Edwin CoSeteng, President, First Philippine Industrial Park; and Guillermo Luchangco, Chairman and CEO, Science Park of the Philippines: Interview

Interview: Edwin CoSeteng, Guillermo Luchangco

What challenges and opportunities have arisen for industrial estate expansion and for the manufacturing sector as a whole?

EDWIN COSETENG: The Philippines has experienced a surge in interest in terms of foreign direct investment in manufacturing over the past four years. This has come at a time when most industrial estate developers have had reduced inventory. All players have had to fast-track their expansions to keep up with this increasing demand. The government through the Philippine Economic Zone Authority has been very helpful and supportive in all of our expansion efforts. The main challenge we all face is in the lengthy process of acquiring, converting and reclaiming land for industrial estate purposes. The government may need to amend or simplify both the requirements and processes in proclaiming industrial zones. In addition, it can evaluate giving PEZA additional abilities to coordinate and fast-track the process at both the local and national level for developers that meet the stream-lined requirements. We believe that as the Philippine economy continues to grow, more foreign companies will look to the country as an attractive market on its own. This increases the possibility of promoting the Philippines as a viable manufacturing site serving both the global markets and the domestic market. The Department of Trade and Industry and PEZA have explored the creation of domestic manufacturing zones around the country. This is a welcome effort that provides a level-playing field for all investors – both foreign and Philippine – in an era of increased free trade agreements. It should surely result in more inclusive manufacturing growth and economic development throughout the Philippines.

GUILLERMO LUCHANGCO: Prior to 2012, the Philippines lost ground in terms of manufacturing activity and employment numbers. This trend has been reversed in recent years, and industrial estates have played a key role in revitalising manufacturing development.

The business process outsourcing (BPO) industry’s recent robust growth has masked a decline in manufacturing employment, but the fact is that many displaced workers are unable to readily switch to services. This highlights the importance of having a manufacturing base in the country. The Philippines needs more lots and a bigger inventory of industrial estates, especially given that developers are currently scrambling to provide suitable sites. If one looks at the export economy, a major portion comes from factories located in industrial estates, as locators there operate under several incentives conducive to exporting and are supported by PEZA, which has been extremely effective, transparent and collaborative in addressing investors’ concerns. Countries with China-based production are now eyeing alternative locations due to emerging uncertainties affecting their operations, such as political factors, decreasing productivity levels, increasing labour costs and copyright infringement issues.

How will the country benefit from the new trade status under the EU’s General System of Preferences Plus (GSP+) and competition from ASEAN?

LUCHANGCO: With the awarding of GSP+ status which allows the Philippines tariff-free access for strategic exports to the EU, we expect that the Philippines will have an advantage over its competitors in several production areas. Europe is already awakening to the potential of Asia as an investment destination, but there are factors present in certain ASEAN countries that have lessened their attractiveness to investors, particularly in terms of political problems and natural disasters such as floods. The Philippines, however, has been the second-fastest growing country in Asia since 2012, with a sustained GDP growth rate above 6%, and the investor community has expressed a renewed confidence in the country due to the current administration’s emphasis on transparency and political stability. Both of these factors have accelerated the return of manufacturing to the Philippines. In addition to Europe, several countries, and Japan in particular, have stated their interest in the young, English-speaking demographic in the Philippines as a source of labour.

English is generally acknowledged to be the language of business, and although competing countries may have lower wages, the Philippines stands out, when productivity cost is measured against output, as having a high level of labour productivity. As integration continues, the location of the Philippines as the northernmost ASEAN member, and its close proximity to the region’s biggest economies – Japan and China – positions the country as a gateway or production base for the region.

COSETENG: Competition from within the ASEAN Economic Community will drive firms to review their supply chains and seek to make them more agile, cost-effective and responsive to changing market demand. This may result in diverse strategies – some may decide to concentrate products in specific countries and ship them throughout the region. Others may decide to employ a local production strategy tailored to specific market requirements. All of this can be enhanced with strategies that address the supply chain and logistic networks through the use of innovations in both process and technology to increase the speed-to-market capability. This will be especially true in many consumer markets. The Philippines with its young, rising consumer base can serve as a vital supply base in the Asian market as greater consumption grows throughout the region.

Business enablers that will benefit and complement integration include logistics, market analysts and trade facilitation service providers, who will enable swifter product movement both within and between countries, that allow firms to create, drive and respond to market demand in many segments. There is a wide range of industries in Europe that the Philippines can supply competitively and effectively. This advantage will be aided by the country’s GSP+ status, particularly as the Philippines is the only country in ASEAN that has these privileges. We should see more investors establishing manufacturing operations that will leverage the Philippines’ deep pool of skilled, English speaking workers to serve not only the European market, but the rest of the global market.

What role do environmental sustainability and climate change resilience play in ensuring the value proposition of industrial estates for investors?

COSETENG: Sustainability is a prime concern for all industrial park ecosystems, and operators have been actively finding ways to make sure business is conducted in a sustainable manner. Given that an industrial park hosts a whole community, warning mechanisms and mitigation plans are in place in case of earthquakes, fires, floods and storms. Industrial parks – in their design process – have to build in the capacity, resiliency, and swift response to all the above-mentioned environmental risks. In addition, industrial parks in their planning are responding to requests from most locators to operate the park in a manner that also has less impact to the environment. In fact, we are exploring different approaches and service delivery mechanisms that can provide greater resource certainty within the park, while at the same time lowering both the costs and risks of achieving this result. In addition, we are bringing to bear the expertise within the First Philippine Holding group to our locators as they seek to improve not only their compliance, but increase their resilience to climate change and other environmental risks.

Whereas the majority of industrial parks are able to manage most disruption within their own estate – clearing roads, restoring power and water supply – they are still vulnerable to events that damage roads, ports and telecoms facilities. This requires industrial estate developers to work closely with PEZA and other government agencies to ensure quick restoration of services and the integrity of the supply chain in the shortest possible time and by increasing the redundancy of the various infrastructure that connect our industrial park to the rest of the world.

LUCHANGCO: There is a high premium placed on climate change resilience, in particular disaster control management for floods and earthquakes. Fortunately, in the provinces of Cavite, Laguna and Batangas where the bulk of manufacturing activity takes place, rivers and other bodies of water are far below ground level, minimising the risk of flooding. North of Manila, floods are much more common and so industrial parks need to look for ways to contain surges of water as part of their estates.

Other ways environmental sustainability is emphasised in industrial parks are master plans that allow for the preservation of green areas, use of green-building initiatives and infrastructure designed to minimise car usage. To further guarantee business continuity, industrial parks have embedded power generation or have situated themselves with a direct connection to national transmission lines instead of passing through a provincial franchise, thus ensuring greater power reliability and lower costs.

How far can industrial estates be decentralised, and what enablers would facilitate this process?

LUCHANGCO: Industrial estates have to some extent been branching out and fuelling the development of their own communities and townships. Decentralisation has occurred in viable areas outside of Metro Manila and Calabarzon, which remain the centres of manufacturing in the country. However, the challenge has been to encourage companies to locate to estates in remote areas. If one has land in underdeveloped, outlying provinces, the first one must consider when developing an estate is accessibility. Adequate infrastructure such as ports or airports must be in place before land is developed to ensure a finished product or raw material can enter or exit the site, as well as a reliable water and power supply. The Philippines has over 100 approved industrial estates but only 10 industrial estate operators are responsible for over 50% of output and economic activity, with operations centred around Calabarzon or Cebu, primarily because those areas have already developed infrastructure and are serviced by airlines and shipping lines. The benefits of decentralising industrial estates will translate into growth for urban centres in outlying areas, as estates transition into self-supporting townships, providing “live, play, eat and shop” opportunities for locators and workers.

COSETENG: Many things need to be in place to facilitate the decentralisation of industrial estates and increase their attractiveness outside of Metro Manila. For instance, investment in additional transport infrastructure – such as highways, railways, and port facilities needs to be accelerated. Once this is in place, there will be greater attraction for industrial estates to be established outside of Metro Manila and the Calabarzon. Government incentives whether in the form of tax reduction, cheaper land, or support for locators can encourage decentralisation in remote sites that still have to prove their viability. As industrial estates and BPOs begin to migrate out of Metro Manila, the formation of communities around these new areas will follow. Although physical infrastructure is important to consider in terms of estate development, social infrastructure is essential for a community to flourish. Reliable, affordable health care services and quality educational facilities at all levels are two important factors that will encourage migration to areas of new development. Fortunately, private suppliers of schools and hospitals have begun to respond to pockets of demand for these services.

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The Report: The Philippines 2016

Trade & Investment chapter from The Report: The Philippines 2016

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