After several years in the wilderness, the Philippines’ tourism industry is beginning to enjoy an international renaissance which, combined with an ambitious domestic infrastructure spending spree, has the capacity to catapult the country into one of the region’s best performers over the next decade. A regional leader back in the 1970s, its potential as an archipelago of 7107 islands complete with virgin rain forests, volcanoes, pristine beaches, exotic wildlife, five UNESCO World Heritage sites and a population possessing good English was squandered – and then lost – due to ageing or missing gateway infrastructure.

Yet there are indications that this is about to change. Tourism is now receiving the government’s full attention, leveraging private sector partnerships to improve domestic and international infrastructure, local government capacities (historically a barrier to investment in the sector), and ensure product development.

CHALLENGES: Regaining lost ground has been a big task for Ramon R Jimenez Jr, the tourism secretary appointed in September 2011, after his predecessor, Alberto Lim, resigned in August 2010 following a short and controversial tenure. The period 2010-11 was defined more by international setbacks than successes, but these have galvanised the nation to restore its reputation as an attractive destination. The death of eight Hong Kong Chinese tourists during a disastrous hostage rescue attempt in August 2010, played out in front of the international press, saw the blacklisting of the Philippines by Hong Kong, blocking the sale of tours and products from one of the country’s top 10 markets. Arrivals subsequently fell from 133,000 in 2010 to 84,000 to September 2011, and the incident’s impact reverberated internationally.

Three months later, as the Philippines received travel warnings over terrorism concerns, its $200m “Pilipinas Kay Ganda” tourism campaign was dropped amid claims of plagiarising Poland’s “Polska” logo and in September 2011 Manila’s Ninoy Aquino International Airport was named the “world’s worst airport to sleep in” by travel website This came with the industry’s reputation still reeling from the Civil Aviation Authority of the Philippines’ (CAAP) downgrading by the US Federal Aviation Authority (FAA) in 2008 and the EU in 2010 after a failed safety audit that blocked all Philippine-registered carriers from US and EU airspace. The ban remained in place after a less-than-stellar review in early 2012..

RECOVERING: The industry has rallied behind Jimenez, whose marketing background with Cebu Pacific, which has now surpassed national carrier Philippine Air in terms of market share, and links to President Benigno S Aquino III, have been lauded. Jimenez’s new marketing drive, under the slogan “It’s more fun in the Philippines”, was launched at January’s ASEAN Tourism Forum and seeks to redress the country’s international reputation, rebranding the Philippines based on its people, destinations and culture. While momentum in the Department of Tourism (DoT) is now building under his leadership, 2011 was a lost year in which most initiatives were frozen as the industry blueprint, the National Tourism Development Plan (NTDP), was revised after conflicts stemming from the 2009 Tourism Act’s implementing rules and regulations arose. The November 2011 resolution of a dispute within the private sector’s advisory body on tourism policies, the Tourism Congress, was critical to ensuring the sector’s support for the government’s plans.

Despite the difficulties encountered, tourist arrivals have been resilient, rebounding from a 3.9% shrinkage in 2009 to growth of 16.7% in 2010, hitting a then record high of 3.5m international arrivals, and expanding by 11.28% to reach 3.9m in 2011.

NEW MARKETS: Compared to neighbours, the Philippines’ international arrivals have underperformed. The 2010 record was barely a quarter of arrivals for one of the region’s top performers, Thailand, which the Philippines seemingly sees as a mentor on industry matters, mimicking many of its initiatives. Officials admit that unlike Thailand, the Philippines has never had a strong market share among Western populations, nor the traditionally prestigious European market. This has led the Philippines to favour its Asian neighbours instead; thus Korea, Japan, China, Taiwan, Singapore and Hong Kong have consistently led the Philippines’ top 10 markets by volume and will remain a cornerstone of future growth as the government aims for 10m arrivals in 2016.

The 2008 CAAP downgrading reinforced the need to concentrate on Asian markets as relations with Western suppliers steadily worsened. With European wholesalers unable to receive or provide insurance to domestic flight sectors that transport 98.3% of tourists, interest has waned. European carriers withdrew their routes in favour of other more popular and regionally competitive destinations (in April 2012, the last European carrier flying direct to the Philippines, KLM, will close its route).

In 2011 European wholesalers threatened to remove the Philippines entirely from their portfolios – a move that would take several years to reverse and have wider reputational ramifications within the industry – unless the CAAP passed an FAA review. But with a report released by the FAA in early 2012 citing numerous lingering faults in the industry, its future remains uncertain. While demand from Germany and the UK has proven resilient despite these challenges, marginal growth in European arrivals of 1.8% in September 2011, recorded by the DoT, suggests that the European market remains a distant goal.

NEIGHBOURHOOD WATCH: Focus has remained fixed on expanding neighbouring Asian markets, with Korea’s pole position in arrivals facilitated by 21 flights per week by Korean Air alone. Regional airports, opened under the government’s highly successful “pocket open skies” initiative, have helped to efficiently funnel international arrivals directly to the favoured destinations of Boracay, Cebu, Palawan and Davao.

To reach the 2016 goal of 10m, the Philippines needs to see a 21% increase in arrivals each year, or 11% if it wants to reach its former target of 6m. Mass-market tourism, particularly in the form of tour groups, underpins the department’s strategy. The DoT’s director of planning, research and information management, Rolando Cañizal, expects North-east Asian arrivals will grow proportionally to maintain their current 47% of arrivals, with Korea in first place.

However, receiving just 5% of mainland China’s outbound travellers, the Philippines is eyeing the populous western provinces as a potential further source of growth, and its airlines are looking to establish regular routes to replace current charter services.

FURTHER AFIELD: Australia has risen from seventh to fifth among international arrivals, with 4.2% in 2010, thanks to a strong economy that has encouraged travel. While rising from a low base, Russia and India have also entered the arena, led by winter tour packages and corporate incentives combined with family packages. Arrival figures in 2011 from these two countries have already exceeded 2010’s totals, with India increasing to 42,844 arrivals and Russia’s share rising to 20,185 visitors for the year. Operators expect these markets to be a strong source of future growth, principally for beach destinations.

Although arrivals for the US, Australia and Canada have hit the top 10 in 2010 and 2011, expatriate Filipinos – “Balikbayans” – are reportedly 65% of total US arrivals, which in turn is thought to be just 10% of the estimated 3.5m Filipinos living there. As a key source of overseas remittances, this is a lucrative market that the government has taken to heart, launching the “Pinoy homecoming” initiative in mid-2011 through the Tourism Promotions Board, targeting Filipinos worldwide with numerous accommodation and activity incentives nationwide. While the Balikbayan market may be considered international, the promotional campaign reflects an industry that caters to a domestic market, which stood at 27m in 2010, and whose growth will continue to outweigh international arrivals for the next decade at least.

DOMESTIC TOURISM: Despite aggressive targets for attracting more foreign tourists the domestic market is the foundation of the industry. Some 80% of the Philippines’ P1.04trn ($23.9bn) tourism revenue in 2010, equivalent to 5.7% of GDP, was from domestic receipts according to the Board of Investments (BOI), and the segment’s growth continues to outperform the international segment. While international receipts saw a 9.6% year-on-year (y-o-y) increase in 2010, totalling P109.2bn ($2.5bn), domestic receipts were up 15.1% at P932.8bn ($21.5bn), according to NSCB Tourism Satellite Account and DoT Statistical Reports.

The government is hoping to reduce this disparity over the next four years. “We want to get more yield from international arrivals so that their contributions are 30-40% of the total,” said Cañizal. However, this could be a challenge: “On the domestic front we are expecting to see a rise of 4-6% per annum. There has been a dramatic increase in the number of domestic travellers in the past years, growing from 14m in 2000 to 27m in 2010, and we are projecting 34.8m domestic tourists by 2016,” Cañizal said.

DISPOSABLE INCOME: Behind this continued growth is the national economy, posting per capita GDP of more than $3500 in 2010, almost double the figure of a decade ago, which has seen a surge in the middle class with the disposable income to travel. The average Filipino travels twice every six months for tourism according to the National Statistics Office, a trend that former president Gloria Macapagal-Arroyo helped kindle with the 2001 “Holiday Economics” programme, which moved national holidays to enable public and private employees to enjoy more three-day weekends. While the domestic industry provides a smaller per capita market, with an average stay of four nights and average daily expenditure (ADE) of P2212 ($50.90) in 2010, the sheer mass will continue to outperform the international market (ADE of $83.90 and an average stay of eight nights in 2010, down from 16 in 2007).

Manila continues to be the principal gateway for international arrivals, but the breakdown of hotel guests mirrors that of overall visitors, with leading hotels reporting their key customer base is local, followed by Balikbayan, Asian and European guests. Moreover, the domestic-led leisure market constitutes 60-70% of their business, dominating weekend revenues. Manila’s average nights stayed has further declined in line with improving flight connections to leading secondary destinations, namely: Boracay Island, Tagaytay, Cebu, Laguna, Batangas, Cavite, Bohol, Pampanga, Palawan and Davao.

UPSIDE POTENTIAL: The commanding influence of the Philippines’ rapidly expanding and increasingly sophisticated domestic market has steeled the industry for further international engagement, providing an educational process for the services industry and training for the international markets. Consequently, the tourism sector is well placed to take advantage of the internationalised outlook and experience of the Philippine people, a point emphasised in the DoT’s latest campaign. “It’s the Filipinos that will make your holiday unforgettable,” Jimenez announced at the ASEAN Tourism Forum 2012. With English as an official language, the national potential to quickly harness the broader international market adds a highly competitive edge against its ASEAN neighbours. Moreover, the Philippines is likely to win favour with travel and tour companies soon looking for the next “undiscovered” destination, particularly compared to its regional competitors offering beach destinations.

“The quality of the product is fantastic and we have many islands, many of them are uninhabited and are perfect for tourism, because most of them are very small. So you can have one island, one resort; a bit like the Maldives,” Alexander Stutely, the CEO of Blue Horizons, a local travel agent, told OBG.

AWARDS: The building enthusiasm for the Philippines is seen in recent awards, with Palawan’s Underground River gaining international recognition as a UNESCO World Heritage site and winning a place in the “New Seven Wonders of Nature”. The Philippines’ top beach destination, Boracay Island, also pulled in two major tourism awards, including “Best Island Resort” and “Best Resort Destination in South-east Asia”, at the 2010 Moscow International Exhibition on Travel and Tourism, which also recognised the Philippines as the “Discovery of the Year for 2010”.

Despite the fact that the killing of eight tourists from Hong Kong occurred just four months after the Philippines won a gold award in service quality at the China Outbound Travel and Tourism Market Fair in April 2010, its Chinese market has proved resilient, registering a 5.9% growth in arrivals y-o-y from 2010 to September 2011, while Hong Kong’s growth dropped less than one percentage point, from 3.8% to 2.9%.

The government, noting that the Philippines is not alone in such incidences, has moved to reassure foreign visitors, introducing the “Top Cop” scheme in coordination with local governments to roll out plainclothes police escorts for tour groups when requested, based on existing projects in key destinations such as Boracay and similar programmes in other countries.

NTDP: While these awards and initiatives underline the nation’s potential as a destination, the revised 2011 NTDP is the key stimulus factor, with a three-pronged approach set to push domestic and international tourism revenues and employment to new heights by 2016. The DoT now enjoys broad private sector support thanks to its participatory consultation process in the plan’s revision and its own growing support internationally to firms attending trade fairs, inviting them to join its booth. The NTDP will facilitate the improvement of market access and connectivity nationwide by the rapid expansion of secondary airport capacities with infrastructure linkages to strategic destinations, expanding its pocket open skies policy and easing visa restrictions where possible. The liberalisation of the aviation sector saw increased competition among the Philippines’ six registered carriers, dramatic price reductions, and an upswing in passenger traffic (see Transport chapter).

Product and destination development will focus on facilitating public-private partnerships (PPPs), community-based initiatives and mandatory accreditation for all enterprises. The DoT will also work to build technical expertise and reduce red tape among central and local government departments, alongside increasing the tourism workforce, which the government hopes to double to 6.5m in four years.

NEW INCENTIVES: The government has recognised that partnerships with the private sector are integral to the country’s future success and has pushed aggressively to win their inclusion. Established in August 2011, the fledgling Tourism Infrastructure and Enterprize Zone Authority (TIEZA), which is the implementing arm of the DoT’s national development plan, has already seen strong private sector interest following national roadshows that saw five project applications in three months, the largest totalling $20bn.

“The passage of this law is a success in itself, because it addresses all problems in tourism and gives power to the DoT to be able to implement major changes. And the provision of incentives will also greatly help motivate investment in tourism,” Atty Joy M Bulauitan of the Tourism Enterprise Zone Task Force, told OBG.

While TIEZA will help spearhead investments across 21 tourism clusters, 77 tourism development areas, 250 tourism sites and 10 international gateways, the NTDP’s clusters are based on each of the regions’ optimal tourism products, services and infrastructure requirements, leveraging these opportunities to stimulate investment and encourage PPPs.

Working with a restricted marketing budget that has remained largely unchanged since 2005, the DoT’s Tourism Promotions Board has been reaching out to the private sector with some considerable success, and is banking on further corporate sponsorships to help make the most of the new campaign.

SPONSORSHIP: Philippine telecoms giant Globe Telecom has been supporting the international Pinoy homecoming campaign and is voluntarily increasing its financial commitments through 2012, according to the Tourism Promotion Board assistant secretary, Domingo Ramon C Enerio III. The opportunity for these corporate sponsorships has grown in direct correlation to the maturity of the private sector. “The branding campaign can serve as an anchor for the private sector to latch on their own promotional objectives. Moving forward, we are counting on – and have been getting – more private sector support than we’ve been receiving in the past,” Enerio said.

With further partnerships, the government is likely to disburse more funds for promotion. However, Manila envisages a leading strategic role for foreign and domestic investors. “The private sector will drive development of Tourism Enterprise Zones because TIEZA will provide an enabling environment for private investment in tourism enterprise,” said Cañizal. TIEZA considers the incentives currently on offer the best it has ever been able to offer, outperforming BOI and Philippine Economic Zone Authority (PEZA) incentives, the traditional go-to institutes for investors.

Moreover, TIEZA is able to offer fiscal and non-fiscal incentives to foreign and local firms, including income tax holidays for six years that are extendable for another six years, net-loss carry over, tax-free importation of capital goods and services, as well as visas and a relaxation of rules governing the employment of foreigners. Moreover, investors currently registered with the BOI or PEZA can transfer to TIEZA for the remainder of their originally permitted term. This has been enabled by the signing of memoranda of understanding between various government departments and TIEZA’s one-stop centre for investors, scheduled to open January 2012, which guarantees to process applications in just 37 days. Moreover, as distinct from the BOI or PEZA, TIEZA projects require only the approval of its board of governors.

While TIEZA has acknowledged that inter-agency coordination and skills gaps need to be overcome, this is a challenge for the Philippines, which has generally more limited experience working with foreign investors than its neighbours. Yet there is little doubt that with no geographic restrictions to where these incentives can be offered, TIEZA will prove popular.

CAPACITY INCREASES: The central requirement over the next decade is to increase capacity across infrastructure, the services sector and the workforce to meet the government’s 2016 goals. Investments in these areas will define growth in the sector in the short to medium term, cascading into periphery services and industries. The identification of eight strategic themes for development will streamline the prioritisation of projects, but with PPP architectures placed under review by the Aquino administration, progress in their implementation during 2011 faltered. The year 2012 should see the government move forward aggressively in cooperation with the private sector.

REGIONAL NEEDS: Key to the successful implementation of the government’s policies will be to spread investment nationwide, beyond Manila and Luzon to Cebu, Palawan and Davao, which are set to become major destinations. While investors in the services sector have shown interest, the limited infrastructure that restricts arrivals have deterred many from committing, favouring instead established destinations with good infrastructure. TIEZA acknowledged that the applications received in November 2011 are in the more developed, well-known tourism destinations.

INFRASTRUCTURE: The revised NTDP will map the needs in national infrastructure to prioritise investments. In an unprecedented move, the DoT has been given influence over the expenditure of parts of the Department of Public Works and Highways budget, set at P4bn ($92.2m) in 2011, to reinforce interdepartmental coordination in line with the national tourist infrastructure programme, which is currently focused on improving access to certain destinations.

While airport developments are considered crucial gateway infrastructure, PPP projects are expected to favour transfer-operate agreements with the government responsible for construction, as piloted by a subsidiary of San Miguel Corporation, Trans Aire Development Holdings, which is investing $300m to redevelop Boracay’s Caticlan Airport, privatised in 2011. The redevelopment will reportedly bring the airport up to international standards and include a 5000-room budget hotel, a 2500-seat convention centre, a commercial area, and an extension and widening of the runway to accommodate larger aircraft and allow night arrivals, increasing the airport’s capacity by 30%.

Ahead of these projects, the services sector remains largely committed to existing centres, although Davao and Palawan are attracting substantial interest and investment in the development of new products and destinations. Yet new hotel investments in Manila have been welcomed, re-injecting competition into a market long suffering from a shortage in capacity rather than demand, with the development of Newport City, Mall of Asia and Fort Bonifacio locales providing a more inviting and modern face to the city.

OUTLOOK: Mass tourism has presented itself as a readily accessible and lucrative market. However, in the longer term the Philippines has its sights set on increasing arrivals of free independent travellers, which typically offer higher ADEs and yields. For the immediate future though, mass package tourism is being courted as a means to boost arrivals and thereby ensure the commitment of resources from central budgets to further the sector’s development.

“The Philippines will attract more international travellers with the diversification and expansion of tourism destinations and products for offering,” Cañizal told OBG. This should come on-line in time to tap into the international industry’s search for new destinations anticipated in the next decade. If the country can eventually regain its Category 1 rating from the FAA, which most expect given the government’s contracting of FAA consultants to oversee the necessary modifications, then the Philippines is likely to enjoy renewed interest from airlines and wholesalers alike. However, an early 2012 review of local aviation industry by the FAA pointed to remaining areas that needed improvement before any upgrade will be considered.

The country will continue with previous strategic efforts, including medical tourism, health and wellness, and ecotourism, all of which are included under the revised NTDP, but without visible and concrete action linking gateway infrastructure to key tourist destinations investors may be wary of committing to new locations. Without these, government targets may miss their mark, or tourists will face a lack of facilities and services. Progress made in 2012 by the government and its private sector partners will indicate whether the Philippines can meet its 2016 goals.