OBG talks to Arthur P Tugade, President and CEO, Clark Development Corporation; Deogracias G P Custodio, Chairman and Administrator, Freeport Area of Bataan (FAB)

Interview: Arthur P Tugade and Deogracias G P Custodio

How can connectivity to and from economic zones be facilitated to complement growth?

ARTHUR P TUGADE: Connectivity to and from the nation’s ecozones is important for ensuring the fast and efficient delivery of goods and services, as well as the movement of people. Airports and seaports with complementing road network infrastructure are necessary. The government should provide these facilities and continually upgrade them. Some of the major road networks that could offer connectivity to the CIA and Subic Port are the North Luzon Expressway, connecting Clark to Metro Manila; the Subic-Clark-Tarlac Expressway, connecting Clark to Subic/Olongapo; and the Tarlac-Pangasinan-La Union Expressway, connecting Clark to North Luzon. Clark is within four-hour’s flight time of key cities in Asia. In late 2014, the Clark Development Corporation (CDC) signed a contract for a 3-ha container yard intended to further support connectivity and just-in-time processing in the zone.

DEOGRACIAS G P CUSTODIO: Enhancing connectivity with Metro Manila is key because that is where shipping containers from the vast majority of locators in ecozones go. Given significant bottlenecks at the Port of Manila and the growing problem of congestion in the city created by ongoing infrastructure and road connectivity projects, the opportunity has arisen to push containerised traffic to alternative ports to avoid road and port congestion in Metro Manila, in addition to developing a containerised port or a roll-on/roll-off facility to complement growth in ecozones.

For the FAB, the construction of another port facility in 2015 in the freeport offers enhanced logistics infrastructure that will complement its growth trend. Increased connectivity to the FAB, which offers lower cost of doing business, creates the opportunity to attract more investors, as other ecozones are starting to reach full capacity. Additionally, connectivity would be a major enabler for the development of a leisure component for ecozones, especially for the FAB, complementing ongoing developments in gaming and resort facilities. While the FAB is only a 25-minute drive away from white sand beaches and hotel facilities catering to their locators and an hour away from Manila by ferry, increased connectivity will further boost the entertainment potential in these areas.

Which sectors are best suited to benefit from intra-ASEAN investment and competition generated by the ASEAN Economic Community (AEC)?

CUSTODIO: Certain sectors have already been identified as priorities, as they would benefit the most from the impending integration of ASEAN. In the FAB, the sectors that are expected to boom and generate additional investments are garments and textiles, electronics and electrical, and agriculture and fisheries – as well as services sectors, such as health care or business process outsourcing (BPO).

Health care presents an opportunity for ecozones like the FAB, where the medical tourism angle can be leveraged for growth. In particular, given that a sizable bulk of health care costs are accounted for by rehabilitation and not just operations, the former can be performed in Manila while rehabilitation can be done in the FAB with its nice beaches, clean air and lower costs, which is a draw for foreign consumers. Manufacturing is also being promoted and has gained noticeable traction. In the case of the FAB, growth has continued in garments and textiles. Bags and purses have generated higher volumes, with more high-end brands starting manufacturing operations.

Moreover, the FAB has also begun to accommodate the BPO industry after generating strong interest from the Chinese market in 2014. With the establishment of the AEC and subsequent liberalisation of the ASEAN market, it is expected that the BPO industry in the FAB will expand in the coming years and create thousands of new employment opportunities. Consequently, we have strengthened our communication lines with both the Technical Education and Skills Development Authority (TESDA) and our locators in regards to their development plans in order to make sure we can meet labour requirements in the future.

DE LIMA: Given their economies of scale and trade experience, one of the sectors best suited to benefit from ASEAN integration is the export manufacturing sector. Through PEZA, the Philippines hosts a large number of export manufacturing companies that also support a range of different suppliers. The presence of these firms in the country has become a magnet for other export manufacturers given the already existing infrastructure and emergence of supporting industries in the archipelago nation.

In order to maintain the momentum of our export-oriented industry, our port infrastructure must be able to cope with the increasing needs of our export manufacturing sector. The use of alternative ports to Manila’s seaport, such as Batangas International Port and other international seaports in Luzon, will considerably ease the movement of goods from the Philippines to the rest of ASEAN and the world. In addition, another area to benefit from liberalisation is the agro-industrial sector, which has the greatest potential to alleviate poverty within the Philippines.

How can economic zones keep their appeal for investors once the AEC has been implemented?

DE LIMA: Although everyone speaks of ASEAN integration occurring in 2015, most of the tariffs have already been removed and liberalisation has been an ongoing process in recent years. The current landscape thus creates an environment for both competition and cooperation among ASEAN member countries. In this context, the Philippines’ principal asset will be its young, English-speaking workforce. This competition has also translated into ecozones which have consistently been trying to outdo one another to attract manufacturers. For instance, several ecozones have been boosting their services and amenities, and improving their hotel infrastructure to attract more locators and businesspeople, with positive results for end-users. The result of these efforts can be seen in how, among all locators in PEZA, more than 50% of annual investments consist of reinvestments of companies. This demonstrates the existing confidence in the competiveness of ecozones, and ensures their continued attractiveness after liberalisation.

GARCIA: Subic Freeport has a modern container terminal with a capacity for 600,000 twenty-foot equivalent units, as well as a strategic location to reach the Asian market. Therefore, it presents fertile ground for export industries to locate. The coming ASEAN integration in 2015 provides an opportunity for manufacturing and logistics hubs to make Subic an ideal choice given its strategic location and advantages in serving the ASEAN market. The unsustainable port congestion at the Port of Manila provides opportunities for the increased use of other large trans-shipment centres that serve the city and the surrounding area. Of the 2.8m containers that passed through the Port of Manila annually, some 45,000 currently come from or are destined for Central and Northern Luzon. They would thus substantially relieve both the port and traffic congestion in Manila if they pass through Subic. The availability of vital urban and leisure infrastructure within walking distance from one another in the ecozone can also create the environment necessary to become an attractive hub destination. However, despite the ongoing progress of liberalisation efforts, locators have not sought to arbitrarily open production sites all over the country, but they have focused on plug-and-play areas and are willing to pay the premium for them. As a result, ecozones in Luzon are looking to invest in energy sources to supply affordable power to electricity-intensive industries and contribute to a self-contained ecosystem for companies. In addition to increasing manufacturing presence, most ecozones are trying to incentivise high-value industries, for instance ship builders. These industries require higher capital investments in the ecozone and represent opportunities for economies of scale as the locators are now sourcing more of their raw materials locally. This would make the overall landscape more efficient and competitive.

TUGADE: Ecozones will remain attractive because they provide additional factors conducive to business environment. More than liberalised trade rules, investors still look for the basics: connectivity, accessibility, safety and security, competent workers, and ease of doing business – all factors that ecozones are already ready to provide. Often, ecozones create a different work culture from that of the host country. It is a community that is efficient, autonomous and adaptive to diverse cultures.

Clark will remain attractive, despite of the challenges brought about by the AEC, because of its unique land use mix, support infrastructure, and the qualifications and culture of its people. Clark is more than a building or an industrial zone, it is a complete work-live-play environment where almost everything an investor and their family needs is within reach.

Clark offers better connectivity because of the presence of CIA, Subic Port and Clark’s support container. We have utilities in place and an educated, skilled, English-speaking workforce. Most importantly, we provide government support to investors with the CDC assisting locators to meet government requirements. The CDC instills a spirit of service and integrity among its employees. The company has already adopted changes to improve services, including a 30-50% reduction in processing time. CDC was also recently commended by FDi Magazine as “Best in Reduction for Regulatory Process”. Given these factors, we believe that Clark will still be attractive to investors even with the full implementation of the AEC.

What opportunities do economic zones represent for small and medium-sized enterprises (SMEs) to act as suppliers and ancillary businesses?

GARCIA: SMEs can help to complete the supply chain, provided these companies can supply resources or equipment to multinational companies at a competitive price and faster than it would take to import the products. The multiplier effects of locators within an ecozone are not limited to SMEs, but also include expanding the human capital pool, which will grow and be developed through skills training and in partnership with the government.

For example, working alongside TESDA and partnering with the Commission on Higher Education, ecozones and their locators can work to improve existing curricula to fit current and future employment needs, especially in high-growth areas such as shipbuilding in the case of Subic. Locators can also supply mentors or training programmes to these schools and their students so as to improve the quality of human resources in any ecozone.

CUSTODIO: The ongoing concern that exists about the AEC is centred on the viability of SMEs, which could be marginalised as the lager players stand to benefit most from integration. However, the Authority of the Freeport Area of Bataan supports SMEs finding niches in the sectors least served by the bigger players in order to also experience the benefits of liberalisation, which in the case of the FAB is higher-end products at the right price, where the Philippines does have a competitive advantage compared to other countries in the ASEAN community.

For example, as a result of the manufacturing activities going on within the FAB, SMEs are looking into the possibility of supplying domestic producers, such as zippers and other necessary components for highend bags and purses. Additionally, a large number of brands are already operating in the freeport due to economies of scale, which is increasing the opportunities for new players to come in and take advantage of a ready market. Similarly, small- and medium-sized packaging companies are already in high demand, and although Chinese locators continue to source their packaging from China, as demand grows, it will be more feasible for local suppliers to participate.

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The Report: The Philippines 2015

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