Report No. 1095a-PH l ' The Philinnines Prio-ritioe and Prosprctc for Develonment a I a %-E I ILI'%-. %-, Ls B~ %IaI N-,.r~ - - 1 DB%ic, Eo,icRponrt- UO.DI%.- L-%AjI I%.JI I II%-, L. (in Three Volumes) Volume Ill: Investments & Resource Management May 5, 1976 East Asia and Pacifir Region East Asia arid Pacific Programs Department FOR OFF!C!A! USE ONLY This document has a restricted distribution and may be used by recipients nniv in thp nprformanrp of thpir offirial dities. Its rnntpnts mav not .the r - - --i - e w ----. - ---- __ authori, otherwise be disclosed without World Bank authorization. CURRENCY AND OTHER EQUIVALENTS Currency Unit = Peso (P) US$1.00 = P 7.5 P 1.00 US$0.1333 US$1 million = P 7,500,000 Fiscal Year Through 1976 July 1 to June 30 Beginning 1977 January 1 to December 31 .. = zero or negligible -- = not aDDlicnble n.a. = not available FOR OFFICIAL USE ONLY This report is based primarily on the findings of an economic mission whiclh visited the Philippines in April/May 1975. The preliminary findings of the mission were further updated after discussions with the Government in Decomber 1975 and January 1976. Mission Members Russell J. Cheetham Chief of Mission Bruce Jones General Economist Madhusudan S. Joshi General Economist Carroll Long Editor/Urban Specialist (Consultant) Guenter H. Reif General Economist Ellen Schaengold Research Assistant/General Economist Kevin Young General Economist Vladimi.r Dragomanovic Industrial Economist Frank Lowenstein Agricultural Economist Peter K. Pollak Commodity Specialist Augustin V. Que Financial Economist Mr Hlajimu Maeda and Ms Inai Y.-Bradfield also contributed to the mission's worl in the fields of power and transoortati.on, respectively; as did I2s Beatriz A. Florendo in the collection and tabulation of the external debt data. The renort was comnleted under the direction of Mr Rdward K. 1-awkSns3 Senior Economist. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Chapter 8 THE LEVEL AND ALLOCATION OF INVESTMENT Page No. A. Overview of Investment Needs ...... .................... 2 Past Trends in Investment ....... ...................... 2 Future Level and Allocation of Investment .... ......... 4 B. Expanding-Public Sector Infrastructure Expenditures ... 8 The Past Record . ...................................... 9 Public Investment Needs for the Next Decade .... ....... 13 Planning and ImDlementin2 the Program ..... ............ 17 C. Influncning the Pattern of Private Tnventment .- - 23 The Role of Dirert Foreign Investment oae..-.. --23 Investment Incentives .......... ....................... 23 D. The Role of the Construction Industry ..... ............ 32 General Characteristics of the Industry ..... .......... 32 The Potential Contribution of Construction t Employment ....................................... 33 Mo-sures to Promote the Industry .38 Techni"al No~te......................39 Chanptr A THE LEVEL AND ALLOCATION OF INVESTMENT 8.01 The u-nequal distribution of benefits among the population and the unbalanced pattern of sectoral development that characterized Philippine nrn,f., Far .n..n.At ; 4-ioF ehn-Q hro AnnAoo trot. *1001. 1 4nlrn_.. growth o mL **LucLug fh a LLe past Sh.L. dce Was vcvl'.JO 5l ,,1,eA Lt r eour cL management policies and to the pattern of resource allocation in that period. Al"Cthough t--e aggregate l-evel of resources available for i.vest.ent were relatively high, outcomes in terms of output and employment growth were disappoinr.ting. The reasons for th4s situat.on 4ncluded the 14JtedA -ccss to the investable resources and the concentration of investment in large- scale enterprises, which reinforced rather than changed the-a cocetrte pattern of asset ownership and income distribution that existed at the time of ineedne fJJ .5nU=Ok%LLU~LL..L1_= 8.0 The m- aege fo rura and urbar. develop.ment andU thCe -prog-rams u 'JA. ±L0 0 LJL4L#_,L=0 .LL LJ.ULaX.L CLLLU Ut UCLLL UCVO±.UFJIOL 1U LIO JULLL for agricultural, industrial, and human resource development that are out- £±lieUd in tLIe prteceding chapters should help [ -vd -1 `l-riOUVio- of benefits in the Philippines. If these programs are moderately success- U.L, LLley soLLUUlU, UVCL a FroL.LdU UL yeaLrs prLUV.LU LUL IIULA. LCLrJaU groUWLI .1in employment opportunities and for an improved level of services in both urban andU ruraL areas. But successfuOLl 4implemtentatiOn olzfL th.1ese p mjJLUg1.IUL W.L.L± cal.L for a substantial increase in the level of investment in the Philippines and 'or i_-pOrtLant cnanges in Lth sectoral alloUCaL.LUlL Of that Linvestment. Ag- gregate investment would probably have to grow by about 12 percent a year in real terms during the second half of the 1970s. The rat'o of 'nvestment to GDP would have to rise from about 20 percent (the average of recent years) to no less than 25 percent by the early 1980s and thereafter remain at about that level. Within this total, the share of public investment would need to double to at least 5 percent of GDP. An investment program of this mag- nitude raises a number of important issues in resource management which can be conveniently divided into three main groups: (i) How can the requLrea sectoral allocation of investaDble re- sources be accomplished? (ii) Can sufficient domestic resources be mobilized to carry out the program without excessive dependence on foreign financing? (iii). If the needed domestic and foreign resources are not forthcoming, what are the main eiements of fiexibility in the investment program; that is, to what extent should the investment program be reduced, and to what extent can dependence on external foreign financing be increased? 8 .03 The issues dealing with resource mobilization are discussed in Chapters 9, 10, and 11, while those related to the size and ailocation or investments are dealt with below. -2- A rf.... tB. Over-view of .Luvestment Needs Past Trends in Investment 8.04 Iq aggregate tgrvs,q the level of fixed in,vestment in the Philip- ,pin5e rue fro,m a,Eut 13 pgercepT of GPr in tq#e early 1950s to an average or abput 16 perc,ent dri4g te la,te 1t95Q an e,arly 1960s (Table 8.1). In the lattetr hnalI the 19 A6Q, a period ;n wnip theFre were heavy investmepts in steel, chemicals, cqmgnt, and other inte med*atp go,ods indutries, the iavestment rate rose to aDouF 20 percent or uDr. bince 1970 the rate has dropped back to an average of about 18 percent as a result of the sluggish grpwtn in aomestic demand, tne excess capacity in industry that stemmed trom the heavy investment in the late 1960s, and the sharp increase in the cost of imported capitai goods after th,e 17u qevaluation. Following the boom in incomes in 1973, the investment rate recovered to about 20 percent of GDP in 1974. Tne yearly incr4aqse in stpo!k has climbed steadily trom a little more than 1 pepcept of GDP in the early 195SO to ab4out 2.5 percent in the 8.05 A strikin feature of papst evelopment has been the high levels of investment relatje to outpput, the v,erage increeptral capttal-output ratio 1/ in the 1,60s ,was 3.9. Untortunately, there are no data available ,on th,,e ,s,ctoral allocation of i,nyestent during this period, so it is not p,oSi,Die tO pnpoinr r rebasons r! what appears to be a relatively in- efficient use of investable reesources. However, it is generally agreed that # large share ot fixed inveAtment ,was concentrated in man,ufcturing and, in particular, in project,s wh4qoe impact on output and employment was reiatively small. 6.Q"b tiThie sgs±on as atte,mpted ,t,to put together a rough picture of the ,s,ecxtop; #llo,ca,:,t$,on of investmen.t for the fiFst half of the 1.97,Qs in Table 8.2. 4AJthou9gh th, data in t,he t,ble 1_ ,,re o,ny esti,mates, they highlight sev,e,ral characteri,stics of invetment in the Phili,ppines: (i) industry (manufacturing and mining) has p.ro,bab-y acco.unted for about 4Q percent of total fixed investments in recent years; (ii) the transport sector has had a rather signiticnt s,hare of in,vestment, most of which is private investmen,t, pri- marily in trans,port equip.m,ent (includin private automobiles), rather than public investm,ent in transport infr.astructure; (iii) the a,gric,ultural sector has ha.d a relatively small share of investment, nosore th,n 10 percent,of total inves,tient v accQrding to Mission estimates; and (iv) o.nly a sm,all amount of investment has b.een undertaken by the pub-lic sector, about 2 percent of 1/ The incremental capital-output ratio is defined as the ratio of fixed capi.tal formation 'in the c.urrent period to the increase in gross .domestic product over the previous period. - 3 - Table 8.1. ShiLare ol 'Uross Domestic Capital FormLation in GP arU Incremental Capital-Output Ratios (At 1967 constant prices) Gross Increase Domestic Incremental Year Fixed Capital-Formation- in Capital Capital-Output Private Public Total Stocks Formation Ratio8/ 1950 n.a. n.a. 14.7 1.4 16.1 2.01 1951 13.1 1.0 14.1 1.66 1952 11.9 0.9 12.8 1.57 1953 13.8 1.3 15.1 1.73 1954 ft It 13.6 1.8 15.4 1.88 1955 13.8 1.9 15.7 2.12 1956 15.6 1.3 16.7 2.70 1957 17.6 1.5 19.1 3.55 1958 " 16.7 1.7 18.4 3.72 1959 18.1 1.8 19.9 5.33 1960 15.7 1.6 17.3 4.85 1961 16.5 2.0 18.5 4.98 1962 " 15.5 2.2 17.7 3.06 1963 " 16.8 2.4 19.2 4.15 1964 19.1 2.2 21.3 4.32 1965 19.0 2.2 21.2 4.73 1966 IRA 2.2 20.5 3_77 1967 18.9 2.2 21.1 1.9 23.0 3.79 1968 1A-4 22 920 6l9 225 3.80 1969 17.4 2.2 19.6 1.8 21.4 3.61 1970 15 6 1.9 17.5 2.4 199 349 1971 15.9 1.6 17.5 2.1 19.6 3.55 1972 15.1 2.0 1771 2.2 19.3 3.21 1973 15.1 2.2 17.3 2.6 19.9 3.43 1974 17.9 2=4 20.3 3.1 23.4 a/ Three-year moving average. The incremental capital-output ratio is defined as the ratin of fixed capital formation in the riirrpnt -nprintd t-n t-he cuirrent increase in gross domestic product over the previous period. Source: Based on data supplied by the National Accounts Staff, Statistical Office, National Economic and Development Authority (NEDA), and Aii14i tnr. (1rneor.ml t c Table 8.2. Sectoral AMlocatioon of Fixed T7n%estment Estimated for 1970-71k and Projectedl for 1980 (Amounts in millions of pesos at 1.974 prices) Average Annual, 19170-74 r oTjected, 1980 Amioint Percentage of GDP AmTount Percentage of GDP Sector Public Private Total Public Private 'Totatl Public I-rivate Total Public Pr:Lvate Total Agricu:Lture 170 1,400 1,570 0.2 1.6 1.8 600 3,100 3,700 0.4 2.1 2.5 Mining and ManuJEacturing * 6,570 6,570 .. 7.5 7.5 .. 13,400 13,400 .. 9.1 9.1 Transport 880 2,620 3,500 1.0 3.0 4.0 1,800 4,400 6,200 1.2 3.0 ,.2 Power 180 700 880 0.2 0.8 1.0 3,350 150 3,50° 2.3 0.1 2,4 Other utilities 180 / 80 260 0.2 0.1 0.3 450 150 600 0.3 0.1 0.4 Housin. aJ 2,100 2,100 2.4 2.4 300 3,800 4,100 0.2 2.6 2.8 Other 350 530 880 0.4 0.6 1.0 1,150 1,150 2,300 0.8 0.8 1.6 TotaL 1,760 14,000 15,760 2.0 16.0 188.0 7,650 26,150 33,800 5.2 17.8 23.0 a/ Refers to housing construction by the puiblic sector and eccludes (iovernrent financing through the Government Service -Insurance System (GSTS) -and the Social Security Sy-stem (SSS) of houses built by thae private sector. Source: Data for 1970-74L are MJssion estimates; data fcr 1980 are Ydssion pro;jections. GDP according to Mission estimates. 1/ Only in recent years has the share of investment undertaken in tie public sector increased; in 1, it had risen to about 3 percent of GDP. It should be noted, however, that until recently it was the private sector in tne Pniilppines tnat undertook a iarge share of the investment in areas that, in many other countries, are the responsibility of the public sector. Tnus, there nas been substantial private investment in power generation and transmission and in roads, ports, and communications facilities, although not all of the facilities have been for use by the public. Future Level and Allocation of Investment 8.07 There is no up-to-date Government statement of the planned level and sectoral allocation of future investment. Z/ The Mission has therefore attempted to formulate a statement of investment priorities that would be needed to support the sectoral development strategies outlined earlier in this report. 8.08 Because of the need for relatively larger investments in utilities, especially in power generation and transmission, and the initiation of a number of large, capital-intensive projects in the industrial sector, a sharp rise in the investment rate will be necessary. The rate of fixed investment to GDP, which has been about 18 percent in recent years, would have to rise by about 12 percent a year and reach 23 percent of GDP in 1980; it will need to be maintained at least at that level in the first half of the 1980s. As Table 8.2 indicates, this would mean fixed public and private investment of about P 34 billion by 1980 (at 1974 constant prices). As a result of the probable composition of investment, the incremental capital-output ratio is not ex- pected to change significantly from the current level of about 3.4 during the next five years. This ratio conceals opposing trends, however; better cnna- city utilization in industries like steel, wood products. pulp ;Ind paper, and cement will tend to bring down the ratio, while capital-intensive projects with long gestation periods, like nuclear power plants, will tend to raise it. 1/ For the purposes of this report, public investment is defined as capital expenditures by the national government, by local governments, and by public corporations in such areas as transport, power, and public irrigation works. Specifically excluded are equity investments and loans from the public sector in industrial activities and the banking system. Also excluded, but discussed separately, are public investments in housing proiects. Unfortunatelv. there is no one serieR of data that adequately measures these public investments in infra- structure. The data used in this rennrt are a c-omnnpite of infrastrvuc-ture expenditures of the national government as reported by the National Economic and Develonment Authority (NEDA) and ennital penditures by local governments as reported in Auditor General Reports. 2/ The most recent statement, for FY74-77, was contained in the Four Year Deveo1nnmPnt Plann F7L_77 which iS nTow niiot of date in many respects- - 6 - 8.09 Successful implementation of the development strategy would re- sult in significant increases in the rate of investment in agriculture, industry, transportation, and power. Because of their current large share of investment, industry and mining would account for about one-third of the total increase in investment. Nevertheless, the share of investment going to industry would decline somewhat and successful implementation of the development strategy would cause the share of investment in power, agricul- ture, and "other services" 1/ to rise. At the same time, there would be a sharp increase in the relative importance of public investment. Whereas the public sector accounted for about 11 percent of total fixed investment in the first half of the 1970s, its share would rise to about 23 percent by 1980 if the proposed programs were implemented. In terms of its share in GDP, public investment would rise from an average of 2 percent in the first half of the 1970s to about 5 percent by 1980. After taking into account increases in stocks, gross capital formation in the Philippines would probab- lv have to rise from an average of 20 Dercent of GDP in the first half of the 1970s to about 25 percent by 1980, and then remain there during the firs.t half of the 1980s. 8.10 Raising aggregate investment to this level will require vigorous efforts to mobilize more domestic resources. It should be possible to raise dnmot1irt c:Ainqs tn ahoniti 22 nprr'pn of GDhP hv 1QRfl! 2/ thy rpmaindpr of the program would have to be financed with foreign savings. Even so, this would mean a decline in the ratio of foreign savings tn GDP from the nrpepnt high level of about 4.5 percent to about 3 percent by 1980. The decline would cor.tinue in Qhe 980, nind by IQ985 foreigon savtingsc nprobably wouild onlv ybe about 1 percent of GDP. Provided these external resources are available o n sui- f-able te-ms I/ the tank oVf ,mnin aintn-n interran l ar.d etor.nal finar.ca4I stability should be manageable. 8.11 The present relatively strong dependence on foreign savings is prm LLIaril COy thLL e result of the -ecet-- -a-se *in -4 eae i h co trolem- crude and products. It will be a number of years before the Philippine econou,my canu compULete a reasonably ooth L transition tLo the point where these higher energy costs have been fully absorbed. Increased investments in the export sector, in import-replacing industries, and in alternate sources of energy will be required to reach that point. Some of these investments are necessarily capital-intensive witn iarge foreign excnange requirements. Tne Mission believes that a smooth transition is preferable to the alternate strategy of trying to sharply reduce dependence on foreign savings in the next couple of years, which would have unduly disruptive effects on income 1/ This category includes educational facilities, flood con- trol and drainage canals, medical taclilties, and commercial buildings. 2/ See Chapters 9 and 10. 3/ See Chapter 11. -7- and employment growth. Since finished consumer goods are now only a small proportion of total imports and cutbacks in raw materials would have an immediate and unacceptable impact on production and employment, rapid cutbacks would have to be concentrated on capital goods. However, a decrease in imports of capital goods would not only hamper the Philippines' adjustment to higher energy prices, but it would also have adverse effects on programs aimed at expanding productive employment opportunities. 8.12 The projected rise in the share of investment in GDP and the decline in the relative importance of foreign savings will undoubtedly not progress quite as smoothly as the foregoing discussion implies. The actual outcome in any one year will be influenced by the world prices of capital goods, short-term changes in domestic incomes and savings, and the timing of major investment projects. The issues related to foreign and domestic resource mobilization are discussed in the subsequent chapters, but it may be helpful at this stage to give some indication of the extent to which out- comes on the investment side may deviate from the projected trends. 8.13 There are several reasons for which investment expenditures in any one year could be somewhat different from those projected. One reason is, of course, that physical investment programs may turn out some- what differently than expected. Final decisions on a number of major investment nroierts for the industrial sector have not vet been taken, 1! so it is difficult to be very precise about the timing of these projects, and henre ahoilt inupetment reaiiirements. Tn addition- a]thou1gh the Mission has argued for a major increase in investments in so-called nontraditional indiitrial epwnnrts by 1980, it is by no menn certain that. even with the- promotional policies of the Government, individual Filipino entrepreneurs urill fopl t1h:t- thg. nntarntinl nrnfiti-e n,it-o'1 tho r inh'rpnt in xrestpr …~~~~~~~~-- - - ---e a -..- riQ- …-il .pn in- _vn p exposure in export markets. A more cautious approach among private investors m`ay., th.erefore, re-sult ir. a imle xr.vf-tm.er.ti" in indutry.7 8.14 For the agricultural sector, gross inveat onr is priercAre tn grow at about 12 percent a year, compared with an almost negligible rate of increase rn the past few years. :.hether thi 41 wl marterialize will depend on ncen- tives for private investment in agriculture and on the availability of creudit. WtJh the relxaio --I -credit-F -4 restriciors (.g. .oltea -eur-4 * VY.LLAI LI L LcLa a J.j, JJ. L. J. *O L.L.LL.jLflO WL W* 5* , LA a a.~a - 1 -.L t ments) under programs of the Masagana type, effective private demand in agriLcu±Lture fLor capitLa.L LfrIU LLinLs.LULt.JoLr.L soUrL is.L_ pJroUbabU.Ly fLar iLe s of supply. Private incentives will also depend, in part, on the rate of progress in the public agricultural program. 'rieLce, shortfalls iLr p Ub±-Lc agricultural programs may not be entirely offset by private agricultural investment demand that is greater than planned. As a result of thesL aLl other uncertainties in the agricultural program, 2/ circumstances may preclude an agricultural investment program as large as pianned. 1/ See Chapter 6. 2/ See Chapter 5. - 8 - 8.15 The total investment Drogram of the Dublic sector could fall short of projected levels if difficulties are experienced in project preparation and imnlempntatinn- This is nperhaps most likely in the nowpr sector where a very large build up in projects is required. Such a situa- tion cniild hnweaver he nffset by nrnrgrer-h -nm-leneed nrnoirms in other sectors, especially in transportation and public housing. 8.16 Any reduction in investment expenditures caused by delays in Project pn-repation anrA impl- n ntatior could possibly17h nbprtiallu nffaet by substantial cost overruns, particularly for equipment purchases in the steel, che.icals,and min.ir.g industries, and in the poer sector. There are several large capital-intensive projects in these sectors that have long gestationL per.iods; 'Lea s L-L*,A deti' .L'.J LLOFUAZ---U-- J#-..- S_ v 4 } A X tv _ ~~~W. - ILU2v ..s_AUP s S - A A_ 4 4 o1>e not yet been fully developed, an accurate estimate of their cost is not yet established. II thle field of transportation, cost overruns may also pLrVe to be an important factor that may tend to raise investment needs. 8.17 These various possibilities suggest that investment costs could vary from the projected level in any une year uy about IU percent. Suchl a variation is not, of course, substantially different from the projected investment figures. IL, huwe-veL, investmenit expenditures exceeded the projected level by 10 percent and if that difference had to be met through a corresponding increase in the dependence on external financing, the increase in estimates of foreign borrowing requirements would be very large indeed. The alternative to heavy reliance on foreign capital is some combination of a reduced investment program and a higher level of domestic savings in the event of contingencies adversely affecting the resource outlook. For- tunately, the Philippines would appear to have scope for adjustment without seriously aftecting the economic growth targets or sacriticing employment objectives. 8.18 The kinds of adjustments that could be made in the face of excessive investment demand will depend to some extent on the form in which the demand is manifested. The effects of excess demand for investment in construction may have largely internal inflationary effects, whereas excess demand for machinery and equipment is apt to have much more important balance of payments consequences. In the former case, adjustments in the level of domestic construction activity could be made by delaying some construction starts or using other means, while in the latter case imports could be reduced by resorting to tax measures and other controls. B. Expanding Public Sector Infrastructure Expenditures 8.19 In the Philippines. public investment has historically been very low and sector accomplishments very uneven. Even though the Government has, in recent years. been making vigorous efforts to improve the Dublic infra- structure, facilities are still grossly inadequate. If the sectoral strate- gies outlined earlier in the report are to succeed; it will be necessary to continue giving a high priority to public investment in the future. 8.20 It is estimated that public investment will have to rise fror the present level of about 3 percent of GDP to at least 5 percent by the end of the decade. Such a rise is required in part because relatively larger amounts must be spent in areas like irrigation and transportation to directly support efforts to expand production. The increase is also the result of recent policy changes that have given the public sector sole responsibility for developing power generation facilities and the national power grid. As a result of this policy change and the Government's efforts to reduce dependence on imported petroleum by developing alternative sources of electric energy, the share of expenditures on power would rise from about 10 percent in recent years to about 35 percent in the future. The share allocated to transportation would decline from 50 percent to 33 percent. Despite these changes in the composition of the public investment program, there would still be substantial growth in real terms in public investment in all sectors. 8.21 The other major change in the pattern of public investment relates to the regional distribution of expenditures. Greater efforts would be needed to use the public investment program as a means of improving the regional distribution of the benefits of develonment. The Government is already making noteworthy progress in this area and there is likely to be a very suhbtantia1 chanae in the geographira1 concentratinn of otbli- investment away from Metropolitan Manila and Central Luzon to other regions suteh as Mindannn- Rirnll the Visavas, and the CaoAvAn VallPV 8-22 The Mission estimAtes that during the next ten years public in- vestment outlays will need to be about E 76 billion (at 1974 constant p-rices), AR percent- of which would be= fo,reigr. exh nge otlays for importedA goods and services. In the past, public investment was constrained both by insuffic4nt fu.Aa and by thee 1A ni a imnlement- ation capacities. In recent years, there has been substantial progress in '.J~A.LAJM.AL~LAI jI IUJ.LIA ~. ~U) LLI .L .. LPJ ~. ULA~ UL. So a ' pr g a ovdidoming tbAe problems created bly the lack of: funds, b-ut ev-nsoaprgm of the above magnitude will require additional fiscal reforms in the latter part of the 1970s. 1'/ there will need to be continued efforts to improve the capacity of Government agencies to plan, prepare, and implement projects, especially in such sectors as power zr,d irrigation.. ±LJ ct L k%L;V LU r Puic au-vestment 'n the Phiiippines during the :960s a er 1970s has averaged about 2 percent of GNP. About 75 percent of the public iuvestment in tne Philippines has been undertaken by the national govern- ment, 15 percent by public corporations, and 10 percent by local governments. Compared to many otner developing countries, public investment in the Philippines is relatively low. Intercountry comparisons, however, are complicated by variations in the extent of Government responsibility for providing infrastructure and services. As was noted above, for example, 1/ See Chapter 10. - 10 - Table 8.3 Public Capital Formation in Selected Countries Per Uapita U(N? a/ 1972 Public Capital Formation- Period Country (In US dollars) .s Percentage of GDP Philippines 220 2.2 1969 Jamaica 810 4.] 1968-70 Kenya 170 4.o 1969-71 Korea 310 7.0 1969-71 Malaysia 430 5.1 1963, 1966 and 1967 Mexico 750 3.8 1963, 1966 and 1967 Zambia 380 6.9 1968-70 a/ Public capital formation is defined for Jamaica, Kenya, and Mexico as gross fixed capital formation by producers of government services; for Malaysia, Zambia, Korea and the Philippines as gross capital formation by general government. These countries were selected on the basis of availability of data and level of economic development. Source: Data on public capital formation is from United Nations, Yearbook of National Income Statistics, 1972, ST/STAT/Sec. 012, Add. 1 (i974), vols. 1 and 2. Data on GNP per capita is from the Wbrld Bank Atlas, 1974. much of the past investment in power and telecommunications in the Philippines has hben uineartaken by the nrivat-a sp,-t-nr p ' ann 80 it * ld anppear that there has been a relative neglect of infrastructure facilities that serve the needs of the public at large. -As Table 8.3 ir.dicates, public i.n.vesment outlays of 4 to 7 percent of GDP are not uncommon among countries at roughly the same per capita income lerel. 8.24 The man4 rf-aso- fo: the rel-4tiely low 1evels of Investment - * -- *flC~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. Ma. - Ob4C - -**- a _ .c & _&jO ML by the national and local governments and by public corporations during th&e 190s0 were a shortzge of pubic" fu-ds fromdoms-i ore,arltvl LI5& *J%jfJ &&%#&C&5 UL jUUJA%.-~ X.ULUO &LULU UVUIUCL.L,., OVUULL=, = &=LaLJ.VCZY weak capability within the public sector to adequately prepare and implement proJects, andU a corcomiLtant lack. ofA externa'L financial support. JuriLg the past three or four years, however, a very considerable effort has been made to overcome these -Dottlenecks. - PVLrV--…t … -1…Ve 4vicreased substan- tially, external assistance has burgeoned since the Consultative Group for the Philippines was formed in 1971, and the project pipeline has Increased substantially. These factors have resulted in a considerable rise in public investment during the past few years, and the ratio of public invest- ment to GDP is now about 3 percent. (Table 8.4.) There has also been a dramatic increase in the official external assistance available for investment projects, which rose from US$125 million in 1970 to over US$700 million at the end of 1974. 8.25 Only since 1967 has reliable information been available on the allocation of public investment among sectors. More than half of total outlays went to the transport sector during FY67-75, ii percent to irrigation, 9 percent to power and rural electrification, and 5 percent to water and sewerage. The remaining 18 percent was allocated for flood control, school construction, and other programs. The dominance of transportation reflects both the Governmentis priorities during that period and the transportation sector's relative superiority in implementing projects. While the alloca- tion may at first glance appear to be unbalanced, it must be remembered that there was insufficient spending in all sectors. 8.26 There has also been a very uneven distribution of outlays among the various geographic regions in the Philippines. Infrastructure invest- ments in the past have been very heavily concentrated in Manila and Central Luzon. The International Labor Office (ILO) reported that "between 1965 and 1972 almost half (47.5 percent) of the total infrastructural investment took place in only two regions: Rizal (which includes Manila) and Central Luzon." 1/ Perhaps even more revealing is a recent analysis done by the National Economic and Development Authority (NEDA). 2/ In terms of ongoing projects in December 1974, the per capita investment in Metropolitan Manila was three times higher than the national average. Central Luzon was second with a per capita invest- ment about 50 percent higher than the national average. (Table 8.5) 1/ ILO. Sharing in Develonment. D. 196. 2/ NEDA "Racyin.nl Dstrihiitinn nf Puahlir TInvant-mant" WMA Devealnnmant- Digest, Vol. 2 to 22 (April 1975). _ 12 - 7w21 R 1. Lu Jn - _ r_J_^1;__SA^.~. . . ... _ __ .&w_zL_. lL2 12 t2 = __ r U J. ±11VtU1,j1t;111t lAIV UIiUCIL J L b1 v L L 11 ±a XZ1O Averaze Annual Increase (In percent) Item 1960 1965 1970 1975 1960-70 1970-75 1960-75 Total Public Investmeent 1( I lIRA4 I-579 2,3 4.5 132 7 - (in millions of pesos at 1974 prices) National government n.a. n.a. 1,164 2,449 n.a. 16.0 n.a. Local governments n.a. n.a. 183 125 n.a. -7.2 n.a., Public corporations n.a., n.a. 232 362 n.a. 9.4 n.a. Share of Public Investment in GNP (in percent) 2.2 2.0 2.1 2.9 __ __ National government n.a. n.a. 1.6 2.4 __ __ __ Local governrments n.a. n.a. 0.2 0.1 __ __ __ Public corporations n.a. n.a. 0.3 o.4 -- Source: Mission estimates based on Government construction figures in the national accounts, infrastructure expenditures reported by NEDA,and capital expenditures of local governments listed in Auditor Generalts reports. - 13 - 8.27 There is evidence that the Government is attempting to redress this imbalance in its current infrastructure program. In its analysis of the FY74-77 infrastructure program, NEDA indicated a very substantial shift away from Metropolitan Manila and Central Luzon to Mindanao and the Cagayan Valley. While the Visayas continue to receive less than the national average, there has been a substantial improvement in their position from less than a third of the national average on a per capita basis to over two-thirds. The short-term horizon of the analysis, together with the lumpy nature of public investment projects, caution against attaching too much significance to the particular numbers presented in Table 8.5. However, the overall thrust of the analysis indicates that the Government is moving in the direction of a more balanced regional allocation of funds than in the past. Public Investment Needs for the Next Decade 8.28 If the Philippines is to expand output and employment opportuni- ties, a relatively larger share of investable resources will have to be chan- neled into public investment programs in order to upgrade and expand exist- ing facilities. Particularly large programs will be needed in the power and irrigation sectors in direct support of production programs. The Mission believes that the level of public investment in infrastructure will need to rise from the current level of 3 percent of GDP to 5 percent by the end of the decade and to remain at about that level during the 1980s. This would require more than a fourfold increase in the average level of public invest- ment in real terms compared to the level of FY67-75. The average rate of increase would be about 13 percent a year in real terms during 1975-85 compared to an average of 7 percent a year during 1967-75. In 1974 prices, the program would require outlays of over US$10 billion for the next ten years. 8.29 Sectoral Allocation: The problem is more complicated than iust increasing the overall level of public investment, however. The particular circumstances of the Philippines warrant a maior change in the sectoral distribution of public investment during the next ten years. (Table 8.6) If output in the Philippines economy is to grow at about 7 percent, there must be a major increase in investment in power generation and distribution facilities. This large increase in public investment in nower is du-e in part to the Government's decision to have the National Power Corporation (NPC) responsible for all new generation facilities in the Philinpines. Previously, a large amount of power had been provided by the major private power com- pany--Meralco. It is also due to the Government's decision to substantially increase the availability of power in Mindanao and the Visayas, areas which have been largely neglected by private utilities, 8.30 A detailed review of the proposed program is aiven in Appendix III to this report. Briefly, however, the demand for power is expected to grow at about 11 percent a vear during the nevt decade, so that additional genera- ting capacity of about 5,000 megawatts (MW) will be needed during 1975-85. The Government is activelv engaged in a program aimed at reducing dependence on oil-fired power plants, which presently account for almost 80 percent of - 14 - Table 8.5. Regional Allocations of Public Investment Expenditures Per Capita on Projects During FY74-77 (In pesos per capita at current prices) nfn-rnino, P+ro -ac+to P-oee' tn eha Projects Implemented in Implemented After Reg4ion (December, 197T) I 74 T 74 Metropolitan Manila 754 214 167 Ilocos 1714 85 1145 Cagayan Valley 138 85 972 C- +"al T-vwr^n 37e 09 1 (7 Southern Luzona/ 83 58 367 n.r 11 ~~I LL 0 D.LUJ. cO. L4U O Western Visayas 74 27 196 Ce.+a -Isa 543116 -w...- ~~~~~~~~~~~~~~~~~~~~~~~LUC Eastern Visayas 131 30 173 Western Min4-an.so 69 '-5 179 Northern Mindanao 215 99 442 Philippi",."- ...es23 3e 0255- a,r Exc:uding "Retgpol ita- Msnilae Source: NEDA, "Regional Distribution of Public Investment" (n.p., 1975, processed) a e± . j. .. . T .i .1 - ±aUJ.U V .U o ±L"V LWJ1utI, %PALI,.LeU 117 IAW ruuL.U% Owuw.,r Average Annual Expenditur (LIn millions of peos Composition Share in GNP at 1974 prices) Tn Ee tpercent) Sector a~~8/b/ FY67-75 ' 67-7 F!76-81 Sector FY67-75- FY76- FY67-7- F677 Transportation 977 e,410 56.9 31- 1.2 1. C/ o (- o z n IC a e- 3 -I a uX--I vw Vu vu S v v. _L .Li Ru,-=l Vlc/A-l £U" . a" .L.L( L,UU_ LJ.U'J. cation 38 330 2.2 4.3 - 0.2 Irrigation 186 590 10.8 7.8 0.2 004 IvaerY.L auu sewerage vv 400 5.3 0Je.3 Flood control 664 460 3.7 6.1 0.1 0.3 Other 2.48 730 L.*4 9.6 0V 0.14 Total 1,718 7,600 1.0 v 100.0 2.1 5.0 b/ Pt4slen preeietions. 2y/ :,cludi4n rur. al elect.-ifiLcation. Source: For actual data,the infrastructure expenditures of the national government and puolic corporations reported by NEDA and capital expenditures of local governments listed in the Auditor General's reports were used. The projections are Mission estimates based on the analysis of individual sector programs that are reviewed in this report. - .L - generating capacity. The program includes development of additional hydro- electric nrojects- exnlnitation of genthprmal rpsonires-P and Construcition of two nuclear power plants with a combined capacity of 1,200 MW. After allowing for aMfit-ionnnl trAsnamiainn and dist-rihbtt-inin farilitip- the Minqlnn esti- mates that investment outlays in the power sector will have to amount to about R 29 billion during 1976-85 at 1974 prices (equivalent to-n US39 billion at the present exchange rate). The program would absorb about a third of public in.vestment during the neriod, comnared to the 7 nercent alloc ated to the power sector during the past decade. The Government recognizes that it is confronted with a ma4or challenge in ImplementIng a program of this magnitude. It has, therefore, begun to upgrade the capacity of NPC, which hAOs the ma_i4n reApo4nsb4 14 fo Fr iM-1---mn4-- m,-Anw...nt 1/ Th00 exne-o-A_ ..ao ..^_ ICtA ,L_1J..waVa;a -~J ~ r- L^S5 .* a.rsW . . --- ^r--- itures do not include the requirements of the Government's ambitious rural ellectr4fication progrm h,at s discusseA 4n Chapter 4. 8.-) -- Ihie oUthLU IfIlJUV coUmpAonUent1U of U e proposed1V U ±xivest iA iitmen IJiU , is transportation. Investment expenditures on transport infrastructure will ijavu U1 .J Ue tjq)wiU0U b±LrtL1LUa1 b.L.Y UUrIUJI 141C I1Ct}. UCCuuLC± UtIUvtC ±L5 1U Ut a continued improvement in the amount and quality of transport services in thA'e ecor,oriT. T,; z emp,wals- -wl hav to beL~ sut s _UF -upfo-r- the covrag of _-.-L~' - 1.40 0LIL~iY- - JJ1 0ZUJL .Lo W±LJ_L llav%514 UV 1~L±ULUJI .1 U0d, 4. public transportation in Metropolitan Manila and on improving interisland shipping anrd farU -to-market roads to support rural de-velopment inl other parts of the country. However, because a substantial part of the current Govern- ment transportation progrLar,l is essentially- only- a project list with itrvtle supporting data and. justification, a meaningful review. oL this program could .~4. t.. ±2 ~ / TT4~ ~t. J_ - r,ot1 be carried o Uut. 2c/ 'until suc a review is underiakell, a reasonabie target would be to increase capital expenditures on transportation by about l0-l2 peroent a year. This would result in transport expenditures of about P24 billion (at 1974 prices) during FY76-85. This wculd be equivalent to about_l.6 percent of GNP during the period and. about one-third oT the public investment program. 8.32 For the reasons given in Chapters 4 and 5, this report places a high priority on continued expansion of irrigation facilities. At this stage, it seems likely- that about 300,000 additional harvested hectares could be brought under irrigation with new gravity schemes (including cormunal ones) constructed by the National Irrigation Aldministration (NIA) and another 300,000 hectares couid be renabilitated. _in addition, some public invest- ment expenditures would be required in the companion program to expand pump irrigation, adding about 200,000 hectares during the next 10 years. Total public investment in new irrigation facilities probably would amount to 1/ The steps being taken are discussed in more detail in Appendix III. 2/ In this regard, the World Bank is considering providing technical as- sitance to the Government to review the immediate four year infrastructure program (FY76-79) and to assist in an updating of the "Philippine Transport Survey" prepared in 1970 by Metra International and Sauti Consulting Engineers. - 17 - about -5l O billionI at IQ7?. p rlce -urn 'r VY7(_FP A+lhougnll hesh +b.a ofb public Livestment in irrigation waola aeclUie to auout 6 percent, there woula. stL.L be a uhreefola I r e ase th -Cv of ouJ.cT a to.a z h i.- pi" FY67-75. T'Aile this program would still not meet the need for additional iigatior,~-P fai_ tis th 4present consra.11ts on con str_ uct IC, oui- ea 111 I . CLu ULUL I L'J.I. ULC1 I_,J. U . VI I ~Ju aa 0 lIQ U n i 4.J Ua ci Sti 4- UA. 4s --A a I. Lc4 1 irrigation systems make aclieving even this target optimistic. 8.33 Other sectors would continue to account for about one-quarter of the overall program. They would, nevertheless, require a more than threefold increase in the average levels of investment. Because of its past neglect, the flood control sector warrants a larger share of the total. The Govern- ment has recently increased investment in this sector considerably; main- taining this momentum would result in flood control accounting for about 7 percent of investment during the next ten years. Similarily, compared to past levels of investment, the Government has embarked on a large water supply and sewerage program in Metropolitan Manila, as well as improved water supply in a number of provincial cities. This program would result in an increase in that sector's share from less than 1 percent in FY75 to 6 percent by FY80. No substantial changes are proposed in other sectors; telecommunication will probably continue to account for less than 1 percent of public invest- ment, schools for 3-4 percent, and miscellaneous public works and projects for 4-6 percent. 8.34 Financial Implications: The financial implications of the pro- posed public investment program are considerable. In 1974 prices, the program will require F 76 billion during FY76-85, more than four times the actual outlays during the previous ten years. Along with this substan- tially larger overall requirement, there would also be a significant change in the pattern of expenditure. (Table 8.7) Primarily because of the increase in expenditures on power, the public corporate sector would account for almost half the program compared to its current share of about 12 per- cent. Local governments would maintain their share of about 4-5 percent of public investment, and the national government's share would decline to about 48 percent. The foreign exchange component of this program is roughly estimated to be 9 34 billion (at 1974 prices) or US$4.5 billion. Planning and Implementing the Program 8.35 The proposed public investment program is ambitious and, in view of te1, pas record, there is nuestio-n as to whether the proar-n oan be ~* ** L* 'cx , ... -_ - ' - - -_ fully implemented. The Mission believes that it can if there continues to be close allentlon to project formula tioU n -,nLL pL l ann-LLir.Ln Oa.ng the various agencies of the Government and if there are concerted efforts to build up thAe c a4pjai4U.LJ ..L 1 -it t Ai eUs ofL thesCe agenie and of the domestic construct i4on IndLus t. ry to execute the programs. - 1i9 - Table 8.7 Projected Public Investment hi&penditures by Source, 1976-85 (Tn hillionns of npeo a+. 197I pnrice) Public Sector Amount Percent -National government 3'.5 48 Public corporation 36.5 48 .r Local governments 3.0 l4.o Total 76.O 100.0 Foreign exchange component 3)4.2 945.0 a/ Includes the Philippine National Railways, National Power Corporation, National Electrification A.lnisttion, Metpolitan Manila Water- works and Sewerage System Source: Mission estimates. - 19 - 8.3J Jector and P LUJeC; P.L4aninL1g:. I UU.Lic.sector inLUVesLtmeLn pJLILLLa.16 in the Philippines has, in the past, suffered from both a weak link between the macro planning ana project planni'ng uniLts within tLhe central planning agency, and from the lack of adequate planning units in the various operating agencies. As a result, projects have not been groupeu *Lno suuua SecLUr programs and the central planning authority has not had a significant in- fluence on the programs of Lhe various sectors or tne intersectorai invest- ment mix. The Government has recognized this shortcoming and NEDA has begun sectoral planning exercises in the areas of education, industry, tourism, infrastructure/utilities, agriculture, housing, health, social welfare, and foreign trade. 8.37 As this is the first effort of its type to be undertaken in the Philippines, there is obviously considerable room to improve the sector plans. The treatment of the individual subsectors is sketchy and overall financial planning is largely neglected, but NEDA is aware of these deficiencies and intends to remedy them in the future. Despite particular weaknesses in some of the sector plans, however, the basic approach that NEDA has taken is commendable in that an effort has been made to include the implementing agencies in the exercise so that the plans that are eventually approved will have the backing of both agencies. The involvement of various planning agencies has varied considerably because of substantial differences among them. The first drafts of the sector plans were also reviewed in workshops that included representatives from the Budget Commission and the Central Bank in order to translate the sector plans into budget allocations. In the future, it is NEDA's intention to emphasize longer term planning in the various sectors as well as to add a regional dimension to the sector plans. Tne goal is to eventually have the operating agencies define the sector plans and to limit NEDA's role to one of general guidance, coordination, and determination of intersectoral priorities. 8.38 One particular planning problem relates specifically to the public infrastructure projects. In the past, the approved infrastructure program has usually been significantly larger than could possibly be undertaken either from the point of view of financial availability or implementation capacity. This has left the final determination of actual priorities to another agency or to the capabilities of the agencies to implement their respective programs. This situation has usually resulted in actual expenditures not matching planned priorities and in the highway sector receiving the major portion of the funds available for public investment. More emphasis needs to be given to evaluating the implementation capacities of the various agencies to determine whether they can carry out the proposed programs and, if not, what action should be taken to build up the agencies' capacities. 8.39 Project Selection: Many considerations must enter into the choice of specific projects that are to be undertaken in any one year. In the past, political influence probably played an unduly large role and, as a result, - 20 - projects were concentratedi in a few regions and, on occasion, were not economically justified. 8.40 Efforts are now being made to improve the methods used to select indSvidual investment proiects. With the assistance of the United States Agency for International Development (USAID), an inter-agency team (including NEDA, the DeveloDment Academy of the PhiliDpines; the Project and Planning Development Office, and the Presidential Economic Staff) has been developing a methodologv for oroiect ranking. 1/ The apnroach of the team is to P5tim.ArP the performance of a proposed project on a large number of specific indicators which are relatpd to oartiriilar development- onhiprftivp annd then to rank projects according to their potential for achieving the various goals set out in the Philipnines' dpvelonment strategy. Thpse nprfnrmanrc innirators are weighted to give an overall performance rating. These overall performance ratings can then hp uwsedr to select nroijrts Tt is sicaifirnnt that the goals or objectives against which projects are rated are much broader than eco- nomiC effiriency as measured by traditional cost-henefit anlyvsis; they v include such objectives as job creation and a more equitable distribution of income. In order to attach weights to the various goals, opinion surveys were used to determine the Philippine society's relative valuation of the goals. 2/ The pnnroarh is- till heing develoned nndi appniration hns been only on an experimental basis; however, the model could result in an improve- ment in tflip n-rnocs nf nrniect splertion nna n hetter nlia.nmcent be-tweeon the investment program and the nation's overall development goals. 8.41 In a separate exercise, Deepak Lal has developed accounting ratios for a lanrge number onf trdeabe goods and the maoin- orn-traded goods for the- Philippine economy. 3/ Those ratios, when divided into the market price of a good, yield the accou-nt-4g pri, , -h4ch is an est4mn,ate of the soc4al value as distinct from the market value placed on the commodity or service. The 1/ The following discussion is based on a summary of the preliminary re- port on the "Methodology for Project Ranking," prepared by the Project Economic Staff of NEDA. 2/ The weights worked out from these surveys are as follows: promotion of so.ial dev.lhiCL&U , 28 percent; .more equitable distribution of Inco..&e and wealth, 26 percent; maximum feasible economic growth, 19 percent; mza-iu.- use of Iao force,- 19 ------t; preservation -of enviro-ulna ltfA.tAt.LU.i UOC WL taUL . LUL 1~, .J elJ LU I. .i .~O . kVC L.AS-&*-Ll Ctt nmen*LJ al stability, 8 percent. Of course, the problem with this approach is LLtat the rankli-ng of goals.0 iL arbitL.LrL.y sinLLce LLIh LnLoti.LJnL aLL LLiU.LVdUUCal. has about attaining a social welfare goal may well differ from the value society at large attaches to it. 3/ Deepak La!, Men or Machines - A Philippine Case Study Of Labor/Capital Substitution in Road Construction, (Geneva: International Labor urfice, rortncoming). - 21 - two prices often diverge due to market distortions. 1/ Although Lal's study made use of these shadow prices to evaluate alternative production techniques for a road project, they could be used to evaluate other investment projects ,in the Philippines. 8.42 Project Implementation and Mlonitoring: Project implementation capacity was frequently poor in the past. There were often long delays in initiating projects and construction schedules were frequently extended substantially. These delays in turn led to cost overruns. There are a number of reasons for the rather poor record of implementation, including a shortage of financial resources, delays in release of budgeted funds, the release of funds for non-approved projects, poor maintenance and-organization of government-owned equipment, and weak project management and implementation capacity. 8.43 The problem created by the Door fiscal position of the national government has been largely overcome but difficulties caused by the delay in releasing funds when needed to carry out the approved program have persisted. This has been due to administrative delays, and to the fact that the link between approved programs and the budget was weak, therefore, planned prio- rities were not always those that were funded. In the most recent report of the Project Mtonitoring Service of NEDA, however, the funding problem, including inadequate and delayed releases, was estimated to account for only 7 percent of the delays encountered in on-going projects and thus seems to have dwindled as a serious source of project delay. Nevertheless, sonme implementing agencies continue to identify budget releases as a problem. 8.44 In an effort to further steamline the budgetary process, the Government has recently implemented a system of automatic cash releases. This empowers the Budget Commission to make releases based on the approved program without necessitating approval from the Office of the President for quarterly releases as was the previous practice. It is too early to see what effect this modification might have, but obtaining releases for the approved annual program and the budget should now be easier. In general, it should strengthen the relationship between the approved program and the budget. 8.45 The Government is attempting to strengthen other areas of project implementation as well. It has established a system of sector and regional specialists to monitor and identify problems in on-going projects. This 1/ The accounting prices were derived along the lines of the OECD manual on Social Cost Benefit Analysis, except that a somewhat different numeraire was used. See I.M.D. Little and J.A. M4irrlees, Manual of Industrial Project Analysis in Developing Countries, Vol. II, Social Cost Benefit Analysis (Paris: DeveloDment Center of the OECD .1969). - 22 - involves a system of Presidential Regional Officers for Development (PRODs) annd Coordinating Officers for Program Execiitinn (GOPF) uindpr the OffireP rof the President. There is a PROD in every region who is responsible for see- ing that projects are operating on time withln the budget, and acording to standard. The line agency project officers call problems to the PROD's attenti-nn, and, the PPRO nttimrptQ to retsoslve theb npr1ble,m himealf if nnpCibl,a or report it to the Office of the President. The PRODs operate without any oFfici;al budget c S r ted rnot renoenio -,xr -JJ4 -Inrn- r-munae--jron for carrying out this responsibility. The COPEs perform the project and program m.onitoring function at thlle national level. A senior offical 4 .iali app d Lt see that programs or projects are implemented on schedule and that inter- departr.ental programs escape th'e norm,al bureaucratic hazards. u~j.'i LIL~IL~± FLU~Lu1L C-LurLdJd c-LL_ ILLOrULO.L iUUJ. ~aLAL m0nitOrinL0 L LLUO. 1 y U . V it: IllOLt: eLL UC L st L aU aL[L IULU11± CU IIIULI±LUL it; 1 ULIUCL Ld&ql ULy L1IC line agencies providing data to the National Computer Center (NCC). The NCC~ m,aintains - -tna -n Jfiin projet -lnit-rin- format. A ctual IN.,U 1L[d.L LE.LiI Ct Z LdILIUdI U d.LIU tCii. A._LLIL jJL U_J t= L 111ULLA. LJL .LIi6 L uLIL £tC LU . target and variance data are recorded for the key projects and programs on a montiLLly basis. I±n aduitL.LLIL, UVwtever, the INDAt Lecently createud tfle Proj- ect M4onitoring Service (PMS) to monitor the implementation of on-going proj- ects. I t Lunctions siml±arly to the defunct Infrastructure Operations Center in that it relies on reports from the line agencies on the status of its projects. The PMS issues quarterly reporLs summarizing the status of nation- al development programs and identifies major problem areas of implementation. It also makes recommendations for improving the process of implementation to the NEDA Board. Finally, the Department of Public Works, Transportation, and Communication (DPItT.C) is in the process of starting a data bank in support of its Planning and Project Development Office. In general, it appears that thie DPiJTC intends to build a system to provide the basis for botlh planning and implementing the infrastructure projects under its jurisdiction. 8.47 These monitoring systems usually operate independently of each other, and for that reason there is both a duplication of eftort and the failure to take advantage of each others efforts. It is not clear at pres- ent what the Government's intentions are regarding the long-term role of the agencies involved in monitoring, but there is a strong prima facie case for improving communication and coordination among these agencies. The PMS, for instance, could make use of the data generated by the NCC monitoring service.as well as at the reports of PRODs on the problems they encounter in the field. 8.48 .. The administrative capacity of the line agencies responsible for implementing major parts of the public investment program is crucial for the proposed development program. In areas like power and irrigation, the very large increases in investment that are proposed will undoubtedly strain the capacities of the responsible agencies. To ensure that these programs move forward as planned, the Government will have to give close attention to the needs of the technical and managerial staff and to the planning and administrative procedures being followed within these agencies. - 23 - C. Influencing the Pattern of Private Investment 8.49 Even though the relative importance of public investment should rise in the future, the major portion of total investment will continue to be provided by the private sector. The creation of new public infrastructure and the improvement of existing facilities will have an important indirect effect on the pattern of private investment. Nonetheless, the Government will have to depend primarily on indirect methods of influencing investment decisions. The credit and interest rate policies of the monetary authorities' will, of course, have a considerable bearing on the outcome, and these, as well as the level and allocation of private investment, are discussed in the next chapter. The fiscal incentives and administrative controls over domestic and foreign Private investment that are operated by the Board of Investments (BOI) will also have an important influence. Investment Incentives 8.50 Investment incentives have been used in the Philippines since the early 1950s as a maior tool for mobilizing domestic and foreiRn resources and channeling them into socially desirable directions. The incentives system that oDerated through the early and mid-1960s was regulated by the Basic Industries Act (Republic Act 3127); a number of specialized incentive laws conrprnina individuial seetnrs such as mining, tvtilpi- and cnttage industries were also an important part of the incentives system. 1/ A com- nrphpnRivp TnicbRtmpnf Tnrpntuivp Art (R A i1RfA ntrnmi,laAtor in 1Qf77 annl tho 1970 Export Incentives Act (R.A. 6135) were both amended by Presidential Decrees 92 and 485. The incentives osacblished hu th ltaws ar now administered by the Board of Investment, which also has the task of preparing annual invPsrmPnt and exnort- prioritv nlqnq- R -51 Anprt from non-m:antQrwAl rightsa ndA garantnta J"n?gatmnt n-_ centives consist of a number of tax exemptions and deductions. They are sum- mAri7al in tha Techni-cal Note attached tn this C-hanter. Thee inecentiveQ ara used to encourage investment in manufacturing, mining, some agricultural activities, fisheries exponrts, tnourism and public utilities. 1/ The most important among these laws covered mining activity (C.A. 187, R^.A. 3823, P.D. 34, 69, 237, and 238); oil exploration and development (R.A. 387, P.D. 8, 87, and 234); cottage industries (R.A. 3470), R.A. 5326, P.D. 34 and 62); iron and steel industry (P.D. 272); fertil- icers (R.A. 3050, P.D. 135); textiles (R.A. 4086); tobacco industry (R.A. 4155); Export'Processing Zone Authority (R.A. 5490, P.D. 66 and 69); private development banks (R.A. 4093, 4887, 5431 and 6110, P.-D. 34 and 69); rural banks (R.A. 720, 3128, 4106 and 5938, P.D. 34 and 69); and nonagricultural cooperatives (R.A. 2023, 4363 and 5431, P.D. 34, 69, 175 and 299-A). - 24 - 8.52 In all these areas, incentives are applied to "preferred" activi- ties, which are all those included in the current Investment Priorities Plan (IPP) and the Export Priorities Plan (EPP). In the field of industry proper, all activities that are not included in the list of "overcrowded industries" are,potentially preferred. 1/ However, they must be included in the IPP or EPP in order to be registered with BO! and thus eligible for inrentives- Since about one-fourth of the industrial sector (in terms of value of output) falls in the categorv of overcrowded industries; it is clear that by far the greater part of it is either explicitly (through priorities plans) or potential- lv liQl(blp for incentives At Dresent there arp ahmiit 11O suhsertors undpr the IPP and 280 under the EPP 2/ listed as investment priority areas, compared to 40f overc-rowded industries A S ize nanA Cnat nf Tnuvetment TnpenivuesQ Tt wo.uld hpe difficu..lt t-o assess with any degree of accuracy the real cost of tax reliefs granted by th-e (Government, since th kinA nf ,1n1t- noeoler for c-h ,, an nQaqacmant- ic cimniry nonexistent. According to an estimate compiled by an earlier World Bank mis- sion, the total tax foraiyen.ec acniat'ei wit-h inrdusitrinl invactmentc as a result of general investment incentives (R.A. 3127) and sectoral incentives , M.&..a..A n af- 4- n ^, t-A - 1 AA_A in ~ ~ ~ ~ ~--- -tls minng fetlzra.dctaei.dustries amounted in 1965-68 to P 430 million, or E 108 million per year, which was about 20 percent of grross Jinvyestme-a in tboee years. The came ratio for- RBTIreagiteavdA n4ects under R.A. 5186 in 1969-72 has been estimated at 15 percent. 3/ This decline in the relative incidence of tax relief is to be attributed partly to the fact that the greatest beneficiary of incentives during 1965-68 - the textile 4nduOtry = enjoyed no benefits during 1970-72, s4nce wt was classif4ed as overcrowded. 8.54 The relative incidence of fiscal incentives has probably risen agsin si..ce 19-72 due to thei bradne __op and to i.ceae -investments agaJ.LI I - u LUV L.Ll=L L ULVCUCUXAU ~%U&JC QXLIU L.U LULALCa1U L&C.LULL 1! Overcrowded industries are those in which the existing capacity is deemed sufficient to cover domestic and external demand. These are: meat processing, coffee and cocoa, flour milling, sugar centrals, soft drinks, beer brewing, alcoholic drinks, cordage, leather tanning, rubber tires, matches, paints and varnishes, ammonium sulphate (excluding urea), complex and mixed fertilizers, super-phosphate (with qualifications), non- integrated paper plants, cement, soap and detergents, cold rolling, iron sheets, pipes, steel wires, tin plating, bar mills, copper wires, nails, LPG cyclinders, room air conditioners, automotive assembly, truck assembly, wheeled tractor assembly, electric and gas stoves, refrigera- tors, sewing machines, fluorescent ballasts, light bulbs, pencils, soybean oil meal, radios, phonographs and storage batteries. 2/ The number of actual projects under the Sixth EPP is 61. 3/ See World Bank Report No. 280-Pn, "Industrial Development Probiems and Pros- pects in the Philippines" (March 19, 1974), pp. 23-24 and Tables II-8 and 11-9. It should be noted, however, that this may be an underestimate since it is derived from preinvestment studies, which tend to minimize the size of fiscal savings for the investor. Besides, the ratio would certainly be higher if more projects were covered. - 25 - in capital-intensive and exporting sectors where the cumulative value of tax relief has been the greatest. In a large copper smelting and refining project now under consideration with BOI, for instance, the total investment cost has been estimated at US$239 million with incentives, and US$284 million without incentives; US$45 million worth of taxes forgiven represent a savings of 16 percent of the total project cost for the investor. For the Government. this represents a clear-cut revenue loss unless the project would not have been applied for in the absence of incentives. This loss will Presumably be partly offset by the revenue increase after the expiration of incentives and by the secondary growth effects of the proiect. For the national economy, the question of whether there will be a net loss depends on whether the amount saved (or foregone) will be invested in a preferred area.. 8.55 These considerations suggest that the initial net revenue loss for the Government amounts to 12-15 percent of the total cost of investments effected through Government channels. In most Philippine largp-srale invest- ments, some 60-70 percent of total project cost relates to imported equipment and other imnnrterd inniit Since the minimium import duty is 10 percent and the compensating sales tax 7 percent of the c.i.f. value augmented by import duty, the tax relief n t-his arcount alone will am-ount to at least 10.5-12.5 percent of total project cost. Other tax exemptions make up the remainder. Due to the long duration of nnct-nnoerative incentive, an additional revenue loss builds up after a project has started to function. 8.56 Economic effects of investment incentives: There is no doubt that the share of favored investmernts (that- is, of BOI-regi6tered projects) in total investments in the large-scale sector is preponderant and rising, al- tho-ugh, itould be A4ifficult t-o Aocm,en.t this for t-he years since 1972. 1/ - A 'JJL % U ~ A . . %'.U . ~ '4A' ~J ~ AI. LLL1- U.. A.LL ~ I LZ. I'I The implied investment requirements for all BOI-projects (approved, regis- tered, ap-pied for or planrned, arnd as such included i- tha Eighth [PP or Sixth EPP) for 1976, for instance, would total P 6.6 billion at 1974 prices, which might be four-fifths of total investment needs in organized industry in that year. Based on past experience, it can be safely assumed that actual BOI- apn^"ordA 4-vs.et will -mouti to much less than n 6.6 billi11on Jn 1976, SPO-St -Cl alrw . wer . tU*5._ - ULJ __,ArAt.l. hAJ WA .fl JCO U,AL" r -. V W U~.LJ.A. AlA I2 U though much more than the P 1.5 billion which was their estimated annual levelI 4n the earl- 1070s-(i- 1074. -4ices) 8.57 Thi,s, ol course, does -no; tell .--ha ------- o atulinrme A. -- JU9~ UL LC.LJ. W&LAL FrLLII9IJL.LYUU OfJ actuaLUJ .increment in investments was or will be induced by the benefits associated with tax anu V LILL %oncetsso.LU0. IL&% cLU,sory eV.LU'dnc UabCU On peLrUnal inrULVieWs with-businessmen and on knowledge of prevailing profit rates in major invest- ment areasseerse to suggest that much of the investment would have been ef- fectei even without incentives. Equally important in influencing investment decisions seem to be factors that are not actually fiscal benefits but are 1/ Most of BOI investment statistics relate to planned rather than actual investment. Moreover, the proiect coveraze in the reDorting system has usually been less than 50 percent. - 26 - associated with them, such as a preferred access to institutional finance and foreign exchange. 8.58 It would also be very important to see in which way the incentives system influences the use of productive factors, employment creation, and industrial exports. Most of the incentives are input, import, and capital- oriented. The system is understandably geared to makin8 investments more attractive through enhancing their profitability, but this is being done primarily through a cheapening effect of incentives on the inputs used. Of all the incentives listed, only general tax exemptions, the deduction of pre-ooerational exDenses. the additional deduction of incremental exnort sales, and the carry-over of net operating losses, have a bearing on pro- fit-ahilit-v via outiit- or sales levels=- Sinre most innuts other than lahor are imported and the bulk of material, inputs consists of capital equipment that is again imnorted,f the mnere -e-istenrp of inpit-nrient,ed inteontives produces a bias toward the use of capital and of imported components. The relative net gain accruing to th in-nvestor ninovina tax foraiug_rne ia directly proportional to the size and capital intensity of a project. 8.59 These following benefits are directly or indirectly related to the use of canita-l and in fct, en-rMag it: an exe-mption from customs duties and compensating taxes on imported machinery, equipment and spare parts; tax credit for 1 ocal 1 u, ,rch- edA machinei Ayt,- . tel a,-AA A eC;-Aon4 ; a r e . ' .J r '''UC' a -- * - L--L U. a .; - investment allowance; the reimbursement of infrastructure cost; a double eduction of shlipping costs; and a tax credit for interest wLthheld on foreign loans. The share of these capital-biased benefits in all benefits provideA by tLle incentiLves system i overwhelming, as can be seen Arom abULe 8.8. - 27 - Table 8.8: Estimate of Incentives Availed of by ROT-registered nroniprts 1970-72 (In millions, of pesos) Category 1970 1971 1972 Total Oap±tal-related in.centives 63.0 108.0 57.9 228.9 Transport duties on machinery 11.1 37.0 32.7 80.8 Complensat-ing tax on imported machinery 7.3 23.2 10.8 41.3 Tax credit fL1or locally produucedu machinery 1.0 0.3 ... 1.3 Accelerated depreciation 1.4 11.5 3.7 16.6 DoUUbl UCUU;L.LVU ofL sLI.Lppig.LL cost 3.8 6.2 4.0 14.0 Reinvestment alluwance 38.3 29.8 6.6 74.7 Tax credit for tax on foreign loans interest O.i 0.0 0.1 0.2 -Other Incentives 20.6 22.4 12.7 55.7 Pre-operating expenses 3.0 0.5 0.1 3.6 Double deduction of promo- tional expenses 0.2 0.2 0.2 0.6 Net loss carry-over 2.6 2.4 0.2 5.2 Compensating tax on imported raw materials 1.6 13.1 7.6 22.3 Sales tax 12.3 2.1 4.5 18.9 Tax credit for exported finished products 0.9 4.1 0.1 5.1 Total value of tax relief 83.6 130.4 70.6 284.6 Capital-related incentives as percent of total 75 83 82 80 Source: BOI, Statistical Appendices to the Fourth, Fifth, and Sixth IPP. The number of reporting firms was 75 in 1970, 105 in 1971 and 70 in 1972. 8.60 In 1970-72, capital-favoring incentives accounted for P 229 million out of P 285 million, or 80 percent of the total estimated amount of tax relief enjoyed by BOI prolects. In order to contain this capital bias, the policy makers have included certain labor-favoring devices in the system. Rezistered enterprises are entitled to deduct one half of labor-training expenses incurred from their taxable income, up to 10 percent of the direct - 28 labor wage. In addition, they may deduct from taxable income the cost of dirert lahnr and Inral raw matprials used in the mannufqctira nf export products as long as it does not exceed 25 percent of total export revenues fnr producers, in nprcent fnr trdr an.d 50 percernt for service exporters. Tne'first provision has been made very little use of so far, and the second, introduraed in 19Q73 will prnoba1v not have much imnpcto nn the use nf laor for two reasons: (1) in many cases, the share of the value of domestic raw m -Lerials alneo in total Pvnnrt valtue ic ann to- apprch t-he 92 nprce-t- ceiling, with no room left for the subsidy for the use of labor; and (2) the real weight of this measure is l1mited to a maximumof 8. 75 percent of gross export sales (equivalent to the 25 percent income deduction), to which a ta rt of 35 pcent is applie, and this axsm can b eve only by firms with export profit margins of at least 25 percent of gross sales. The relative importance of this measure is even smaller for enter- prises engaged in production for both domestic and export markets. 8.61 The BOI has attempted to reduce the capital-favoring effect of incentives in anot,her way T t has imposed conditions on a relatvely l ~~ .~,Q. t.uua iu a ,~. -t L t V CL LCL 1 number of industries which require that a new project should generate at least one Job fLor e-very U.JS9$4,00J0 worth of imported equiLpment, fa.L.L.Lng whichi it must earn through exports within five years the foreign exchange it ;lseS in excess of1 TUS$4,000) per Job creatledu. Th uroe ftisc-dto is to make new projects in capital-intensive industries such as petro- c.ui.-cals, pulp and paper, ni.ke 1 … C sm. ls advantageous, L4LLI.@.L, j.u±~ aiu ~ LAJ...~. CSLIU %I;VJpJ.IL OUWCWiidL. AU* CUVdL1Ld6t!UU5, while at the same time giving more weight to employment and export criteria inL VLUJULL elLeciLUL1. LhLLs pJLuViLoLUL app.LiCU LU eLeCLteU insUtLLres only, 2nd is therefore unlikely to divert many resources from capital-intensive to aouur-iLtesive seLctr. iroreover, i;t is uIILcuLt to understand the rationale for setting a uniform limit of US$4,000 worth of imported equipment per JoU in a varlety of industries, with each one of them having a different economic and technological profile. In addition, an industry should not have to undersell for export in order to receive other benefits, and then have to seek to recover the profit loss through higher prices in the domestic market. 8.62 The need for revising the incentives system: The above analysis, together with the discussion of export incentives in Chapter 6, suggests that a thorough overhaul of the incentives system is needed. It will not be an easy undertaking, considering the complex interests involved. While any concrete proposals for a change in the system will have to be based on a comprehensive study, the Mission would like to offer a few comments on the principles of such a change. 8.63 It is easy to agree that investment incentives should be made less costly, more effective, and administratively more manageable. But it must also be recognized that what the system needs is to focus on achieving very specific goals. In the Mission's opinion, employment creation and export expansion deserve the highest priority; a rapid expansion in labor- intensive exports is probably the single most important part of a future - 29 - industrial strategy since tte Philippines' comparative advantage lies here. The incentive system should be instrumental in pursuing these priorities. 8.64 Such an approach would imply a malor restructuring of the present .system. There are two methods for doing this: to change the selection of industries eligible for incentives, or to change the incentives-mix itself. A combination of both methods is possible and perhaps preferable, particular- iY during the transitional period. 8.65 Under the first method, incentives would ultimately be confined to the industries complying with certain labor-intensity criteria, and to exDorting industries (other than extractive). Some imorovements along this line could be undertaken within the present system without much delay: a) the distinction between "Dioneer" and "non-pioneer" Droiect categories could be removed, since it is by no means clear why a certain product should eniov additional benefits merely because it has not nreviouslv been manu- factured in the Philippines, while another product, perhaps more essential in other resnertsj should not: b) the list of overcrowdetdi industries could be revised on the basis of recent findings on the changes in the rate of canarit-v utiili7at-ion in individual mannfartiirins industries: and r) more industries could lose the status of preferred investment areas on the basis of certai-n aAnnteA criteria (e.g., industries ronstantlv attaining profit margins above a certain level or above the average). 8.66 Restructuring the existing incentives through changing their com- position and relativ ...-4.,nAe c,oul also effected on a step-by-step basis. In general, the duration of tax holidays should be reduced. The National Tf-e-nrl Reavenue foe clurrentl V ora-ta a inn nprntvoexe mption & - n.e... *' -- s- %, U - C, b' r------- .r., from all taxes except the income tax for the first five years. and a diminish- ing rate for anoterk, tea year s. Some of t-he 4inc .- ive favor, ntho use of capital could be reduced or abolished and new powerful incentives favoring thoe use of a1bor. could be introduced. ne. Xe la of a dAivrect- pmnl"mon- incentive would be an income tax deduction equivalent to perhaps 200 percent of L*C annua. wage il.l of produci n work f -e* - S0- -a- -__4_ 1O V,a. U i 9 f amount per month; 1/ another would be a direct employment subsidy. The revLa~ Cy L~ OLUUJ.U ".LOV jJLIV.LUCr &JL aUAULA1 -LJ&= FLWLU&&%LLLC. revAiseud system- sh o-us also provid for U - -c mor prnune -di - A fferential1 between export and other incentives in favor of the former. Under certain conditionLs, a-trausfLer ofj ircentives shlouIUd be allowed; e.g., hLe ain contractor should be entitled (or perhaps compelled) to pass on to his subconLtractors a part of. the benefis accorduedu him. Fir.LLly, LtLh le process of restructuring incentives could be made less painful by transforming some of the tax exemptions into tax UeLerrals. The Role of Direct Foreign Investment 8.67 In recent years the Government has been attempting to attract a larger amount of direct foreign investment to the Philippines. This drive 1i/ This is an idea proposed by G. Sicat in Economic Policy and Philippine Development (Manila: University of the Philippines, 1972), pp. 46-51. appears to be succeeding; since 1972 there has been a sharp increase in new commitments and in actual net inflows, reversing the pattern Of net Outflows that had prevailed for the previous 15 years. Foreign companies are being attracted to investments in such export ventures as component parts for auto- mobiles, textiles, and other manufactured products. The sheer volume of investment required for the proposed projects in mineral ore processing, fertilizer production, and other major import-replacing projects will neces- essitate much larger inflows of direct foreign investment in the next decade. 8.68 Past Pattern of Direct Foreign Investment: According to the Inter-agency Study on Foreign Investments, gross direct investment inflows totaled US$1.40 billion during 1955-70, and related outflows were US$1.78 billion, leaving a net outflow of about US$380 million. 1/ Nearly half of the surveyed firms had foreign equity participation, and the share of foreign equity was over 60 percent in about one-quarter of them. Overall, foreign equity investment accounced for 40 percent of the total equity capital of all firms. 2/ About four-fifths of the foreign investments were owned by United States nationals as a result of a special post-colonial relationship where investors from the United States were granted a privileged status compared to other foreign investors. Nearly three-fourths of the total foreign investments were in the mining sector and in the import- substituting manufacturing sector. There appears to have been little attempt by foreign firms to take advantage of the relatively cheap labor and to produce manufactured goods for export, which is a development strategy widely followed by neighboring countries such as Korea and Taiwan. 8.69 Incentives for Foreign Investors: The Government has recently liberalized foreign investment rules to broaden the scope of incentives for foreigners in desirable business activities. The Board of Investment im- plements the general incentive system for foreign investments under three laws: the Investment Incentive Act, the Export Incentive Act, and the Foreign Business Regulation Law. Full foreign ownership is allowed for companies with a pioneer status, companies which export 70 percent of their output, companies in the Export Processing Zone, and companies active in areas which are not "overcrowded" and which do not conflict with the nationality requirements of the Philippine Constitution and nationalization laws. In the nonpioneer areas, foreign ownership is limited to 40 percent. Foreign investors are entitled to certain basic rights and guarantees which include: the rights to repatriation of investment, remittance of profits, interest payments, and repayments of loans; guarantees against expropriation and requisition; assurances regarding the continuation of protection and action 1! See--Government nf the Phi ippines, Interaency Study on. Fore4n Investments, June 1972. 2/ A similar study based on a survey of the nonfinancial corporate sector for the years 1964 and 1965 indicates the proportion of foreign equity of about 32 percent of the total equity capital of the reporting firms. See Niceto S. Poblador, "Foreign Investment in the Major Non- financial Corporate Sector of the Philippines, 1964 and 1965," (Quezon City: University of the Philippines School of Economics. 1971, processed). - 31 - against foreign dumping; and provisions for preferential treatment-of re- gistered enterprises by the Government's financial institutions in extending loans, and for employment of foreign nationals for a period of five years. 8.70 Apart from these general incentives, there are various fiscal incentives given to foreign investors which depend on the nature of the activities of the firm. Pioneer firms are entitled to exemption from all taxes under the Internal Revenue Code except income tax and post-operative tariff protection. Exporting firms enioy additional Drivileges. including: tax credits on taxes and duties paid on supplies, raw materials and semi-manufactured products: additional deductions from taxable income of the sum of direct labor costs and local raw materials used (which cannot exceed 25 percent of total export earnings): and exemption from exnort taxes, imposts, or fees. Other fiscal incentives which are applicable to non-Dioneer enternrises are s mmarized in Technical Note I- 8.71 Overall- the general as well an fi'4sal inrei.t4iea fnr fnreign 4in- vestments in the Philippines appear competitive with incentives in other Southeast Asian cnountries. 1/ Nevertheless, the c-hief eatermin,ant- o%f fnreign investment flows, particularly direct investment, is apparently not the fiscal iniiir-em.nts nfferned by the host countriac hbtti the ge.neral political and economic climate prevailing in each country. According to a study of foreign inugctymant in i no^nnvra 4ni aatman. Aad"1 Jinnk _ a 1, mnA- e-n Fhe basis of the long-term outlook for political and economic stability in the host countr- rather than on. t-hba h oo4c rf t-n, 4nc-4ves. 2t 8.72 I-r the ls ffew yea:s, f g .v re Board of Investments have increased sharply; commitments jumped from a level of US$30in mi4l liAon in 197 to7 US$63. L mil lion in 1973 and almost quadrupled to US$234 million in 1974. More than one-half of these investments were in m4r.ir.g, 4.*l - r ---.-s-- 4, and che4mial-based industries. "'here was also an increasing trend-of investments in agro-based enterprises. Data on for- ei8gn Investments luy country of origin revea'L the 'increasLng iLmportan.ce ofL Japanese and European investors in the Philippines. In 1974, 35 percent of the total UdLrect nLLvestmeUts were from Japan and about 10 perLCeIL eaCU LLOmU the United States and Europe. The prospects for a continued increase in direct foreign 'nIvestmensL appear promising 'Ln vi±ew of thle current Leve'l of interest in the Philippines among potential investors and the opportuni- ties for participation in the proposed major projects in industry and min- ing:- These projects might involve a total investment of about US$4.6 billion 1/ See the report of the Government of the Philinnines. "Comnarison of Laws and Regulations on Foreign Investment of Asian Countries" in the Studv of Private Foreign Investment^ in th_ PhIlinninpQ, 1972. The countries used for comparison are Hong Kong, Indonesia, Republic of Korea- Malaysia, Singapore, Taiwan, and Thailand. 2/ Helen Hiughes and Ynu Poh Seng (eds.), Foreign I-vestment and Tndustri- alization in Singapore (Canberra: Australian National University Press, 196q9) 183 qSe also Thomas W All-n- Drect Tnvestment oC TT.C E nt r rs ---i n, . So ut hst Asa(e York Sctt 7 3 - U. Enterprises in Southeast Asia (iNew York: Scott, 1973). - 32 - at 1974 prices in the next decade, requiring a considerable amount of foreign equity participation. If these projects materialize, the total of private foreign investments would provide a net inflow of about US$150 million a year during the decade. D. The Role of the Construction Industry 8.73 The construction industry has a particularly important role to play in Philippine development over the next decade. If the proposed in- vestment program is to be successfully implemented, the construction in- dustry will have to expand by about 12 percent a year during 1975-85. The prospect of rapid growth in construction offers important opportunities for expanding productive employment in the economy. It is estimated that the sector could be creating close to 100,000 iobs a year in the 1980s, which would be a major contribution to employment in both rural and urban areas. However, if this potential is to be realized, and if construction is not to become a bottleneck to implementing the investment program, Government policies will need to encourage the orderly exDansion of the sector. General Characteristics of the Industrv 8-74 The Dotential future contribution of the construction sector con- trasts sharply with its actual contribution in the past. One of the most striking features of the industry was its relatively small contribution to value added and employment during the 1960s, especially when compared with other ronuntries in Souutheast Asia. This was not always the case= In the early 1950s during the postwar reconstruction period, for example, the construction sector accounted for ahout 6 pereent of GNP- and the share of construction in gross fixed capital formation was about 80 percent. But the industry stagnated during the 1950s wirh most of the new investment in the form of equipment. Its decline in relative importance continued in the 1960s, and b 1070 it acco--nted for little more than 92 percert of GNP, employed only about 3 percent of the labor force, and construction expenditures accounted for less than 30 percent of flixed invest-mentL . Slnce 19.70 th-e nas been an encouraging reversal of these trends. Value added by construction I"ds gLrWiL 'y an aveOre oI a-out Q prcent a year JLn Lea" tes sO LhaO v-a share in GNP has begun to rise, and the share of fixed investment in the .ormU of corLLtructiLorL Lhas incrIeCalsed tLU 40 perceLnILL. HoLLVWeVtL thLLrL LhIaO LLV yet been a significant increase in employment in the sector; the labor force has remained at aDout the 1970 leve'L oU]c qvV,VuJ work-ers. 8.75 An important characteristic of construction employmLLent is t'ne relatively low skill level required. The proportion of manual workers and craftsmen to the total employed in construction has been 90 percent or more, at least since the mid-1960s. Moreover, there is a high percentage of wage and salary employment in construction--consistently above 90 percent. By providing substantial employment for unskilled workers, the sector has probably contributed to a more equal size distribution of income. But as we - 33 - have already seen, there has been a concentration of investment activity in Manila and Central Luzon so the contribution of construction to a more equal regional distribution of income has probably been rather limited. Another important characteristic of the industry is that it is comprised of a large number of small contractors. Among a group of 1,109 contractors licensed in the Philippines in 1972, some 870 of them (almost 80 percent) had a net worth of less than P 500,000 and 450 had a net worth of less than P 50,000. Only one contractor had a net worth of more than P 100 million. The Potential Contribution of Construction to Employment 8.76 With an acceleration in the investment program along the lines proposed in this report, the construction sector could play a major role in employment creation in the decade ahead. Its precise impact will depend on the extent to which the productivity of construction labor rises, which, in turn. depends lareelv on the techniques used in construction. The Mission believes that the proposed investment program could result in an increase in emDlovment in construction of about 10 Dercent a year during 1975-85. 8.77 A8 Table 8.9 indicates, a substantial Dart of the increase could be expected to come from the proposed public infrastructure program and from an expansion of investment in housing. It is estimated that P 1,000 (at 1967 prices) spent.on Government infrastructure created between 40 and 50 man-davs of work during 1967-72; although there was a downward trend over this period. 1/ Because of the increasing relative importance nf inesatments in nnwo"r rn,1inmcnt- thi. ,ie,.11no mAv rpnnt1ni,i to ahntit 90 m_n_ days by 1985, but even so the proposed public investment program would ac- coun.t for an-- arage of 25,000 nev a ing Q195-85. Employment on public works projects would rise to an estimated 350,000 by 1985. In the case0 of hn.houi, the Missio4nn 0-4mn*ot tha,.tt anl nM.,ent 4.n residenti-1 corn- struction could rise from the present level of 100,000 to about 250,000 by 1005. Ass ir,g --a soewa -lowe growth inepomn r.ohrknso I JV &%00OUIU.1r, t 0VU=MW&LAL, 0A.L0W=& rL%JWL.L1 L.1 =uLJJ.LVJYLU±LLL. LU '.JLAL=L. E-LAUD IJL construction activity in the private sector, the Mission estimates that total empl.oyu,ent in construction could rise- to about 1 million wrole-rs by 1985, compared to about 400,000 at present. By 1985 the sector could be aulorb'JU ~L~1LJ LW~LLaLL LAI LL LaUM.L A.LLL .., WLZJ..L%L WU UJ aborir,ng 15 Fercer.t ozf new en.trants iLnto tbLe labor force, which woul 'I a major contribution to employment creation. Employment could be somewhat higher with the use of labor-inteUnsi-ve technLquL , particularly in the sectors with significant earth-moving components, such as highways, irrigation, and flood control. 1/ ILO, Sharing in Development. See especially Chapter 6. - 34 - Table 8.8. Projected Employment in the Construction Sector (In thousands of persons) Sector 1975 1980 1985 Public infrastructure 100 180 350 Housing 100 150 250 Other private construction 200 300 400 Total 400 630 1,000 Note: For public infrastructure and housing, the projection is based on the estimate in the ILO report, Sharing in Develop- ment, pp. 198-202, that, at 1967 prices, P 1,000 expended on public infrastructure created approximately 25 man- days of employment. Dividing this ratio into actual expend- itures of public infrastructure and housing in 1975 gave the base 1975 employment estimates of 100,000 in public infrastructure and 100,000 in housing. Because of the increase in the relative importance of power expendi- tures in future public investment, and hence a larger equipment as opposed to construction component on average, this man-day ratio was projected to drop to 20 by 1985 for public infrastructure. For housing, it was assumed to remain at about 25 man-days per P 1,000 expended. Source: Mission estimate. 8.78 Scope for Labor-intensive Techniques: The Government has demon- strated considerable interest in the Dossibilitv of using labor-intensive techniques and in 1972 established a committee in the Department of Public Works, Transnnrtatinn- and Communination to undertake studies in the use of labor in public works to help solve the problem of unemployment. The Gov- ernm'ent supported extensiv(e __e of 1 h_ ro tvthni.ni: nn snma nrni- ects and has issued guidelines on the construction of feeder roads requiring that, as far as possible, preference be given to such techniques. Further, a draft presidential decree on the use of labor-intensive methods is being consi deredl. It. wouIA propose that l.Uor-4n.tensive methods be used whenever LLJILO.LUCL CU * ~~.1 L W UU A.U t'DtW- lL U' S*L.f5. VO -Cttt -- . At. h~ the structural integrity of the project is not impaired, its financial cost does nLot increase buy m,ore than 10 percent over capital=intensive methI-1odAs, and employment of workers for labor-intensive operations will not signifi- cantly detract from the labor required for agricultural production. 8.79 Aside from this formal support, two significant pilot projects on labor-intensive techniques have been undertaken. In 1972. the Bureau of Public Works, with the assistance of the ILO, undertook a pilot project on the construction of levees by labor-intensive methods. This was a rela- tively small project based on the reconstruction of about 750 meters of flnod onntrnl lvees whir.h were washed out during the floods of 1972. The study concluded that labor-intensive techniques could compete on favorable terms with tradito-n-al rqn1ti1-int-Pn%iuP methndas and. ae a resjilt; the committee studying labor-intensive projects endorsed a manual for the con- strur-tinn of levees by Ilabnr-intengiue m ethnda= 8 8n Mre e- tlntl i a npint nrniprt' nn Vhp rnnRtrl,ptinn of a road URaino labor-intensive techniques was undertaken, this project involved field ex~~,, ---4-1*- -,- tra-_U^fnln, n-f1^i* rnnA nr-nia.-, Tho nrn4aii- t wAa nrvf pd expr4nt on the Capas-Botolan pilot road project. -ThAe pr,--- --- ------- out in collaboration with the ILO and involved comparing capital-intensive i-CCU 4- . .. .J_ 1 ** # .U 0-rA4A o..a.l . A & L. AVf- … .A techniques to bot tradiinla oiidlbrit^ietc9-qe. This was done at both market prices and shadow prices. A basic conclusion Af t sudy waO LLL " v** U *S_ _4 a4e lauor. nlensive0 met,,A0-h .4 1d _- o.4 ve . -r V 11 lower cost (using market prices) and yet it generated substantially more employment thanrU1. did cor.struct4or. by capltal=4rtenslive -thods- oo--A se in the Philippines. 2/ The results of the Capas-Botolan road project were adjusted to give a usL sULLuon 'or an average gravel road in tV Philippines. In applying shadow prices to labor and equipment, it was also found that the modified labor-intenLsi-ve metho0d was2 CheapCer thLlu the capital-intensive one both for the Capas-Botolan road and for the average gravel road. Tnis was true for the two alternatives employed - high shduow wage/low equipment rental and low shadow wage/high equipment rental--although the superiority of the modified labor-intensive technique is greater in the low wage alternative. The results of these two studies are summarized in Table 8.10. 8.81 Based on these results, the study concluded that it is possible to devise technically efficient labor-intensive techniques (at least for certain tasks) for gravel road construction in the Philippines. Tne find- ings are encouraging, and the Mission believes that the Government should proceed in making use of them in order to ensure that labor is employed effectively. However, there are some special problems that Government should keep in mind in this regard. Results of experimental work often make labor-intensive techniques appear more promising than they actually are when applied in actual production conditions for an extended period of time. 3/ 1/ The uroiect and its results are diseussed in dpta1l in nppnaik TSl Men or Machines: Philippine Case Study of Labour/Capital Substitution in Rnnd Cotrctin. 2/ Based on an extrapolation of experimental productivity rates gathered during actual field observations of the project over a six month period. 3/ This has been. an observation made by the World Bank in its study on the substitution of labor and equipment in civil construction. - 36 - An imnnrtAnt rpnann in that the manaopment and superuvisinn nf lnrge labor forces require special skills, experience, and organization quite different from thnon nepeoA in uinment-intnniv operatinns- In a convntrvy whevre these methods have not been commonly practiced, large-scale implementation of civil works by labor-inte-nlsive maethonds without c-are ful adva.nn.ce- planning, organization, and training could render these techniques quite inefficient. 1/ 8.82 Another possible problem is that in the large-scale implementation of such techniques, there are frequently shortages of 1laor at different ass. &.B. 55 & t8-O,L L.S a times and places, even in labor-abundant countries,, and that the social cost ., la-so 1,uc. -u_ atC 1 .. +J ,.._., A A ULC t.s-asOn n lA L.t" -less Tonstructio s~~~. s I V* ; - a -j --W_ --*zo^ s ZVXL VL. L 6 ~ WV@L LLKV& authorities are prepared to pay higher wages during peak periods (e.g., the hlarvest season) , projects may suffer costly i.terruptio LnLs '- In addiio, although it has not been possible to quantify the costs, there are indications that with 'larger labor-intensi;v=e -FrU-JJeCtS the cost o' ruaageen ula -increase- LIL4L W.LLI LaLIJL ILL~ja.LV jALIJ ~ L AM[I LoLJL, VLi LIICIId6IIIULL Li) LIY LcLUadV_ more than proportionately with project size. 3/ Thus, while the results of Lthe pilot suL deLUU.Ls unIUeLnLdNCl X11 *LLI rLf.±L.jJJPJ±1r_ LIdVt UCUL1 tLLCUUrLrLg, Lnere remain important questions as to their efficiency when applied on a large sca'le. Perhaps th'e m-ost appropriLate next steep would bCe aan a-t-LOupt to apply these results to a large project in actual production conditions with careful attention to developing suitable project organization, including the supervision and management structure, for the construction units. 4/ L/ TLhe WnUorld Bank founUL ir stuu.Les AM nIUna anU Lnudo.esia, for ir,stance, that good supervision was associated with productivities from 33 to 125 percent higher than those w'ith fair supervisiou. See "Study of the Substitution of Labor and Equipment in Civil Construction: Phase II, Final Report," World Bank Staff Working Paper No. 172 (January 1974). 21 In particular, the World Bank study found that the supply price of labor increases where large labor forces are required. Large projects call for supplies of labor from points beyond the local market. Even in abundant labor economies, this labor can only be obtained by paying prices high enough to cover the additional costs of transportation and, in some cases, to cover the cost of on-site housing. 3/ Thus, one conclusion of the World Bank study is that labor-intensive methods suffer from diseconomies of scale as project size increases. 4! A possible model for such a project is the Kenyan Rural Access Roads Program, in which the ILO and World Bank are helping to implement labor-intensive techniques. - 37 Table 8.10 Comparison of Employment Effect and Costs Between Labor and Capital-Intensive Koad Building Techniques Evaluated at Evaluated aL .a r et Piices . Shad6w Prices Labor- Capitta- Labor- Capital- Item Intensive I'ntensiive Intensive Itntnsive Capas-Botolan,Road Man-days per km. 10,224 1,491 io,224 1,491 Total 6ost per km; (in thousands of pesos) 176 209 -- -- With low wage/high ren'tai -- -- 633 1,377 With high wage/low rental -- 813 1,082 Average -hilippine Grav'el-{kd.X Man-day' p'er ki. 5,639 674 5,639 674 Totai cost per ki. (in thousa,nds of pesos) l'Oi 1i9 -- -- 1iith iow wage/high ihtai. -- -' 62 131 .With h-igh wage'l'6w 'rental --- --- 7.8 102 Source. D1eepak LAi. Mei2r2n aIchT-6es:. PhiliPpine,Cas:eStudy of,Labour 4 Th .a...(o-i.R..oa~db.ah&,Contrii fti6On, (Gene'va: International = rb6. fi-f `1974- f6Sthlmin4, Y) 8.83 Whii'e ther'e air ,dlifttultbe§ 'and u?nresolved problems in any attempt to employ 're labto ln '.o'ns'tJruc'tion, the'se di'ffi'culties should hnot be allowed to w>aknh effo'r'ts i'n this 'areba. The p'ote'nft-i'al.behefits of .greater use of labor-i-T'tehsi'v'e techn'iBue's-'req to ensuie that labor-intensive manu- tacturing i'n sectors such as food:, textiles, wood processing, engineering, and other light industries obtain adequate financial resources; and (ii) to improve the credi:t d'elivery sy,stems. in general,, and those in agriculture and indi try in particQular,, to allow small' and meditu-scale industries, as well as small agricultural, borrowers, greater access to institutional credit. 1/ Some steps have alread.y, been, taken' i'n this direction. The operations of the Industri'al Guaranitee andi Loan Fund:, which assi'st the development of small and'-me6d'iT4i indu'stries,, h11#e expand'ed considerably in the pas.t couple of yeTars. There has also,been an, i'ncr6asing; flow of institutfioal credit into agricul- ture, througkh the Masaganai 99: program and through streng'thening and expanding the rur,al banking T,,e seveTopment Bank of theP,hiippin es is assum- ing a more act,ive r;ole in lending for rice production, fisheries, livestock develop.pmen,t, a,nd fo6& processing. The Government is also strengthening the Philippine a.tiQnal Ban,'k, by futrther expanding its network of branches to in- crease.the availability of funds for. agricultural and small and medium-scale industrial development. Development- of Finariciali Institutions 9,..58 The future iss,ues for resource management that were discussed earlier in this chapter are closely related to the institutional structure of the fi- nancial syst-em.e In addition to interest rate and credit policies, the develop- ment of 'financi'al institutions an'd instruments is important in improving the qua,lity an'd'.co,qver4g.of finia'nciaI services. Becaiuse of its extensive influ- ence over the finiaiicial system,, the Government will need to tdke the initia- tive in imprioving the financial structure by encouraging financial institu- tions to lengthen the.maturities of their instruments, and, as discussed in Chapters Sand 6, by improving credit delivery systems, especially in agri- culture and to small andimediu,m-sscale industries. There.should also be im- provemnents in the operating efficiency of financial institutions, which should lead to reduced spreads nd lo,wer.costs. The growth of financial intermedi- aries in the Philippineslha,s b,een quite extens,ive but uneven. Consequently, although' theke is hno ne'ed ;to establish whole hew classes of institutions, it is import'ant that th'e -i-tiva'-llvy undeveloped .o-n'es, such as savings and mort- gage banks and tfie sec'rities markets, should be given sufficient incentives to grow. 1/ See Chapters 5 and 6. - 74 - Issues in Developing the Financial System: The overwhelming need in the next few years will be to make the existing system work more effectively by encouraging certain new activities in both the mobilization and alloca- tion of resources among the present institutions, fostering competition. and lowering the cost of intermediation. In the long run, the Government should aim at developing a strong securities market which can provide li- quidity to holders of stocks and bonds, and thus be an effective mechanism for mobilizing and allocating funds directly from savers to Government and corporate users. The following discussion, therefore, deals in broad terms with various ways to strengthen the existinR institutions and'with the future role of the money and securities markets. 1/ 9.59 Before the Central Bank's recent program to improve its equity position, many commercial banks had weak financial structures as a result of lending beyond normal levels of their loanable funds by depleting ex- cess and required reserves. The insolvency of the Continental Bank in June 1974 was only symptomatic of more widespread difficulties. There were several reasons for these financial difficulties. In constrast to the 1950s, the banks had to operate with significantly reduced reserves when they expanded their lending volume sizably in the 1960s and the early 1970s. Entrepreneurs preferred financing through borrowing rather than through raising equity, since by borrowing loan capital they could maintain control over their enterprises. The authorities recognized the need to expand the equity base of banks. The Central Bank's program to double the capital base of the whole commercial banking system to P 3 billion in 1975 was a step in the right direction. This was achieved through increased capitalization, the merger or consolidation of commercial banks, and foreign equity participa- tion. 9.60 The most suitable financial institutions for dealing in long-term funds are development banks, thrift banks, insurance companies, and pension funds. The role of these institutions should grow in the next decade be- cause of the substantial. increase in the demand for long-term funds to fi- nance large investment programs. The development banks, especially the DBP, which have been the main suppliers of long-term finance, would continue to play a dominant role in this field. The DBP will play an important role by continuing to finance both capital-intensive industries, which require sub- stantial amounts of foreign and domestic currencv, and small and medium scale industries which entail greater financial risks. Private development banks wouild nerform a useful supporting function by focusing on local needs and absorbing the risks inherent in small-scale loans that do not receive the DBP's sunnort. In the long run, efforts of these institutions would be aided by an brganized bond market and an invigorated stock market. 1/ The role of the rural banking system has been discussed specifically in Chapter 5. 9.61 Thrift banks (e.g., savings banks, and mortgage banks) should be considered a main vehicle for issuing long maturity obligations. Mortgage and savings banks could be major issuers of consolidated mortgage bonds, and could expand their operations in financing construction activity and housing. In.order to provide that service, however, it would be necessary for the mortgage and savings banks to expand to areas other than Greater Manila and Southern Tagalog. 9.62 Another important type of institution having considerable poten- tial for supplying long-term funds are life insurance companies. These institutions, both private and Government-owned, could provide long-term finance to agriculture and industry either directly, through purchases of corporate securities, or indirectly, through purchases of DBP, Government, and other intermediary bonds. These institutions also finance construction and residential mortgages. Insurance cQmpanies in general, and GSIS and SSS in particular, can act as catalysts in rationalizing and developing the mortgage market by moving away from direct mortgage lending and concentrat- ing on acting as financial intermediaries through purchasing consolidated mortgage bonds Issues of savings and mortgage banks. Pension funds are similar to insurance companies in terms of their ability to mobilize long- term funds and could be major factors in the development of securities markets. The Short-Term Money Market: The money market will continue to perform a maj6r intermediation function in the future. From the point of view'of liquidity management, it serves a useful purpose as the interbank market by allowing banks and quasi-banks to balance their day-end portfolios. But in the last few years, commercial banks have availed themselves of other segments of the money market to cover reserve deficiencies by direct borrow- ing from the'nonfinancial private sector, thus circumventing reserve re- quirements and interest rate limitations 1/ as savers moved out of currency and deposits and acquired higher yielding deposit substitutes. However, it is equally important to recognize that savings have been channelled to this market in' p'tt b'&ecause o'f tax advantages' obta'in'able from; these instru- ments and btecduse- th'ere have' been few long-term i"nstrum'ntg offered. 9.63 In t-he future, the money market should emphasize its function of placing large amounts of temporarily idle corporate funds and savings of la-rge investors', since large amounts' are normally required to permit eco- nomical and efficient money market transactions; for this reason it is not a place for the small saver. However, it is important that the dualism which. now characterizes the market for savings, where large savers obtain higher yields for shorter maturities than do small savers for longer maturities, be -reduced and that opportunities for obtaining better yields from longer term assets be open-to all classes of savers.- 1/ Prior to December 1974, promissory notes and other dealer-issued paper were not required to be backed by liquid reserves. However, Central Bank authorities, recognizing that these instruments were essentially banking liabilities and must be backed by reserves, then imposed a 5 percent reserve requirement on these instruments, which were issued by both banks and quasi-banks. - 76 - 9.64 In addition, it is important to segregate the interbank market from the rest of the money market. Measures are needed to prevent the circumven- tion of reserve requirements which current money market practices permit. One ay nf d-eali 4n w-h fth1,4 . -.o -,re Ac nnmmnro4al n ankl- - fron no4rlnat-. ing issues in the form of promissory notes and repurchase agreements, and int-ad to-. encour..age them- to 4issue only longer term certificates of depo s4 subject to the same reserve requirement as time deposits. However, since a market for overnight money is needed b all fin-4ancal --insluions, -he Cen- tral Bank should perhaps consider expanding the interbank market to allow quasi-banks to participate. Bout thle C entral Bank must e t these transactions are processed through its central clearing system to prevent 4nst-itutions from rais.ing rIeserve A4bdre.t borrowing fo.. -he nonfinancial private sector. The Securities Market: The Philippine financial system does not have an act i ve an'L qUatntit v LL±V ey IIMrtant LdtIL soLUS.k sLU UUoIUs mIarLetL LLCL. rec Ln yaLrs, only a small proportion of the capital expansion of Philippine corporations has been financed through issues sold in the three stock exchanges, which are located in Manila, Makati, and Quezon City. Only corporations such as San LMiguel, Meirall.o, and L Lhe PDTC hi ave been ablte lo lap private savLngs directly to some extent. New firms- except for highly speculative mining ventures - h,ave been unablle or un`willing lo sell equities. The_ sarl apple to-.oporat Li UCCI UIdit UtU W.L L± ±11 _ LU OC.. CIjU L JJCO tIIe Oaiilie app± iCO- LU Lk.UL UtCt LtC bonds. No corporate bond offerings have been made to the public in recent years otUhLer than L ILLLose iLssuel y one finance company, an' tLose lave alrealy been redeemed. The peso-dominated corporate bonds included in the definition 0of gross prvt iaca seshv en sold through private or direct Ut rLUO0 PL -LVCtLCR L.LIiCtILtL_C1_L CtnC L6 I5lVt U)CCI UL U L ilt U U 6 1 ptL_ tV aL UtL SALtCL placements rather than through the exchanges. 9.65 There are several reasons for the underdeveloped state of the se- curities mUarkeUt t TLhUe fLrstL ULIo is a supply cUsLdLL. Private owns are not disposed to sharing their control over the enterprises and have, there- fore, avoided raisilg new equity through public issues. Moreover, there are no incentives for enterprises to go public, since the corporate income tax rate is the same for an open as well as for a closed or privately-held cor- poration. i/ Second, high interest rates and tax advantages on short-term money market instruments compared to those on long-term securities biased savers' preferences toward the former type of investments and constrained the demand for securities. Tnird, except for mining, the largest commercial and industrial issues, and a few speculative shares, shares are not very liquid investments, since the market is limited. Fourth, the substantial swings in market activity reflect speculation which is not adequately controlled by the regulatory framework. Finally, tnere are deficiencies in tne dissemination or information to the market and especially to smaller investors. 1/ Twenty-five percent on taxable income of up to P 100,000 and 35 percent on income above P 100,000. - 77 - 9.66 These structural problems can be resolved by a determined effort of the Covernment authorities in conneration with the privat- sector- The primary securities markets should mobilize more private savings by offering a greater variety of inveQtment pnnnrtunitlPes and it Qshonlrd channel more of the mobilized funds into long-term assets. Direct financing through stock and bond markets wnould also represent the creation of an investment medium which is distinct from a money medium. It might be desirable to gradually +ntroduce long-tem.m bonds through the organized exchanges by starti4 wlit 3 to 5-year corporate debentures, followed by 5 to 10-year mortgage bonds, stretching to 2L0 to 25-year matur.ties for Government LLonds. Unde-r pvalling market conditions, issues could be sold to yield from 16 to 25 percent depend- ing on quality and m,,aturity. These bonds should lead the way in ILeatiig a bond market and increasing the share of long-term assets in private financial savings. (] A r-7 Ap r _r n tle4 rk 4n o v m t _n t: inn ne inar e i. _ t n L ^- __.__ _L_.. 7. u /I pCrrent Expenditures oln,-a,-,Cash.Budget.l,Basis (At current!:prices) ..___ , , F-75 =__0 _ F ,, O Perc,e,,n,tag,e., P?ercentagee Category, Milli Z of.; t:ota1 PercentUge. Millions. of :.total Percentge …of _eso,; ____out o f.GNP. of pesoS. out'. of GNP' General 'I 750 30. 4 3.-, .;75O 24O. : 3 .0 Defense ' "^' 2.,69' 2i00.- 2.2' - : 20 Other .l9, 06C! 8.6 O.09'r 2,2Q05 7.'8' 1.0 Social services, _50, 25-.6. 9 15 31-5. 38 Education - 2,h2o 19i'6C 2.3' 6,5k 23.1 2.8 Health . 6o5 4.Th. 0.6! 1,725 6.1 0.7 Other 135C 1.1 0.1- 650 2.3 0.3 Economic sectors,, 2,-3 1_9,;1 2.2. 84 30.0 3.7 .Agriculture 'and>,natur 9 _ . 4. 9, al resources. ~96 7'.8U; -. 3,T2-5 ii.5 1. 'Transport and communcation.. 875 7 0.8:; 2,830 l0.) 1.2 Commerce and, indu,stryo1 ' 1 ., 1 .0 0.1 1,105 3. 9 0.5 Other economic .e dev,e,o t 3 34 .. 1,300 4.6 0.6 Transfers 200-__ 17.Ot 2.4., 1980 - 7.0 0.9 Debt service 975.^ 79 0.9 2Ir 7 i 0.9 Interest 615<,5S; 5.0"" 0.6 1,5,00'o- 5.3 0.6 Repayment 360'.9 2.9. 0.3 625 2.- 0.3 Total current. expend.itures l2-33O. ..... 100.0 11. 6 ^ 28,;300. C) 123i Allotments and ,other- financial,. assistance,to.,Loc lgoy,ernme,,$.:. 653:- 5.3 0.6 1,553 5.5. 0. 7 Source: Mission projections - 94 - 10.33 The decreasing allocation to education in the national govern- ment budget in recent years has caused concern. As discussed in Chapter 7, the relative decline in that sector's allocation of budget resources atter 1972 appears to have been fairly drastic, especially since public education expenditures in the past had not been very high by international standards. Moreover, although in absolute figures the obligational budget expenditures for public education rose from P 1.36 billion in FY72 to P 2'.23 biltion in FY75, they actually remained at the FY72 level (expressed in constant prices and applying the GNP deflator), and on.a per capital basis they declined by 15 percent in real terms. Consequently,.per capital expen- ditures for education in FY75 were only US$8 (at constant prices), which was about the same level as in Thailand. i/ it should be remembered, however, that private expenditures for education are very significant; the Catholic Church, especially, plays an important role in secondary and tertiary edu- cation. Nevertheless, it would be desirable for the share of education expenditures to grow in the future; expenditures for education should probably rise to almost 3 percent of GNP by FY80, or about 23 percient of current outlays, in order to support the expected expansion of public education. 10.34 The Mission forecasts propose that current expenditures for health services would rise to over 6 percent of total outlays, or 0.7 percent of GNP. This would be in line with the proposed expansion of health services in the rural areas and in urban areas outside the Manila area. 2/ The number of staff will have to be expanded in the health field proper and the quality of the staff workers in family planning and in rural health services will have to be improved. The Mission has also allowed for a relatively large increase in current expenditures for other social services, including social welfare, community development, and youth programs, since the Government has indicated on various occasions that it will become much more active in these areas as part of its regional development program. 10.35 Regarding economic services, the forecasts propose a sharp rise in current outlays for agriculture and national resources, which would amount to almost 1.5 percent of GNP by FY80, or 11.5 percent of total current expendi- tures. As mentioned earlier, such an increase will probably be necessary to improve the extension services and other services for rural development. The forecasts also include outlays for additonal maintenance associated with the various agricultural development projects in progress. 10.36 The need for more emphasis on maintenance is also the reason for raising current outlays for transport in the forecasts from 0.8 percent of GNP in FY75 to 1.2 percent by FY80. Maintenance of the road system has been neglected in the past and will require significantly more financial resources in the next few years. Moreover, Government transport services will have to be expanded in order to support the Government's efforts for more bal- anced regional development, which means that the expansion of port services 1/ Per capita education expenditures in Korea were US$11 and in Malaysia US$32 in 1974. 2/ See Chapter 7 for a discussion of the health sector. and the improvement of air transport links will become increasingly import- ant. Telecoimiimnicatiorn services will also need to be improved, especially in the outlying areas (e.g., in the Visayas and Mindanao). 10.37 Services for itdustty and commerce will also have to be improved in order to support the Government's promotion of mjedium- and small-scale industries and to aid the iiidu§tiialii& ti6fi process ih the less developed kiO_gi6ft; The forecasts increase outiays fot these setvices, which would amount to about 4 percent o£ tOtal durfent expendituresj or 0.5 percent of GNP, by FY80. The forecasts aisb inciude a rise in current expenditures for StPOrdtinR setvices such as electticity; and thus increase the outlays for the Natiofial Eiectricity Administtation (which is part of the national governmieht budget) in confiictioni with the tural electrication program cur- irnitly ifi progress. 10.38 The projections also assume a reduction of national government subsidies and othef hondefense tt'rasfers from around 17 percent of current outiays to about 4 percent by the end of the decade. The present large subsidy paymenfits may have bee' hnecessary as an emergency measure, but they should pfobabiy not become a permanenit featute of Philippine price policies. A §tfU tuitAinR of Govermffient services for the benefit of the lower-income groups 'wouid ai1bw direct price subsidies to be reduced. However, the thrust of such a policy would -robablV haVe to differ in urbafn and in rural areas. In urban at eas, especially the Greater Manila area, where the level of ser- vices has alfdady bee'n considerabie compared to the rest of the country, more emphasis should ptobably be givet to reaching the lowest income groups rather than to &kbandinh the quatityt of services. In many rutal areas, on the other hand, som- of the basic services will have to be begun or expanded from a very ioW e''i 1o.39 Cabita&l ExpendiitUte6: Until PY72. the volume of capital expen- ditures b'y the ctentf'al g6iir6nthnt was very low, accounting for only 10-15 perceht of total natibnal k6Vbffnent expendituires, and averaging just over 1 perce'nt of GNP- l'/ Most of the capital .ekpenditures were for public inestmeint in infr'a'sttuctutre although some outiavs wetke caDital trans- fer's fo equity iih public' corporationIs and loans to the rest of the public sector. rIe sectboral comip;sition of capitai outlays shown in Table 10.6 rhfc1d6ot- a-heavy -e0pha-'ls on trafispobtt; especially road construction, and onl #'rlltuifli i ue to t-h t6iisttudtiof of'maior irtigation projects. 1/ The Mission encountered serious statistical problems in its attempts to determine the amounit of canital exnenditures actuallv snent. '0bligational autho'rity" figures substantially over-state actual tional governiment canital outlays: the cash budget concept, intro- ced in FY71, probably gives the most accurate account, but may derstate somewhat the actual imnpementatfon of Infrastructure - 96 - Table 10.6 National Government Capital Expenditures (As a percentage of total capital expenditures) Category FY60 FY65 FY70 FY71 FY72 FY73 FY74 FY75 General administration 6.5 6.0 3.3 2.5 2.5 3.8 1.8 2.4 Defense 1.4 0.8 1.1 1.6 1.5 3.5 1.7 1.6 Other 5.1 5.2 2.2 0.9 1.0 0.3 0.1 0.8 Social services 17.6 4.7 12.4 8.0 5.5 6.1 4.4 7.5 Education 12.5 2.6 9.1 5.8 3.6 4.6 2.0 4.6 Health 5.1 1.7 3.0 1.0 1.8 1.3 2.2 2.7 Labor and welfare ... 0.4 0.3 1.2 0.1 0.2 0.2 0.2 Economic sectors 75.9 89.7 84.3 89.4 91.9 90.0 93.9 90.2 Agriculture and 22.7 6.4 7.9 15.8 24.0 18.7 36.0 25.7 natural resources Transport and communication 41.7 76.8 61.3 46.5 35.5 37.2 24.0 41.4 Commerce and industry 0.5 0.8 2.3 9.4 1.8 0.8 4.7 3.4 Other economic development 11.0 5.7 12.8 17.7 30.5 33.3 29.2 19.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data are on an obligational basis. Source: Budaet Commission. 10.40 Capital transfers to Government agencies, development banks, pub- lic corporations and Government enterprises have become a major component of the Covernment's capital outlays in recent years. This development is very significant. It demonstrates the Government's determination to pro- vide ntiblic cornorations and Government-controlled develonment banks with an adequate financial base to enable them to borrow sufficient funds for the finansing of their develonment nrograms withoilt a serious deterioration of their debt-equity ratios. For instance, increased capitalization of hbnks in the form of bonds reached P 1=65 billion in FY74 1/ with the creation of financially strong development banks that could assist in the imnlpementation of orivcilltural and rural development programs. Di rect capitalization of Government institutions and enterprises rose sharply in FY75 andn.-ll probably be substantially larger in FY76- Siuh transfers amounCed to about P 650 million in FY75; 2/ as some of the transfer out- lays originally budg...tead for FY75 will - e IInt in FY76, total expenditures I/ On a cash d4sburseent basis 31 2901 m.illion went to the Development Bank of the Philippines, P 530 million to the Land Bank, and P 200 m[li. to the Phil[ ppine National lank. LI Oin a cash disbursement baisizs. - 97 - for the capitalization of Government institutions and enterprises in FY76 may rise to around P 3.0 billion. 1! 10.41 The Mission's forecasts of national government capital expendi- tures are based on the projections of public sector investments discussed in Chapter 8 and on Mission estimates of required central government loans and equity contributions to public entities as explained later in this chapter. National government infrastructure expenditures are projected to rise rapidly in order to support the implementation of the Government's most important investment programs, particularly those in irrigation, flood control, and road construction. In addition, ambitious investment plans in the public corporate sector and expanded lending programs by Government- supported development banks will require significant capital subsidies and equity contributions to these institutions by the national government. Lending to local governments will also increase. 10.42 Under these assumptions, total national government capital out- lays would need to reach a level of almost P 12.0 billion at current prices, or 5.2 percent of GNP, by FY80. Of this amount, P 8.0 billion, equivalent to 3.5 percent of GNP, would be for infrastructure investments by the cen- tral government, compared to P 1.1 billion at current prices or 1.0 percent of GNP in FY75. Realizing this goal will require significant improvements in project preparation and implementation, as well as a considerable accele- ration of the Government's ability to release appropriated funds for dis- bursement. Given the fact that cash releases for infrastructure invest- ments in FY75 were already at a level of P 1.54 billion while obligational nuthority was around P 3.4 billion a year in FY74 and FY75, it is reason- able to assume that the disbursement process can indeed be accelerated. The allocation of infrastructure expenditures to various sectors is sum- iarized in Table 10.7. I/ Rniiohly a ' iS h bilI ioNn wasc or will lbe sen.t in FYV75 and FV76 rombhnced for capital transfers; about P 1.5 billion of this amount has been Permarkpd fnr thp tanke mvpr o-f MFRALCO, P 450 million for the capital- ization of the National Power Company (NPC), and another P 270 million for the National Electrification Administration (NEA). Around n50 million is allocated to the Philippine National Oil Company for its 41 and natural gas exploratio Conpital trnsr of 'n million will go to the National Irrigation Authority (NIA), P 100 million lo the 1 Lan Bank, anA n 3'40 million to L he Atic-ultuatl Credlt ALminis= tration (ACA) in order to broaden agricultural credit programs, espec- ialy thos fr_ rice -ar. ---- fr.-,,-ers andu for the coconut revitalization .LaXLy L LILIC LI.t _L*.C aLLU LUL LI LJ II-a ii U Lil LLUIL tv L _LJ.L _LUI program. Another P 300 million is allocated for the equity of the Export fl - 7 A ~LJ.~ t 'L . /TEt7J'1 _ t C ' 1 1_ rrocessLng Zone L II ut 1Lor1Lty 1'EPZ) to expedite tile estabu1lshr,ent of tIle Table 10.7. Mission Forecasts of National Governmerit Capital Expenditures (At current prices) FY7 5'- FYo0 Amount Anount (In millions Composition Share in GNE' (In millions Composition Share in GNP Category of pesos (In percent) (In percent) of pesos) (In percent) (In percent) General administration 25 1,2 0.02 145 1.2 0.06 Defense 17 0,8 0.02 95 0.8 0.04 Other 8 0,4 0.0 50 0.4 0.02 Social sectors 80 3.9 0.08 1 150 9.6 0.5 Education 49 2.4 0.04 720 6.0 0.3 Health 29 1,4 0.03 240 2.0 O.]L Other 2 0,1 0.01 190 1.6 0.]L Economic sectors 980 47.4 0.90 61770 56.6 2.9 Agriculture and natural resources 272 13.1 0.26 2,390 20.0 1.( Transport and communications 440 21,3 0.41 3,830 32.0 1.7 Other 270 13,0 0.23 550 4.6 0.2 Total infrastructure 1,085 52,5 1.0 8,065 67.4 3.5 aptI t ran s f e rs t o ....,,....700 5.8 0.3 local governments Other capital outlays; 982 47.5 0.9 3 195 26.8 1.4 Total capital outlays; 2,067 100,0 1.9 11L960 100.0 5.2 a/ Total capital outlays are preliminary actual cash disbursements during FY75. They include "pr1or years' accounts payable" which are assuimed to comprise primarily appropriations for capital outlays made in earlier years but actualLy spent in FY75. The sectoral breakdown of infrastructure expenditure is analogous to the breakdown in the obligational budget. Source: Mission estimates. - 99 - I1O.4 Th're amount oil national goverr.mer.t capital transfers tosuch e.i lu 1 'J LI II lLUL t [CLUI± VC LLCLL . L £I CLL £ C~L 0 C' OULi- ties as corporations, Government enterprises, and Government banks is proj- ected to rise to P 3.9 billion at current prices, or 1.7 percent of GNP, by FY80. It is difficult to predict a sectoral breakdown of equity transfers to these entities during the next few years, as allocaLions will depend on their individual investment programs. In addition, the extent to which Government funds will be required to provide financial backing to iarge industries such as steel, petroleum, and fertilizer could only be roughly estimated. The Mission did assume that by FY80 about P 700 miilion would be granted as loans to local governments to finance part of their invest- ment programs, in accordance with increased Government efforts to stimu- late local government participation in economic development. Financing National Government Expenditures 10.44 Throughout the 1960s, tax performance was inadequate and nontax receipts were low. As a result, national government savings on current account were insignificant, and even negative in FY69 and FY70. The situa- tion began to improve markedly after FY71 because of the export boom and the successful implementation of tax reform measures. As Government revenues temporarily rose faster than current outlays, the Government's current ac- count surplus increased considerably. In FY74, the current account surplus amounted to P 3.85 billion, or 4.6 percent of GNP, but the current surplus fell to p 2.85 billion in FY75, when tax receipts were somewhat below the budget estimates. The high level of Government savings on current account can be attributed in part to the national government's strict anti-infla- tfonary fiscal management and in part to the significant improvement in revenue performance. 10.45 In both FY74 and FY75, the current account surpluses far exceeded total capital expenditures as cash disbursements for infrastructure and other capital outlays lagged considerably behind the rapidly rising appropriations. As the Government continued to borrow substantially from domestic and foreign Sources, overall national government cash balances in FY74 and FY75 reached record surpluses of P 3.2 and P 2.8 billion, respectively. In FY74 and FY75 combined, net domestic borrowing totalled P 4 billion, 70 percent of which was derived from the issuance of bonds. Net borrowing from abroad, which was used exclusively for the support of investment programs, amounted to the equivalent of only US$25 million in FY74. In FY75, as project implementa- tion sped up, net borrowing from foreign sources on a cash disbursement basis rose to over US$80 million, which financed over 55 percent of national govern- ment infrastructure expenditures in that year. 1/ Tho Gonvernment nlsn nlnnq to nrpepnt for the first time a ronsolidated budget of the entire public sector by FY78. In addition, as mentioned earlier, the fisrcl year is to hp synchroni7ed with the calendar year as of January 1, 1977. - 100 - 10.46 The Mission's forecasts of national government finances in Table 10.8 assume that total current receipts by the national government will amount to 16.0 percent of GNP by FY80. If the projections of current spending are realized, expenditures would not exceed 12.3 percent of GNP by that year. This would allow national government savings of 3.7 percent of GNP, which would finance somewhat more than half of the Government's capital outlays. The balance, roughly P 3.5 billion at current prices (US$460 million), or 1.5 percent of GNP. would have to be financed by net borrowing from foreign and domestic sources in that year. This financing would not in- clude direct borrowing from domestic and external sources by public cornora- tions and Government enterprises, such as the National Power Corporation or the National Steel Cornoration. which would nrobablv he geiaranteed by the national government but which would not be channelled through its budget. 1/ 10.47 The analysis in Chapter 8 indicates that about 30 percent of the nafional government'sq infRfastructure exnendituiires wonld i be financed through foreign loans. This would result in net borrowing from abroad of Y 2.3 millinn (TUS$300 million at the nresent exchange rate), which would be about 1.2 percent of the GNP estimated for FY80. 10.48 About P 1.4 billion, or 0.5 percent of GNP, would have to be financed from dom.estio hnrrnw!TIn in FYRn. The level wurnlzd not he hlgher in FY80 than in FY75 at current prices, and in real terms there would be a signiflcant decrease in domestic net borrowiing Th. underlyieng - tion is that claims on domestic savings from the private sector and from the briskly expanding public corporate sector will be -ery large. 10n 9 Ac discussed in rha--tr Q, t-e Mis- on expects the marginal domestic savings rate to rise from about 21 percent in 1975 to 25 percent oL UJL uby 178U. 1Tlis signiflcant in[Lreaset nU [nd Lot easiL[y -aceved. But even with such a favorable marginal savings rate, the Mission believes LIdL L tLe nldLU[Lld gUvert [[IentL miday fio IL (lil1L UUJ.L LU rais mu:tLU Lidall around P 1.2 billion (Table 10.8) without preempting funds which would otherwise be sources of financing for the private and cuipUorte public sectors. In. other words, the success of a national government development program of the size discussed above wiil depend to a iarge extent on tne availability of as much external finance as is possible at reasonable terms considering the constraints of the balance of payments. 1! The P 3.9 billion would include all borrowing for national government infrastructure programs (e.g., for irrigation, port construction and education), as well as for loans and transfers to local governments for infrastructure programs and for capital transfers to public corporations. - 101 - Tabie iO.8 Summary National Government Frinances on a Cash OUgeL Basis (Amounts in millions of pesos at current prices) Actual Estimated FY75 FY80. Percentage Percentage Category A-ountfl of GNP Amount of GNP Re.eips 15,63 7 14.7 A6,810 16.0 1%~~~L. C ~~~~y L D / .~~~Jt I I..gJUI', ITaxes 13,365 12.6 33,3 14 Nontax receipts 2,272 2.1 3,450 1.5 Current expenditures 12,785 /a 12.0 28,300 12.3 Current surplus 2,852 2.7 8,510 3.7 Capital expenditures 2,067 1.9 11,960 5.2 Infrastructure 1,085 1.0 8,050 3.5 Other capital outlays 982 /b 0.9 3,910 1.7 Total cash deficit/surplus 785 0.7 3,450 1.5 Financing Net borrowing 2,041 1.9 3,450 1.5 Foreign 621 0.6 2,300 1.0 Domestic 1,420 1.3 1,150 0.5 Treasury bills and notes 881 0.8 550 0.25 Bonds 539 0.5 600 0.25 Change in cash balance 2,826 2.6 /a Includes Treasury Warrants from prior years outstanding and balances for guaranteed obligations minus collections of obligations of prior years as well as other so-called nonbudgetary operations on a net basis. These items are not included in current expenditures in the earlier tables. /b Includes P 329 million of "Prior Years' Accounts Payable," which was assumed to comprise primarily appropriations for capital outlays in earlier years actually spent in FY75. Source: Department of Finance and Mission estimates. - 102 - B. Public Corporations and Enterprises 10.5 PU Eublic corporations and Gjovernulentow.ed or controlled enter= prises have traditionally played a relatively minor part in Philippine econor.ic duev e1lUoLprL.ie. Theitr ro1le hLas Ubee pr LImariL .y LItt oL pro v JLU.iLrn some basic services, including electricity (National Power Corporation), transport (Philippine National Railways), water supply and sewerage (Metropolitan Waterworks and Sewerage System), and gas (Manila Gas Corpora- tion). The GUover-iuent has operated a number of enterprLses, but r,.ost of them have been quite small in size. A variety of self-governing boards, commissbuLon, and agencies have, also existed, but muany have had no budgets o their own; instead, they have been included in the national budget. Several have had limited economic or legal responsibilities, although some of them, like the Board of Investments (BOI) have held key positions in formulating development policies. The primary exception to this pattern has been the Government-owned banks, particularly the Philippine National Bank and the Development Bank of the Philippines, which have played major roles in the field of finance. 10.51 By the end of FY73, Government agencies included 7 Government- financing companies, 5 public utility corporations, 39 Government develop- mental and other corporations, and 19 self-governing boards, commissions, and agencies with total assets of P 38.3 billion. The overall financial condition of these 70 Government entities in 1972, 1973, and 1975 are sum- marized in Tables 10.9 and 10.10. Table 10.9: Assets, Liabilities, and Net Income of Government and Government-Controlled Corporations (In millions of pesos) Item June 30, 1972 June 30, 1973 Assets 28,506 38,265 Liabilities 22,828 29,951 Liabilities (as a percentage of assets) (79) (78) Net worth 5,678 8,314 Income 3,340 3,940 Expenses 2,870 3,377 Net income 470 563 Souree: Philinnine Commission on Andit- 1973 Annual Financial Report of Government-owned or Controlled Corporations (Quezon City, 1973), p. 5. Table 10. 'LO: Assets and Liabilities of Selected Government Corporations, Enterprises,and Financial Institutions (In milliLons of pesos) FY73 - Actual FY74 - Estimate FY75 -- Estimate Government Public UtilitiLes Assets Liabilities Assets Liabilities Assets Liaibilities National Power Corporation (NPC) 1,342.6 68'3.9 1,602.5 521.1 2,395.5 888.1 Philippine National Railways (PNR) 547.1 48.3 593.8 46.5 618.7 40.1 Manila Gas Corporation (MGC) :33.6 7.6 33.8 6.6 35.0 6.6 Metropolitan Waterworks and Sewerage System (MWSS) 1,490.9 649.1 1,475.9 677.2 1,508.7 700.8 Total GovernmeIt PUDliC Utilities 3,4:L4.2 1,388.9 3,706.0 1,251.4 4,557.9 1,635.6 Enterprises Manila Hote:L ComLpany (MHC) 4.4 2.3 4.3 2.2 4.2 2.0 National Development Company (NDC) 257.4 254.0 244.7 220.5 245.8 221.0 National Sh:Lpyards and Steel Corporation (NSSC) 1:38.7 137.8 109.8 111.0 107.6 110.2 People's Homesite and Housing Corporation (PHHC) 837.4 4'i.2 85.8 45.7 272.1 101.2 Home Financing Coumission (HFC) 6.3 1.0 7.5 0.4 9.0 0.5 Philippine Charity Sweepstakes Of:Eice (PCSO) :36.8 34.2 35.9 32.8 35.4 31.9 Philippine Coconut Administration (PCA) 5.8 1.0 .. ... .. ... Philippine Sugar Institute (PSI) 41.5 1.5 45.0 1.6 47.0 1.5 Philippine Tobacco Administration (PTA) 45.3 ,7.7 49.6 4.2 59.3 4.2 Philippine Virginia Tobacco Administration (PVTA) 390.2 227.8 90.7 211.0 80.8 120.0 Total Enterprises 1,0:L3.8 712.5 673.3 629.4 861.2 592.5 Financial Institutioins Development Bank of the Philippines (EIBP) 4,702.9 2,84:3.6 5,279.4 3,304.1 7,475.9 7,324.4 Philippine Naticnal Bank (PNB) 5,309.8 4,776.6 LanLd Bank of the PhilippiLnes (LBP') 1;29.2 54.8 Government Service Imsurance System (GSIS) 3,520.8 3,357.3 3,781.7 3,643.8 4,045.6 :3,903.1 Social Security System (SSS) 1,891.9 130.9 National Investment and Development Corporation (NIDC) 348.7 88.8 Central Bank of the 'PhiliLppines (CBP) 14,433.3 14,433-3 231,273.6 20,947.L Total Financial Institutions 30,3 6.6 25,68',.3 Total Financial Institutions (Excluding CERp) 15,903-3 11,252.0 Source: Department of FiLnance and annual reports of thea various organizations. - 104 - 10.52 The Mission estimates that investments by these corporations and enterprises were, on the average, probably less than 0.3 percent of GNP throughout the 1960s. However, this situation began to change in the 1970s as the Government started to expand public investment. The Mission believes that investments by the public utility corporations were probably equivalent to about 0.7 percent of GNP in the late 1970s. It is clear from the discus- sions in Chapters 5 and 8 that an even larger role for public corporations and enterprises is contemplated for the future. By 1980, investments by the public utility corporations could reach 2.2 percent of GNP, and investment bv Government-controlled enterprises in basic industries. including ferti- lizer, petroleum refining, and steel making, could also be quite signifi- cant- ]0 53 The magnitude of the nronosed investments in oublic utilities and in basic industries represents a major change in the role of the Government in the Philippine economy. Apart from the obvious issue of the manner in which these investments will be financed, a number of other key issues will need to be resolved. One of these is the degree of autonomy in investment decision-making which shouLd be given to the corpo- rations and enterpr1ses. Cs rela ted to thise i s the w-a in which operating surpluses shall be dealt with: should the individual enterprise be allowed to reinvest earnings (either in its mai n line of business or in new and unrelated fields of production), or should at least some net earnings be transferred to t--he national government budget. 10.54 As investments are being expanded rapid1y, various corpora- tions and enterprises may run deficits. The question of covering the defictCOs wit epen[ll deedon how much Ile na[ional goverrCment is willing or able to finance through the budget and to what extent public sector corporations andL enterprises will Lh1ave to LUlorrow directly, either ±oL[nes- tically or externally. The external borrowing of public sector corpora- LlU[ti dllU entr Lt piLsesb cUU'U bU VeLy large and w±il± [lIVC LU Ue cUoe'ly con- trolled to assure that the amount of borrowing remains within the limitations set by the balance of payments and by external debt inanagement. As far as domestic borrowing is concerned, the competing claims of the public and private sectors will have to be resolved. 10.55 The expanding role of Government corporations ana enterprises also raises the issues of how to organize the administration and control of these institutions and which entity within the Government will be respon- sible for their control. Obviously, the variety of administrative and fi- nancial control options is large. Perhaps the most logical arrangement is for the National Economic and Development Authority (NEDA) to supervise the direction and economic consequences of the operations of the public corpor- ate sector, and for the Department of Finance to coordinate the financial and fiscal policies with regard to the public sector, including tax and pricing policies. Close cooperation with the Central Bank, which will have to set priorities as far as the amounts and terms of borrowing are concerned, will also be required. All of these issues are likely to become extremely important in the future, since the financial operations of the public en- tities are expected to significantly increase during the next decade. Public Utilitv CorDorations 10.56 At the nresent time, there are four orimarv Dublic utility corporations in the Philippines: the National Power Corporation (NPC), the Philippine National RnilwsvR (PNR)- thp Metrnolitan Watprworks and Sewerage System (MWSS), and the Manila Gas Corporation (MGC). In 1975, these coporations had rnmhined assets of about P 4.5 hil1ionn equivalent to about US$600 million at the present exchange rate (Table 10.11). It ls perhaps worth noting that in terms of assets, the NPC is by far the largest corporation in the Philippines, with assets totalling about P 2.4 billion (US$300 million). 1/ The MLWSS: is alo qui ite largera hby Philinnine standards, with assets of about P 1.5 billion (US$200 million). 10.57 Investments by public utility corporations have only been about 0.7 percent of GNP in recent years, but this situation is likely to change dramatically during the next decade. Total investments by the 1maCjuL PJULIL.k ULJL.LLLV %%LVVL12UJLVLJAL0 itayLCLY CJ..LLULLU ~. 7 jJ A...zL1 or P 4.2 billion at 1974 prices. In real terms, this would be over six tiaLes the average anlnuadld adIuount spent uy the public utility .orporations during 1970-74. Over 80 percent of these expenditures would be In the power sector, the largest portion of -which will ue spent by Piru on Lts expansion program; the proposed investment program for NPC would be equi- valent to almost 2.5 percent of GNP by 1980. The Mission estimated capital outlays of about 0.1 percent of GNP for the PNR and other transportation corporations which may have been establisned by then. Anotner 0.3 percent of GNP would be invested in the expansion of other utilities, including large investments to upgrade services in some of the urban centers which are expected to grow significantly by the end of this decade. 2/ Table 10.11 Estimate of Investments by Public Utility Corporations (At constant 1974 prices) Annual Average, 1970-1974 FY1980 Millions of Percentage Millions of Percentage Public Utility pesos of GNP pesos of GNP Power 180 0.2 3,570 /a 2.5 Transport 265 0.3 150 0.1 Other utilities 180 0.7 450 0.3 Total 625 0.7 4,170 2.9 /a Includes purchase of existing facilities from the privately owned Manila Electric Company. Source: Mission estimates. 1 For comparative purposes, the largest private corporations in 1970 were the Manila Electric Company (MECO) and the Philippine Long Distance Telephone Company, with P 0.9 billion each. Other large corporations included Iligan Integrated Steel Corporation (P 0.8 billion) and San Miguel Corporation (P 0.6 billion). 2/ For a discussion of these centers, see Chapter 3. - 106 - 10.58 Investments of this magnitude create two major concerns for the public utility corporations. One is the manner in which the investments will be financed; the other is the need for continually improving the manage- ment capability of the corporations. On the matter of financing, the equity base of the corporations will need to be enlarged to a level commensurate with the investment program. Recently, the amount of long-term debt (with a maturity of over one year) in relation to equity, that is the debt-equity ratio, 1/ varied significantly among the individual corporations. Data for FY73 2/ show very unfavorable ratios for the PNR and M4CC. 3/ The PNR's ratio was only 0.01, and the M4CC had no long-term debt at all. The MWSS, on the other hand, showed a very unfavorable ratio of almost 50 because most of the investment in water supply and sewerage has been financed by incurring long-term debts (of P 425.6 million), while very little equity (F 6.2 mil- lion) has been built up. The NPC's debt-equity ratio recovered to 1.13 in FY73. 10.59 The Government has recently begun to raise the equity of the ailing corporations to acceptable levels by direct budget grants. In 1974, the NPC's authorized stock capital was raised from P 300 million to P 2,000 million- Tn mid-1q75, the PNR's authorized stock was raised from P 650 million to P 1.5 billion in order to widen the corporation's equity base to obtain loans for the further expansion of its network. Fturther in- creases in equity will probably be needed for all these corporations in the fut-ure. Th~ese Increpase will ke financpd from intprnally aenerated fuinds and/or transfers from the national government's budget. The amount of internally generated funds will, of course, depend on the Grovrnment' s future price policy with regard to utilities. Because utility rates are highly political and have a great impact on the other sectors of the economy, the Government has kept rates down in the past, with negative effects on the corporation's net earnings. Asaresult, roughlyP D.5 billion of additional equity at current prices will be needed between now asn OQ F . 15;_A -4+s Am.o.n1 W UA F 4 fnane lArgelyb _ A1wtks7_-A_;A 4:- A - ,L I 1 IJU , LII SO . LLD tItI L WLJ UL. UC L I 11a L1.L lCI 1 -'-Y U y 6 LOLL LC O St 'L-IL L ILC 111 L L [LUa11L government's budget. About p 11 billion (US$1.47 billion), however, would I-ave to le lorrowed either externally or domLes t4cally. 'le largest portion LLL1VC ~~~~~~~LU ue ULuWC .CLLL ~ CAL L LLO± UtUU~L L .L.y ILLL ±OL5~L~LI would probably come from abroad; domestic borrowing would be primarily in thie LUor,. of bonds. IU t -is estLlmatedL thiat tthL[ e forLeignU 1 UUxIcaLgL,e LUIMpULIenL Uo rhe investments of the public utility corporations will be on the order of U.) perceitL, anu it Is assutimeu pUsslUle Lo provide virtually all U1 Ltlese funds from external sources. 10.60 Table 10.12 shows the Mission's estimate regarding the financing of investments by public corporations in FY80. Nationai government equity transfers would amount to P 85() million, or the equivalent of 0.4 percent 1/ This ratio is the one generally applied by the World Bank; it relates to assets in use. 2 See the Philippine Commission on Audit, 1973 Annual Financial Report of Government-owned or ControlLed Corporations (Quezon City, 1973). 3/ The favorable debt-equity ratios actively reflect the discouragingly low level of investments rather than sound financial management. In other words, the corporations did not use their borrowing capacity to make investments which may have been very important from a develop- mental point of view. - 107 - of GNP, while around P 1,100 million, or 0.5 percent of GNP, would have to be borrowed in the domestic market. Foreign borrowing would cover 64 per- cent of the investments, or US$550 million. Table 10.12: Mission Estimate of Financing Public Corporation Investments in FY80 Amount (In millions of pesos) Composition Share of GNP Category_ 1974 rices Current rices (In ercent) (In ercent) Foreign borrowing 2,710 4,170 64.0 1.9 National government equity contribu- tions 550 850 3.2 0.4 Domestic borrowing 710 1,100 16.8 0.5 Other sources /a 200 400 6.0 0.1 Total investment 4.170 6.520 100.0 2.9 /a Includes initial cash generation. Source: Mission estimates. 10.61 Another key issue is the management of the corporations and the 4mnlDm.entmt-inn nf t-he innect-ment- nrroram The larg-e amouinsc iniAlved in the investment program point to the need for substantial improvements in the --r 4-niztion and ad4,m4.fctsr4nn -f thi-h cororation these improvements might include intensive staff training, especially in the medium and higher skill le V ceO , as wel.o as tCC lL1L iLL; 4n L oLf W st Laf W4 L Li OU 1C L4e. rainL L L i g tLitt L IlC0.l with the forthcoming issues. In addition, the accounting systems of virtually all pUb.Lic uti.LLLty corporations neeLU substantial O± I.iJiJVl.veUieLLL. All ULiLiLy corporations need to collect the large accounts receivable, to systemize th,eir billi 4-ng in ordler to precludle the accum,ullation of unbil 1led production LL . L iiu .L J.LL LI Li I I) fiC.. .US L_ tiC 0..i. tii UiS lLt. Ut iL CL Li Ut..L -t L and to conduct sustained studies on the advisability of transferring the c n r ' an_ op r o of u t _ _L 'A. t _L I_ _. _ _ _ _ - _ - I -_ __ _ _ __ _ _- conLLutI dLL U p C CltU {JaLdiUll ULt UL1 a XL Cb ILLL LULOL ara LU UL u%aXL UVULL1LiL0_n. 10. NL L'ational ruwerL '.sUipCILnY (LNPC) As muentILinUe dL Iarlier, tLe NPC is the largest corporation in the Philippines. Its assets increased by almost 80 percent from FY73 to FY75, reflecting the sharp increase in the power investment program. i/ Originally created as a non-stock public corporation in 1936, the NPC was converted into a stock corporation in i960 witn a i00 percent Government subscription. Although it has been competing with a number of privately-owned utilities, particularly the Manila Electric Com- pany (MECO), the NPC accounts for over a quarter of power generation in the Philippines. 10.63 With the promulgation of Presidential Decree 40 in November 1972, the NPC was made solely responsible for the construction of national grids, 1/ See Appendix III on the power sector in the Philippines. - ink - and ultimately for owning and operating all generating facilities in the Philippines. MECO, at that time the largest generating as well as distri- buting company, will eventually become only a distribution utility. In order to meet the expected increased demand for power, the NPC has begun an expansion of its hydroelectric power facilities and the development ot geothermal power plants. The NPC's construction program for FY76-FY85 is estimated to total P 49 billioni, or US$6.5 billion. At 1974 prices, the proposed program would require outlays of about P 24 billion, or US$3.2 billion, compared to actual NPC expenditures of P 1.1 billion at 1974 prices during FY67-FY75. 10.63 It goes without saying that such a large investment program will raise serious management problems for the NPC, which has up to now had a poor record of administrative and organizational performance with a much smaller investment program. The financial implications of the program are also significant; the proposed program dwarfs the NPC's existing fixed assets. Because of its very large size, the high foreign exchange component (64 percent), and the limited funds available domestically, the bulk of the financing will have to come from external borrowing. Assuming a tariff level which would allow the NPC to earn an 8 percent per annum return on fixed assets in operation, retained earnings are estimated to contribute about 14 percent of construction costs (including interest during construc- tion). To obtain the required level of financing on favorable terms will require a significant increase in the NPC's equity base. A minimum contri- bution of P 11 billion in current. prices (US$1.5 billion), or about 25 per- cent of total investments, will be required from the national government to maintain an adequate debt service coverage. 10.64 Philippine National Railways (PNR): The PNR has expanded its facilities very little in recent: years. The corporation has suffered losses in its operations in the last few years, although some administrative improve- ments have gradually reduced the losses. The Government has decided to reha- bilitate the PNR with a minimum expenditure in the hope of allowing it to provide a competitive low-cost Dassenger and freight service. The corporation, cur-cently limited to Central and Northern Luzon, plans to expand its network to the south of the Island with the helD of the Asian Development Bank (ADB). It Is also considlering a moderniz3tion of its rolling stock. 10.65 As mentionei earlier, the Government has increased the corpora- tio,n's eqnuity be to Y 1t P iillin t-, enahl it- tn hnrrow on a larger scale, especially from abroad. Presidential Decree 741 of July 1975 ex- plicit Ijmpcmners -he PMP.R to-n nnt-r t loans with fnreign governments and their agencies, international organizations, or with firms extending sup- pi IfOt' o -A i f-c Tf-i.- n I, on icc,,o I,nn -c in I nov0 or h On iW IO t-J other's currencies. I a as ssebnd npeo rthe equivalent other currencies. - 109 - 10.66 The Mission assumes that the PNR's investments over the next ten years will be about 1 200 million (US$27 million) a year. About 60 percent of the amount will be raised by foreign borrowing, which would cover the estimated 60 percent foreign exchange component of the program. The bal- ance would come from domestic borrowing (about 10 percent) and from equity increases. Assuming that the Government will not allow a significant rise in tariffs, the Mission has allocated an average annual transfer of p 50 million to the corporation from the national government's budget, which would be the equivalent of about 25 percent of the annual investment out- lays. This share would be smaller if railway rates were raised to allow a hiaher rate of return. 10.67 Other Utilitv CorDorations: The MetroDolitan Waterworks and Sewer- age System (MWSS) has undertaken substantial investments to enlarge its facil- ities in order to cope with the pressures of urbanization in the Greater Manila area. The Manila Gas Corporation (MGC) is the smallest of the corpora- tions disuissed here; tith totnl assets of only Y 35 million in FY73. Its main problems in the past have been the inadequate collection of bills and connrm c,:, 1nrzczteo rniiQ-orl hA7 Q, 10-lt' Tho Mrr hnQ rocontlv hocriin tt- imnrnx,n its performance and has made some investments to modernize the gas distribu- ti-n sC-te-m Ts- tar -,et ist recetn ga lIoscoc Frnm nlmnct- n,5pernt of production to only 10 percent. Only a very small allowance is made for capital trian4sfers to the corprai-on b1 th- nti-4-na1 ---o-rr--- 4n i-he f-re,-- although the corporation continues to have current liabilities of more than twice its assets. Its weal debt-pay lng aillty 1 WXXJ problabl-y r- -4 - - - - -- Government capital transfers in the long-term in order to finance necessary expasios of Ih syste-,',. II --ver, because of `he FY75z boost in r th-e N"Ic's t=2xpCnLi-.UL[L U.L Ult: Z~V LtUI * [1Uw_Cv -_L , UecUk bCtr UL LLI C I1 J UUUJb L i ti L Itt o equity by a P 200 million transfer from the central government, other capital transfers fLrori GUovernmiient will probably be small in the mediurm-termin. Government-Controiled industrial Enterprises 10.68 During the first decade after tne Philippines gained independence, the Government created and operated a wide range of manufacturing and other industrial enterprises. According to Golay, the Government was "directly producing coal, cement, steel, pulp and paper, and textiles and yarns and operating a shipyard and engineering shops". i/ In addition, the Government owned substantial investments in other manufacturing enterprises, in airlines, and in shipping. It was also indirectly involved in the production of a variety of manufactured goods through a Government-owned holding company. In this period, there was a persistent faith in the capacity of the Government to participate directly in industrialization, but the results of these activi- ties led to an abrupt change in policy in 1954. 1/ Frank H. Golay, The Philippines: Public Policy and National Economic Development (Ithaca: Cornell University Press, 1961), pp. 242-243. - 110 - 10.69 In the wake of widespread charges of mismanagement of various business enterprises, the Government initiated action in 1954 to sell many of its enterprises to the private sector. This disposal was slow because of the poor financial conditions of the enterprises. During the 1960s and early 1970s, the Government largely confined its activities to public utilities, as discussed earlier, or to special Government functions such as marketing and price regulation or the establishment of promotional boards for certain economic sectors. 10.70 This period of quiescence has now begun to change and the Govern- ment plans to forge ahead with the build-up of key industries such as petro- leum, petrochemicals, fertilizer, and steel. Investments over the next ten years are expected to be very large. i/ This raises the question of to what extent domestic and external financing can be mobilized to fund these projects. Evidently, some of these projects will be too large for domestic investors, so the Government will probably have to provide financial support. Two major options are open for Government: (1) the central government could guarantee equity up to a controlling 51 percent, or (2) it could guarantee the borrowing of the corporations after having provided for an economically sound debt-service ratio. Equity contributions could possibly also be pro- vided by Government-controlled financial intermediaries like the DBP, PND, or the National Investment and Development Corporation (NIDC). 10.71 At this preliminary stage of planning, it is difficult to make any precise estimates of the Government financing required, since the size and timing of maior nronects have not vet been determined. However, in order to give some indication of the implications such financial contri- butions mav have on the Government's hudget; the Missinn lits-. below a few major industries which have large capital needs and where Government intervention is most likely. They include the Philippine National Oil Company (PNOC), the planned urea fertilizer complex, and the integrated steel project (PHIVIDEC) Nlr Government participation was envisaged for the petrochemical complex (PINOC) in the medium-term, since this project is still at a ver early state~ of preparation.2/ Table 10.13 Estimated Capital Requirements of Potentlal Government-Controlled Industries Capital Requirements (In billions ofL pesos uonstructLion periou Industry at 1974 prices) Planned by Government Philippine National Oil Company (PNOC) 5.0 i975-i980 Urea Fertilizer Project 1.4 1976-1978 Integrated Steel Project (PHIVLDEC) 7.7 1976-1979 Total 14.1 Source: NEDA, BOI, and Mission estimates. 1/ See Chapter 6 for a discussion of industrialization. 2/ PINOC is estimated to require P 7.0 million. 10.72 Although the time horizons of these projects are not yet clear, the Mission assumed considerable delays in implementation. A 70:30 debt- equity ratio was adopted as a desirable target for industrial enterprises. For the PHIVIDEC and the urea fertilizer project, it was assumed that the Government would want to acquire a 51 percent equity share. PNOC is al- ready Government-controlled, but Government equity will be increased further. A 51 percent equity share by the national government in the former corporations would amount to abouit P 1.4 billion at 1974 prices. Given a delayed period of construction and assuming that equity will be paid as construction progresspes the Mission estimates that national government equity contributions to the fertilizer and steel projects alone would be nronind Y 30I millinn nnniunllv hy naniit- FY80. Rnrrnwing, by t-hp onrnnrntion will be guaranteed by the Government, with no immediate effect on the bud- gets Apart fonm thsce rcnnttrihibtinsQ the Goverarnmentt ic also cnZncrtePd trn transfer equity funds to PNOC of about P 50 - 100 million for its oil and natur-al ga-s explorations. Governm,er.t-Contlrolled Banks and Finnancial Instituti- Iu. I IJULL' uring le I nUrs anu early -us, w..en ... Ihe Governmen. tL-.- Lrew from active participation in industry, Government-controlled financial interr,ediari'es continued to play- an impotan par in th dvlo,mn iiL LiiUitLb (~L IuU LU diiL iLliPUtLdLCLL PCiLL -LiL L11_ Uev~UVt iLkJII _1L of the Philippine economy. These institutions included (apart from the Clentral BandIs of thie Philippines T1/), ie rPiiLppine iNatLoniaL IanlK (PNB), the Development Bank of the Philippines (DBP), the Land Bank of the Philip- pines, and the National Investment and Development Corporatlion (NIDC), a subsidy of the PNB. The two Government social security funds, the Govern- ment Service Insurance System (GSIS) and the Social Security System (SSS), are also part of the Government financial sector. Total combined assets of these institutions amounted to P 28.9 billion (US$3.85 billion) at the end of FY73. The combined assets of Government banks, including the Central Bank, was equivalent to 54 percent of the total assets of the banking system; excluding the Central Bank, the combined assets of Government banks accounted for about 30 percent of total bank assets. 10.74 Since FY73, the Government banks have greatly increased their activities in the implementation of major development programs. PNB, the largest commercial bank in the Philippines, accounted for one-third of the commercial banking system's total assets in March 1975. 2/ As intermediary of Government funds and through its own borroring abroad, the PNB has in- creasingly been involved in providing short and medium-term finance for manufacturing (especially for small- and medium-sized industries), commer- cial transport on land and at sea, and rural programs, particularly Masagana 99. The PNB's widespread network of branch offices in the provinces lends itself well to the implementation of rural programs, for which it also furnishes the services of its credit technicians. The Government increased I/ Its functions and policies are discussed in Chapter 9. 2/ The commercial banking system more than doubled its assets in 1973 and 1974. The PNB's assets reached about P 15 billion by mid-1975. - 112 - PNB's equity from P 500 million to P 700 million in 1974 to support i $ -further expansion. Thi in -ranSe in enqui ty wri a11 I on nrovi do nAA i- tional finance for the PNB's long-term lending subsidiary, NIDC. 10.75 With the Government focusing on agricultural development, agra- AriJA i rellrm Anu o_l er .ru_r Aa I Aevelopmn pogas te h q1;rua bakn .system £ X ail L t tJ L1t1 H a iiu uI X LICL L UIL al t1 Vc v ct (JIILCIX L MI (S6 I aLLLC U. LI LS I L a if VLjlLWLL6 OJ L CLh( has been expanded. In particular, the Land Bank, which has existed since 1963, hias been revitalized andIU Ihas bUeen awardUedU an liportant roLe in the flnan- cing of the Government's development programs. In FY74, a Government budget transfer raised the Land Bank's equity from around P 70 million to v 600 million. Another P 100 million transfer took place in FY75, and annual equity contributions of P 100 million are scheduled over the next eight years. Total equity should reach P 1.5 billion by FY83, which would make the Land Bank the major agricultural bank in the Phiiippines and enabie it to be the main lending agency of the agrarian reform and Masagana programs. 10.76 The DBP is the most important provider of long-term finance in the Philippines. Its main private competitor, tne Private Development Cor- poration of the Philippines (PDCP), holds only the equivalent of one-tenth of the DBP's total assets of P 7.0 billion. The DBP finances projects in all sectors of the economy. In FY74 the Government almost doubled the equity of the DBP, raising it to over P 1.7 billion. Given the sheer size and diver- sity of its financing operations, the DBP's contribution to the development of the Philippine economy is considerable. 10.77 An ex ante evaluation of returns and partial economic indicators on a sample of DBP-financed industrial projects does provide an impression of the economic benefits deriving from the DBP's operators. In FY73, the DBP provided financial assistance to 45 BOI-registered projects; its contri- bution totalled P 592 million (US$84 million) out of a total investment of about P 1.2 billion. When completed, these projects are estimated to gener- ate around 8,300 jobs directly, and net foreign exchange earnings/savings derived are projected to be US$50 million annually. The ex ante average financial rate of return of these projects in FY73 was 20 percent, and the average economic rate of return 15 percent. The average cost of fixed investment per worker, about US$14,000, although high, was below the average for all BOI-registered projects. 10.78 With a sharp increase in lending volume, all Government banks would have to make considerable improvements in their organizations to ensure better project preparation and supervision. They would also have to enforce more systematic management of Government debt and strict obser- vance of rules governing the reloaning of borrowed funds to their customers. The latter will involve more efficient collection of outstanding credits. Currently, the DBP, LDB, and PNB suffer from severe problems with resnect to the collection of overdue amortizations, advances, and receivables of loan accounts. 10.79 Another important issue which may arise in the future is the extent of Government intervention. As banks borrow more funds from inter- national organizations or biiaterai donors, tne Government, whicn wiii have to guarantee the loans, will want to supervise the banks' lending activities more closely. However, care will have to be taken that Govern- ment influence is not used to pressure these institutions into activities which are financially doubtful and whose developmental significance is small. 10.80 The Government's two social security funds, the GSIS and SSS, had combined assets of P 5.4 billion at the end of FY73. The GSIS is the social security fund for Government employees and the larger of the two, since con- tributions from public employees are obligatory. The SSS, created in 1954 to provide social security 1/ to non-Government employees, had at that time only half the assets of the GSIS. Its coverage has been expanded by various legislative measures, but so far only a small minority of non-Government employees has become a member ot the scheme. Social security contributions to both funds in the 1960s and early 1970s rose more slowly than GNP at current prices. In FY74, they amounted to P 800 million, or about 1 percent of GNP, compared to P 260 million, or 1.3 percent of GNP, in FY64. 10.81 Both the GSIS and SSS resources have been used primarily to pro- vide housing loans to their members at subsidized interest rates. Middle and upper income groups have apparently benefitted the most from these loans. 2/ The record of the SSS has been similar. Another matter of concern is the fact that the funds use members' contributions to invest in short-term, money market instruments to offset the subsidies on the loans to their members. 10.82 Social security contributions are likely to rise faster in the future than in the past because the Government intends to effectively ex- pand coverage and increase rates and benefits of the social security schemes. If contributions were to reach 1.1 percent of GNP by FY80 and 1.8 percent by FY85, total contributions would be on the order of F 2.53 billion and P 8.50, respectively. This would mean that the combined social security systems would have considerably more funds available than at present. As in other countries (e.g., Malaysia), the social security systems could be increasingly used as an important source of Government borrowing. 1/ This includes disability, sickness, old age, and death insurance. 2/ During 1962-72, 46,000 member borrowers used GSIS funds; the average loan was approximately P 23,000. The borrowers, 8 percent of total membership in 1970, had an average monthly family income of between P 500-800, which represents the highest 20 percent of the income distribution. Currently, the GSIS is making 10 to 25-year housing loans at 6 percent per annum on amounts less than P 30,000 and at 12 percent per annum on amounts from P 30,000 to P 70,000. See International Labor Organization (ILO), Sharing in Development, pp. 215-216. -114 - 0.83 The resources of these institutions represent an i .portant-source of long-term public capital which has so far been underutilized. Following the ex a rp'Le o f o thLer dueve lop I-JingIr coun Lt r i es0 _- 4 _r (.g., la ysiaLCt) ,L - te in sti4Lt u tion s could be required to invest on a large scale in long-term Government bonds. The present policy in these institutions ot uouiuwlig long and lending short should probably be terminated, and more resources should be channelled into long-term Government infrastructure programs. The SSS and GSIS, for exampie, are particularly suited to finance the large-scale, low-cost housing program discussed in Chapter 3. 1/ C. Local Government Finance 10.084 Thle Phlrilippines has historically had a centralized, form of govern- ment. Constitutionally, local governments have been considered creatures of the national government; provinces, cities, municipalities, and barrios possess only delegated powers. As a consequence, the local government sys- tem has been weak in every respect and local administration has been largely ineffective. Until recently, local government finance was one of the most neglected areas of national government development policies. Locai govern- ments had a very limited revenue base and depended heavily on central govern- ment contributions. Early attempts to improve the situation failed. The Decentralization Act of 1967 (Republic Act 5185) stated that it was "the policy of the State to transform local goveL-rments gradually into effective instruments through which the people can in a most genuine fashion govern thilese'lves andU worLk out their ouwn destinies". Yet thILe act actually did little to revitalize local government administration and finances. In fact, even after its proclamation, local government revenues and expenditures as a per- centage of combined national and local government revenues and expenditures continued to decline. 10.85 Since 1i972 tne national government nas attempted to provide tne local governments with more authority, better administration, and sounder finances. In the area of local government finance, the four most important measures have been: (i) a revision of the system for allotting national government revenues to local governments; (ii) the establishment of a Local Tax Code; (iii) increases in the local government real property tax; and (iv) the authorization for local governments to borrow from lending institutions in order to finance projects as well as to meet other budgetary needs. Moreover, the national government, with the help of some of its agencies (e.g., the National Tax Research Center) has begun to review the administrative and financial management of local governments in order to improve the Government's information base on them before further reforms are undertaken. 1/ A detailed review of local government administration in urban and rural areas is provided in Chapters 3 and 4 of this report. - 115 - Past Revenup and Exnenditure Trends 10.86 Local governments have derived their revenues from real property- taxes, license taxes and, in some cases, profits and receipts from the oper- ation of nublic utilities and other business enterprises, including public markets. The local governments' collected revenues have never exceeded 1.3 percent of GNP and in FY72 were only 0.9 percent. Since these revenues have usually fallen short of financing current expenditures, the local governments have received national government allotments consisting of a fixed percentage of all national internal revenue collections. In addition, there have been national grants-in-aid and Inans for some develonment projects. The amounts have varied from year to year depending on need, the availability of funds, and the Government's attitude towards grarntin financial assistance to local units. 10.87 Because the local governments' revenue base has been restricted both in the number of revenue sources availahle to them and in the total amounts received, local units have been unduly dependent on national finan- cial alid even for minor projects, such as the construction of feeder roads. Due to the inadequacy of their financial resources, they have been largely unable to assist in accelerating economic development. The local ,governments have undertaken only a few functions, while the national government, through the field offices of its various agencies, has administered most government services. 1/ National government contributions to local governments have also been subject to regional political pressures; so that the distribution of funds has often not been dictated by development needs, but has been the result of0 reg1onal and local political influennce at the national level- 10.88 Several ft-il4e attempts wre m.ade in the late 1960s to improve local government in the Philippines; the Decentralization Act of 1967, for example, sought Lo revitalize local governments by providina them with more functions and some additional financial resources. The results of th'le act have bUeen udisappoi4nt4ng and the dependency of local government fi- nance on national financial aid has, in fact, increased. Although local go-ernment receipts and expenditures nt cl1urrent nripes rose notirpablv after the act was passed, in real terms and on a per capita basis there was hardly any rise until FY74. Since 1979, several important legislative measures have been undertaken in order to strengthen the finances of local governments, increase the eff4c4ency of local revenue collections, and im- prove the system of revenue sharing. 10.89 One of these legislative measures was the promulgation of the Loca' Tax Code (Presidental Decree 231), which put into a single code all of the provisions related to the taxing and revenue-raising powers of dif- ferent' levels of local governments. In the past, the tax and other renenue- raising powers of local governments were stated in different laws, such as the Loca&L AuLonorutIyI Law, the Revised AdM.inistra-lve Code, and varionus barrio and cify charters, which frequently led to overlapping impositions by dif- ferent levels of government. The new code transfers the collection authority of some of the national taxes to provinces and cities and redefines the ex- tent and limitations of the taxing powers of each level of local government. 1/ Frank H. uolay, The Philippines: PubJi4- . Pl4 an T National Economic Development, p. 205. 116 - Some of the new, although relatively minor, taxes transferred from the national government to the provinces, cities, and municipalities include taxes on the transfer of real property ownership and on business engaged in printing and publications, occupation taxes, and admission taxes on amusement. The Local Tax Code also establishes nationwide maximum rates for a number of levies and fees. 10.90 Tax Revenues: The single most important tax revenue source for ldcal governments has always been the real property tax, which is imposed by local governments as an annual ad volorem tax on real properties within their iurisdiction, including land, buildings, other improvements, and machinery. 1/ Maximum tax rates, authorized by national legislation, have varied among provinces, municipalities, cities, and barrios. In many jur- isdictions, the rates imposed by the councils of the local units have been significantly below the authorized levels. Also, the assessment of real property has remained far below actual market values; assessments averaged only 45 percent of market value in the l9SOs 2/ and even 1ess in the q190q and early 1970s. Most assessments are still outdated and many taxable prop- erties have not even been included in the assessment rolls due tn the ab- sence of tax maps and other basic assessment tools. A major cause for the ineffective identification of properties has been the absence of a nation- wide cadastral survey. Because portions of many provinces and cities have not been surveyed inurisdictional boundaries are frequently inadeIIqutelv defined. Finally, local government real property taxation has been beset with the problem of under-collection. In the 196ns; only half of the real property taxes were collected; often, unpaid or back taxes exceeded taxes currently due. In FY70. back taxes accounted for about one-fourth of the total collections. Among the reasons cited for the lack of collections are inadeouate staffing wit-h urndernaid; and ronseouentilv low qualityv; of- ficials, and penalty provisions for tax evaders which are not sufficiently coercive. 10.91 Revenues from the nrnnperty tax as a percentage of total receipts by local governments showed a declining trend until FY73 (Table 10.14), when the national government hegann to initiiate its- local gover.nment tax reform measures. The reform of the real property tax included measures dealing with the renl valuationC nf prnnorteie, the corrct-inn nf aeCssmen-t levels for different types of properties, and improvements in the collection systems. Presidential Decree 76 (1973) made mandatory a new assessment of all properties, which required property owners to give sworn statements as to the true v-alue of their properties and threatened high penalties for evaders. The decree also introduced fixed assessment levels for va-1rl4us,C types of -rp--r- tles, iclud-i ng -r-r-- -4 rates for residen.tal UA ._ OtA- A ' C SJjJC- A. LL, . LA .LLL n V-4 - - -A CA o ~ tC L O C4 kfCX /j vduardo Z. rLXUIUUadLUezL, Or., tAn1gel V. YoIUnLgLco, aLnU Antoio U. % Caset-rL, Jr., Philippine Public Finance (Manila: GIC Enterprises, 1973), pp. 457-64. 2/ Romualdez, et. al., Philippine Public Finance, pp. 463-464. - 1 I Table 10.14. Revenues of Local Governments by Major Sources TTn nercent) Assistance from National Government Amount Internal Fiscal (in millions Revenue from Taxation Revenue National All b' Year of pesos) Property Tax Other a/ Allotment Aid Others Total . 1955 227 19.9 30.8 23.5 6.9 17.9 100.0 1960 300 19.0 34.2 23.5 12.0 11.3 100.0 1965 567 15.7 26.8 38.0 8.2 11.3 100.0 1966 634 15.5 26.2 33.7 9.6 15.0 100.0 1967 674 16.5 27.1 36.9 6.4 13.5 100.0 1968 741 16.2 27.5 35.8 9.2 11.3 100.0 1969 849 13.2 26.1 40.7 8.9 11.1 100.0 1970 999 18.2 22.1 38.4 3.7 12.5 100.0 1971 1,144 12.8 21.2 42.7 6.0 17.3 100.0 1972 1,293 12.6 20.2 46.9 8.5 11.8 100.0 1973 1,465 14.0 22.2 42.9 7.5 13.4 100.0 1974 1,676 12.0 21.1 413.9 8.4 14.6 100.0 1975 1,814 18.6 21.0 31.1 n.a. n.a 100.0 a/ Including taxes on licences to engage in any occupation or business or to exercise p---elege- ; -s fees charged 40r- erv.ices ret.derad and for regulating certain activities. b/-Including profits and receipts from operations of public utilities and from other business enterprises, including public markets. Source: Annual Reports of the Commission on Audit on Local Governments (FY55 through FY73) and Department of Finance estimates (FY74 and FY75). hones, 1/ and required a revision of real property assessment every five 10.92 In more recent real property tax legislation, minimum tax rates of 1/4 percent for provinces and municipalities and 1/2 percent for cities have been imposed, with maximum rates oF 1/2 nprcent andn2 percent, respectively. To strengthen the finances of the barrios, 5 percent of the collections of the municipalities and in npreont nf tho onllectinn of trho cit.ic goes to the barrios where the taxed property is located. Moreover, an annual tax of one percent on real property situated in a province or city (with an assessed value exceeding P 3,000) accrues to the national government's Speciral Education Fund to support locl school-s. . 93 TIn _addition to the rea! property tax, local overnm.ents collect a variety of license taxes and fees from businesses conducted within their jurisdictions. The most important of these has been the municipal license tax, which usually accounts for over 10 percent of the total receipts of local governmhent s. It is imposed upon persons engaged in any occupat ion or business, including manufacturers of drugs, proprietors of movie theaters, sellers, and so forth. The share of the municipal license tax, together with receipts from fees, declined sharply during the 1960s, how- ever, and has only recentl-y- recovered as a reslt of the tax reom measures. 10.94 National Government Allotments: National government financial assistance has been largely in the fom.m of the Internal Revenue Allot,m-ent, which consists of fixed portions of total collections of various national governr[.ent Caxes; the I llotm..ents are distributed fro,m a centrall fund amo,g local governments on the basis of prescribed formulas. In addition, there hlave bleeni other nati,nal grants-1n-a4d and4 loans, the am.ounts of4wlc have varied from year to year depending on the availability of funds. In LIhe past, thIIe IformiI a LUor tIhe Uis ILstr4iIo 4n f tIIe inernalr ment among the local governments frequently favored the rich and economi- cal lv more active jurisdictions over the less duevelloped areass. 10 .957 L lT- chanIgesLt-.LaLtU Lia Lin - elasLt,LWo _year (peaLlly PeL dential Decree 144, which was later revised by Presidential Decree 559) lhave reducedUU thLe alIlotr,enL as a wole, andU hlave also re[dIstrlbIuted it significantly. The new legislation decrees that the local governments are e Ltit LeUd LU 2U 0 LpLecet L UtLi ' Ie L LUodn I 111 Lt: 11t 1 reve nLUe Lta IUoi"lCe- tions of the third preceding fiscal year, not otherwise accruing to special 1/ Assessment levels as a percent of "current and fair market value" were: 50 perceLuL cO a CUUU11eLCLa al, Lndustrlal anU cLneraL LaUnds; 40 percent for agricultural lands; 30 percent for residential lands; and 15 per- cent (market value oi P 30,000) to 80 percent kover r 500,000) for residential buildings. - 2/ Any increase in the current assessment level will never exceed 10 percent of the prescribed levels or, in any case, exceed 80 percent of the current and fair market value of the real property, except upon prior approval of the Secretary of Finance. - 119 - Table 10O rXpUnalturU5 of Loca uovernmentI s Expenditures Composition of Total Expenditures (In millions.of pesos) (in percent) Fiscal Admin- Economic Social Debt Year Current Capital Total istration Development Services Service Others 1960 279 22 301 48 19 17 2 14 1965 465 76 541 46 19 14 1 20 1966 531 107 638 45 18 14 2 21 1967 570 128 698 44 17 15 1 23 1968 652 104 756 45 19 15 1 20 1969 701 116 817 46 19 13 2 20 1970 808 125 933 45 19 15 2 19 1971 937 144 1,081 45 18 17 2 18 1972 1,098 165 1,263 48 19 13 1 9 i973 14~) L )U.L -i,2i6f 4 1 11 1974 -,71 194 1,665 l 18 13 2 2 1975 1,532 281 1,813 41 19 12 2 20 a/ Preliminary estimate Source: Data for FY60-FY73.are from the Report of the Commission on Audit on Local Governments; data for FY74 and FY75 are from the Department of Finance. - 120 - funds and special accounts within the national government's general fund" 1/ Out of this 20 percent allocation :o local governments, 25 percent will be earmarked for provinces. 40 percent for municipalities, 25 percent for cities, and 10 percent for barangays. Within each of these levels, the horizontal distribution of the allocation is to be determined by a formula which allocates 70 percent of the total according to population and 20 percent according to land area, with the remaining 10 Dercent distributed equally among the local units. For FY74 through FY76, transitional pro- visions ensured that local units would not aain more than 15 percent or lose more than 50 percent of the allotments they had received in FY71. 10.96 Other measures have made it mandatory that all local units set aside 2 npercent of their annual shares from the national allotments for development purposes. Moreover, barrio development funds were established which are to be financed hv the barrios' 10 percent share from the real property tax and by contributions from each province, city, and munici- nplitv to their hnrrios. 2/ However. another 5 oercent of national in- ternal revenue (not earmarked for special funds and accounts) has been set aside In a local Government Fund. which is to be released bv the president as an aid to local governments whenever necessary. 10.97 Additional national government allotments are transferred to local governments for the maintenance and reoair of existing roads and bridges, as well as for new constructions and improvement projects. These allotments are financed from the national government's excise taxes on gasoline and other petroleum products. Twenty percent of these special allotments goes to provinces, 30 percent to municipalities, and 50 percent to chartered cities. Within each level, the sharing takes place according to the same 70-20-10 formula applied to the general allotments. 10.98 Expenditures: As pointed out earlier, local governments have played only a subordinate role in public sector activity. Their total ex- nenditures have heen the equivalent of around 2 percent of GNP; local gov- ernment capital outlays have been very small, around 0.2 to 0.4 percent of (ZNP Thp strlictur-e nf Ioc21 goverrnmpnt exnendiLtures has rernmailntcl ;i most unchanged sinc,e the late 1950s, with 45 to 50 percent of total outlays being sqne¶it for adiMnistrntionn sbout -2n percern for economic develonment (especially the construction and maintenance of roads, bridges, and so fo-r.t-+,'h and nroind 1 '; np-rcent for snoci-a_ services, 1-t ic r1 education (Table 10.15). As local government borrowing has until recently been re- stricted -b law, the debt servTice. .h:h.co .nrac han r -n 9 noercent nf tont- 1 expenditures. About one-fifth and lately even one-fourth of expenditures are fo-r other outlays which are mainly statutory obligations on J-he part o'f local governments, i.e., payments to agencies and corporations of the n:atio-n-all mrovrn .nt- as well c trancfe.rs: tn lonal onwt1-nm ,nt ronrnorntionc: 1/ For example, in FY77 the internal revenue allocation to the local governments will total 20 percent of' the national tax revenues col- lected by the 'Bureau of Internal Revenue and not earmarked for special 'fund-s and accounts in FY74. An increase of t-he total allotment to 25 percent of total internal revenue is currently under consideration. _/ tAlC The contribu-t---ions ae nol lo exceed P 500 J annually Lo each b io. - 121 - The past geographical distribution of local government expenditures, like that of revenues, has favored the larger cities and especially the Greater Manila area, although the Government has stated that this inequity will be changed. Borrowing by Local Governments 10.99 Another step in the direction of local financial autonomy was made in mid-1975 when the local governments were empowered to borrow - under certain conditions - from financial institutions (Presidential Decree 752). Local governments may borrow in order to avoid an impending financial dislocation that could disrupt vital public services or when local funds are not enough to finance development projects. The Land Bank, the Philippine National Bank (PNB), the Development Bank of the Philippines (DBP), and the GSIS are likely to be the main sources of financing for the construction, expansion and improvement of development projects or for other capital expenditures. For the purchase of heavy equipment, the local governments may even seek short-term domestic suppliers' credits. The Central Bank may grant short-term advances to cover urgent cash needs by the local governments, as long as they do not exceed 15 percent of the average income from regular sources by the borrowing local government. Provinces and cities are authorized to issue bonds, debentures, securities, collaterals, notes, and other obligations to finance self-liquidating or income-producing development proiects if those proiects are approved by the National Economic and Development Authority (NEDA). All local govern- ment bonds will be tax-exempt. Presidential Decree 752 also stipulates that the President may extend loans to a local government from foreign borrowing to finance development proiects. 10.100 Strict rules have been established to discourage irresponsible local government borrowing. Failure of the borrowing local government to appronriatp the annual debt service In its buidget emnowers the national government to declare the budget inoperative. The Secretary of Finance is t-hen entitled t-o enforce pavment of ohligations hv withholding corres- ponding amounts from the internal revenue allotments. Also, local govern- ment officials can, to 2 certain extent; be held nersonallv liable for unpaid debts. In the long run, the new authorization to borrow can be interpreted asafirst stepn toward replacing the national govrnmeznt's_ internal revenue allotment with direct borrowing. In the short run, it will allow richer Jurisdictionst , which will receiveless in national government grants under the revised allotment formula, to make up for 0ome of the losses. Fluture Role of TocalGoen.tFiac 1 U L_ . -L L L* _ __ _LJ. lYLd V_l 1. C : _ __LLLL__. _ _1_. _ _ALLML_ .lu UJ. 1L lilt: recent:I reLormsli oUL tiLet locadl goverrLtIentCI financiadl systemI I'Wve been important first steps in improving the financial viability of local aduministratLon. The refor,i,s reflect the Governmiuent's concern to promuote balanced regional economic development in the country and to mobilize grassroots support for its "New Society" program. ine Government, hiowever, will still have to decide which functions it is willing to delegate to or share with the local bodies and which administrative system is best suited to implement those tasks. - 122 - 10.102 Although recent reforms have broadened the revenue base of local governments and have reduced financial discriminations among jurisdictions, they have so far done little to enhance the administrative autonomy of local governments, with the possible exception of the recent authorization to allow them to borrow from lending institutions. The reason for this may be that the administrative structure of most local governments is still weak and probably unable to handle an increasing volume of funds and projects. In the long run, however, more responsibilities should be allocated to the local levels in both rural and urban areas, and this can only be implemented if effective spending and borrowing powers are also delegated. - 12' - Chapter 10 TECHNICAL NOTE I Tax Reform in the Philippines 1. As the previous analysis indicates, the ratio of taxes to GNP will have to be increased from its present level of around 12 percent if the Government is to succeed in improving the existing level of public services and expanding the public investment program. The Government fully recognizes the need for a substantial and sustainable increase in tax revenues for the financing of its long-term development program; it is studying various proposals for new tax legislation, as well as for improving collections and streamlining tax administration. 2. Since the late 1960s, the Philippine Government has also under- taken a series of major tax reforms in the form of legislative acts and decrees. Reform measures began with the introduction of the export sta- bilization tax in 1970 and an increase in the corporate income tax rates in 1972. Reform measures have been intensified since 1972 and over one hundred presidential decrees dealing with taxation have been promulgated. The most significant recent measures have included: (i) the enactment of a revised tariff and customs code with a simplified and standardized tariff structure, higher tariff rates, and a more rational tariff protec- tion system; (ii) the introduction of a permanent export duty system with differential, and generally higher, rates; (iii) sharp rate hikes for selective excise taxes, especially on petroleum products, liquor, and tobacco products; and (iv) significantly higher rates for the stamp tax and the sales tax on automobiles. In addition, a tax amnesty for pre- viously undisclosed or under reported income and wealth was proclaimed in 1973. Several administrative reforms to improve tax collection and administration as well as to combat corruption were also implemented, resulting in significant personnel changes in the Bureau of Internal Revenue and Customs. Finally, a major reform of local government finances to raise local government revenues by increasing their tax authority was initiated. 3. While the tax reforms have boosted national government tax reve- nues, the legislation has not resulted in any significant improvement in the structure of the revenue system, especially in the area of direct tax- atinn. The share of direct taxes in total tpx revenuies did not increase as a result of the tax amnesty, apart from possibly "one-shot" boosts. The complex and timoe consming task of overhauling the corporate and per- sonal income tax system still has to be undertaken. Hence, income distri- buftio-n -etures of the tax refor.m measures have so far been limiteod tn in- creases in excise and import duty rates on some luxury consumption items and the taxatio n of1 windlfall gains accruing t-1o the exporters of prim-ary products. - 124 - 4. The thrust of the Government's future tax reform measures should probably be in two directions: (i) the heavy dependence of the tax revenues on international trade will need to be reduced and the domestic base wid- ened, and (ii) the social equity of the tax system will need to be improved by an increase in direct taxation and higher indirect taxation of domestic goods and services consumed by the upper-income population. At the same time, a comprehensive overhaul of the existing tax laws, with their con- fusing and conflicting plethora of deductions, incentives, and rebates, should probably also be undertaken. Some of the major issues that will be involved in future tax reform program are discussed below. Taxes on International Trade 5. The recent reform measures have heightened the already heavy de- pendence of revenues on the external sector, which rose to almost 50 per- cent in FY75 from around one-third in FY69. Import duties and export taxes accounted for most of the improvements in the growth elasticity of the national tax system, and contributed almost 55 percent of the increase in national tax revenues between FY72 and FY75. As mentioned above, this situation makes the financing of the budget extremely vulnerable to foreign market developments, as demonstrated by the shortfalls in export tax re- ceints in the latter nprt of 1975 when exnort taxes on copnpr, rpmpnt, copra, and wood products had to be suspended. Substantial shortfalls are also likplv in FY76 n2 a rpesult of thp laggina Pffprt of thp rcurrpnt low international prices for most Philippine export commodities. It is obvious that this dependence has to be reduced in order to place the public develop- ment program on a more stable internal revenue base in the long term. 6. Export Taxes: Taxes on exports were introduced for the first time 4i 10.7U 1/ Thl- wer jJIJCCU ia.aiLo tradliLLtional raw matlerial -a- agz cultural exports in order to capture some of the gains resulting from the 197r0 currency devaluation. Thflese taxes were --ignall inenedol- as ±1 70 I u U tLci. cVC.u Ui i ~ at CI U L L [tat Sy £LCLLi.=LL U ULLJy a,~ a temporary measure and were to be phased out by the end of FY75. In 1972, h-owever, the Stabilization Tax Taw was repea'led andU tLe export taxes were made a permanent feature of the Customs and Tariff Code, effective as of Jul 1, 17/3. In addition to the export duties, t[e UoverCLLUient a'so intro- duced a premium export duty, effective from February 16, 1974, to capture some of the profits resulting from the commodity boom that began in 1973. Premium duties at rates of 20 to 30 percent were imposed on the difference between the current export price and a base price, which was initiaily set at 80 percent of the f.o.b. value of the exports established by the Bureau 1! Under the Export Stabilization Tax Law of May 1, 1970 (Republic Act 6125), export taxes were imposed on two major groups of export pro- ducts: (a) 10 percent on logs, copra, sugar and copper ore and con- centrates; and (b) 8 percent on mollasses, coconut oil, desiccated coconut, copra meal and cake, iron ore and concentrates, chromium ore, abaca, tobacco, wood products, canned pineapples, and bunker oil. The taxes were subject to diminishing rates in subsequent years, falling to 4 percent and 2 percent, respectively, in FY74. - 125 - of Customs in February 1974. 1/ The premium tax ceased to operate after the commodity Drice boom fell in 1974 and some of the export industries began to experience difficulties as a result of the recession in 1975. In the case of wood nroducts. copper, and cement, the Government temporarily suspended the export tax altogether. 7. Among the advantages of the export tax are its ready enforcement, itA hroad coverage; 2/ and its flexibility both in coverage and in the level and structure of rates. The expoft tax and ptemium export duties were i Xally stiiel-rd t-n effpctivplv taqx f-he hiph Px*ort nroflts of FY73-FY75- Moreover, in the absence of a n'ational land tax, and in view of the unsat- facto-nrv npersonal q1rd ioConrnre income ftax svystpm, thp Pxnnrt f-tax riirrpntlv represents the oily significant tax on agricuitural incomes and the only onr 1 aru on the rnn nit n rf non: i tiirn;l nnt,oila_ rr,iczirrpc in the Philippines. By taxing hitherto untaxed or dindertaxed sectors of the rnr ,, f-ho export taxv has' r.ot oy-ax n produced sizeab-e afditional revenues (P 2.7 billion in FY74 aind FY75 comnbined, eq'uiva'lent to 1.4 percent of GNP) but, in the short run has con'tributed to a more equita'ble pl ication of the ta'x system. 8. In general, this re'port is in favor of miaiintaining some form of pemaen -Yoetx 'Tlth: apre-'u.di etr ecueI roie'h Gov~ernm'ent with a mie6ans of siphoning off windfall profits resulting from atily hligh TC,t.La iartt p.i L fo LcLCL-.n ISuUtC. IF -a t oI) have a pe'rmanent place in th'e Philippine tax system for other reasons as well', at Ie't uti o- e Cf.tve M-.ethods-of taing the doTmestic inComes detived from these p'roductive activities (regardless of whether they amre tor export or local CCIe I- 1ca be *,,.p)C.-ieitid. 3/j A exa. I / hc que-tion more comppletely, however, it is co'ivenient to distinguish between agricul- ttt.a co.'',,'''odlF expoFs' lWe sg-r, coconut prod 'ts, and banns n a material exp6ots (or items' manufacturfd f romi them) such as wood products ^7v Tn~L the case of agiic-Ultra_' products, the warlysis in Chap,ters 5 and If indicates that the value df these exports is not likely to grow very rapi'df'y in the fu't '., wh9ich nieaffs that these export taxes witll not be a major source of gtowth in' taix re'ffniies. On the' oth'er hand, export taxes aLt 0JLiCe UoLf F10 L-w 1mean01s p ree11LJl v -tLCIJ.L tC Che 1.) vL n'1en1 C t axin1 1/ Should th'e' cri4it ricr of any export prwduct be lower than the estab- 1; e to; v1t i ' _ _ 4~~. '_1 ti;.r A4 oa 4 1~~~ A 1, 1 kFhF ivh .L-L±LICUU UaC FIL [Lt-C Uiiy LILC JC10 L- LLCL LO CitUro, LI XI L tO Lil u- iiium tax is' ony flexible upwairds.- Z-/ urfiLig r iiu / I-rJ, 0o LU 7U pULLC1U-L UL rlii-LL_ ppIiie xApurts, in LLterms of Va:1ie- ,+were subject to the ta'x 3! hRis aiscussion aoes noE taKe up tne question of whether export taxes can be used by the Ph'iippines to restrict production for export, and hence influence internaulonai prices. Inere.haS Deen some discussion of this issue iwitli respect to tai,ihg co6onuit pro'dudts' ; since the Philippines provides aoout 4U percen't of th'e wordri suppiy of coconut oil. See ILO, Sharing in Deve'i6pment, pp. 262-263. - 1-'n- non-corporate agricultural incomes. There is a strong case for more effective taxation of these agricultural incomes on equity grounds alone. Apart from the export tax, which affects only a few agricultural products, agricultural activities in general contribute little to Government revenue. In the early seventies. onlv abott S nercent of the income taxes was attributed to the agricultural sector (including forestry) despite the fact that this sector accotunts for one-third of CNP. The main disadvantage of using export taxes is that they are not really suited for taxing the agricultural sector adequately because their coverage, and hence their incidence, is very uneven. On the other hand, they do provide some form of taxation, however imperfect, and they have the advxantage of being easy to collect and to administer. The real question is what alternatives there are for taxing agricultural incomes; the alternatives include comnrehensive land taxes; which are disculssed helow; and increased charges for Government services. 10. The case of taxing extractive industries is somewhat different. Ag ain ther eJ ci a st crona case f- be m-ade fnr taxa tinn of these at tivitie, which are depleting natural resources. Moreover, as the analysis in Chapters 6 and 11 indicates, the growth in receipts from these exports is l, l-l to be quite rapid in the decade ahead, so they do provide a potentially important source of revenue growth for the public sector. .'ut agriculture, exploitation of the Philippines' natural resources is dominated by the cor- porate sector, where a taxing echanism already exists. The question is whether the level of taxation that is levied on resource exploitation in general is sulfficlent, regardLess of whether the products are for locall or export markets. It appears that the export taxes on mineral resources, which are: auUditional Lt tle uorIpLora Lta , ;iIfLU Us fLeafllntLaICU n a La least UllLiL LtltC corporate tax system has been overhauled. There may even be some scope for expanding thLe export taxes in tfLhe interim lf world L , ULaI- prices aga L e UcLome favorable. Expanded .axes on copper, chromium, and, more recently, on nickel exports Lf1day ensure tLife Government a fair sha iLe 4n the exploitatlion ol the nation's nonreplenishable natural resources by private domestic and foreign lnvestors. II. Diff erentiated rates could be use' to enicourage a higherdereo IL. UL.-L LCI -LL L U LLLu 0 L UL C iCf L U UIU L h IfI5iflt- UZ!6hIUC Of domestic processing, as has been done in the case of wood products through increased rates for unprocessed logs. In the case of wood products, the issue is the extent to which taxes should be levied on the value of forested land, as opposed to processed wood products. Accor-ding to present invest- ment plans, the wood processing industry will be a major manufacturing sub- sector in tne 19180s. IL would, therefore, seen more appropriaLe to tax this new industry by a more effective corporate tax system. 12. Import Duties: Import duties are currently an extremely important part of the Philippine revenue system, accounting for between 25 and 28 per- cent of national tax receipts. Prior to 1973, the Customs and Tariff Code was gengrally regarded as ill-suited to the Philippines revenue and devei- opment needs; -the average ratio of duty collections to import was only about 10 percent. Its main deficiencies were: (i) the exorbitant rates on some - 127 - items, which not only encouraged smuggling and false declarations, but also undermine,d ollectinn and pnrotertlnn nbiectives; (if) 7pro rntep for a variety of goods declared "essential"; and (iii) the unsatisfactory struc- tCure of protection. The issue of protecti.on Ils dAealt- with more fully i Chapter 6, but, in brief, the previous code encouraged local production of less uesirable nonessentiall goo-us over essCentlal goods, -an it haOL.pe industrialization by imposing heavier duties on machinery, equipment, and raw material's over finished goodls. 13.~~~~~I Ax_.D_ IU I L , :7 _Revised Customs an" Trari Eff odle was iLntrouduced ln1973 'ITt greatly simplified the rate structure by reducing the previous specific C fl~~-i rJ 2 in rates LI01 271-oL 2 and by fixing U adU valorem rates ranging froL iU LU 100 percent for all other imports. The duty-free category was abolished. 1U±Jl l. JI [1Lb ILLLLUUUL LUII, LI1 L C Wd9 d UU UUi 11 1 I LV t iIUt LUiL iIII UL L duties in FY74 and another 35 percent rise in FY75 (which was, however, largely due to the rapid increase in imports). The raLio of duLies to total imports rose moderately -- from 13 to 20 percent -- over the two years. I14,, _11. it . IgI - The report UUeb noL recommend maJor chlanges In tlhe level and structure of the import duty system purely from the point of view of reve- nue generation. Consumer goods are the most highly taxed imports and, since their share is expected to decline steadily to less than 5 percent of totai imports by the 1980s, it would appear realistic to expect the elasticity of customs revenue to GNP to remain at slightly less than unity as it has been over the past decade. Consequently, we would expect the increase in revenues in real terms from this source during the next decade to roughly match the growth in import.s. Taxes on Income 16. Taxes on personal and corporate income currently account for al- most 25 percent of total collections by the national government. Over 70 percent of these collected taxes are derived from the corporate tax. Direct taxation in general, and personal income tax in particular, have been the most neglected areas of tax legislation. Therefore, a comprehensive reform of the income tax syste.m should be.given high priority in the next few years. Such a step is a prerequisite for making the tax system compatible with the goal of a more e.quitable society*. 17. PersQnal Income Taxa.tion: The main features of the personal in- come .tax in the$PhIiipkines have-.no.t changed over the past fifteen years. The tax is levied on a relatively small part of the population, with most of the tax paid by a tiny fraction of this already small group. 1/ The rate-of increase in returns filed has expanded steadily over the years, with a very sharp bqo.st in 1973 due to the amnesty granted to previous nonfilers (Table 11.1). As a percent of the entire Philippine population, the number of tax filers has risen from about 1.6 percent in 1960 to 3.5 percent in 1970 and 12.4 percent in 1973, which suggests that coverage of 1/ See Bird, et al.,"Taxes and Tax Reform in the Philippines" p. 27. - 128 - the personal income tax in the Philippines is considerably wider than in many developing countries. But the proportion of returns which result in actual tax payments has contintued to be very low, rising from only 0.4 percent in 1960 to 1.1 percent in 1970. Despite the sharp increase iP the number of tax filers, the percentage of taxable filers to the total popula- tion has remained at around 1 percent. Table II.1: Number of Income Tax Filers, 1960-1973 Individuals Corporations Calendar Percent Percent Year Total Filers Taxable Taxable Total Filers Taxable Taxable 1960 422,770 103,337 24.4 6,335 3,586 56.6 1964 636,775 166,734 26.2 8,056 4,446 55.2 1969 1,146,865 356,044 31.0 12,118 6,544 54.0 1970 1,295,415 399,350 28.0 12,807 6,766 52.8 1971 1,431,024 468,514 32.7 13,856 7,190 51.9 1972 1,439,077 n.a. n.a. n.a. n.a. n.a. 1973 4,540,303 440,581 9.7 15,352 10,063 65.5 Srource: Bird, et. al.. Taxes and Tax Refotm in the Philippines, p. 49A. Figures for 1973 are those reported by Bureau of Internal Revenue. 18. The reform of thie personal income tax needs to be given high prior- ity. According to a recent study, 1/ personal income tax rates in the Philip- pines are reasonably progressive. however, the beginning personal income tax rates are among the lowest in Asia, and should probably be raised. A recent consultants' report to the IMF 2/ recommended that the initial marginal rate should be increased from the current level of 3 percent to 10 percent. The report agrees with this suggestion. Other elements of a reform would include broadening the base of the personal income tax, reducing drastically the present system of personal deductions, and revising and simplifying the tax structure. There is a low basic exemption for any single individual, hbtt this is offset by high exemptions for children. There does appear to be a case for changing the nattern of dedctirions for childcren to support the Government's efforts in family planning. 19. A comprehensive reform will take some time to be formulated and imnp1mPnt-Pd, hlit it- would improve the elasticity of the system (10 percent of tax revenue could be derived from the personal income tax by FY85 com- naredr ton only 6, percent l-n FY75), -and, if structured a-nd adlministered to capture an increasing share of increments in real and monetary incomes, could contribute to a more equitable tax system ln gnrl JW L CRL 1S 1 @ Ul CIL I ICLACL CL ~JL.S/C.LLJ LC Can C CiDi) li L LaC.LC L OW LC; rCL[U/ Council, 1972). 2/ Bird, et al.,"Taxes and Tax Reform in the Philippines." 20. Corporate income Taxes: The current crpUorate jlcom e tax rates of 25 percent on taxable incomes of under P 100,000 per year and 35 percent on incomes exceeding P 100,000 are not unauly low considering the neea ior investment incentives, although they are lower than in some other countries in the region like Malaysia, Singapore, and Taiwan. The main weakness of the corporate tax system seems to be its extensive and highly complex array of possible deductions. These are numerous loopnoles, and intentionaiy built-in tax incentives are practically inoperative due to the very low effective rate of tax collection and the possibilities for tax evasion. It should be noted that high effective tax rates are not only important from a revenue point of view. The purpose of any tax incentive system, development or otherwise, can only be attained if effective rates of taxa- tion are reasonably high. The lower the effective rate, the weaker the impact of the incentive systems. 21. A recent report on income tax returns of corporations 1/ revealed that out of about 15,350 registered corporations which filed tax returns, about one-third were exempt, with a recorded total gross income of P 3.75 billion. Between 1959 and 1972, when there were fewer corporations regis- tered, the ratio was between 50 and 60 pecent. The effective income tax rate of both taxable and exempt corporations decreased from an averae 6.8 percent of gross income in 1973 to 4.0 percent in 1974. Taxable corpora- tions derived deductions of from 65 to 85 percent of their 1973 gross income. Exempt corporations claimed deductions of between 105 and 155 percent of their gross inopmes; in 1974, taxable and exempt corporations combined claimed deductions of 74 and 84 percent. A sectoral breakdown showed that in 1973 the highest payers were agricultural and natural resource indus- tries, with 9.7 percent of gross income, and manufacturing industries, with 8.8 percent. The finance and real estate sectors paid only 4.9 percent of gross income and other services paid 4.1 percent. The latter seems to have claimed abnormally high deductions or declared very low gross income. 22. Because of this situation, a complete review of the present cor- porate tax incentive system is needed aimed at raising the effective tax rates. This review deserves high priority. A consolidated and more easily administrable corporate income tax code will have to be established which closes loopholes and applies tax privileges and deductions to those sectors and activities which the Government actually wants to promote. 2/ This review will have to be comprehensive and would, therefore, be conveniently centralized under the direction of the Department of Finance. 1/ Unpu,,1-blished report -k,-i April 1-75 by - . C. Toledo-, - rcto- --r, Revenue Operations and Management Planning Division of the Bureau of Internal Re-ve / tj1 c-o M4sael I . Vera, Com.m.Jtissioner, BI.T -/As indicated earlier, econoru,ic sectors 11ike agriculture an' m.anufac- Lf In -L UI'-.L eu _cLJ~.L LUUL LL LtLU .N ~ . LUJ. LU diU ILaIUd turing which the Government wanted to aid have paid higher effective rates than tLhe rest of the private corporate sectors in the past. - 13 -%r , _-V - 23 1The imnpPmpntation nf 2 carefiul novprall rpvipw wi II ta,kp time In the interim, this report suggests that the Government raise the nominal cornoratinn incomp tax ratesp which, as mentioned earlier, arp lnwer than in comparable developing countries. An increase of the lower rate from 25 to 30 percent and of the higher rate from. 35 to 40 percent could probably be enacted without economic difficulties. Also, tax treat- ment of partnerships and closely-held corporations should be made uniform, and special rates for certain types of enterprises (e.g., building and 1 .fl,, _ cc nit 4 ,. 1nn a . _ vni.l vi v0 rtVv, 4 _i,_A Tb n Cne , Govenmi, en 1s x rrentlo y co n- z sidering the imposition of an additional five percent income tax on family corporations in order to induce these fi.ms to go public. This would a welcome step in the direction of modernizing the corporate sector. Indirect Taxation on Domestic Production, Goods and Services 24. At the present time, taxes on domestic goods and services provide a-bout 20 percent oLf nationaUl govLer-.ment r[evLenuLtesUb-, UiOmparied withl mUre than 30 percent in the 1960s. This decline has been one of the striking charac- teristlis; OL te Philippine Tax system. Th'e so-calleu selective excise taxes 1/ - the most important source of national government revenues in FY54 - declined sharply in relative importance throughout the decaue since rates remained very low. The principal tax on domestic production,the sales tax, proved even less responsive to GNP growth than the personal in- come tax. This was partly due to its obsolete rate structure (basically unchanged since 1939) and to the low priority given to its administration and collection by the Government. 2/ 25. Luxury consumption should attract relatively heavier taxation than has been the case to date, but the Government should continue its present policy of abolishing or levying very low taxes on basic necessities, especially those consumed by low income groups. There is ample scope for raising reve- nues from indirect taxes such as sales taxes, excise duties, motor vehicles taxes, and taxes on services. Reforms in these areas would need to focus on the sales tax and on the motor vehicles tax, because they are the revenue sources which would most effectively contribute both to a rise in the elas- ticity of the tax system and also to some progressivity in the system, al- though to a much lesser degree than an income tax reform. While there is hope for increasing the selected excise duties on certain nonessentials, the ex- cise taxes are the most regressive and inelastic components of the tax system and should only be raised if revenues from other sources are inadequate. 26. As far as the sales tax on domestic production is concerned, an increase in the current basic tax rate of 7 percent on most domestically- produced goods appears justified. The report concurs with the proposals 1 Those on such items as tobacco products, alcoholic beverages, oils and fuels, and matches. 2/ There is no separate sales tax administration in the Philippines. Taxes levied at the import stage are collected by the Bureau of Customs, while sales taxes from domestic manufacturers are collected by the Buiireii nf Tntern21 Reveniiu made by consultants reporting to the IMF 1/ that raising the basic tax rate to perhaps 15 percent would be a convenient means of increasing revenues. The report suggests that the present luxury rates of 40 and 70 percent be consolidated to a uniform 50 percent rate, and that the special low sales tax rates for essentials. narticularly for staple food products. should be maint- ained. The sales tax on domestic products is considered a particularly ronvenient vehirle to rnise tax revenues ranid1v Rate increases can be quickly decreed and can produce revenues without the time lags required in the rcs o f -inrome or 1and taxes. 27. A reform of the oresent Philinnine sales tax administration will be necessary in order to provide for the efficient collection of the sales tax. Such a refnrm shuled greatly imnrnup the P1east-ir-ty nf t-hp ta.x svytem and should also indirectly increase the progressivity of the tax system as a whole, since a substantial portion of the poorer consner groups will not be covered by the tax because they are either largely outside the market economy or consunme mostly unprocessed (i.e., untaxe) fnnd,- whicrh acrncontst for over half of the household budgets in the Philippines. 2/ 28. The taxation of motor vehicles and fuels would be another area with scope for considderable i-ncreases in revenue collection. Following the example of the United States, the level of motor vehicle taxation has, in the past, been tied t-o the peceve fiaca ed f ---adcntulo and maintenance. The potential of such taxation as a source of general revenue a[t U as a means LoU r impLo UV LIng LnrUIc UD L ieU ULUIl au Lource all cations has never been fully recognized or utilized. The ILO report noted that the preserit domestic sales tax on douestically assemble!d Cals rLanges from only 10 percent for cars selling at not more than P 20,000 to only 20.5 percent for cars selling at v 40,000. It recommended tnat tne begin- ning rate be raised to 40 percent. 3/ The Government is aware of this and recently raised the annual registration fee of private vehicies, in part as an energy conservation measure. The increased fee is not imposed on private vehicles serving as public transportation. 29. Gasoline taxes are relatively low by international standards (29 centavos per litre), and the diesel oil tax (10 centavos per litre) is even lower, for the benefit of non-automobile diesel oil users. The Mission believes that the gasoline tax may be doubled and the diesel oil tax significantly raised. However, the impact ot both increases on urban mass transportation will have to be watched closely. The operation costs of jeepneys, in particular, may be seriously affected. Moreover, the sales tax on private automobiles (currently between 10 and 20 percent) could I/ Bird, et al.,"Taxes and Tax Reform in the Philippines." 2/ Ibid., pp. 120, 120A. 3/ ILO, Sharing in Development, p. 259. probably be raised. i/ In view of the high income elasticity of the pur- chase and use of automobiles, increases in fuel and motor vehicles sales taxes should have a particularly desirable distributive effect and raise the progressivity and elasticity of the tax system. Moreover, the admin- istration of these forms of taxation is relatively simple. Taxation of Land and Real Property 30. Another important aspect of the tax reform in the Philippines is the improvement of taxation on 'Land and real property. As land becomes more scarce, windfall profits and rents on land should be taxed more heavily. This is a very complicated task, since such taxes should, on the one hand, provide significant revenues and contribute to equalizing discrepancies in incomes, while, at the same time, be simple enough to be enforceable and administrable in view of the relatively underdeveloped nature of the Philip- pine revenue administration. Moreover, the issues differ when one deals with the rural and the urban sectors. In any event, fast progress in this area of tax reform is unlikely to be achieved; consequently, the Mission has not made any allowance for revenues derived from such taxes in its projections. The following discussion will consider first the rural and then the urban sector. 31. A system of effective taxation of agricultural land would fill an important gap in the tax system by incorporating the non-exporting, crop- growing farmers into the revenue system; it would, therefore, be applied in particular to the rice, corn, and livestock farmers who, at present, are virtually untaxed. Introducing land taxation is a formidable task in any country, and the legislation and administration of a land tax in the Philippines will be time-consuming. In the long run, land taxes, if prop- erly designed and administered, are able to produce significant revenues which would probably not be achieved by higher and better enforced income taxation. The Mission envisages a comprehensive land tax as a national tax, with possible revenue-sharing for local governments. 32. In designing a system of land taxation, the Government should focus not only on the raising of revenues, but also on nonfiscal develonmental objectives such as better income distribution in the rural areas, more effective 1use,'p of agricultiural lanid, anrd hringing idle land inton nrorduirtion, As the vast majority of the farmers have small farms and low income levels, 2/ the land tax would have to focus on higher income groups, w .ith larger lan.d holdings, through progressive taxation. Small landowners should also be effectively taxed, however, whenever the productivIty of their land increases I/ Bird, et al.,"Taxes and Tax Reform in the Philippines.' p. 20. It is estimated that an increase in the minimum sales tax on private automobiles from the present 10 percent to 50 percent would produce aDout thLe samue yield as a 5 percent raise in thiie corporate iticoriie tax. I'/ Ninety-four percent of all rice Iarmers have less tilan 4 hiectares, anu almost 70 percent have less than 2 hectares. as a result of the Government's rural development programs (e.g., Masagana 99 and irrigat4on pro4ee,,S. The rate and collections will have to be as simple as possible to administer, and the effective rates of taxation should be high enough to realize the nonfiscal object4ves of the tax. The land tax assessmernt will also have to take into account the service charges to be paid by the farm.ers for services rendered to them. If service charges, in addition -o land taxation, become too high, fewer inputs may be utilized, with a resulting loss in proluctlvLLy. 22 T1-k 4 A;u.,. {,r,. 4. ,1.ii4,.- i, i-h, 1~~ X-i, -t Lile lllC oUal vice Lc h.arges in rela.tin .io lie land tax is an important one. In a number of irrigation projects, for example, the col- JLectio. oUL serviLce ch'larges LhLas lUeen signifLicantLy LimprovedU a.lu some form of fair taxation has been established. The report does not intend to challenge this approach. in order to ensure that land users are charged for improvements on their land whenever services are available, the Mission suggests a heavy reliance on charges for the time being; tnese cnarges would be gradually replaced by the land tax in the long-term. 34. The most formidable preparatory administrative problem is the establishment of a uniform land cadastral system. Land title registration in the Philippines is very poorly administered and records are incomplete. There are two alternatives to determining the tax base which have been used in other countries: the estimate of agricultural income on the basis of assessed land value, as applied in Italy, and the assessment of income by the physical yield of different farm products on "standard" land, as is done in France. The latter amounts to an income tax substitute. Given the lack of information on land values and ownership in the Philippines, the report agrees with the ILO mission that the simplified Italian system may be better suited to Philippine conditions. 35. The taxation of urban land has different problems. There is currently no exclusively national tax on urban land. Provinces, cities, municipalities, and barrios are empowered to levy a real property tax on the assessed value of real property. As discussed earlier in this chapter, the rates range from 0.125 to 0.5 percent for the provinces, 0.125 to 2.0 percent for the cities, 0.25 to 0.5 percent for the municipalities, and up to 0.25 percent for the barrios. The national government also imposes a 1 percent tax on the assessed value which is earmarked for the Special Education Fund. There is an overall 3 percent ceiling on the total property tax that can be imposed. 36. Revenues from the real property tax constitute the most important revenue source for local government. As local governments should be strength- ened financially, this tax should remain under the authority of the local governments. Yet the report proposes that the maximum rates which individual local governments may impose could be raised significantly, especially in the large metropolitan areas where the value of land has risen exorbitantly in recent years as a result of improvements in public services and increased _ ±1,4 - economic development. The Mission endorses the view of the ILO mission 1/ that the present 3 percent maximum rate of property tax in residential areas should become a minimum. 37. In addition, real property tax administration will have to be significantly improved. In the past, it has been characterized by low assessment levels and inadequate collections. In 1967, two-thirds of the provinces and one-half of the cities had no tax maps for property identi- fication. Moreover, assessment lagged about 15 years behind real property value, which meant that effective tax rates were low. Considerable efforts of the Government will therefore be necessary to improve the enforcement of the real property tax on urban land. 1/ ILO, Sharing in Development, p. 267 - 135 - Ghanter 10 TECHNICAL NOTE II Mission J.Lrojections of Nattional Go)Vernm.ent TLax RlC evenues .r I I,u_r loJ 1. The following table presents in some detail the report's projec- tions of national goverr.U iLent tax revenues. The projections are bUasedj on the proposals for tax reforms set out in Technical Note I and assume a significant increase in culIections. u Ti11 WoUli alilw IaLional goverament tax revenues to increase to 14.5 percent of GNP in FY80 and 16.5 percent in FY85. The structure or revenues inuicates a snift in importance away from taxes on international trade in favor of a long-term continuous rise in the contribu- tion from direct taxes and higher indirect taxes on domestic goods and services. 2. The base year for the projections is FY76; the Department of Finance's cash budget estimates for that year are used. For import duties, an average 20 percent tariff rate was applied to 70 percent of the value of imports, as projected in Chapter 11 of this report. The projections of export tax revenues apply the effective export tax rates of FY74 1/ of the var- ious export commodities to the export receipts from these commodities as projected in Chapter 11. As the terms of trade are assumed to become less favorable than at present, only half of the special export duty rates are applied to the projected export earnings in the future. 3. Regarding direct taxation, an average 23 percent annual increase is assumed over the entire forecasting period. A slower increase is anti- cipated for both personal and corporate income tax revenues in the earlier years, as income tax reforms are assumed to take time. The projections also assume. a sharp rise in revenues from the general sales tax and other taxes, including those relating to motor vehicles and gasoline, whose share in total national tax revenues would reach 26 percent in FY80 and 31.5 percent in FY85, compared to only 6 percent. in FY76. 1/ Bird. et al..,Taxes and Tax Reform in the Philippines,"p. 175A. Table 10.II Projectiors of National Government Tax Revenues (Amrounts in millions of pesos) FY76 FY77 FY78 FY79 FY80 FY85 Per- Pler- Per- PFer- Per- Per- -Source of Revenue Amount cent Aimaunt cent Amoumnt cent Amcunt cent Amount cent Amount cent Taxes on Income and Wealth 4,230 25.o 5,160 26,0 600 270C 7,945 28.5 A010 30.0 27.30 35,0 Corporate tax 3,090 16.1 3,82C 19.2 4,630 19.5 5,715 20.5 7,170 21.5 18,330 23.5 Personal income tax c)75 5,9 'I,17() 5.9 1,540 6.5 1,950 7.0 2,440 7.3 7,800 10.0 Others 115 0C8 170 0.9 230 1.0 2801 1.0 40C 1.2 1,170 1.5 Amnesty 50 o3 *. *** *** ** ** Taxes on International Trade 7,1480 45,2 8,930 45,r 1 430 144.) 11,850 42,5 1 340 40.2 23,400 30,0 i!kport tax 1,000C 600 1,330 6.7 1,500 6.-4 2,035 7.3 2,335 7.0 J4,68C 6.0 ]Import duty )4, 6oo 27,8 5,550 28.0 6,6oo 27,6 6,550 23.5 7,505 22.5 12,1480 16,0 Sales tax on imports 1,880 11.L 2,05c0 10D.3 2,330 9.8 3,265 11.7 3,500 10. 6,2 40 8.0 Taxes on Dormestic Goods and Services 3,6140 220 14,500 22.7 5,690 24.0 6J9710 25 0 8,675 26.0 2.,579 31.5 E&cise tax 2,720 16,14 3,130 15.8 3,320 lhoO 4,045 114.5 5,005 15.0 13,26C) 17.0 General sales ta-. and others c920 5,6 J,37() 6.9 2,370 100 2,925 10,5 3,670 11,0 11,310 14o5 Other Taxes 1,780 7.1 1,26C) 6.3 1,190 5.o 1,120 4.0 1 5 4.0 2,73() 3.5 Total 16,530 100 19,850 100 23,7Lo 100 27,885 10(0 L 360 100 78 00) 100 = :_ -- : = - - - S = -_- = S = GN]' (at current prices) 131,080 150,35o 173,050 199,180 230,055 472,765) Ratio of Revenues to GNP 12,6 13,2 13,7 14.0 1L45 16.!5 Source: Cash budget forecasts for FY76 (as of May 1975) and Mission estimates, - *137 - Chptr17 'D^f T U . Z~Ulx %1 ~AT hIPnA " A- '0- --, LW=Ot OF LAAA. .LU4ZU MADE N'D IJ 'CE, Page No. A. External Trade and Foreign Exchange Needs .... ......... 139 Import Requirements for Sustained Growth .... .......... 140 Expanding the Capacity to Import . ..................... 143 Earnings from Invisibies and Transfers .... ............ 148 Issues in Trade Policy . ............................... 150 B. External Capital_Inflows .............................. 152 Foreign Aid and the Consultative Group .... ............ 153 Expanding the Use of Commercial Loans .... ............. 156 C. Management of External.Debt and Foreign Exchange Reserves . ......................................... 159 Amount and Composition of External Debt ...... ......... 160 Management of External Reserves ......... .............. 161 - 138 - Chapter il ROLE OF EXTERNAL TRADE AND FINANCE 11.1 For most of the period after independence, the Philippines suf- fered from a chronic shortage of foreign exchange that periodically led to major policy adjustments, including currency devaluations. The root cause of this problem was the slow growth in export receipts relative to import demand, resulting primarily from wide fluctuations and a long-term decline in the terms of trade. The Philippines depended in large part on the export of agricultural products for its foreign exchange needs; given the relatively inelastic world demand for these products, export receipts did not keep pace with the growth in demand for foreign exchange. As the analysis in Chapter 6 indicates, the imbalance between the supply and demand for foreign exchange continued even after the adoption of import substitution policies in the 1950s and 1960s. Industrialization based on import substi- tution did not reduce import dependence in spite of substantial devaluations; it simply shifted the dependence from finished consumer goods to capital and intermediate goods. If the Philippines is to escape the past constraint on growth that has been imposed by a lack of foreign exchange, a substantially better performance in export growth will be needed in the decade ahead. 11.2 Exports must grow more rapidly than imports in order for the PhiliDDines to reduce its current large resource gap. Whether they will be able to do so will depend on the country's ability to increase production for exportj on the expansion of overseas markets- and on trade nolicies that will keep exports competitive. The ratio of the current account deficit to GNP in 1975 ws aonitt- 6 nprrcnt- largrelv hecaiise of the sharnlv int-re2sed prices for imported petroleum and related products. For the reasons given in rhant-rQ A andA A a reasonabyv smnnth naiitR-tmnt to the higher rosts of imported fuel and petrochemicals should be made by accelerating the rate of growth of exports rather than by reducing imorts. But, as the earlier analysis indicates, it will be a number of years before the Philippine ;;UwzuZ ~~~~.>- elu;X w - -- so--- -b r- 1- -- econmy an omp Cea reasonabily sm-oot#h t-asition t- point where t-hese higher energy costs have been fully absorbed. Increased investments will I-a-ve to b'e madue in the export sector, in imot=elai. -autis -and -- -4-- LA4 L W U .L AL LLL A. . L L~~. , LU.LA .A.LI4Fr..JA. LL, ~LUUO L.A. " LIU in alternate sources of energy. Some of these investments are necessarily capital-intensive wLthI 'Large lforeLgn exchange requirements. 11.3 In order to sustain the investment program outlined in Chapter 8, the volume of imports will have to expand by about 7 percent a year during i975-85. Assuming a rate of import inflation of about 7-8 percent a year, the import payments would increase by about 14-15 percent a year over this period. Any cutbacks in the import level would probably be concentrated on capital goods imports and would have adverse effects on income and em- ployment growth. Imports of finished consumer goods are only a small pro- portion of total imports and reductions in imports of intermediate goods would have an immediate and unacceptably adverse impact on production and employment, especially in the nontraditional manufacturing sector, where growth depends on these vital imports. Similarly, cutbacks in capital goods imports at this time, when locally available capital goods are in short - 139 - supply, would hamper the Philippines' adjustment to higher energy pprices and also have negative Affaecso programs aimed at -pandig production and employment. Since gains from the external terms of trade are expected to be modest during.-I the next ten -,years the v-- of e by about 9 percent a year. A critical assumption underlying all these pr4 ectio0ns -alsa t hat th e AOE CD c ou n tr i-4 es w ilJl I re c ov er Au --r 4 -ing thle r.ex; td3ecade and experience rates of economic growth comparable with those they enjoyed in the 1960s. Sustained 0ECD growth wl..Ll al80 be required to a1Ke thLe projected capital inflow possible. l1.4 Even if the current account deficit can be reduced to about 4 per- cent o YMTD kby 19OA an.d o I percer; b-y 1flOa, Ue Pil'ppines -woul nee . L WLUJ I 4U 70 LIU LU . I&L.uL UJ 7Oi afl MU.±LjJLUCL wuLU U average net foreign exchange inflow of around US$1 billion a year in the first half of the 1980s. The bulk ol this amount ili probably have to be in the form of medium and long-term loans. External reo,uirements of this magni- tude do not appear excessive in relation to current ±eveIs of inflows nor to reasonable prospects for future inflows. The Consultative Group and other official donors wili have an important role to play in this area, since at least one-third of the loans should be on concessional terms to ensure that the ratio of debt service payments to exports does not rise beyond its present level of about 17 percent. For its part, the Government would need to develop a wider range of external capital sources. An inflow of the above magnitude would be sufficient to ensure that international reserves increase from the present level of about US$1 billion to about US$4 billion in 1985, a level equivalent to 3 months of imports. Considering the chronic shortage of foreign exchange that the Philippines has experienced in the past, prudent foreign exchange management in the future would require that reserves be maintained at this level and debt service ratio not exceed the level suggested above. 11.5 The outstanding amount of medium and long-term debt would rise from about US$2.3 billion at the end of 1975 to about US$11 billion by the mid-1980s. The service of such a debt depends, of course, both on the Philippines' future economic expansion and on the capital inflow which the Philippines can reasonably expect over the period. If the combination of loan maturities is along the lines suggested in this chapter, management of the debt and debt service should not present serious problems. Of course, the development program that the Government has set for the country itself and for the people of the Philippines will not be without difficulties. But there appears to be a recognition in the Philippines of the problems and uncertainties of further development, and the Government intends to modify and adjust policies and objectives as necessary to stay on a fairly even and manageable course, both internally and externally. A. External Trade and Foreign Exchange Needs 11.6 The Philipnines enanot nn,int on fnreign inflows to finnrce the resource gap at its present level indefinitely and must reduce its depend- enDce On such inflows to about 2 percent of NP b- '985. Y.owever, t - iho - Philippines requires imports of capital and intermediate goods which are not manufactured domestically but are essential to siustain the invest-mpnt program. The Philippines will, therefore, have to expand the capacity to pay for these imnorts and aim for an avpraap anniil inpcreas of bou-t- 19 percent a year in the value of exports during the next ten years. Since earnings from axnort-s of traditonal aagriniiltural prodta wi11 continue to expand at a slow rate, the required growth in foreign exchange receipts will have to come from a a program aimed at expanding exports of wood products, minerals, and so-called nontraditional industrial exports. Even with this growth in export earnings, the requirements of net UL LVLJLwL UULLUW.LLL6 WU.LU Ue sUUbLaILUd1, With 4;L IleaSt One- third of the loans on concessional terms, during 1975-84. If the Philippines aemptedU a sustaiLnedU expansion in iLts G OLfr o percent a year in reai terms when the volume of exports was growing at much less than 9 percent a year, it is xtLLCuMely unlikely that the present heavy dependence on foreign inflows can be reduced, and the Philippines would face the prospect of the same inad of constrainea growtn of foreign exchange that was characteristic of the 1950s and 1960s. In this case, output and employment growth rates would Liave to be adjusteu downwards. Import Requirements for Sustained Growth xI.1 The volume of imports is projected to increase at about 7 percent a year during the next ten years, and, assuming that the unit value of im- ports increases by about 7-8 percent a year, total payments for imports would rise from US$3.4 billion in 1975 to US$6.9 billion in 1980 and US$13.4 billion in 1985 (Table 11.1). .9.9 Import requirements, however, would vary from year to year depend- ing on the short-term changes in domestic incomes and savings and on the timing of individual investment projects. They are particularly vulnerable to prices of petroleum products, which accounted for more than 22 percent of total import payments in 1975. Petroleum prices will probably rise in line with international prices over the next decade, and any small change in this price projection, of even 10 percent, for example, would affect the import bill significantly. The annual import requirements would also vary according to the timing of individual large investment projects in power, mining, steel, fertilizer, and other industries. The total investment cost of these projects is expected to exceed US$7 billion during the next five years, with the individual cost of ipany of them exceeding TT$$200 million. As outlined in Chapter 6, Government policy provides various incentives for import substitution and for increasing the use of domestic components. Several investment projects are likely to come up in this area in the next few years. If these plans materialize, 1/ there is considerable scone for import substitution in the 1980s. 1/ For a detailed discussion, see Chapter 6. 4-L - .Li.J _ Table 11.1 Import Payments in Current and Constant Values an.d Price In.dices Actual Projected Item 1960 1965 1970 1975 1980 1985 Current value (in millions of US dollars) Cereals 25 95 33 143 105 159 Other consumer goods 75 90 98 357 02 7 Crude petroleum 21 59 103 752 1,516 2,875 other raw materials 26A 281 442 1j098 2,421 4,987 Capital goods 223 283 414 1,000 2,327 4,626 Total 604 808 1,090 3,350 6,871 13,364 Price Indices (1967-69 100) Cereals 62.5 68.2 72.0 214.2 245.5 354.1 other consumer goods 100.7 112.1 91.6 244.0 354.2 496.8 Crude petroleum 115.2 102.2 99.9 832.8 1,198.4 1,680.8 Other raw materials 92.3 101.6 124.3 298.8 433.6 608.2 Capital goods - 82.8 97.5 107.1 181.5 263.4 369.4 Total 89.4 95.8 108.8 274.1 392.0 549.5 Constant Value (in millions of US dollars) Cereals 40 139 46 67 43 45 other consumer goods 75 80 107 146 142 144 Crude petroleum 52 75 119 90 127 171 Other raw materials 239 258 344 368 558 820 Capital goods 269 290 387 551 883 1,252 Total 675 843 4 2 1,222 1JL5 2,432 Source: Data for 1960, 1965, 1970 and 1975 are from the Central Bank of the Philippines; those for 1980 and 1985 are World Bank staff projections. - 142 - I .10 Imports of consumer goods (including cereals) currently account for about 15 percent of total import pavments. Because of the erowinQ caDa- city of domestic industries to meet the needs of consumers, the share of finished consumer goods (other than cereals) in total imnort Davments has declined steadily to the current level of about 11 percent. This trend is exoected to continue; and by 1985 these it-pms mqv arcoint- for about- S ner- cent of total payments. Given a reasonable degree of success in expanding agricultural Droduction Drograms alon' the lines aisicuspd in rhanter S- imports of rice and corn can be eliminated by 1980; imports of wheat would continue to grow, but by 1985 cereal imports would only hp about- 1 nperrent of total imports, compared with about 4 percent at present. 1 .11 As a result of the sharp increases in prices, payments for petro- leiim cruide ar.d piroduct-s have iiuT.ped f-rom about US8 million 4e 1973 to about US$750 million in 1975, and their share in total import payments has dAo.u-1 A A 9I9 t A erc Paym., - f ue imports. 4 _Are no. euiva en t A ~~~~- - -- .A- Cr---*1 LO 4r-o C; &*JU .'.jLV O,ztf to about 5 percent of GNP. Since consumption of petroleum crude is projected togrow bvy about 8 percent a year in the latter half of t-he 1970s, the L.J LOW U UJ L. U L.4 LL'-' .4.L. L. LIA L.L. J. LIL&~ I . I U a , - L 1~- Mission projects imports to be about 100 million barrels in 1980. During th,e 1980s, a somewhat slower growth is expected since the Government's program IL. I JS.JSv , o LL L. A. 5- W & .'.- Lj~ .L U ~~A~ #-Li U~LL~L to develop alternative energy sources should begin to have an impact on LtLi U'euana' *ur petruoiei:: pr'Luucts: u'y LtIhd LtiUC. 41 t±LnUugn LLthre are reasonable prospects for discovering commercial quantities of petroleum, the Mission has assumed that all requ'rements will' have to be met from imports, at least until 1985. Thus, imports of petroleum crude are proj- ected at about 140 miiiion barreis in 1985. - ~ At the present time, the ruture course of petroleum prices is very uncertain. For the purposes of this analysis, the Mission has assumed that the price of crude will rise in line with international prices generally, which are assumed to increase by an average of 7-8 percent a year during 1976-85; therefore, the Mission used an oil price of US$15 a barrel in 1980 and US$21 a barrel in 1985. Payments for petroleum crude would thus be about US$1.5 billion in 1980 and US$2.9 billion in 1985; in other words, petroleum crude imports would still be about 21 percent of total payments in 1985. 7 ~'3 Other raw materials and intermediate goods currently account for about 33 percent of total import payments; chemical products, iron, and steel account for more than half of the payments for this category. During the past decade, imports of these items have grown at an average of 6-7 percent a year in real terms, which is slightly higher than the GNP growth rate and roughly in line with the growth of industrial output. The Mission expects this trend to continue for the remainder of the 1970s, and has, therefore, projected an average increase of about 8 percent a year in real terms (the same as the projected industrial output growth rate). A slower growth of 1/ For m discussion. oft roLA LeU. of petrL.LeUm i.n1 I-Le Fhil.ip- pine economy, see Appendix II, volume II. 2/ For a detailed discussion, see Appendix II, volume II. about 6 percent in imports of these items could be expected in the 1980s, *e. outputLLULU LIr m proposedU mJaor LnIvestments in steel, fertilizer, puip and paper, and chemicals should begin to replace imports. After allowing for ar, average iucrease in prices of 7-8 percent a year, totai payments for imports of raw materials and intermediate goods are projected to be about US$5.0 billion by 1985, or about 37 percent of total import payments _1.4 In the firsL half ofte 1iOs, tnere was not much growth in reai terms in imports of capital goods. Given the scarcity of domestically available capital goods and tne projected expansion in industrial invest- ment and the program of public infrastructure investment described in Chapter 8, the Mission projects imports of capital goods to increase by about 8-9 percent a year during 1976-85, and, after allowing for an average increase of about 7 percent a year in prices, the payments for capital goods imports would rise to perhaps US$4.6 billion by 1985. This large amount means that the Philippines will need access to significantly greater amounts of external capital to finance these purchases. As the subsequent analysis indicates, the Philippines would need a net inflow of medium and long-term loans of around US$9 billion during the next ten years. The country will be confronted with a scale of external borrowing that is much higher than in the past, which will require concerted efforts on the part of both the Government and the international financial community to ensure these needs are met. Expanding the Capacity to Import 11.15 If the Philippines is to be able to sustain a growth in imports of about 7 percent a year in real terms, there will have to be a sharp in- crease in the growth of exports. As already indicated, exports will have to grow by at least 9 percent a year in real terms during 1976-85. This will mean a substantially better performance in the volume of exports than in the past. According to statistics published by the Central Bank of the Philippines, the volume of exports grew at a relatively steady rate of 6-7 percent a year between 1950 and 1965. In the second half of the 1960s, there was no significant increase in the volume of exports. 1/ but a somewhat better performance was recorded in the first half of the 1970s, when the trend rate of increase was about 7 percent a year. 11.16 Prospects for Exports: The prospects for exports will depend on the implementation of an aggressive program aimed at expanding exports, particularly of nontraditional manufactures. with an emphasis on diversi- fication of products as well as of markets. Traditional agricultural exports are exDected to erow slowly. and increasing emphasis must be Placed on the processing of primary products like copra and logs prior to export. Large investments are uronosed in extractive industries to increase the value of mineral exports both as a result of the additional processing of mineral 1/ However, some caution is needed in interpreting these statistics since there is reason to believe that the official trade statistics under- state actual earnings. - 11.1. - ores and the exports of new mineral products. Exports for agro-industrial products--mainiy copra; cnunnt, - noil, sugar, fruit ar vegetables--have traditionally provided the bulk of the Philippines' foreign exchange earnings. In the early 1950s, for example, they accounted fror about 85 perce.t of export earnings, but since receipts from these products increased by less than 3 percent a year during 1950-70, thi4r suare .-A AroppeA to about 43 percent by 1970 (Table 11.2). Primarily as a result of the boom in inter- na *tionall prices of th uese COMAw^o-4es, earn^ir.gs l^ave rlsen 1 _I_ . -hrl sinc 1972,b ~A. LL~~ ~UIIL'UA.L.I.a A.LLI~ LLaVC L.LZCU *LlilkyLjJ IILUCU 1 7 ,a and this group of commodities accounted for about 59 percent of exports in 1975. From 1972-75, however, the volume of these CApOrts increased only very moderately. As the analysis in-Chapter 5 indicates, the Mission expects exports oUt LelIe coUoUU±LtLe LU goW Uby daUUtL 4 percent a year in real terms during 1976-85, roughly in line with the projected growth in world demand for these items. Assbing an increase of about 6 percent a year in tne unit value of these items, 1/ earnings would rise to about US$4.0 billion by 1985, compared with about US$1.4 bililion at present. Since earnings from these exports increase at a slow rate, the required growth in export receipts will have to come from exports of wood products, minerals, and nontraditional industrial exports. 11.17 Exports of forest products were an increasingly important source of foreign exchange during the 1950s and 1960s. Starting from negligibie amounts in the early 1950s, exports of logs and other forest products rose to about US$300 million by 1970 and accounted for 27 percent of export earnings. The growth in earnings in the first half of the 1970s was constrained by increasing difficulties in expanding log production and the relatively slow growth in overseas demand, especially in 1974-75. As the analysis in Chapter 6 indicates, however, earnings frorn wood products are projected to rise by an average of about 20 percent a year during 1976-85 as processed wood products replace exports of logs; exports of logs are expected to be phased out in this period. By 1985, earnings are projected to be about US$1.4 billion. l1.18 Exports of minerals, particularly copper and nickel, are expected to be an increasingly important source of foreign exchange earnings for the Philippines. From very small beginnings in the early 1950s, earnings from minerals have grown rapidly to the point where they now account for about 14 percent of export receipts. As the analysis in Chapter 6 indicates, production of minerals for export is expected to expand by about 12 percent a year during 1976-85. Earnings are projected to grow by about 25 percent a year to a total of US$3 billion by 1985. 11.19 For the reasons given in Chapters 5 and 6. it seems unlikely that substantially larger volumes of exports of traditional agricultural products, wood Droducts, and minerals will occur during the next ten years, although actual earnings could be affected somewhat by different price outcomes. But 1/ This is somewhat more rapid than the rate of increase in prices of the individual commodities. The reason is that the composition of the group would shift in favor of higher unit value commodities such as coconut oil (instead of copra), fruits, and vegetables. - 145 - Table 11.2. Export Ea-rnings in Current arid Constant Values and Price Indices 1960 - 85 ... - Actual Projected r,e", i.vo 19'65 1970 1O75 1980 195o I LUt :L V .L7vSJ 7 J CtJ LIJ Current vaiue (in nmiiiions of US doiiars) Copra 139 170 80 161 238 188 Cocobnut oil 16 68 96 217 530 1,157 Sugar 33 132 i88 697 895 1,506 W6'd ro-ducts- 102 195 295 226 793 1,423 bver t.vn,.wtaLc ands ^Oper JJ 4' j i85 1,6 ~ Cd 2,414 rminera d prodbcts7 31 30 39 i34 304 621 Other agiricltuiuria product,4 ., 96 1d4 107 288 668 1,275 Manufacturing and miscellaneous-' i3 22 93 392 1,384 4,291 Totai 560 768 1,083 2,311 57,12 12,875 r L !C-ILU.L%C ¶ 17U!U-v 100J 'Cop'ra ~ -98.1 109.3 '' 115'7 207,7 357.9 r A^i,nni; t^iAi 1 qR o^ in0 ln&:i i,49'4 ^997 7 ^'^ ri Suga'r ~ '~ . 87.1 1028 262`8 251.2 352.4 Woo6d poiducts a/ 97.7 87.6 99.4 112.9 239.5 368.5 Coppek coicentrate O;9 i23.2 i2iA3 259 8 416.5 Other m i ._i5 3 11iii; 62.1 242.9 390.9 596.0 Other 'agicuiturai pr6ductsii 1-45.0 109.2 138.6 187.4 267.4 375.1 Manufacturing and miscelaneous._ 30.8 40;0 189.8 378;3 549.1 770.1 Total 92.3 12. 0 108.6 186.1 291.3 468.5 Consta`rt ivaiue (in m`iiiions of US dollars) C.ora 142 1i;-6 i25 39 114 Si C6oconut oit 1 64 92 163 233 302 Sugl5r . 163 152 183 265 356 427 W'ood products>' 1i4 223 291 200 331 386 Co'pper concencract and 53 66 150 162 346 580 Other pructs- . 21 2i7 24 55 78 104 OLher agr.iqlturai product!ts&;l . 6 86 177 54 250 340 in a I I ta L 4 L rai i ttItLetIUarieOU 'D U'-J 4'7 Ii4 22L tot;ai 9-n: R9R I R 1'9h9 1 al 9 7/,P a! Incl'udes pl'y-w6dd viie"orc lumber, pulp ad paper h/ I'ncii'"e ni'85i 'egold chromer iron orean'd c i0ii-as c/ ,, Inc-lf'uade d fs&ated cocoiiut, oi6lcakeg-, mlaasses, bAn'