Government investment plans to address uneven development between regions in the Philippines

With some 7641 islands inhabited by 175 ethnolinguistic groups, the Philippines is one of the most diverse and geographically fragmented countries on Earth. The modern Philippines has thus long been faced with the challenge of uniting these multiple groups within a single nation, while also allowing local and regional communities to prosper. The year ahead will likely see the latest chapter in this process begin with a major push towards the creation of a federal state (see analysis). This, advocates hope, will help address issues of uneven development between the regions, ushering in a new era of investment and enterprise in some previously neglected areas.

However, many of the Philippines’ regions outside the traditional powerhouse of Luzon have already developed vibrant economies, attracting the attention of both local and international investors. Davao, Cebu, Baguio, Cagayan de Oro and Iloilo are some of the key areas outside the National Capital Region (NCR) which have experienced significant growth in recent times.

Background

During Spanish rule, Philippine settlements were governed by the Reduccion System, which grouped barangays (villages) into towns organised around a newly built church. The Spanish adapted the barangay as the most basic administrative unit, with a chief at the head, whose primary function was the collection of taxes. When the capital moved to Manila, government rule became more consolidated throughout the subsequent phases of Philippine history, from the US occupation to the declaration of martial law under President Ferdinand Marcos, who increased central government powers with minimal authority allocated local government units (LGUs).

The overthrow of President Marcos in 1986 led to a wave of anti-centralist measures and the return of democracy. The 1987 constitution drafted under President Corazon Aquino allowed for the referendum that formed the Autonomous Region of Muslim Mindanao (ARMM), which comprises the predominantly Muslim provinces of Maguindanao, Lanao del Sur, Basilan, Sulu and Tawi Tawi, with its de facto capital at Cotabato City. The establishment of ARMM arose as a result of efforts to bring peace to this region after years of fighting between government troops and militants of the Moro Liberation Front, and later, the Moro National Liberation Front (MNLF). In 2012 the MNLF signed a peace accord with the central government, under which ARMM will transition to the Bangsamoro Autonomous Region. The Bangsamoro Basic Law (BBL) seeks to establish this, but further outbreaks of fighting have delayed its passage. With the election of the new government of President Rodrigo Duterte in 2016, the BBL was initially shelved in lieu of a new federalism law, but at the time of writing, major efforts were being made by lawmakers to pass the BBL in the first half of 2018.

Regional Policy

The 1987 constitution was succeeded by the 1991 Local Government Code (LGC), under which the country was divided into 17 administrative regions, with these breaking down into a total of 81 provinces. The regions are spread across the three main island groups of the country – Luzon, the Visayas and Mindanao. Luzon is by far the most economically significant group, containing the country’s richest areas. These are led by the NCR, which accounted for 38.1% of the nation’s GDP in 2017, according to the Philippines Statistics Authority (PSA). The NCR is bordered by two other key regions, Calabarzon and Central Luzon, which contribute a further 14.7% and 9.2% to total GDP, respectively. Other regions within the Luzon island group include Ilocos, the Cordillera Administrative Region (CAR), Cagayan Valley, the South-western Tagalog Region, also known as MIMAROPA , and the Bicol Region. Together, Luzon accounted for some 72% of GDP in 2017.

The Visayas group includes the Western, Central and Eastern Visayas, together responsible for some 12.7% of GDP, with Central Visayas – home to Cebu City – contributing the most at 6.5%. All the other regions belong to Mindanao, which includes ARMM, the Zamboanga Peninsula, Northern Mindanao, Davao Region, Soccsksargen and Caraga. These account for the remaining 15.1% of GDP, with Davao contributing 4.6% of national GDP in 2017. In terms of population, Calabarzon is the largest region, with 14% of the country’s 104.9m people in 2017, followed by the NCR with 12.3%. Central Luzon came third, with 10.9%. Luzon is the most densely populated grouping overall, with some 56.5% of the total population living there, as opposed to 19.3% in the Visayas and 24.2% in Mindanao.

Administration

With the exception of ARMM, where there is an elected assembly and governor, the country’s regions are not overseen by LGUs. Instead, they act as administrative divisions of national government, with departments – such as agriculture or energy – maintaining offices in each regional capital. LGUs operate at the subregional level, with each region comprising a number of provinces, most with an elected governor and legislature, also known as the Sangguniang Panlalawigan. Exceptions include the NCR and the 38 independent cities, 16 of which, along with one independent municipality, constitute the NCR area. Common public services in the NCR come under the remit of the Metropolitan Manila Development Authority. Other key independent cities include Cebu City and Cagayan de Oro, with these electing their own mayors and city councils.

The provinces themselves are then divided into municipalities and component cities. The former, also known as bayan (township) administrations, are run by elected mayors and assemblies and have the ability to enact laws and raise taxes at the local level. When a municipality reaches a certain size, it can also opt to become a city, making additional central government revenue available, although this gain can be offset by higher taxes. Indeed, component cities are chartered institutions with their own elected mayors and legislative chambers. Beneath both municipalities and cities, finally, is the barangay, which is led by an elected chairperson, or kapitan, and a council.

Apart from the barangay, each administrative level has the power to raise finances, though barangays, municipalities, cities and provinces all receive an internal revenue allotment (IRA) from the central government. The amount each receives is calculated according to a formula involving their land area and population as outlined in the LGC. IRAs continue to be the main source of LGU funding, with the Department of Budget and Management reporting that 43,000 LGUs would receive P522.75bn ($10.3bn) in 2018 via IRAs. Of this amount 23.3% would be allocated to provincial governments, 22.9% for cities, 34% for municipalities and 19.8% for barangays.

Development Initiatives

With the NCR and its neighbouring regions traditionally seen as the political and economic centre of the country, successive administrations have sought to address the wide imbalances in job creation, investment and per capita income that characterise the Philippine landscape. Provision of the IRA has long been one way of funnelling assistance outwards, with this funding also supplemented by federally development programmes.

The latest of these is the Philippine Development Plan 2017-22, produced by the National Economic and Development Authority (NEDA), which stresses the need for building greater inclusivity and linkages across the regions to enhance economic opportunity. The NEDA has also produced a series of regional development plans, targeting specific issues and projects in each region, excluding ARMM and the NCR. The election of President Duterte has contributed to this renewed drive to funnel investment away from the NCR and its neighbouring areas.

Indeed, the island of Mindanao is now a priority for the NEDA, with at least five of the government’s flagship national infrastructure projects located there. Expansions at Davao International and Laguindingan airports worth a respective P40.57bn ($801.5m) and P14.6bn ($288.4m), are under way and are set for completion in 2025. Other initiatives include the first segment of the P35.26bn ($696.6m), 102-km Mindanao Railway Project Phase 1, connecting Tagum, Davao City and Digios; the P4.86bn ($96m) Panguil Bay Bridge project, linking Tangub City with Tubod; and the P5.4bn (106.7m) Malitubog-Maridagao Irrigation Project Phase 2, which will service 10,000 ha in 56 conflict-affected areas.

Regional Promotion

A series of government-backed institutions also target specific regions or economic sectors for promotion. The Regional Board of Investments-ARMM is one, offering incentives such as tax holidays, duty-free importation on designated items, zero value-added tax and improved visa conditions for the employment of foreign nationals for companies locating within ARMM. The board is a local branch of the national Board of Investments (BOI), which offers similar incentive packages to firms based in certain designated economic zones and free ports. The BOI list of these includes some 300 economic zones run by the Philippine Economic Zone Authority (PEZA), which comes under the Department of Trade and Industry. While many of these are located within the NCR and Luzon, some are also in the Visayas and Mindanao. In addition, attracting investment to less-well-known parts of Luzon are outfits such as the Cagayan Economic Zone Authority, in the north of the island, or the Phividec Industrial Authority in Misamis Oriental province, the location of the Mindanao Container Terminal (MCT).

Yet, even if the NCR and Calabarzon remain the greatest contributors to GDP and hold the largest populations, some of the Philippines’ other regional economies are catching up. The PSA’s 2017 statistics show a 8.9% growth in the NCR’s GDP, at current prices, yet the fastest growing region was Davao, with 13.7%, followed by MIMAROPA (12.3%) and the CAR (12.1%). “The Philippines has many cities in need of development. These emerging locations represent real opportunities for first-movers that are not afraid to be ahead of the curve, ”Romolo V Nati, chairman and CEO of real estate firm Italpinas Development, told OBG.

Davao

The Davao region consists of four provinces – Davao Del Norte, Davao Del Sur, Davao Oriental and Compostela Valley. Figures from the PSA indicate that growth for the region slowed in 2017 overall, but remained a solid 10.9%. Davao Del Sur is also home to Davao City, which has a population of some 1.63m people and is an independent city with its own mayor and city hall. The president’s daughter, Sara Duterte-Carpio, serves as the incumbent mayor.

According to the PSA, in 2017 services contributed 49.6% to Davao’s GDP, followed by industry at 39.2% and agriculture, forestry, hunting and fishing contributing 11.2%. Industry was the fastest growing of the three – expanding at 19.1% overall, compared to 7.3% growth for services and a rise of 1.7% from agriculture, forestry, hunting and fishing. Key to Davao’s development – and indeed, that of many regions – is infrastructure, with international transport connections particularly important to development prospects. “Davao City has worked on building strong transport infrastructure to other ASEAN countries,” Jefry Tupas, the city information officer for Davao City, told OBG. “We now have direct flight connections to Kuala Lumpur and Singapore, alongside other cities in the Philippines as well as the Manila hub.”

The city’s Francisco Bangoy International Airport is the busiest on Mindanao, and the third-busiest in the Philippines, after Manila’s Ninoy Aquino International Airport and Mactan-Cebu International Airport. Its expansion and improvement has also been designated as a government flagship project by the NEDA, with the government currently considering utilising a public-private partnership (PPP) scheme for the estimated P40bn ($790.2m) upgrade.

Road projects are the focus of Davao City’s development plans, with the city currently also transitioning from the traditional Jeepney vehicles to a high-density transit system, with a focus on bettering roads to rural areas. “We are currently working on road projects that focus on hard-to-reach areas,” Tupas said. “Road improvements are expected to facilitate better living conditions and decrease poverty.”

The Japan International Cooperation Agency has proposed a $684.1m railway project for Davao City, with a 15-km line also helping to ease congestion and boost business and investment. An interim bus system is also being planned in cooperation with the Department of Transport and the Asian Development Bank.

Added transport infrastructure is also expected to facilitate tourism, which has been highlighted as a key growth driver. Visitor arrivals to the city were up 20% between February 2017 and February 2018, according to the Davao City Tourism Operations Office (CTOO), with some 172,439 arrivals that month. The CTOO is also making efforts to promote Davao City as a centre for meetings, incentives, conferences and exhibitions (MICE) events. Meanwhile, the city was chosen as one of the Philippines’ six pilot Muslim-friendly cities, further tying the region to the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area.

Cagayan de Oro

Cagayan de Oro (CDO) is the administrative capital of the Northern Mindanao region. The city’s location on the coast opposite the Visayas enables it to function as a logistics gateway to the island for goods from the rest of the Philippines, aided by the close proximity of the MCT.

March 2018 saw the NEDA green-light the aforementioned expansion plan for CDO’s Laguindingan Airport, which in October 2017 became Philippine airline Cebu Pacific’s seventh regional operations hub. The airport is adjacent to a 526-ha special economic zone, with property developers Ayala Land announcing plans to build a mixed-use manufacturing facility in the zone in October 2017. The project will mark the company’s first industrial estate outside of Luzon.

“We have a lot of opportunities opening up in terms of logistics,” Eileen E San Juan, local economic and investment promotions officer at CDO’s Trade and Investment Promotions Center, told OBG. “In addition, while transport, manufacturing and distribution are priority areas for investments, due to our strategic location, we also have a major strength in ICT.”

One reason for this is that CDO is home to four major universities, all of which produce a steady stream of qualified graduates for the ICT sector. This has led the government to qualify CDO as a next-wave city – one of 10 Philippine cities identified as having potential to be centres of industry – for the business process outsourcing (BPO) industry, according to San Juan.

The Visayas

Moving north, Cebu City has long been an economic powerhouse, with recent years seeing tourism, IT and business process management, and construction emerge as major drivers of the city’s growth. To accommodate the rising number of tourists – in 2017 international arrivals to the region were up 11.2% – two major infrastructure projects are set to be completed in the second half of 2018, including the Mactan-Cebu International Airport terminal 2 development and plans for the P7.8bn ($154.1m) Panglao Island International Airport. The former is expected to open in June, catering to 4.5m passengers per year, while the latter is scheduled to start operations in August. Approximately 2500 extra hotel rooms are also due to be added to the city’s current 11,800-room capacity over the next few years.

Meanwhile, according to government estimates, Cebu’s IT-BPO sector, which employs around 150, 000-160,000 people, is set to grow to 200,000 by 2019. Global sector outfits such as Accenture and Sykes expanded their footprint in the city in 2017, while new arrivals included international manufacturers Dover, digital marketing firm MoPro and Japanese IT equipment and services company Fujitsu. The P9.2bn ($181.8m) New Cebu International Container Port will also double the current container yard capacity in Cebu from 7373 twenty-foot equivalent units (TEUs) to 14,400 TEUs by its expected completion date in 2020.

West of Cebu, the city of Iloilo has also seen some solid growth in recent years. Located on the island of Panay in the Western Visayas region, infrastructure is once again the key to Iloilo’s development. As part of five regional airport projects, Iloilo International Airport in Cabatuan was approved by the NEDA for an estimated P30.4bn ($600.6m) in rehabilitation and improvements to be implemented through a PPP.

By sea, Iloilo International Port serves as the main trade and commercial hub for Western Visayas, while the Iloilo Domestic Port acts as the jumping off point for the island of Boracay, contributing to the continued expansion of the local tourism industry. The city itself has been boosting its MICE credentials with the Iloilo Convention Centre offering a 3700-seat hall within the Iloilo Business Park, a development that has further attracted hotels, malls and a variety of commercial developments.

Baguio

Further north still, on the island of Luzon, Baguio City has also recently developed as a burgeoning investment centre. Often dubbed the summer capital of the Philippines due to its cool, higher altitude climate, it has grown from a US-era hill station to a major city home to PEZA’s Baguio City Economic Zone and a large number of BPO and knowledge process outsourcing firms. The city is also a major tourism draw, with 2017 tourist arrivals up 17.52% to 1.5m. Helping pull in visitors is the fact that Baguio is among just 15 cities worldwide recognised by UNESCO for its craft and folk arts. As a result of its popularity, a plan to revamp the city’s tourist highlights and attractions is currently under consideration.

Outlook

With federalism now closer to being adopted, the country’s diverse regions are facing a period of major transformation. The new model should deliver a notable shift in decision-making from the centre to the periphery. As decentralisation initiatives in other countries have demonstrated, this can be challenging. Ensuring that the administrative framework is in place and that the various authorities do not overlap is key, with investors looking for straightforward jurisdictions and procedures.

As the government works to attract new businesses into underdeveloped areas, it is crucial for governance not to add to the burden investors will face. “Some of the challenges faced by initial investors can include difficulties in recruiting qualified manpower, gaps in the administrative framework and a lack of local knowledge,” Nati told OBG. At the same time, the Philippines’ regions have shown their potential. The cities highlighted above are all likely to see further strong growth, capitalising on their strategic locations and established reputations. Further improvement in infrastructure, will also help boost wealth and job creation, improving conditions beyond the capital city.

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The Report: Philippines 2018

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