The Philippines has been one of the top performers in the global IT and business process outsourcing (BPO) sectors for the last few years. With the government promoting the development of high-growth industries to generate export revenues and create employment opportunities, the IT sector, and in particular the software industry, has witnessed robust performance.
Software services are about the most important components of the country’s IT capabilities and it has benefitted from infrastructure development, a skilled workforce and competitive pricing. This has also provided foreign investors the opportunity to enter the market and leverage favourable conditions for software exports. The nation’s youth are highly connected and show a keen interest in social networking and gaming applications. Domestic telecommunications providers also dominate the market and offer varied services.
IT GROWTH: The IT sector plays an important role in the Philippines’ economic development. According to a report by PricewaterhouseCoopers (PwC) the sector is expected to register a compound annual growth rate of 12% from 2006 to 2014, with total IT spending at $4.5bn as of 2011. The government has come up with the Philippine Digital Strategy (PDS) 2011-16, which sets the framework for the future growth of the IT sector and fosters national development. The PDS stresses transparent government regulations and efficient delivery of services, growth of the internet, digital literacy programmes and promotion of innovative business practices through IT usage. The government also aims to widen the coverage of internet in small and medium-sized enterprises (SMEs) and enhance IT research capabilities in the country. For the corporate sector, the administration’s targets include enabling internet usage in 90% of domestic companies by 2016 and an increase of 10% IT usage by micro firms by 2016.
SOFTWARE: Within IT, the software industry has been instrumental in expanding services and exports and creating jobs for Filipinos. According to the Tholons-Philippine Software Industry Association’s (PSIA) “Software Skills Inventory Report”, in 2011, the major subsectors contributing to exports were maintenance accounting, software testing, custom application development, product engineering and infrastructure support services. The banking and insurance industries were among the most important clients of software services in 2010. In addition, healthy demand for software services also came from the health care, bio-engineering, manufacturing and energy sectors.
Software exports recorded strong growth in 2012, according to the PSIA. Export revenue in the year stood at $1.16bn, a 17% growth over 2011. The number of full-time employees was 57,000, an increase of 14% over 2011. Estimated revenue per annum for every full-time employee was around $20,500. The PSIA expects that the software industry will clock revenues worth $1.5bn by 2014. “The IT sector has been able to penetrate the Japanese market and we are also looking to establish ourselves in niche segments within IT,” Gillian Joyce Virata, senior executive director of the Business Processing Association of the Philippines, told OBG.
Currently, the Philippines education system produces around 500,000 graduates with 180,000 in engineering and IT related courses. It is expected that the software industry will create a large number of employment opportunities for youth and be a prime catalyst for economic growth in the future. The industry is trying to further develop key export markets such as the US and is exploring new opportunities in UK and Asia Pacific (APAC) by offering high value business.
CHALLENGES: Despite growing software exports and expanding capabilities of domestic firms, the Philippines still faces challenges in IT and enterprise support functions. Many clients tend to view the country as an important destination for voice BPO operations, which means the government and the corporate sector need to work harder to promote the country as a destination of choice for value-added software services. Sourcing talented software operators and competing with behemoths such as India are central challenges.
“The development of good managers has also been an issue. Since the industry has grown very fast, the industry has not had the time to develop experienced managers. Expats have been brought in which has driven up costs,” Virata told OBG. The government aims to overcome these challenges by improving wage competitiveness compared to other countries, scaling up talent with corporate training and tie-ins with universities, improving the regulatory environment and expanding the business footprint in the UK and APAC.
ZONES & INCENTIVES: The government provides a number of investment incentives to promote the IT sector. Various regulations have been framed in order to promote software services exports and develop IT parks. Incentives are increased if companies launch new processes and products or operate in specific sectors that have been approved by the government. In such cases, the companies qualify for pioneer status.
The Export Development Act of 1994 provides incentives for the promotion of IT exports. These include 100% duty-free import of IT equipment, provided they are used exclusively for production of services exports. Tax credits are provided for incremental export growth: the rates are 2.5% for the first 5% increase in yearly export revenues, 5% for the next 5% increase in export revenues, 7.5% for the subsequent 5% increase and finally 10% for additional expansions.
The Special Economic Zone Act of 1995 is currently enforced by the Philippine Economic Zone Authority (PEZA), which is in charge of evaluating investment proposals and granting incentives for the development of IT parks and promoting IT exports. Investments in the IT sector are primarily routed through the PEZA. IT enterprises registered with PEZA are accorded income tax holidays (ITH) or corporate income tax exemption for a four-year period, which can be extended to eight years. Following the ITH period, companies are allowed to pay a special 5% tax on gross income in lieu of local and national taxes. Companies are also allowed duty-free imports of certain equipment and materials.
The Omnibus Investments Code of 1987 provides similar incentives as the PEZA for enterprises registered with the Board of Investments (BOI). However, in this case the law makes a distinction between Filipino companies, which are eligible for incentives if they export 50% of their output, and foreign-owned companies, which must export at least 70% of their products. The incentives include ITH of four years for non-pioneer companies and six years for companies with pioneer status. Companies can avail of a bonus year of ITH if they are located in less developed areas and their net foreign exchange earnings amount to at least $500,000 during the first three years. The maximum period of ITH for both types of firms is eight years. The companies are exempted from paying duties on imports and they are exempt from wharf charges and export taxes.
According to data from the National Statistical Coordination Board, during the second quarter of 2013, approved IT investments stood at P3.9bn ($94m), an increase of over 300% from the same period the previous year. PEZA had a 94.3% share in the total number of investment pledges received. The IT services sub-sector received the maximum investment commitment worth P3.3bn ($79.5m), thereby garnering 77.2% of the total IT investment.
The major source of investment pledges in IT was from foreign investors in the second quarter of 2013. These investors committed 91.2% of the total pledges, thereby registering an expansion of 304.3%. Filipino investors, on the other hand, committed investments worth P372.1m ($9m). The approved IT investments are expected to generate 8298 jobs in 2013, a growth of 74.5% over the previous year. The IT services sub-sector is expected to create 6916 jobs, which amounts to 83.3% of total employment.
E-GOVERNMENT: The Philippines ranks low globally in terms of its e-governance standards. According to the UN E-Government Survey, the Philippines ranked 88 out of 190 countries in 2012. The government has, however, launched initiatives to leverage IT to enhance the quality and transparency in public services delivery and has framed a new e-government plan. The objective is also to break into the top 50 global e-governance rankings through continuous improvement in project implementation and strengthening of institutions. The E-Government Master Plan (EGMP) 2014-16 is the latest attempt to enable better communication between people and the government and follows a number of ambitious initiatives. A number of projects under the EGMP have been launched to create efficient information systems and link government data centres and private databases. The Integrated Government Philippines Project (iGovPhil), a P460m ($11m) project, is one such initiative. The iGovPhil project has started the Philippine Government Cloud, which encourages the use of cloud applications and has launched an online payment system that will enable citizens to make online payments to various organisations.
The EGMP also intends to extend broadband services to rural areas over unused television broadcast channels. This is known as the TV White Spaces initiative. The objective of bringing broadband to rural areas is to provide services such as telemedicine and educational content, as well as to facilitate data collection.
INTERNET: Over the past few years, the Philippines has witnessed steady growth in the internet segment. According to data from the International Telecommunications Union (ITU), 29% of the population and 15% of households accessed the internet in 2011. The number of users is increasing at a healthy compound annual rate of over 10%. With new technologies such as mobile broadband yet to gain considerable traction, a large segment of consumers access the internet through cyber cafes. Broadband penetration remains low even though this segment is expected to witness rapid growth over the next few years with the extension of the mobile WiMAX network and government’s aim to allocate more bandwidth for broadband.
As of 2011, the penetration of fixed broadband and mobile broadband stood at 1.9% and 3.4%, respectively, as per data from the ITU. The state-owned Philippine Long Distance Telephone Company (PLDT) and the privately operated Globe Telecom are the two main internet and broadband services providers.
PROMOTING SPEED INCREASES: The Philippines lags behind its advanced Asian peers in terms of quality of internet services delivered. According to a report by technology firm Akamai, the average peak internet connection speeds stood at 11.9 Mbps in the third quarter of 2012, an increase of 43% over the previous year. However, connection speeds are significantly below countries such as Hong Kong and South Korea. For example, Hong Kong had a peak connection speed of 54.1 Mbps while South Korea’s average broadband speed stood at 14.7 Mbps. Despite the improvement in peak connection speed, average download speed in the Philippines was just 1.3 Mbps. Moreover, only 1.3% of Filipinos had a broadband connection, which provides internet speed of over 4 Mbps. In South-east Asia, Vietnam and Indonesia had similar internet speeds.
The improvement in the average peak connection speed of up to 42 Mbps in the Philippines is attributed to the fast roll-out of 4G or long-term evolution (LTE) technology as well as the implementation of the fibre optics network by operators, which have been able to enhance the quality of services to consumers. Companies have also been promoting higher bandwidth plans through affordable bundling schemes. However, it has also been argued by senior industry executives that faster broadband speeds can be maintained if the price of 4G-enabled smartphones and tablets come down. These devices are more expensive than 3G phones and will affect the adoption of high-speed internet.
The availability of relatively lower-cost smartphones is, however, is fast becoming a reality which in turn is driving the usage of these devices by technology savvy consumers, particularly in urban centres. According to a survey conducted by TNS between November 2012 and January 2013 in Metro Manila, a high number of smartphone users were accessing the internet on their devices apart from performing basic functions such as calling and texting. Of the 38,000 people surveyed by TNS, 75% used their smartphones to take photos or videos and 37% to check their email. The phone was used to browse the internet by 45% while 44% accessed social networking sites with their devices. The survey also indicated that approximately 35% of the respondents connected to the internet by accessing Wi-Fi hot spots in public places.
SOCIAL NETWORKING: The growth of internet in the Philippines has translated into a growing and diverse use of online media and social sites. There is a high degree of penetration of social networking and multimedia sites such as Facebook and YouTube. According to ComScore’s South-east Asia Digital Future in Focus Report for 2013, internet use in the Philippines is registering the fastest growth in the South-east Asian region, with an expansion of 22% from March 2012 to March 2013. The share of social networking in total minutes spent online was 41.8% in the Philippines and as of March 2013, 96.1% of web users in the country visited a social networking site, the highest in the region.
The Philippines is one of the top three markets globally for Facebook, with the social networking site reaching 92.2% of internet users in the country. Other Southeast Asian countries figuring in the global top 15 are Malaysia and Thailand with penetration rates of 82.3% and 89.3%, respectively. After Facebook, the reach of micro-blogging site Twitter is also quite high with 20.3% of internet users logging into the site. Twitter penetration in Indonesia and Malaysia stands at 26.4% and 15.9%, respectively. YouTube is the most popular multimedia site and accounts for the highest share of unique site visits in South-east Asia. The Philippines sees more than 4.9m unique YouTube visitors.
The popularity of social networking and multimedia sites in the Philippines is most likely a reflection of the country’s favourable demographic distribution of the internet user population. According to data from ComScore, 40% of the nation’s internet users are between the ages of 15 and 24, while those in the age range of 25 to 34 comprise 31% of the total online population. The average time users spent online was 16.4 hours per week as of March 2013. However, users in Vietnam and Thailand spent more time online, comparatively, at 26.2 hours and 27.2 hours per week, respectively.
CENSORSHIP: The government’s recent enactment of laws to curtail cybercrime has attracted criticism. The Cybercrime Prevention Act, which came into effect in 2012, aims to penalise IT-related crimes such as identity theft, online fraud, pornography and illegal accession to computer networks. However, the law also has provisions for prosecution and imprisonment which has raised the concern of many. For instance, it has been argued by advocacy organisations that the law seeks to censor and prosecute comments made on social networking sites such as Facebook and Twitter. If comments are deemed libellous, the person who writes the comments and the one who shares them could be prosecuted and imprisoned. This ruling has had an adverse impact on internet freedom in the country. Senator Miriam Defensor-Santiago has recently introduced a bill that seeks to repeal the cybercrime law and protect freedom of expression in the cyberspace. Earlier, the Supreme Court had indefinitely extended an order stopping the law’s implementation.
GAMING: In recent years, there has been a marked rise in the preference of young Filipinos for online video games. The studies conducted have repeatedly shown that the proportion of the country’s youth engaged in playing games ranks just a notch below their usage of the internet for social networking, research and instant messaging. According to the Yahoo-Nielsen Net Index Digital Philippines Survey 2011, 54% of internet users played online video games in 2011, up from 45% in the previous year. Home internet access has climbed from 27% in 2009 to 35% in 2011 with home users spending an average 10.4 hours per week on internet. These users spent a major proportion of their time on social networking sites, as well as playing online video games. However, the problem with the gaming industry is that it generates a comparatively small average revenue per user (ARPU) rate. “Our ARPU is relatively smaller than regional peers such as Malaysia, Thailand and even Vietnam,” George Royeca, the head of business development at IP ventures, told OBG. “There are more online games to be played so the less time spent on one game means the less money spent. The industry will have to look at other monetisation schemes such as advertising and developing other types of content.”
The popularity of online gaming has significantly wider implications for the future of the Filipino gaming industry, which is still in its infancy. Currently, the sector has only around 60 companies that employ approximately 4000 professionals in the design of games. However, in 2012 the industry earned revenues worth $70m, with some 80% of the employees working on mobile and social games.
OUTLOOK: As the IT sector continues to roll out new and updated infrastructure, the expanding services exports segment is likely to see growth. One challenge to this, however, may be securing enough skilled local workers to fill positions. If the government continues to extend incentives to new firms, this is a hurdle that can be overcome. This should leave the industry in a good position to see increasing internet uptake, growing exports and a rising number of jobs for locals.
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