the expense of stability in the infrastructure sector, with Mr. Dominguez assuring “there will be no hiatus with the PPP projects that are coming up.”

“We’ll go ahead with all of them; we’ll just assume the administration did the right thing and we will push ahead,” he said during the BusinessWorld Economic Forum 2016 on July 12.

PPP Center Executive Director Andre C. Palacios, during the same forum, said the sector was “very happy to hear the new President is saying that the PPP will be playing a key role in the infrastructure program of the Duterte administration.”

“We should understand not only is strong political support needed — sustained political support is necessary,” Mr. Palacios said. “We should understand that the average PPP contract has a life of 25 years, and will involve at least five Philippine presidents in the life of the project.”

Stain on Aquino govt’s infrastructure program

The PPP program basically taps into the third way of financing infrastructure projects — the private sector, as an alternative to direct government funding or foreign loans.

Mr. Palacios in his presentation before the BusinessWorld Economic Forum noted the “huge gap” between the $57 billion that the government of President Benigno S.C. Aquino III was able to budget and the $127 billion needed to address infrastructure needs according to the Asian Development Bank.

“The gap is filled by $5 billion in foreign loans and grants, and $35 billion in private-financed infrastructure PPPs,” he said. “There is still a gap of $30 billion. Now, government could either raise the money and put it in its budget or further tap the private sector.”

The PPP was pitched by President Benigno S.C. Aquino III during his first State of the Nation Address as “our solution” to the country’s pressing infrastructure needs, at a time when “our funds will not be enough to meet them.”

By the end of his term, however, his administration was criticized for various delays, culminating in the failure to reach its target of awarding at least 15 projects.

When Mr. Aquino bowed out of office, only 12 projects with a cumulative project cost of P191.2 billion were awarded.

Already completed were the P2.23-billion Daang-Hari SLEX Link Road (Muntinlupa-Cavite Expressway) Project, the P1.72-billion Automatic Fare Collection System (AFCS), and the P9.89-billion PPP for School Infrastructure Project Phase I.

Other awarded projects are the P17.93-billion second phase of the NAIA Expressway Project, P3.86-billion PPP for School Infrastructure Project Phase II, P5.61-billion Modernization of Philippine Orthopedic Center project, P17.52-billion Mactan-Cebu International Airport Passenger Terminal Building, P64.9-billion LRT Line 1 Cavite Extension and Operation & Maintenance project, P2.5-billion Southwest Integrated Transport System (ITS) Project, P35.43-billion Cavite-Laguna Expressway, P5.2-billion ITS South Terminal Project, and P24.41-billion Bulacan Bulk Water Supply Project.

It was the Philippine Orthopedic Center project that stained the Aquino infrastructure legacy, as winning bidder Megawide Construction Corp. rescinded the contract in November 2015 over the government’s failure to turn over the possession of the project site.

Former Health Secretary Janette P. Loreto-Garin told reporters in March that there were no qualified proposals from interested service providers to take over the project, effectively shelving it.

This was because of the government’s commitment on allotting 70% of the specialty hospital’s capacity to indigent patients or those enrolled under the state-run Philippine Health Insurance Corp. program, with the remaining 30% going to paying private patients.  Private developers have not found the setup profitable enough to pursue.

One project was supposed to have hurdled the bidding stage already, but it ultimately ended in an auction failure.

None of the three qualified groups offered their bids for the P122.8-billion Laguna Lakeshore Expressway Dike Project in March. The developers have withdrawn from the project over qualms about the project’s viability.

Whether the project will have to go back to square one will depend on the feasibility review being done by the Department of Public Works and Highways, Mr. Palacios explained. If the original parameters that turned off developers are kept, the NEDA Board approval would still apply.

Registry project poised to be Duterte govt’s first PPP?

The awarding of the P1.59-billion Civil Registry System Information Technology Project Phase II narrowly missed being wrapped up by the Aquino administration. Instead, it is poised to be the first to be awarded by the Duterte government.

Only one bidder had submitted an offer and the Investment Coordination Committee would have to approve the lone bid first for compliance. Mr. Palacios said this was targeted for the first ICC meeting on Aug. 2.

Meanwhile, the submission of bids for ten projects remained pending. Five of these involve the development of regional airports: New Bohol (Panglao) Airport (P4.57 billion), Laguindingan Airport (P14.62 billion), Davao Airport (P40.57 billion), Bacolod Airport (P20.26 billion), and Iloilo Airport (P30.4 billion).

The other five were: the operation and maintenance of the LRT Line 2, the P18.99-billion Sasa Port modernization project in Davao City, the P298-million Road Transport IT Infrastructure Project, the P18.72-billion New Centennial Water Source-Kaliwa Dam Project, and the P50.18-billion Regional Prison Facility project.

Still in an equivalent stage is the aforementioned NLEx-SLEx Connector Road unsolicited proposal, which would be subject to a Swiss challenge this month.

These pending projects were not free of problems either, with several being beset by delays. For one, the regional prison facility, which will accommodate convicts to be transferred from the congested New Bilibid Prisons and Correction Institute for Women, has been postponed for almost a year over delays in the handover of land at the Fort Magsaysay military reservation.

Meanwhile, the P65.09-billion LRT Line 6 Project and the P170.7-billion North-South Railway Project are in the process of attracting prospective investors for prequalification.

Before the procurement for a PPP project takes off, a feasibility study would have to be prepared first and then evaluated by the concerned agency. Next, the ICC reviews and threshes out technical issues before it is submitted to the NEDA Board for approval.

When the Aquino administration ended, three projects P4.21-billion Integrated Transport System-North Terminal Project, the Rural Dairy Industry Development Project, and the Judiciary Infrastructure Development Project are undergoing feasibility studies. The P536.03-billion Manila Bay Integrated Flood Control, Coastal Defense and Expressway Project, meanwhile, is being evaluated by the DPWH.

The NEDA Board is currently evaluating five projects: the NAIA Development Project (P74.56 billion), the Plaridel Bypass Toll Road (P9.33 billion), the Philippine Travel Center Complex Project (P1.75 billion), the Batangas-Manila 1 Natural Gas Pipeline Project (P14.72 billion), and the New Nayong Pilipino at Entertainment City Project (P1.58 billion).

Delayed projects became political ammunition

In his last SONA, Mr. Aquino simply asked his constituents to “calm down” as the procurement process is long.

Instead, he defended the program by noting that his government has awarded more projects than the six accomplished by the preceding three administrations. Still, he did not elaborate how he planned to prevent further delays in the projects’ implementation.

“It doesn’t matter if I am unable to preside over the groundbreaking or ribbon-cutting. What is important is that these projects are well-planned and legal, so that when they are approved, construction can proceed quickly; the quality of the structure will withstand anyone’s scrutiny,” he said instead.

Perceived delays in the PPP program ended up providing ammunition for presidential candidates in decrying the inefficiency of the government. Opposition leader and former Vice-President Jejomar C. Binay even played with the acronym and repeatedly called the program a “Powerpoint presentation” that has been crippled by “paralysis by analysis.”

By the time Mr. Duterte has emerged as Mr. Aquino’s successor, his economic managers continued to echo the sentiment that the government fell short of reaching its PPP goals. Mr. Dominguez even used the “Powerpoint presentation” term to describe what had transpired under the previous government.

“This is first and foremost an opportunity to bring private sector participation in nation-building,” Mr. Dominguez said in June 29. “The PPP program will, in the new dispensation, no longer be merely a PowerPoint presentation.”

He assured the business sector that the implementation of the PPP program will be reviewed.

Mr. Palacios in a July 12 interview disclosed that the review is already underway, as the PPP Center started discussing with the NEDA how to streamline processes.

He explained that the PPP process tends to be slowest at the level of the ICC, because of its task to thresh out the technical issues before the NEDA Board evaluates a project’s policy implications.

Sustained political support necessary for infrastructure dev’t

On the issue of snail-paced processes, Mr. Palacios pointed out during the BusinessWorld Economic Forum on July 12 that momentum would have to be first built by the Aquino government, to be sustained by the succeeding administrations.

“We should understand PPP programs require strong and sustained political support. We have been successful so far over the past six years and we look forwarded to continuing these good experience of having speedy implementation while maintaining integrity,” he said.

Saying “the challenges to the program really started with the capacity of the agencies,” Mr. Palacios noted the government would have to adjust from a traditional mindset in which it decided the design of the project and took over the operation of the asset once it is built.

“We needed to build the capacity of the agencies to understand they have a different role when undertaking infrastructure with a private partner in the long term. So that took a while,” Mr. Palacios said.

“But, I think the idea of the private sector being a long-term partner for infrastructure has caught on already. So we are there. If we have sustained and strong political support, the momentum can be continued.”

Mr. Dominguez said as much during BusinessWorld’s July 12 forum. “To start with, they were just starting with a new system,” he acknowledged.

At the very least, the Duterte government will pick up on 17 projects that have not been finished when the Aquino administration bowed out.

“We will try to do all of those between now and the end of 2017, maybe even earlier,” Mr. Pernia said on July 12. “Unless there are problems with those projects, I think most of them can go.”

For Mr. Palacios, he looked back at the “sufficient experience in procurement and implementation which are then the basis for proposing policy reforms.”

“What we need to make sure is as we speed up the process we’re also ensuring the integrity of it, because at the end of the day, the cost will be shouldered by the Filipino people,” said Mr. Palacios.

Vince ALVIC ALEXIS F. Nonato (@VinceNonato on Twitter) is the court reporter for BusinessWorld. He breaks down court decisions and rants about anime on Twitter. MARGARITA GONZALES (@famamfa on Twitter) designed and updated the charts.

By Bienvenido S. Oplas, Jr.

Corruption takes place when a person has the power to dispense certain actions or render services that other parties needs. Voters who sell their ballots in exchange for money and politicians buying them are both engaged in electoral corruption. Similarly, procurement officers who favor certain suppliers even if others can offer the same products or services at lower prices are also committing corruption.

Elevate the scene to a city or country level, and we can see or suspect large-scale corruption in various levels. Like a cabinet secretary favoring a particular supplier of construction materials and equipment, or arms and soldier uniforms, or school buildings and textbooks, or hospital equipment and medicines, even if other suppliers can deliver those goods and services at a lower price and/or better quality, corruption occurs.

To reduce or eliminate corruption, the process of procurement and signing of contracts should be made as transparent as possible. And the possibility of prosecution and imprisonment for wrongdoing should also be made as certain as possible. Because while the punishment can be as severe like the death penalty but if the chance of being caught and prosecuted is very small, then people will remain corrupt.

During the BusinessWorld Economic Forum last July 12, 2016, Department of Finace (DoF) Secretary Carlos G. Dominguez III outlined some important anti-corruption measures of the Duterte administration. Among these are the following:

1. Reduce income tax (personal and corporate), raise the income tax exemption, all in at P1 million a year. This will reduce corruption in the payment and collection of income taxes, broaden the tax base and hence, can actually raise revenues overall.

2. Rationalize import permit papers, reduce the number of signatures, conduct random audit of shipments, and undertake certain processes outside Manila ports. This will reduce corruption at the Bureau of Customs (BoC).

3. Accelerate the Run After the Tax Evaders (RATE), Run After the Smugglers (RATS), and Revenue Integrity Protection Service (RIPS) programs of the DoF. Undersecretary Gil Beltran was appointed as the anti-red tape czar of the Department tasked to cut the transaction processes at the BIR, BoC, and other agencies under the DoF.

4. Maintain transparency in all dealings — the Executive Order (EO) on Freedom of Information (FoI) that will cover the Executive Department will be signed very soon. This will encourage zero tolerance for corruption.

There are other proposals and programs to reduce corruption at the DoF and other agencies, but the above were highlighted in his speech that day.

These are good proposals. Few permits and bureaucratic signatures can lead to a leaner and smaller government. Instead of 8 or 10 directors in one bureau that require 8 or 10 signatures, make it 4 or 5 and the transaction procedures will significantly improve. The number of officials and their offices will also decline and hence, the need for taxes and fees to keep them going will also be reduced. If people have more money in their pockets because government taxation and mandatory fees have declined, that is already one form of public service. Concrete, down to earth public service.

The extent of corruption in the Philippines is captured in various international reports and studies that are reported annually. One such important report is Transparency International’s (TI) Corruption Perception Index (CPI). TI interviews thousands of expats in many countries worldwide and see their perception of corruption or absence of it in the countries where they do business.

Other selected reports are also included in a separate table by TI. For this piece, four of such reports are included in the table below. These are the (a) World Economic Forum’s (WEF) Executive Opinion Survey (EOS), (b) World Justice Project’s (WJP) Rule of Law Index (RLI), (c) Economist Intelligence Unit (EIU), and (d) IHS Global Insights (GI).

The Philippines has consistently scored only between 34 to 38 over the last four years of TI’s CPI annual reports. So out of 167 countries covered in the 2015 Report, the Philippines ranked 95th or within the lower half of the countries covered. And the Philippines’ low ranking is affirmed in its low score in the four other reports.

I am hoping that reforms initiated by the DoF and other departments of the Duterte administration will be implemented and sustained for the next six years. There will be significant improvement in the country’s corruption perception and reduction in actual practices of corruption in many government agencies, from local to national, and from the Executive to the Legislative and Judiciary.

Transparent and lean government is good. It will be beneficial for businesses and taxpayers and good for the officials and ordinary personnel in government. Trust and respect for both sides will also improve.

Bienvenido S. Oplas, Jr. (@noysky on Twitter) is the head of Minimal Government Thinkers and a SEANET Fellow. minimalgovernment@gmail.com