P H I L I P P I N E S U R B A N I Z AT I O N R E V I E W P O L I C Y N OT E S M AY 2017 Improving City Competitiveness for Economic Development and Job Creation* 1. Introduction and Approach City competiveness can be defined as the ability of city to support job creation, economic growth and productivity growth. City competitiveness is affected by multiple factors, a number of which are outside of control of the city government and by nature are the prerogative of the national government. The analysis on this policy note draws on the competitive city framework which includes four pillars: “institutions and regulations”, “infrastructure and land”, “skills and innovation” and “enterprise support and finance.”1 It analyzes factors that of BPO wouldn’t have been possible without an enabling constrain city competiveness, the role that city governments national policy, proactive and well organized private sector can play, and provides policy recommendations based and growth-minded local governments. While the story on both the Filipino and international good practices in of BPOs is an unquestionable example of success – a lot promoting city competitiveness. Analysis also looks at the of issues persist that will require a commitment by all key enabling environment provided at the national level to foster actors to reform in support of the emergence of new growth city competitiveness. Literature reviews, analysis of national industries in Filipino cities. level data and the results of firm level surveys and focus group meetings inform the analysis. This policy note discusses 5 key challenges which affect economic development and job creation at the city level. In recent years cities have emerged as the key drivers These include; 1) poor business environment; 2) weak of economic growth in the Philippines. Growing infrastructure, land management and access to markets; competitiveness of cities is most comprehensively illustrated 3) low demand for innovation and skill match; 4) access to by the rapid rise of the BPO industry. In less than a decade finance and business support; and 5) inefficient economic Metro Manila, Cebu city, Iloilo have emerged as the most planning, unclear mandate and weak governance. The attractive places for foreign direct investment (FDI) in this analysis of these challenges is followed by a discussion of sector. This story illustrates how local endowments can be recommended priority actions. utilized to become drivers of economic growth. But rise * This policy note is part of a broader study, “Philippines Urbanization Review: Fostering Competitive, Sustainable and Inclusive Cities, 2017 The World Bank. 1 Source: World Bank (2015) “Competitive Cities for Jobs and Growth: What, Who and How” WORLDBANK.ORG/PHILIPPINES/URBANIZATION 1 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N 2. Key Challenges 2.1 Business Environment: Recent Successes and Need for Further Improvements A healthy business environment is essential for growth of the regulatory environment. However, despite local and poverty reduction. There is abundant evidence that successes – broader problems persist. cumbersome and costly regulations, excessive taxation, lack of fair competition, and an unstable policy environment Philippine business regulations remain among the most restrict business operations, undermine investment, constrain complex in East Asia and present big hurdles to job creation. the development of markets, and stifle entrepreneurship.2 The World Bank Doing Business 2016 report ranks the Better business environment contributes to better growth Philippines at only a 103rd place among 189 economies in and job outcomes. the overall ease of doing business. Among major economies in the ASEAN region, only Indonesia ranks lower (109). Across In the last 5 years the Government of the Philippines has the ten topic areas covered by the ranking, the country recognized the importance of simplifying and streamlining scores in the bottom half of the ranking for more than half of business regulations. A number of reforms implemented at the indicators. Starting a business, paying taxes, dealing with local and national level have made it easier to do business. construction permits and registering property are especially Some cities such as Cagayan de Oro and Barangays have daunting. (Figure 1). achieved incredible progress in simplifying some aspects Figure 1. Philippines Detailed Rankings in Doing Business 2016 Starting a business (165) Resolving insolvency (53) Dealing with construction permits (99) Enforcing contracts (140) Getting electricity (19) Trading across borders (95) Registering property (112) Paying taxes (126) Getting Credit (109) Protecting Minority Investors (155) Source: Doing Business 2016 2 See, for instance, the annual World Bank Doing Business reports for a useful summary of the literature on the importance of business environment for growth. 2 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Starting a business in the Philippines is among the most cumbersome in the world. Doing Business 2016 ranks the country at 165 out of 189 economies on starting a business. The average firm spends 29 days securing licenses required to start a business and spends around PHP 20,000 (equivalent to 16.1 percent of the country’s per capita income). Up to 18 licenses, permits, and forms have to be approved before a business can commence. In addition, the Philippines still requires a relatively high paid-in minimum capital and a minimum of five incorporators, a practice that many countries have abolished. In many cases, firms report that they need to pay bribes or give gifts to obtain various permits and government services. Procedures for setting up unincorporated businesses (sole proprietorships), 36 procedures. The time needed to get the permit ranged which make up the majority of businesses in the country, from 46 days in Zamboanga to 169 days in Manila. In Mexico, are simpler, especially in cities with one-stop shops, but for instance, the most efficient secondary cities such as nonetheless remain cumbersome. Culiacan, Colima or Hermosillo, required only 7-9 procedures and 10-40 days to grant a construction permit.4 Cities impose additional constraints on national level regulations. For instance, out of 16 steps and 29 days to Renewing the annual business permit is especially costly, incorporate a limited liability company, 13 steps and 21 slow and inefficient. All firms in the country need to renew days are processed by or at national agencies and 3 steps their local business permits every year, an unusual practice and 8 days are within the control of the LGU or city (Table for more developed countries. As part of the annual renewal 1). Additionally local governments are responsible for the process, businesses must pay local business tax and fees, as organization of application processing. Local BPOs can prescribed by the Local Revenue Code, and then show proof become major sources of delays, or on the opposite can make of multiple licenses and certificates. Firms in the Philippines it easier for business to deal with multiple requirements and also need to provide more licenses than their counterparts in agencies, as has been proven by the examples of cities that neighboring countries such as Vietnam and Indonesia (The have established one-stop shops (Cagayan de Oro, Batangas World Bank Enterprise Survey 2009). The example of Batangas, etc.) LGUs also impose additional requirements on the where until recently the annual business permit renewal already complex national rules on the construction process.3 process required 31 different steps, shows how complicated, As recorded in World Bank Group’s 2011 Sub-national Doing costly and cumbersome the business permit process can be Business survey, Taguig City required 25 procedures to get a (Box 1). Similar and often even more complicated process is construction permits while Cebu City and Pasig City required still the norm around the country. 3 Before going ahead with a construction project, an entrepreneur must obtain zoning clearance and other requirements from the LGU and other clearances from DPWH, ATO, HLURB, DOT, DENR, DOTC, DILG, PPA, Dep Ed, DOH, PHIVOLCS, LLDA, MWSS, NWRB, DAR, DA, DOLE, NHA and NCWDP. Section 302, NWR IRR. 4 World Bank “Doing Business in Mexico 2014”. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 3 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Table 1. Procedures for Starting a Corporation: Average Cost and Time STEPS DAYS COST (PHP) NAT’L OR LGU** 1. Verify and reserve the company name with the Securities and Exchange Commission 1 40 N (SEC). 2. Deposit the paid-in minimum capital at the bank. 1 0 N 3. Notarize articles of incorporation and treasurer’s affidavit at the notary. 1 500 N 4. Register the company with the SEC and receive pre-registered Taxpayer Identification 2 3,065* N Number (TIN). 5. Obtain barangay clearance. 1 500 LGU 6. Pay the annual community tax and obtain the community tax certificate (CTC) from the 1 500 LGU City Treasurer’s Office (CTO). 7. Obtain the Mayor’s business permit to operate from the Business Permit Licensing Office 6 5,353* LGU (BPLO).5 8. Buy special books of account at bookstore. 1 400 N 9. Apply for Certificate of Registration (COR) and TIN at the Bureau of Internal Revenue (BIR). 1 115 N 10. Pay the registration fee and documentary stamp taxes (DST) at the authorized agent bank 1 5,665* N (AAB). 11. Obtain the authority to print receipts and invoices from the BIR. 1 0 N 12. Print receipts and invoices at the print shop. 7 3,500 N 13. Have books of accounts and Printer’s Certificate of Delivery (PCD) stamped by the BIR. 1 0 N 14. Register with the Social Security System (SSS). 2 0 N 15. Register with the Philippine Health Insurance Company (PhilHealth). 1 0 N 16. Register with Home Development Mutual Fund (Pag-ibig).*** 1 0 N TOTAL 29 19,638 Source: Doing Business 2016 * See Doing Business 2016 methodology for details, found in http://www.doingbusiness.org/data/exploreeconomies/philippines/starting-a-business ** Processed by National Agency (N) or Local Government Unit (LGU/city/municipality) *** Simultaneous with step 15 5 World Bank “Doing Business in Mexico 2014”. 4 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Box 1. Annual Business Permit Renewal Process in Batangas in 2012: An Applicant Firm’s Perspective Until 2012, the process of renewing the annual business permit in Batangas required 31 different procedural steps. First, an applicant firm had to first visit the City Hall and go through 13 steps (as in the chart below). Subsequently, the applicant firm had to visit the City Treasurer’s Office and complete additional 9 steps (chart below). Finally, he had to go back to the City Hall to complete the remaining 7 steps (chart below). Source: USAID (2014) “Investment Enabling Environment (INVEST) Project”, final report. Property registration is burdensome. Property registration which do not differentiate with regard to business size or the is managed at the national level by the Land Registration capacity to comply. Value Added Tax, for instance, needs to Authority, which has regional offices around the Philippines. be declared on a monthly basis even by firms that do not The regional level offices, however, vary in their degree of have any revenues for certain periods (such as consultants efficiency, especially with regard to local registry of deeds or part-time lawyers). Most micro and small firms do not and regional district offices of the Bureau of Internal Revenue. have the resources to employ accountants or to maintain Registration costs also differ considerably across cities due to full accounts required by the tax agency. Businesses must variations in the property transfer tax and notarization fees, also pay local government taxes and regulatory fees, which both of which are assessed as a percentage of the property add to the complexity, especially as cities apply different value. thresholds and tax rates. Anecdotal evidence suggests that the tax payments are also prone to corruption, as the tax due Paying taxes is complex, especially as tax regulations make no is “negotiated” between a firm and a tax inspector, the official concession to business size. Micro, small and medium firms tax rates notwithstanding. (MSMEs) face high cost of compliance with tax regulations, PHILIPPINES URBANIZATION REVIEW POLICY NOTES 5 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N The current business environment also contributes to the stunted growth of SMEs. The country seems to be challenged by a relative dearth of medium and large size enterprises, as micro and small firms fail to grow: for instance, the share of more productive medium size SMEs, which produce 10 percent of GDP,9 represented only 0.4 percent of all SMEs and has not changed since 2006.10 It seems that firms prefer to stay small than to grow to avoid taxes, onerous regulations and corruption. Given that larger firms are more productive, failure of small firms to grow undermines productivity, exports and job creation. The government has taken steps to simplify business registration and licensing process, while the first results are positive more needs to be done. In 2010, the government launched a national initiative, the “Nationwide Streamlining of Business Permits and Licensing Systems Reform (BPLS)” and the follow up “Reform Simplification for Local Governments” A burdensome tax regime, business registration process and (RS4LG) to encourage cities to improve business environment. a plethora of other regulations deter MSMEs from entering Following the implementation of both initiatives, cities and or staying in the formal sector.6 It is often easier to leave municipalities were expected to process and release new the system completely than to comply with the red tape, business permits within 10 days and business renewals in 5 especially as the risk of being caught and penalized is low. days. As a result compliance costs for firms were cut in some Many firms choose to remain informal, non-transparent and cities, which increased firm registration.11 However many small.7 Worse, the impact of these regulations is reflected LGUs and municipalities failed to achieve sufficient progress. in the low rate of formal business entry: the Philippines is According to USAID, many cities around the country were among the bottom 15 percent of countries with the lowest not compliant with the program targets, likely because of rate of newly registered firms as the Filipinos establish only a combination of low capacity, lack of resources and weak two limited liability companies per 10,000 working age leadership.12 people per year. In Malaysia, it is 10 times higher.8 6 Aside from regulations covered by the Doing Business indicators, as evidenced by the results of the World Bank led focus groups, companies also need to grapple with obtaining importer licenses, clearing customs, complying with fire regulation, receiving sanitary permits, and complying with food and drug administration product registration.. 7 A World Bank firm-level study in Africa (Ingram, Ramachandran, and Desai, 2007, “Why do Firms Choose to Be Informal? Evidence from Enterprise Surveys in Africa”, September) found that firms’ decision to be formal is “positively correlated with perceptions regarding the availability of electricity supply, access to finance and access to land, and negatively correlated with the rate of taxation and corruption”. 8 World Bank Doing Business Entrepreneurship database: http://www.doingbusiness.org/data/exploretopics/entrepreneurship 9 http://www.dti.gov.ph/dti/index.php/resources/sme-resources/sme-statistics 10 Rafaelita M. Aldaba and Fernando T. Aldaba (2014). Toward Competitive and Innovative ASEAN SMEs: Philippine SME Policy Index 2012. 11 Project Completion Report of IFC’s DB Plus Phil Project number 553125, October 2014. 11 Project Completion Report of IFC’s DB Plus Phil Project number 553125, October 2014. 12 USAID (2014) “Investment Enabling Environment (INVEST) Project”, final report. 6 WORLDBANK.ORG/PHILIPPINES/URBANIZATION 5 World Bank “Doing Business in Mexico 2014”. There have also been reforms at the city level. Within Metro to complete, as opposed to 17 steps before (Box 3.2). This Manila, a number of cities introduced business registration example also illustrates that despite only directly controlling and licensing reforms, which helped cut red tape and 3 steps of business registration of 16, city governments have improve business registration. Quezon City, in particular, has a very important role to play in streamlining registration streamlined the business registration process to only three procedure. While national reforms would be required to fix steps. Other cities--Batangas, Cagayan de Oro and IloIlo--also a number of business environment issues, simply replicating modernized its business registration and permit renewal local best practices across all cities can deliver substantial system. As a result, in Batangas, for instance, registering improvements. a new business now takes only 2 steps and two hours Box 2. Good Practices in Business Registration: The Case of Batangas, CDO, IloIlo and Quezon City In collaboration with the USAID, the city of Batangas, CDO and IloIlo streamlined its business registration and business permit- ting process. In Batangas, for instance, the steps needed to receive a new business permit were cut from 17 in 2012 to only 2 in 2014 (see the Table below). Comparison of Baseline and Streamlined BPLS for Applications for New Business Permits in Partner Cities, 2012-2014 BATANGAS ILOILO CAGAYAN DE ORO BPLS INDICATORS BASELINE (2012) 2013 2014 BASELINE (2012) 2013 2014 BASELINE (2012) 2013 2014 Steps 17 3 2 27 18 4 17 5 3 Forms 11 1 0 8 2 1 10 5 1 Signatories 22 (manual) 2 2 27 4 1 27 7 4 (digitized) (digitized) Required Documents 7 3 0 6 5 5 14 7 5 Elapsed/Processing Around 11 days 3 hours, 1 hour, About 2-3 days 17 days Walk in: 19 days Less than 30 mins - Time 21 mins 30 mins 1 hour 1 hour 1 hour Another project supported by the IFC/World Bank Group, helped Quezon City to reduce the registration process 3 steps: application, assessment and payment. The basic documents needed for the new business include DTI / SEC Registration, Barangay Clearance and Locational Clearance. QC opened a one-stop shop, where all the regulatory departments are located. In other cities in Metro Manila, including Pasig City and Taguig, business registration continues to require 6 steps. Source: USAID 2013 and the World Bank PHILIPPINES URBANIZATION REVIEW POLICY NOTES 7 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N 2.2 Improving Infrastructure, Land Management and Access to Markets to Support Growth Access to international markets and trade connectivity Telecommunication services, especially the Internet, are in the Philippines is weak. In the 2016 Doing Business expensive and difficult to access even in major cities. The report, the Philippines’ is ranked only in the 95th place in 2010 study of broadband quality has ranked Philippines the world in trading across borders, behind most regional digital infrastructure in the bottom ten among 80 countries. peers. Bilateral trade costs are also high: the Philippines’ The cost of the Internet in Cebu, for instance, is more than 30 trade costs with Indonesia are almost twice as high as costs times higher than in Vietnam (Table 2). It costs 15,000 pesos or between Indonesia and Malaysia. In trade with China, the more than $300 to secure a slow and unreliable 5MB Internet key regional trade partner, export costs in the Philippines connection in the PEZA economic zone in Pampanga.16 are 20 to 40 percent higher than in the region.13 Corruption Telephone services are similarly expensive. The high costs adds to the costs of exports.14 The Philippines also fares and poor connectivity result from an oligopolistic structure the worst on overall logistics performance and shipping of the telecom sector, where two major players control most connectivity.15 Anecdotal evidence suggests that internal of the market and the backbone infrastructure. The potential shipping costs can be so prohibitive, that it is often cheaper entrance of a third market player has already encouraged to send cargo from Davao to Singapore than to Manila. This two incumbent players to cut prices and improve service, leads to fragmentation of internal markets and complicates but much more needs to be done. development of local supply chains. Table 2. Cost of the Internet Connection in Selected Cities and Countries CITY/COUNTRY COST OF THE INTERNET CONNECTION PER MBPS, IN US$ Manila 25-45 Cebu 70 The Philippines 20.35 Indonesia 16.83 Malaysia 10.29 Vietnam 2.25 USA 0.35-2.0 Source: Miradilla-Santos, M.G. (2014) Competition Issues in the Philippines Telecommunications Sector 13 Based on World Bank (2016). “Export Transaction Costs in the Philippines”, Special Focus 2, The Philippines Economic Update, October 2015. 14 In 2014, the Export Development Council (EDC) conducted a survey on the cost of exporting and found that many exporters have to pay grease money to facilitate faster transactions. 15 Based on the World Bank’s Logistics Performance Index (LPI) and the Liner Shipping Connectivity Index (LSCI). 16 World Bank interviews with firms in the Pampanga Economic Zone. 8 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Figure 2. Change in ICT Intensity of Employment, 2002-12 35 30 25 20 15 Percent 10 5 0 -5 -10 Moldova South Africa Costa Rica Romania Lithuania Samoa West Bank and Gaza India Philippines Latvia Malta Russian Federation Jamaica Malaysia Namibia Turkey Barbados Mauritius Macedinia, FYR Cambodia Mexico Panama Bulgaria Peru El Salvador Croatia Bahamas, The Ukraine Thailand Average, low- and middle-income countries Average, high-income countries Note: ICT intensity of employment is based on an index between 0 (no use of technology at work) and 19 (most of technology at work), averaged by occupation and weighted by employment. Source: WDR 2016 Poor access to the internet undermines firm productivity and 2013. At the same time, employment grew from zero in early job creation. There is large international evidence that poor 2000s to one million employees today (Box 3). All jobs are Internet access undermines firm growth, productivity and based in urban areas, especially in Metro Manila, but also in job creation.17 In the Philippines, as a result of poor Internet secondary cities such as Cebu (120,000 in 2015) and Davao connectivity, growth in e-commerce has been slow: only 20 (more than 20,000 workers in 2013), IloIlo (40,000) and are percent of retail firms sell online.18 Internet-driven expansion rapidly starting to move to smaller cities and towns. BPO of digital technologies is important for employment: since jobs are well paid: in 2012, an average salary in the BPO 2000, the ICT intensity of employment has increased by 15 sector amounted to almost $9,000, three times higher than percent in the Philippines, above the average for low and the country’s GDP per capita. However, 85 percent of the middle income economies (Figure 2). BPO revenues are generated by low-value added, routine jobs, mostly servicing call centers, which are susceptible to Cheap and accessible Internet will be key to promoting automation. To move to more high-value added, nonroutine further growth of the city-based BPO sector. Over the last and nonvoice jobs it will require a substantial upgrading decade, thanks to the universal use of English and relatively of the telecommunications infrastructure to lower costs, high quality of human capital, the Philippines has become improve quality and ensure reliability, alongside substantial a global hub for BPO. Its share of the global BPO market investment in skills development programs to meet growing more than doubled from 5 percent in 2006 to 11 percent in demands of the industry. 17 World Bank (2016). “World Development Report 2016. Digital Dividends”, p. 79. 18 Ibid. Data for firms with at least 5 employees. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 9 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Box 3. BPO and Jobs in the Philippines: Opportunities and Challenges from Technological Change The information technology (IT) and BPO industry in the Philippines has been a driver of economic growth and job creation in the last decade having grown at an average of 24 percent annually. Direct employment reached 1 million full-time employees in August 2014 from virtually zero in 1999, accounting for around 2.3 percent of the country’s total employment. The industry has a robust voice sector (primarily call centers), accounting for 64 percent of the industry’s revenue. Health care information management employment grew by 47 percent from 2012 to 2013. IT outsourcing revenues also grew by 52 percent from 2012 to 2013, while knowledge process outsourcing grew by 18 percent. Earnings and skill requirements vary across these sectors. Industry-specific jobs tend to be higher skilled than those that cut across industries (such as human resources business processing), as they require more technical knowledge. In 2012, average annual compensation per employee in the industry was around US$8,849, with the highest average compensation in software development (US$17,383). It was US$8,301 for contact centers and US$7,687 for other BPOs. High-skilled, high-paid occupations—as are most research and development–related jobs in knowledge process outsourcing (such as market research and medical transcription), IT outsourcing (such as software and application maintenance), engineering services (such as engineering design and digital mapping), and creative processes (such as art production and game testing and support)—are intensive in no routine cognitive and interpersonal tasks. Middle-skilled occupations are intensive in routine cognitive tasks, mostly in non-voice BPO (such as back-office finance and accounting or human resources), but can also include many of the jobs in voice business processing (such as customer service and technical support). Source: World Bank (2016). World Development Report. Digital Dividends. P. 109, and Capili, Miro. 2015. “The BPO Industry in the Philippines: An Overview.” Background paper for the World Development Report 2016, World Bank, Washington, DC Access to water and electricity is expensive and unreliable. practically all surveyed firms experienced blackouts (Figure 3). More than half of businesses in Metro Manila from a sample Electricity is also expensive, undermining competitiveness.20 report having experienced systematic power blackouts.19 Water supply is also a challenge for secondary cities, although The situation is even worse in Cebu and Davao: in Davao, less so for Metro Manila. Figure 3. Percentage of Companies that Experienced Either Electricity Black Out or Water Supply Problems 100% 93 90% 80% 77 70% 68 64 60% 54 50% 40% 30% 20% 18 10% 0% Electricity black out Water supply Metro Manila Metro Cebu Davao Source: The World Bank 19 The World Bank surveyed almost 100 firms in Metro Manila, Cebu and Davao. The online questionnaire is available at http://goo.gl/forms/odPr2GsKiFdwbSVk1 20 http://www.philstar.com/business/2013/10/07/1242233/phl-power-rates-among-highest-asia 10 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Figure 4. Metro Manila Rail Transit Network Compared to Other Asian Cities Seoul 526 Beijing 456 Shanghai 439 Tokyo 316 Guangzhou 215 Delhi 193 Shenzhen 178 Hong Kong 174 Singapore 146 Osaka 138 Taipei 113 Bangkok 82 Manila 51 0 50 100 150 200 250 300 350 400 450 500 550 Source: Boquet Y (2013) Battling Congestion in Manila: The EDSA Problem Major cities are crippled by traffic problems. Metro Manila’s average car commute in Manila is 58 minutes long. This is public transport is the least developed among peer cities similar to Jakarta and longer than Bangkok both of which (Figure 4). This is a result of many years of underinvestment are also notorious for bad traffic, while commutes in Taipei and the overall weakness of the Department of Transportation and Kuala Lumpur are half as long.23 However, anecdotal and Communication. Policies to reduce congestion have evidence suggests that commute times can be much longer: been ineffective: the car number coding scheme in Metro for instance, driving from Quezon City to Makati during the Manila has little effect on traffic.21 Highway truck bans in morning and afternoon rush hour often takes more than 2 Manila and Cebu have made access to port difficult for hours. Cities have taken measures to lower the commute manufacturing firms, and have contributed to declining times, through for instance, producing more reliable maps throughput volumes in Manila port.22 and monitoring traffic congestion (Box 4), but the impact so far has been limited. Commutes in Manila are longer than in other cities in the region. According to the Numbeo Quality of Life index, the 21 Rey Gamboa, B. (2015) “Is Metro Manila traffic headache unsolvable?”, The Philippine Star. 22 Based on business interviews in Metro Manila and Metro Cebu cities 23 http://www.numbeo.com/traffic/ PHILIPPINES URBANIZATION REVIEW POLICY NOTES 11 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Box 4. Good Practice in Using ICT to Improve Urban Transport: Cases of Manila and Cebu Urban transport is a complex system where newly cheap information unlocks possibilities for greater efficiency. A good starting point is with the most basic foundation of planning: of the 25 largest low- and lower-middle-income cities, 92 percent do not have complete maps of their transit networks. Compiling these maps used to be time-consuming and expensive. Recently, though, Manila developed and applied a mobile phone–based application to survey and map routes, using an open-source data standard. The map powers a consumer trip-planning app and is being used by city planners to reduce redundant routes and plan a new mass transit corridor. Cebu, in turn, was able to ingest real-time taxi data to generate speed and congestion maps for the entire city. This reduced the time to analyze travel time for a bus corridor from two weeks to two seconds. Source: World Bank’s “World Development Report 2016”. The national land information system is underdeveloped and prone to fraud. Information about land ownership, location, boundaries, and land values are not systematically available and is often incorrect. As a result, fraud abounds, which has also led to land ownership conflicts. All title disputes must go to the courts, and this has resulted in delays and abuse. These issues deter investors and complicate implementation of investment projects. LGUs do not coordinate management of land, which deters investors. The constituent cities in Metro Manila do not coordinate their land use and investor attraction policies, which result in inefficient use of land resources and failure to build business clusters across administrative boundaries. Marikina, for example, is aiming to rebuild its shoe-making cluster, based on strong traditions in the industry, access to skills locally and growing demand for high quality garments in the Philippines. However, the city does not have industrial land that could attract large investors and has failed to agree an access to industrial land in the neighboring cities, undermining the growth prospects of the cluster. 12 WORLDBANK.ORG/PHILIPPINES/URBANIZATION 2.3 Low Demand for Innovation and Skill Mismatch R&D, technology absorption and innovation drive It can also help make growth more inclusive by reducing productivity. There is a large economic literature, which information asymmetries in the markets, helping indigent shows that innovation and R&D are one of the mains producers to better respond to changing market prices and source of productivity, economic growth, quality of life introducing new, more productive technologies, especially in and environmental sustainability. Innovation is critical for agriculture. Finally, given the vulnerability of many developing developed countries to sustain productivity growth, while countries such as the Philippines to natural disasters and technology transfer is key for developing economies to catch climate change, innovation can help mitigate risks by up with developed countries.24 Innovation can increase the sharing information, promoting green competitiveness and quality of life in developing countries by improving access developing new, anti-fragile agricultural production. to preventive health care, financial services and information. Box 5. What is Innovation? The Role of Governments Innovation can be defined as a process of transforming an idea or invention into a new good or a service that creates value to customers and helps resolve existing problems. Innovation involves product (good or service), process, marketing and organizational innovation. Each of the four types of innovation can be divided into innovation new to the firm or new to the market or a society called technology absorption; or innovation new to the world, which represents innovation in the most explicit sense. New-to-the-world innovation shifts a notional technological frontier outward, while absorption moves a firm closer to the frontier. Most innovation requires spending on research and development (R&D), but can also occur without it. Innovation is thus a broader concept than R&D only. Governments play a key role in supporting innovation. The government’s main role is to reduce market failure resulting from the divergence in private and social returns on innovation: private investors tend to underinvest in innovation because they receive only a small portion of the benefits of a new product or service, while the society at large appropriates the rest of value added through imitation. As a result, spending on R&D and innovation is lower than socially optimal.25 The government can also help firms mitigate other market failures such as on coordination failures, threshold effects or knowledge spillovers.26 The state can also drive innovation directly by funding critical technologies such as the Internet, GPS and other general purpose technologies and taking the lead in adopting new technologies.27 Source: Own definition based on http://www.businessdictionary.com/definition/innovation.html#ixzz3lFfwrvGT and OECD/Eurostat (2005) “Oslo Manual – Guidelines for Collecting and Interpreting Innovation Data”, OECD, Paris. From: http://www.oecd.org/sti/inno/2367580.pdf 24 World Bank (2010) “Innovation Policy: A Guide for Developing Countries” for a useful summary of the literature; World Bank/OECD (2014) Innovation and Growth: Chasing a Moving Frontier; World Bank (2008) Global Economic Prospects. Technology Diffusion in the Developing World” for a useful summary. 25 For a summary of the theoretical and empirical literature, see, for instance, Hall, Bronwyn H. and Lerner, Josh. (2009). “The Financing of R&D and Innovation”. NBER Working Paper No. w1532. September. 26 World Bank (2008) Global Economic Prospects. 27 Mazzucato, Mariana (2013) The Entrepreneurial State: Debunking Public vs. Private Sector, Anthem Press. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 13 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Cities are the hubs of innovative activity. Most of the global university system, and vibrant BPO industry indicate that innovation activity takes place in cities. This is because they larger cities in the country have the talent and the basic provide the key elements of the innovation ecosystem, infrastructure required for innovation to happen. However, including people, knowledge, infrastructure, economic in practice, Filipino cities underperform in innovation. Metro assets and the enabling environment. Given the falling Manila, Cebu and Davao have been unable to leverage the costs of ICT and easier access to IT skills, including for the substantial human capital potential to enhance innovation unskilled, young and unemployed, cities in less developed (Figure 5) and are struggling to create a thriving community countries can leverage human capital to create innovation of young, innovative firm start-ups. This seems to be communities that generate growth and create jobs. driven by the combined negative impact of poor business environment, lack of access to early-stage finance and weak Filipino cities have high potential to foster innovative access to domestic and global markets. activity. High level of human capital, a well-established Figure 5. Contrast Between Strong Performance of the Metro Manila on Human Capital, and Poor Innovation Outcomes EU Human Capital Index Patents registered 100 140 90 120 80 Patents per 10,000 population 100 EU Human Capital Index 70 60 80 50 60 40 30 40 20 20 10 0 0 Manila Jakarta Kuala Lumpur Bangkok Taipei Mumbai Seoul Buenos Aires Lima London New York Tokyo Manila Jakarta Kuala Lumpur Bangkok Taipei Mumbai Seoul Buenos Aires Lima London New York Tokyo Source: EIU Human Capital Index, Science’s Global Urban Competitiveness Report (GUCR) (2012) 14 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Figure 6. R&D Expenditure, % of GDP, 2011-12, Figure 7. Global Innovation Index Sore, 2015 Versus TFP Growth 2002-12 7 70.0 China 6 60.0 Average TFP growth 2002-2012 (in percent) 5 50.0 40.0 4 30.0 3 Indonesia India Philippines 20.0 2 Malaysia Thailand 10.0 1 Vietnam 0.0 0 Singapore China Malaysia Vietnam Thailand Philippines Cambodia Indonesia 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Research and Development Expenditure (in percent of GDP) Source: Rahul Anand, Kevin C. Cheng, Sidra Rehman, and Longmei Zhang. 2014. “Potential Growth in Emerging Asia”. IMF Working Paper WP/14/2, January; The Global Innovation Index 2015 Effective Innovation Policies for Development. Innovation is weak also at the national level, undermining in Europe and Central Asia suggests that innovation in firms prospects for sustained long-term growth. The Philippines that innovate the least and that are in traditional sectors spends only 0.1 percent of GDP on R&D, behind all regional such as food processing, is likely to more than double labor peers with the exception of Indonesia. It is also behind productivity. (Figure 8). Given the low economic complexity others in innovation inputs and outputs, as measured by, of the Philippines’ production structure and exports (Figure 9) for instance, the Global Innovation Index (Figure .7).28 Finally, and their low productivity, it is likely that innovation can have it lags peers in research outputs, patents and intellectual a strong impact on firm productivity, especially in the cities, property rights. In line with international experience, over which host the majority of companies. Given the country’s time a growing share of productivity growth will need to be level of development and the still significant distance to driven by innovation.29 the global technological frontier, highest returns are likely to result from technology absorption, i.e. innovation new to The impact of increased innovation on the Filipino firms the firm and the country (“imitative innovation”) rather than would likely be substantial. Evidence from a survey of firms innovation new to the world (“frontier innovation).30 28 The Global Innovation Index focuses on five pillars that encourage innovation: institutions, human capital and research, infrastructure, market sophistication, and business sophistication. Two additional pillars capture actual evidence of innovation outputs: knowledge and technology outputs and creative outputs, https://www. globalinnovationindex.org/content/page/framework/ 29 OECD (2015). The Future of Productivity; Rahul Anand, Kevin C. Cheng, Sidra Rehman, and Longmei Zhang. 2014. “Potential Growth in Emerging Asia”. IMF Working Paper WP/14/2, 30 World Bank (2008) ibid; IMF (2016) Fiscal Monitor. Fiscal policy for innovation. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 15 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Figure 8. Innovation Can Have the Biggest Impact Figure 9. Economic Complexity of the Filipino on Low Innovation-Intensive Firms Production and Exports is Low 7 30 300 China Percentage of firms engaged in product innovation Impact of product innovation on productivity (per cent) 6 Average TFP growth 2002-2012 (in percent) 25 250 5 20 200 15 150 4 India 10 100 3 Indonesia 5 50 2 Philippines Malaysia 0 0 1 High-tech and medium Medium low-tech Low-tech sectors Vietnam Thailand high-tech sectors sectors 0 -0.5 0.0 0.5 1.0 Percentage of firms engaged in Impact of product innovation on product innovation productivity Economic Complexity Index Source: EBRD (2014). Transition Report. Chapter 2 “Innovation and Firm Productivity”. Chart 2.3; Rahul Anand, Source: EBRD (2014). Transition Report. Chapter 2 “Innovation and Firm Productivity”. Chart 2.3; Rahul Anand, Kevin C. Cheng, Sidra Rehman, and Longmei Zhang. 2014. “Potential Growth in Emerging Asia”. IMF Working Kevin C. Cheng, Sidra Rehman, and Longmei Zhang. 2014. “Potential Growth in Emerging Asia”. IMF Working Paper WP/14/2; Paper WP/14/2; Weak collaboration between business and science is one the reasons for weak innovation at the city and national level. The university system seems to lack incentives for academics to focus on research, especially commercially oriented, and produce high quality outputs. The on-line survey of business has found that in all of the major cities businesses rely on personal networks and business associations as sources of information required for innovation, but rarely reach out to academic institutions. (Figure 10) Most universities have little to do with the private sector. The public financing for research lacks volume, clear priorities and critical mass. There are also weaknesses in protection of intellectual property rights, startup environment and strength of social capital. As a result, research outcomes are insignificant and cooperation with the private sector is negligible. 16 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Figure 10. Key Sources of Information for Business Innovation Metro Manila Metro Cebu Davao City 80% 40% 80% 70 36 36 70% 35% 70% 60% 30% 29 60% 55 50% 25% 50% 43 41 40% 20% 40% 34 30% 27 15% 14 30% 23 20% 10% 20% 10% 5% 10% 9 0% 0% 0% Universities, Government Personal networks Business Universities, Government Personal networks Business Universities, Government Personal networks Business research institutes agencies, support associations, research institutes agencies, support associations, research institutes agencies, support associations, networks networks networks Source: The World Bank Access to high-risk finance is also limited. High-risk capital helps to finance start-ups, nascent technologies and new business models. Business angels, seed funds and venture capital funds are one of the key driving factors of the success of Silicon Valley and other leading innovation ecosystems in the world. However, high-risk financing in the Philippines is largely missing. While there are no official data, anecdotal evidence suggests that there are only a few venture capital funds in the country, with a total annual investment of less than $20 million dollars, a negligible fraction of the country’s total banking sector assets and the country’s nominal GDP of more than $330 billion in 2015. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 17 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Box 6. Assessment of the Philippines’s Research Capacity and Innovation Ecosystem In 2014, USAID-funded project assessed the quality of the university research and innovation ecosystem based on a survey of stakeholders. It found that there has been an ongoing progress in improving the research ecosystem, but also that there were substantial weaknesses that needed to be addressed for the innovation support system to function efficiently and produce results. Specifically, assessed across six pillars of the report’s definition of an innovation ecosystem, the Philippines does relatively well on general education and human development, but is weak across the remaining five pillars, including intellectual property rights, startup environment and social capital (see Figure below). FACTOR SUPPLY DEMAND ENABLING ENVIRONMENT Education and Human Capital Development Research and Knowledge Creation Transfer of Know-How between Universities and Industries (Extension) Intellectual Property: Protection, Licensing and Commercialization Startup and Spin-off Companies Collaboration: Knowledge Sharing, Trust, Social Capital KEY POOR EXCELLENT Source: World Bank’s “World Development Report 2016”. Public support system for innovation seems to be the system seems fragmented, without a critical mass and fragmented and lacks critical mass of skills and resources. grossly underfunded. For instance, the largest R&D program The Philippine government supports innovation mostly managed by DOST had a budget of only around $30 million through fiscal incentives (reduced tax rates, tax deductions in 2009, raising questions about its impact; an R&D budget and income tax holidays) and grant programs offered by of another governmental agency, DOH, amounted to only a myriad of public institutions.31 Currently there are 28 $0.6 million.33 institutions providing innovation support programs.32 Yet, 31 There are many institutions involved in innovation policy: for instance, the Presidential Coordinating Council for Research and Development founded in 2007 coordinates work of DA, DBM, DOE, DENR, DFA, DOH, DND, NEDA, DTI, CHED, CICT, NAST and NRCP. 32 DTI (2015) Programs and Services for Micro, Small and Medium Enterprises. https://drive.google.com/file/d/0B0ilL7KAK3i5MUEtWDNRemNrSEk/view 33 Estrella Alabastro, “R&D in the Philippines: Issues and Recommendations”, Powerpoint presentation. 18 WORLDBANK.ORG/PHILIPPINES/URBANIZATION There is also little policy prioritization and coordination. high quality graduates. However, almost half of companies Each government agency seems to have its own R&D policy, surveyed by the Bank across the three largest cities report priorities and instruments and be focused basic science rather difficulties in finding quality workforce, suggesting a than enterprise innovation. There is also no framework for mismatch between graduates’ skills and the needs of the impact evaluation, including of the effects of the substantial business community (Figure 11). The survey results and tax expenditures resulting from tax breaks and tax privileges. anecdotal evidence confirms that the skills mismatch can be Finally, there seems to be a low level of awareness among observed in all major cities, even though specific issues and the policy makers of the critical importance of innovation for skills shortages vary.34 This finding is corroborated by other long-term growth: the government’s last innovation strategy studies35. The country also produces relatively few graduates dates back to 2007. in science, technology, engineering and mathematics (STEM) and there are particular shortages in subjects critical Despite relatively high educational attainment, there is also for innovation, including IT. Finally, despite several support a mismatch of skills. The Philippines has a well-developed programs, the large Filipino diaspora is hardly leveraged for educational system, which produces substantial numbers of technology transfer, knowledge sharing and global networks. Figure 11. Share of Firms Identifying Problems with Finding Quality Workforce 14+28+36184v 14+32+3618v 7+14+79v Manila Cebu Davao 4% 14% 14% 7% 18% 18% 14% 29% 32% 36% 36% 79% Very difficult Difficult Somewhat Easy Very easy Source: The World Bank 34 Refer to the full background paper on city competitiveness for further details. 35 World Bank (2010) Philippines Skills Report: Skills for the Labor Market in the Philippines. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 19 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N 2.4 Limited Access to Finance and Business Support Access to finance is key to economic growth Figure 12. SME Loans to GDP and Contribution to GDP, 2014 and development. There is large literature that highlights the casual relationship between access 70.0 to finance and growth.36 Poor access to finance 60.0 51 weighs especially heavily on MSMEs, preventing the SME Contirbution to GDP (%) 50.0 majority of micro and small rural enterprises from 57 40.0 171 growing.37 Because MSMEs often lack acceptable 61 9 forms of collateral and transparent accounting 30.0 practices, they are considered too risky for lending. 20.0 After adjusting for the size of the economy and SME’s Cities often lack leverage to improve the banking contribution to GDP, Thailand leads the region in the domain of SME lending and financial system, however they can run small 10.0 grant programs and help businesses with accessing 0.0 information about their financing options. Cities 0 10 20 30 40 50 60 70 can also play an important role in providing other SME Loans to Total GDP (%) targeted forms of business support. SME Loans Source: Deloitte (2015) “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved”. The banking sector in the Philippines is stable, profitable and well capitalized. This creates an Figure 13. SME Loans Growth Rate 2011-2014, CAGR in % important base for private sector growth. The 12% USD billion CAGR Filipino banks have high capital ratios, high ROE and 171 Thailand is the outlier with loan volumes of 153 comfortable liquidity.38 USD 171 billion and SME loans-to-SME GDP 146 133 ratio of 105% But banks hardly lend to MSMEs. Lending to MSMEs 8% 12% CAGR 11% represented only 3 percent of GDP in 2013, behind CAGR 61 CAGR 48 51 52 57 57 46 47 50 all regional peers. In Thailand, the regional leader, 36 41 6% 42 CAGR SME financing represented 34 percent of GDP. SME 8 9 9 9 lending in the Philippines also grew slower during Indonesia Malaysia Philippines Singapore Thailand 2011-2014 than in the region, increasing by only 6 SME Loans to 9% 55% 9% 36% 105% percent a year. In Thailand, it increased at a pace SME GDP (2013) twice as fast. (Figures 12 and 13) 2011 2012 2013 2014 Source: Deloitte (2015) “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved”. 36 For a useful summary of literature, see, for instance, Demirgüç-Kunt, Asli and Levine, Ross (2008). “Financial Sector Policies, and Long-Run Growth”. World Bank Policy Research Working Paper Series. 37 See, for instance, Stein, Peer; Ardic, Oya Pinar; Hommes, Martin. 2013. Closing the credit gap for formal and informal micro, small, and medium enterprises. Washington, DC : International Finance Corporation. 38 Llanto, G. M. 2015. Financial Inclusion, Education, and Regulation in the Philippines. ADBI Working Paper 541. Tokyo: Asian Development Bank Institute, SME finance forum. http://www.smefinanceforum.org/data-sites/ifc-enterprise-finance-gap 20 WORLDBANK.ORG/PHILIPPINES/URBANIZATION The largest banks are wary of lending to MSMEs. Among the Philippines is limited.41 Significant legal reforms have the largest and most-established banks, loans to micro and recently been implemented but their impact will depend small enterprises represented only 4 percent of their overall on the quality of implementation.42 Financial sector groups lending portfolio. The predominant part of the lending is within the banking industry have set up their own private channeled to low-risk large domestic and international credit bureaus, but they have a limited capacity to share data companies. Many large banks do not meet the legal target across different banking groups and data are generally only for the MSMEs portfolio to represents at least 8 percent of the for negative credit performance records. The fragmented loan portfolio. The share of MSMEs lending is much higher nature of the credit information industry prevents lenders among the cooperative banks, amounting to 23 percent of from obtaining reliable and complete credit history on the portfolio, but the cooperative banks are much smaller existing and potential borrowers. and limited in their capacity to ramp up lending.39 There is also a need to reform the existing guarantee instruments There are also deficiencies in registration of collateral. to refocus it on providing guarantees to micro and small Registration of both movable and immovable (land and enterprises. property) collateral legal framework and registration system also pose a significant obstacle. Registration of moveable Limitations in bank supervision framework and lack of collateral is time-consuming and costly and financial adequate bankruptcy and debt resolution framework institutions often cannot verify if a particular collateral is undermine credit growth for SMEs. Lack of legal protections registered because various Registry of Deeds offices are not for bank supervisors and an inadequate bank resolution centralized. Land registration and titling are fragmented into framework result in an overly conservative stance of the different registries, making debtor searches and financing regulators in setting guidelines for credit operations. The difficult, and property rights insecure (see Policy Note on bankruptcy process is slow (it takes around 6 years to Land Administration Management). complete a bankruptcy case), bankruptcy administration costs are high (38 percent of assets), and expected creditor The national-level system of public support for SMEs is grossly recoveries are at around 21.4 cents to a dollar. Despite the fragmented. There are more than 60 national-level institutions 2013 revision of the bankruptcy framework40, bankruptcy mandated to support SME development, including more procedures continue to be so inefficient that creditors hardly than 30 institutions supporting technology and production, ever use it. These factors make SME financing risky in the 10 institutions supporting SME marketing, and more than 10 Philippines. supporting regulations and incentives.43 In addition, there is a newly established nationwide network of Go Negosyo Lack of comprehensive credit information system add to centers, which aim to help SMEs by (i) informing about limited supply of credit. The scope, accessibility, and quality business registration, (ii) providing business advisory services of credit information through public or private bureaus in on product development and investment promotion, 39 Deloitte (2015) “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved”. 40 An up-to-date bankruptcy framework, Republic Act 10142 “Financial Rehabilitation and Insolvency Act,” which aimed for a faster and more orderly rehabilitation or liquidation of financially distressed companies and individuals was passed in 2010 and implemented in 2013. 41 Deloitte (2015) “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved”. 42 Credit Information Corporation established by Republic Act 9510, also known as the “Credit Information System Act,” passed in 2008 began operations in 2015 43 https://drive.google.com/file/d/0B0ilL7KAK3i5MUEtWDNRemNrSEk/view PHILIPPINES URBANIZATION REVIEW POLICY NOTES 21 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N market linkages and access to technology, financing, and respond to the real needs of the SMEs (see Box 3.7). However, management training, (iii) and serving as a support sharing the program budgets are small, the penetration of services facility and a one-stop shop for MSME services.44 among SMEs is low, and the awareness about the support programs is weak, as confirmed by focus group discussions Cities also provide business support services, but their with the private sector. Given the lack of monitoring and impact is not clear. Quezon City, Pasig and Davao City all have evaluation frameworks, it is not clear how effective the agencies and departments responsible for various types of services are and whether city level offer complements the business support provision (Table 3). Many of them seem to national support system or duplicates it. Table 3. Business Support Services at the National Level and in Selected Cities THEMATIC SUPPORT NATIONAL LEVEL SUPPORT LOCAL LEVEL SUPPORT PUBLIC AND PRIVATE INSTITUTIONS45 QUEZON CITY PASIG CITY DAVAO CITY Marketing 12 - - 1 Regulations / Incentives 14 1 - - Institutional Development 12 1 1 1 Finance Program/ Credit 22 1 1 1 Facility46 • Micro-financing • SME financing Microfinance-oriented rural/ 472 NCR = 75 Davao and cooperative banks47 Cebu = 1 Source: The World Bank 44 By early 2016, 152 Go Negosyo centers were established across the country and serviced more than 30,000 SMEs. Yet, it is not clear yet whether the new centers will be able to materially help MSMEs development. 45 List of Institutions/Agencies providing business support. Link: https://drive.google.com/file/d/0B0ilL7KAK3i5MUEtWDNRemNrSEk/view 46 Source: Financing Programs for MSMEs, https://drive.google.com/file/d/0B0ilL7KAK3i5bGIwb1V2b2dvS1U/view 47 Micro-finance oriented rural banks (331). Cooperative banks (143). Source: BSP Report 2015. http://www.bsp.gov.ph/downloads/Publications/2015/StatRep_2Sem2015b.pdf 22 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Box 7. Examples of Local Business Support Programs: Quezon City In 2012, Quezon City a created Business Development and Promotion Office and adopted a Magna Carta for Micro and Small Business Enterprises to provide a wide framework of policy and services support for small businesses in the city. QC also created the Sikap Buhay Entrepreneurship and Cooperative Office (SBECO). The SBECO conducts business trainings and consultations for city’s small and medium enterprises, and assists the city in the development of an SME Roadmap to guide the SME’s plans for growth and expansion. SBECO manages an entrepreneurship and micro-finance program known as the Puhunan Pangkabuhayan ng Sikap Buhay (PPSB), which is a non-collateral interest loan facility for small entrepreneurs in partnership with several cooperatives. The program has a budget of around 5 million USD a year and over the last 11 years it has supported more than 64,000 entrepreneurs. SBECO partners with Go Negosyo centers to provide additional trainings for micro entrepreneurs. While the headline loan repayment rate of 95% seems impressive, the effectiveness of the program and its impact is not clear. Source: World Bank interviews with the city, http://quezoncity.gov.ph/index.php/news/61/446-puhunan-pangkabuhayan 2.5 Inefficient Economic Planning, Unclear Mandate and Weak Governance City level actors can play a decisive role in promoting second tier of government. The cities are the most self- competitiveness. Global experience shows that cities can sufficient LGUs when it comes to revenue collection. In improve private sector performance by focusing strategic 2014, more than half of city budgets came from their own planning on economic outcomes, striving to improve revenue, while other LGUs collected less than a quarter of efficiency in policy implementation. Even if powers of city their budgets and had to rely heavily on the Internal Revenue governments are limited, they can expand their ability to Allocation (IRA) transfers.49 That said, despite substantial influence growth outcomes through building partnerships revenue independence, the overall city revenues are low in with the private sector or collaborating across administrative line with the nationwide overall tax intake.50 As a result, many boundaries.48 city-level economic development programs, with a possible exception of a few most developed cities in Metro Manila, are The Philippines has a relatively decentralized form of under-resourced and fail to reach a critical mass to tangibly governance with significant powers given to LGUs. Highly support the private sector. urbanized cities in the Philippines are a strongly empowered 48 “City Wedge” framework helps understand how cities can improve governance to achieve better economic outcomes. See World Bank, 2015, City Competitiveness. 49 Source: National Resource Government Institute (2016) Philippines Revenue Sharing, Case Study 50 In 2014, the Philippines collected only 13.7% of GDP in tax revenue, as opposed to, for instance, [25%] of GDP in Malaysia. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 23 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N A lack of clarity on the economic development functions in functions include investment promotion, investor services, among government levels undermines efficiency. De jure MSME support services, skills and even industrial policy and de facto regulations do not clearly delineate the role of (Figure 14). For instance, in Davao, investment promotion national and city governments in promoting private sector activities of the local branch of the national Department of growth and job creation. There are a large grey zone of Trade and Industry overlap with the functioning of the Davao functions, which are often duplicated between the city and Investment Board and there is little coordination. There are national government agencies. This issue cuts across many many other examples across the country. sectors. In the case of economic development, the duplication Figure 14. The Distribution of Economic Development Functions between Local and National Authorities Grey Area Investment promotion City Government National Government Investor services and incentives Jurisdiction Jurisdiction MSME support services Local procurement Trade policy MSME loans and access to finance Municipal property services Import-Export regulations management Cooperatives development Legal framework and requirements Issuing business permits and for business regulations construction permits R&D support and facilities Labor Market regulation Agricultural extension services Business incubation Large scale infrastructure Local infrastructure Industrial policy Small roads Local services and infrastructure Skills Source: World Bank based on analysis of local government code and public sector interviews 24 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Cities delivery models for economic development are key economic development targets are translated into fragmented. Multiple departments deliver services and objectives for various government departments, lined projects that contribute to economic development, but lack to budget allocation and coordinated by delivery units. coordination. (see Box 8) Global best practice suggests that Baltimore CityStat USA51 and PEMANDU Malaysia52 delivery the best results for economic development can be achieved unit offer examples of global best practice. by, inter alia, introducing “transversal management”, when Box 8. Examples of Local Business Support Programs: Quezon City City hall structure is complex and economic development functions are fragmented. There are 48 departments in the QC city hall, which are broken down into 3 clusters (see figure below). Economic development and business support functions are spread across various branches without obvious means of coordination. Skills development and MSME support are under alleviating poverty departments; economic development planning and tourism promotion is under building up the city branch, and business permitting and incentives implementation is within competing on effectiveness branch. Additional investment promotion and development investment functions are given to special Vice Mayor Mayor Special Bodies (Presiding oficer of (Local Chief Executive) (QCDA, QC - EDIB) bodies that are not integrated into the governance the City Council) structure. A 29 people strong LEIPO will also be established soon and will complicate the landscape even further. City Council The special economic development bodies need City Administrator (38 councilors and better coordination with the rest of the city hall. ex-officio members) Quezon City has two special economic development bodies that sit outside the regular city structure and report exclusively to the Mayor. Both of them present interesting innovations in economic government for the Philippines, but it is unclear to what extent their activities will follow key priorities for the city, Competing Alleviating Poverty Build Up the City on Efficiences Departments Departments Quezon City Development Authority (QCDA), a Departments government-owned and controlled corporation with an authorized capital stock of PhP 1 billion, primarily serves as the enterprise vehicle and investment arm of the city. It will provide the Quezon City government - Sikap Buhay - Market - City Treasurer’s with a vital entity for providing additional investments Entrepreneurship Development Office that will enable the city to generate employment and Cooperative Administration opportunities for its residents focused on proprietary Department Department -Business Permits and investments. Licensing Office - Scholarship and - Cultural and Tourism Youth Development Affairs Office Economic Development Investment Board (QC-EDIB) Program was initiated after adoption of the new city investment - City Planning and incentives code in 2013. Its task is to develop policies - Public Employment Development Office to enhance the business climate, attract investors and Service Office promote existing businesses in the city. Source: World bank based on review of Quezon City official web site and report documents 51 http://citistat.baltimorecity.gov/ . 52 Sabel C. Jordan L. (2015) Doing Learning, Being: Some Lessons Learned from Malaysia’s National Transformation Program http://www2.law.columbia.edu/sabel/papers/CS- LSJ--DLB%20Malaysia%20PEMANDU--Final-190115.pdf PHILIPPINES URBANIZATION REVIEW POLICY NOTES 25 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Cities also lack capacity and often willingness to take charge been streamlined and offers an improvement from previous of economic development. Until recently the cities were not approaches, economic development planning remains required to have an economic development office. Cities still ineffective as the new strategic planning model does implemented certain economic development projects and not encourage prioritization. The approach encourages offered business support services, but they tended not to development of a long list of projects covering each of have a systematic approach that tied it to core development thematic areas, rather than clear priorities.57 objectives. In 2010, a new law made it mandatory for cities to establish Local Economic and Investment Promotion Offices Economic development plans do not seem to be the key (LEIPOs) to plan and coordinate economic and investment priority for cities. According to the current structure of promotion policy.53 However, the implementation of the law local planning documents, Comprehensive Land Use Plan has been slow: some cities have yet to establish LEIPOs, while (CLUP) is at the top of the local planning hierarchy, while in other cities the capacity of the newly established offices is the Comprehensive Development Plan is of a lower priority limited.54 (Annex 3). The CDP itself includes a plan for five different sectors, among which only one focuses on economic Finally, corruption remains a major concern at the local development. Global best practice suggests various government level. In 2012, 68% of respondents of the local plans should inform and reinforce each other, rather local government perception survey reported that they than exist in a predefined hierarchy.58 On many occasions thought that their government was corrupt. Around 15% of understanding of future trajectory of economic development respondents have experienced corruption, while 66% have of the city is required for making land use decisions. For heard of it.55 Focus group discussions have also confirmed example New York has made a decision to allocate land on that businesses perceive corruption to be widespread and Roosevelt Island to a university on the basis of a strategic inimical to their development prospects. decision to support development of high-tech economy in the city.59 Inefficient Planning for Economic Development Lack of transparency of planning limits accountability of local Effective strategic planning is an important element of governments. The development plans are not published on city competitiveness. Good strategies help cities organize LGU websites and are difficult to obtain by stakeholders and their efforts around key priorities, streamline allocation of the local public. As a result, it is difficult for the public to hold resources and galvanize public-private coalitions.56 While government accountable for implementation of programs the strategic planning system in the Philippines has recently listed in the plans and for achieving the objectives. 53 Memorandum Circular 2010-113 54 USAID (2013) Rapid Training Needs Assessment of LEIPOs of the Cities of Batangas, Iloilo and Cagayan de Oro 55 Socal Weather Station (2012) Survey on Good Local Governance 56 World Bank (2015) “What makes a good city strategy?” 57 Bureau of Local Government Development (2008) Rationalizing the Local Planning Process 58 World Bank (2006) Local economic development: A Primer. Developing and implementing local economic development strategies and action plans. 59 Mulas, V. (2015) New York city: transforming a city into a tech innovation leader 26 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Public-Private Collaboration and the Role of Business Associations Box 9. Good Practice: Cebu Education Development Foundation for Information Techonology: Business Associations Can Play a Business associations are well positioned to engage in Pivotal Role productive coalitions with the government. Each of the cities analyzed in this report has several active business association, One of the most striking examples is CEDF-IT (Cebu Education including local chapters of the Philippines Chamber of Development Foundation for Information Technology. When the association was established Cebu had minimal presence Commerce, Chinese Philippine Chamber of Commerce and of the IT industry. However the association foresaw the a wide range of sector specific associations, including IBPAP. opportunity and invested into improving quality of tertiary IT education, early IT skills development and ensuring job These associations vary in the level of sophistications and prospects for IT graduates. CEDF-IT played a major role in size: most of them have at least several hundred members in attracting key international BPO and IT companies to the city over the last 15 years leading to development of a cluster each respective city and offer a wide range of services to the employing 800,000 people in Metro Cebu area. Today CEDF- members, including trainings, business advice, lobbying and IT is working to promote innovative entrepreneurship in the city. This example illustrates the extraordinary high potential others. In most cases, these associations are independent, of private sector institutions as drivers competitiveness self-funded and sufficiently staffed, which puts them in improvements. a great position to represent the business community in collaboration with city officials. There is still much scope for local governments and business communities to collaborate effectively. Business associations Box 10. Performance Governance System (PGS) in Metro Manila cities seem not be strongly involved in city Can Help Address Challenges of Accountability governance. In most cases of cities around the country, PGS is a management tool for local governments designed engagement of private sector is limited to consultations, by Institute for Solidarity in Asia (ISA). PGS uses a balanced while the private sector representatives maintain a rather scorecard methodology to link key development targets of a local government into target indicators for each of the negative view of the local government. Metro Cebu is a employees and hold them accountable for delivering. positive example of engagement of business association in First adopters of the PGS (San Fernando City, IloIlo City and local governance, which is illustrated well by the case of CEDF- Marikina City) have substantially improved revenue collection IT (Box 9). Level of collaboration between private and public and efficiency of service delivery. IloIlo reduced time required for business registration by 86%, and built a healthier economic actors appears to be much higher. For instance, Mandaue environment that helped city quadruple its manufacturing Chamber of Commerce has played a role in initiating the output. introduction of Performance Governance System in the city hall (Box 10). In addition, business chambers are now playing Source: Morrel. J (2010) The Performance Governance System in the Philippines: Building the a leading role in promoting and lobbying the establishment Capacity of Local Institutions; Centre for International Private Enterprise. of Mega Cebu Authority for greater horizontal coordination. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 27 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Coordination between LGUs and its Effect on Economic instruments, different investment strategies and different Development land management strategies. As a result, costs of scaling business across Manila are high, which creates a disincentive Fragmented metropolitan governance undermines to growth. Additionally, spatial fragmentation of the metro productivity. An OECD study has shown that metropolitan area limits the potential for development of industrial clusters areas with fragmented governance structures tend to have that could become drivers of innovation and productivity lower levels of productivity: For a given population size, a growth. Without a common economic development and metropolitan area with twice the number of municipalities is investment promotion strategy, cities in Metro Manila often associated with around 6% lower productivity.60 compete against each other for attracting businesses by offering costly tax incentives and discounts on land prices. Government in metropolitan areas in the Philippines is deeply fragmented, limiting the benefits of agglomeration. While the five broad constraints discussed in this chapter Metro Manila is a key example of inefficient administrative apply to most of the cities in the country, the conditions fragmentation. Across Metro Manila businesses need to of each city are intrinsically unique. Table 4 shows the abide by different registration requirements and processes expert’s judgment of the main constraints to private sector in each of the constituent cities, different business support development in the three selected cities. Table 4. “Traffic Light Signal” Overview of Key Constraints in Major Metropolitan Areas of the Philippines GOVERNANCE FOR ECONOMIC LOCAL INSTITUTIONS AND LOCAL INSTITUTIONS AND INNOVATION AND SKILLS ACCESS TO FINANCE AND DEVELOPMENT REGULATIONS REGULATIONS INFRASTRUCTURE BUSINESS SUPPORT AND LAND GOVERNMENT EFFICIENCY PUBLIC-PRIVATE COLLABORATION CROSS-BOUNDARY COLLABORATION TRANSPORT ELECTRICITY AND WATER LAND SKILLS INNOVATION SYSTEM ACCESS TO FINANC BUSINESS SUPPORT SERVICES Metro Manila Metro Cebu Davao City Source: The World Bank 60 OECD (2015) The Metropolitan Century. Understanding Urbanization and Its Consequences. 28 WORLDBANK.ORG/PHILIPPINES/URBANIZATION 3. Recommendations While a number of issues discussed in this chapter are already being addressed through multiple reforms, the persistence of the problems indicates that more needs to be done both at local and national level to improve the business environment, access to land and markets and upgrading of infrastructure, strengthening innovation systems and addressing skills mismatch, improving access to finance and business support services, and strengthening local institutions for economic development. In this report the recommendations focus on areas which are most likely to offer quick results in terms of improving city competitiveness and where cities themselves have a very important role specialization. Metro Manila seems to have a comparative to play as they are less dependent national reforms. These advantage in advanced business services, including in include improving the business regulatory environment, financial, professional and ICT services. In particular, the strengthening business support and innovation, and BPO sector (“administrative and support services”) has been reforming institutions for economic development. But before growing at a fast pace in the recent years and now accounts offering detailed recommendations in each of these areas it for more than a third of formal employment. Manila could is important to stress three key conditions for promoting city maximize spillovers by moving up the value chain in the competitiveness in the Philippines. BPO industry to provide more and better jobs, especially in high value added services such as accounting, reporting and Local economic development efforts should aim to leverage remote process management. The same applies to Metro competitive advantages of cities. While discussion of sectoral Cebu (and specifically Cebu City) where BPO is one of the compositions of city economies is outside of the scope of two sectors of specialization, which in 2015 accounted for this report, it is critically important that local economic 120,000 jobs. Private sector reforms would also help promote development efforts should be informed by understanding manufacturing in Metro Cebu and help new competitive of the structure of the city economy, the trend of structural sectors to emerge in Davao, which does not seem to have a transition and the core competitive advantages of the clear industrial specialization.61 city. Filipino cities reveal clear patterns of economic 61 Metro Cebu refers to Cebu City, Mandau City and Lapu- Lapu City; Cebu City refers to Cebu City LGU and Davao City refers to Davao City LGU. Metropolitan areas are used as a unit of analysis in this report. Oxford Economics data used for descriptive statistics and international benchmarking only includes Cebu City, and excludes Mandaue and Lapu-Lapu. For structural analysis of Metro Cebu, PSBI data aggregated from firm level for all three LGUs is used. While the PSBI sample of firms is not representative at the LGU level, it is still the best approximation. However the tree LGUs considered combined account for 75% of jobs in the Central Visayas region, for which sampling is representative, which limits the possible margin of error. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 29 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N transparency of local government, only a limited number of cities around the country have followed the good practices. This raises questions about the political economy of the process and the possible lack of incentives. This may be due to the short, 3-year electoral cycle, insufficient public pressure driven by a relatively weak civil society as well as large political and economic rents resulting from sustaining the status quo. National authorities should apply tools available to them to push and incentivizes local authorities. The immediate actions may include strengthen national indexes and designations. The introduction of private sector respondents would strengthen the existing Cities and Municipalities Competitiveness Index, while the profile of the national “Seal of Good Local Governance (SGLG)” would be enhanced by increasing the rewards for the best performing cities from 3 million peso to, for instance, 100 million peso. In Involvement of the private sector can ensure much more the longer term following measures should be considered: effective and fast competitiveness reforms in cities. Examples introducing further revenue sharing from growth of national from Philippines and elsewhere around the world show business taxes, requirements of greater transparency that private sector can play a critical role in boosting local through publication of strategic plans and progress reports, competitiveness. Private associations can provide training and possibly extension of political cycle. to entrepreneurs and potential employees, attract investors to the city, provide services to entrepreneurs and start-ups, lobby national government on behalf of the city. The well- Improving the Business Environment organized private sector associations in Filipino cities have all that it takes to complement and even drive the reform efforts There are a number of ways through which cities can improve of local governments. The critical element is overcoming the business environment. Domestic and international animosity between public and private actors, identifying examples suggest that cities have a key role to play in shared goals for city development and coordinating efforts. optimizing the processing of business permits, streamlining inspections, improving access to information about business National government should strengthen incentives for local regulations and enhancing communication with the private governments to promote economic growth. While there sector. The Philippine cities could learn from best practices are many examples of successful reforms to improve the developed by other cities in the country and abroad. (see Box business environment address skills challenges or increase 11) SOURCE: World Bank (2013) “Reforming Business Registration. A Toolkit for Practitioners”. 30 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Box 11. Business Registration Reform Options: International Best Practice There is a wide range of business registration reform options that are available for countries seeking to improve their business registration systems. These include: 1. Standardizing incorporation documents. Without standardized registration documents and clear guidance on how to complete them, the registration process can be discretionary, cumbersome, and costly and result in high rejection rates. In Estonia in 2006, processing time at the registry fell from 15 days to 1 with the introduction of standardized documents. Approximately 65 countries now have standardized incorporation forms. 2. Reducing or eliminating minimum capital requirements. Minimum capital requirements generally do not achieve any of their underlying objectives. Far from being beneficial, some studies find that minimum capital requirements have counterproductive effects on entrepreneurship. Consequently, since 2005, 57 economies have reduced or eliminated this requirement. 3. Making the registration process transparent and accountable. The easier it is to access information about a regulation, the easier it will be to comply with the regulation. In more than 90 percent of high-income economies, fee schedules can be obtained from agency websites, notice boards, and brochures. 4. Integrating registration systems and introducing unique identification. In most countries, in addition to registering with the business registration authority as a business entity, an entrepreneur must also obtain tax and VAT registrations from the tax administration, social security or pension authority, or municipal authority. A number of countries have therefore moved toward integrated registration systems that allow entrepreneurs to complete one application form for all authorities and introduced a unique identification denomination (UID), which is then used for all transactions with the authorities. 5. Creating a one-stop shop. The one-stop shop (OSS) provides a single interface for business start-ups, a mechanism that has gained popularity in many economies. Today about 83 economies around the world have some kind of OSS for business registration, including 53 economies that established or improved their OSS in the past eight years. 6. Introducing ICT. Today, 110 economies use information and communication technology (ICT) for business registration services ranging from online name search to online business registration, annual returns filing, and electronic transmission. Use of ICT makes the registration system faster and more cost-effective, it also enhances data integrity, information security, transparency of the registration services. SOURCE: World Bank (2013) “Reforming Business Registration. A Toolkit for Practitioners”. At the National Level use of notaries and lawyers optional for company startups, (iv) moving toward a fixed registration fee that covers only Further simplify business registration, licensing and business administrative costs, and (v) removing antiquated mandatory permit renewal. Reform areas include (i) standardizing practices of having the BIR stamp the company’s invoice and requirements and procedures, (ii) reducing or abolishing account books. International good practice has also favored the paid-in minimum capital requirement, (iii) making the disassociating business tax collection from business permit renewal. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 31 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Introduce a simplified tax regime for micro enterprises. The Coordinate regulatory requirements and processes across tax exemptions offered by the Barangay Business Enterprise metropolitan areas. In the long run the Department of Interior 2003 Act provide a foundation from which to further simplify and Local government (DILG) should aim to develop the BPLS the tax regime including such measures as replacing the into a single nationwide approach to business registration value-added tax (VAT), percentage tax, and income tax with and licensing. It should lobby for changes in national a single business tax on turnover and offering a simplified legislation whenever necessary would allow for a more system of accounting and reporting. Introducing online coordinated and consistent regulatory environment. In the tax filing and payments would also help to streamline the medium run coordination of regulatory environments within process.62 metropolitan areas should be made a priority. Metropolitan development authorities (after they are established and At the City Level empowered) should harmonize requirements for business registration, construction permitting and property registration in metro areas (primarily Metro Manila and Metro Improve the efficiency of BPLOs and strengthen Cebu) so that business permits issued by one of the LGUs e-government. City-level business and property registration within a metro area allows for operation across the metro procedures can be streamlined by adopting one-stop area. For example, opening a second shop in a different LGU shops for business registration and renewal, (following the within a metro area should be a matter of a one-step process. examples of, for instance, Quezon City and Cagayan de There is also an opportunity to harmonize local business tax Oro) and gradually introducing a comprehensive online rates across metro areas and for DILG to work with BIR to system. In addition, training staff, expanding performance- create a system for LGU business tax revenue sharing within based incentives, and introducing on-line applications the metro area that would allow for such simplified regime. and payments can all improve the capacity of BPLOs as can posting updated information about registration requirements, cost and processing time online. Many of Strengthening Innovation Systems these measures can be achieved by fully implementing and Business Support the Philippine Business Registry (PBR) and linking all cities to it. The local governments should aim to implement the Cities have a big role to play in enhancing innovation and recommendations developed by the BPLS project of DILG harmonizing business support. International evidence and DTI. One way for DILG to improve incentives it is by suggests that in some instances locally provided services linking compliance with BPLS monitoring indicators with are more accessible for businesses and can help address access to the Performance Challenge Fund for LGUs. specific needs of firms, however national programs can be more efficient at providing basic services due to scale 62 For good practices on paying taxes, see http://www.doingbusiness.org/data/exploretopics/paying-taxes/good-practices 32 WORLDBANK.ORG/PHILIPPINES/URBANIZATION effects. Cities can also play an important role of helping At the City Level businesses navigate and access services that are provided by national agencies. The challenge is in striking the right Leverage national support programs and introduce additional balance between national and local provision to maximize programs to address specific local needs. Cities can leverage accessibility and effectiveness.63 The cities can help develop the Negosyo center as a single point of access to national the community of entrepreneurs, strengthen access to high- and local support programs. By focusing on informing risk finance and improve collaboration between universities local firms about national government’s support programs, in city-level business. They can also use procurement to providing small grants to prepare and submit applications support innovative startups and SMEs.64 for funding to these programs (“grants for grants”), and adding extra funding to national grants obtained by local At the National Level firms, cities can avoid the cost of duplicating national-level programs. Additional programs should only be developed to Consolidate the business support system and introduce address specific local needs, for which national programs are a monitoring and evaluation framework to track its not available. effectiveness. The government should consider establishing a flagship entrepreneurship agency, which would consolidate Expand technology infrastructure, networking, and access to most or all of the national level support programs managed high-risk finance. By creating networking spaces, accelerators, by multiple agencies. It should continue to expand the incubators and shared services facilities to leverage the large network of Go Negosyo centers as one stop shops for pool of qualified labor, cities can spur innovative startups business support, but upgrade the scope and quality of and expand technology absorption. Upgrading skills and services available to enterprises. Finally, DTI should develop attracting talents through skill bootcamps, “rapid trainings”, a robust M&E framework to improve government’s ability to mentorship programs, collaboration with universities and evaluate effectiveness of support. attraction of diaspora, as well as strengthening access to high- risk finance by supporting business angels and co-financing Expand incentives for collaboration between universities seed and VC funds can all serve to promote entrepreneurship. and business. Measures include the recently announced Additional support and conditional co-funding to cities for Commission on Higher Education (CHED)’s secondment such initiatives might be available from such agencies as DTI. program between science and the business community, (See Box 12 for an example of comprehensive innovation strengthening the role of cooperation with business in the support at city level) funding algorithms for public universities, and increasing funding for applied, commercial research. 63 Centre for Cities (2013) Support for Growing Businesses, London 64 Mulas et al. (2015) argue that “coding and hardware skills that previous¬ly took years to learn can now be taught in weeks”; Mulas, Victor; Minges, Michael; Applebaum, Hallie Rocklin. 2015. Boosting tech innovation ecosystems in cities: a framework for growth and sustainability of urban tech innovation ecosystems. Washington, D.C.: World Bank Group. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 33 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Box 12. Developing Ecosystem for Startups: The Case of New York New York is an example of a global city and a financial EMPLOYMENT GENERATED IN NEW YORK CITY BY THE center that has developed a thriving digital technology TECH STARTUP ECOSYSTEM (2003-13) entrepreneurship ecosystem, now the second-largest tech startup ecosystem in the United States (after Silicon Valley) PERCENT GROWTH IN EMPLOYMENT 2003 - 2013 with US$ 4.5 billion venture capital investment in startups in 2014. The ecosystem created over 2,200 tech companies, U.S. TOTAL EMPLOYMENT US$ 18.1 billion in successful startup exits, and 50,000 jobs (around one percent of the city’s workforce) in the startups and ten times more in the supporting industries (Figure X). NYC TOTAL EMPLOYMENT The City of New York government has been heavily involved NYC TECH ECOSYSTEM EMPLOYMENT in the development of the ecosystem that has underpinned this growth. It has deliberately taken an ecosystem approach to address four main areas of weakness: (i) lack of technology- 0 5 10 15 20 specialized talent, (ii) insufficient sources of seed capital for startups, (iii) lack of physical space for entrepreneurs, and 58,000 105,000 (iv) a limited and uncoordinated community of tech-led TECH INDUSTRY INDIRECT JOBS innovators and entrepreneurs. In addressing all of these areas TECH JOBS its philosophy has been to act as an enabler and to build the 150,000 83,000 NON-TECH INDUSTRY market (Table 7). TECH TECH JOBS INDUSTRY NON-TECH 145,000 JOBS INDUCED JOBS 541,000 TOTAL JOBS GENERATED Comparison of Baseline and Streamlined BPLS for Applications for New Business Permits in Partner Cities, 2012-2014 KEY GAPS TARGETED POLICIES Lack of tech talent City universities did not STEM Education and Tech Introduce STEM academies, and produce engineers and Campus Cornell-Technion Innovation technical graduates Institute Lack of seed capital Seed capital funds did not NYC Seed Fund Seed Capital fund to invest in invested in NYC companies NYC based tech startups Lack of affordable space Office space too expensive for Network of Incubators Network of co-working spaces startups with accelerators and network of mentors Small and disorganized tech Tech community was small and Competitions and Open Data and Big App community atomized Promotions Competitions, promotion Campaigns for building role models, support of Mayor to community Source: Mulas, Victor; Minges, Michael; Applebaum, Hallie Rocklin. 2015. Boosting tech innovation ecosystems in cities: a framework for growth and sustainability of urban tech innovation ecosystems. Washington, D.C. : World Bank Group. 34 WORLDBANK.ORG/PHILIPPINES/URBANIZATION Use procurement to support innovative startups and SMEs. Modify the structure of the local planning system and Cities can use annual procurement budgets to support the guidelines for LGUs to give priority to economic development growth of city-level innovation and entrepreneurship by targets. The CLUP and CDP should have equal weight expanding the importance of technology in procurement in LGUs planning. Local economic development targets specifications and expanding the use of firm size limits in should become top priority in the CDP along with social procurement tenders. They could also experiment with pre- development and poverty reduction targets. Guidelines for commercial procurement to fund new ideas and technologies development of effective plans should focus on introducing and organize competitions for the most technology intensive best proactive practices: detailed analytics, prioritization, and efficient solutions to city-level problems. SMART goals and clear M&E frameworks. Strengthening Local Institutions for At the City Level Economic Development Strengthen the LEIPOs. LEIPOs should be given more At the National Level power and capacity to identify economic development priorities and programs and coordinate activates of various department. Promote metropolitan governance. “UK city deals” is a model which encourages city councils to work together more effectively provides an example of combining prescriptive Facilitate systematic dialogue with the private sector. measures with incentives for collaboration that the national Cities can leverage the global best practice in conducting government (DILG) could apply to promote collaboration public-private dialogue to engage in a systematic policy- between neighboring LGUs. Additionally, by supporting oriented, transparent and inclusive dialogue with business bottom up collaboration initiatives, like the Mega Cebu associations.65 Box 13 below shows best practice examples of Metropolitan Development Agency, the national government structuring local governance to promote cross departmental can help promote better metropolitan governance. thinking and engage private sector for improving private sector growth. 65 World Bank (2015) Public Private Dialog for City Competitiveness. Washington DC: The World Bank. PHILIPPINES URBANIZATION REVIEW POLICY NOTES 35 I M P R O V I N G C I T Y CO M P E T I T I V E N E S S F O R E CO N O M I C D E V E LO P M E N T A N D J O B C R E AT I O N Box 13. Organizing for Economic Development Cities around the world have used various institutional structures to develop economic development strategies, pursue a competitiveness agenda, engage private sector in policy delivery and facilitate successful implementation. Economic Development Agencies Economic development agencies (DAs) can be defined as, “legal, non-profit structures, generally owned by the public and private entities of the territory”.66 DAs are usually given a range of clearly defined functions that may include branding and international promotion; investment attraction and retention; business start-ups and growth; human capital development; real estate, urban and infrastructural development; social or green development initiatives and others. DAs are accountable to a group of actors that is broader than the city government. DAs help establish economic development at the key objective for the city and attract private sector talent and knowhow to carrying out economic development functions. Economic development agencies have proven themselves efficient at delivering trans- formative change. Barcelona Activa (the economic development agency of Barcelona Municipality) helps set up over 700 companies employing over 1500 a year. New York Economic Development Corporation activities have facilitated $22.9 million of private investment in 2008 alone.67 Delivery Units Delivery Units (DUs) are implementation structures established at the center of government in order to drive improvements in perfor- mance. DUs have a mandate to use the authority of the chief executive—the center of government—to lead “the political and technical coordination of government actions, strategic planning, monitoring of performance and implementation, and communication of the government’s decisions and achievements.”68 Such units usually do not have a narrowly defined focus, rather they are given authority to deliver on a set of priority targets or indicators. DUs help design clear responsibility and accountability structures, and link different public sector interventions to the key development priorities through transparent monitoring and evaluation and improved coordination. DUs have a potential to drive innovation and efficiency improvements in policy implementation. Baltimore’s CitiStat has changed the perfor- mance paradigm in the city governance by introducing clearer performance objective, a robust monitoring system and a performance based budgeting system. Public-Private Boards for Economic Development Public-private boards serve as a platform for information sharing and consultation, but depending on the context they can have a strong influence in defining development priorities and implementation.69 Additionally public-private boards can help surpass the geographic or functional limitations of typical local government agencies. Experience of Local Enterprise Partnerships in the UK reveals that while this units can be very efficient at leading and coordinating local economic development efforts, in other cases they can fail lack of clearly defined purpose, shortage of resources and leadership.70 Source: Gashi, D., Atkinson, J (2015) Guide to implementation of city competitiveness interventions. Background paper to World Bank (2015) Competitive Cities for Jobs and Growth: What? Who? & How? 66 Clark et. al., Organizing Local Economic Development, 2010:28. 67 Ibid. 68 Shostak et. al., When Might the Introduction of a Delivery Unit Be the Right Intervention, 2014: 3; Watkins, Center of Government Reforms, 2014: 1. 69 OECD, Governing the City: Policy Highlights, 2015: 4. 70 Bolton T. (2011) Sink of Swim? What next for local enterprise partnerships?, Centre for Cities, London This work is a product of the staff of the World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 36 WORLDBANK.ORG/PHILIPPINES/URBANIZATION