ࡱ> @ v`bjbj duuh(@@@lFFF$jP|$jm0p"""" ///////$1RG4&0F""0FF""'0<F"F"//FF!" }LgZHh!,#d =00m0!,m5$m5X!jjFFFFm5F!2:H V00j$gRdjRtrade policies by sector Introduction The main changes in the contribution of the different sectors to nominal GDP since 1999 have been the decline in agriculture's share (including forestry and fishing), from 17.1% to 15.3% in 2004, and an increase in that of manufacturing, from 21.6% to 23.0%. Services remains the largest sector, accounting for 60.7% of GDP in 2004, almost unchanged since 1999 (60.6%). It is also the major employer, accounting for 53.9% of employment in 2004, followed by agriculture (36%) and manufacturing (9.7%). Agricultural policy continues to aim mainly at self-sufficiency, while the remnants of the earlier import substitution and "picking winners" strategies remain in the policies affecting the manufacturing sector. These include what seems to be at least partial rolling back recently of the unilateral tariff reform programme and "re-calibration" of the tariff structure to temporarily assist domestic producers and to promote industrial development in priority areas like steel and petrochemicals. Policy in the energy sector has also been aimed at promoting self-sufficiency by diversifying energy sources. Substantial efforts have gone into restructuring the electricity sector. Liberalization in services has continued but with slow progress in key areas, such as electricity. The agriculture sector remains important as some 70% of the poor depend on it or on related activities. Protection in agriculture is aimed at promoting growth; however, productivity in the sector remains low. Deteriorating international competitiveness in major products, such as sugar, coconuts and fruits has hampered export performance. Agriculture's share of total exports has remained low, rising slightly from 5% in 1999 to 6% in 2003. Agriculture remains protected by relatively high tariffs, tariff quotas, and non-tariff barriers, mainly a quantitative restriction on rice and strict SPS regulations (e.g. on fruit and meat products). Sugar production and processing remains protected and highly regulated, and while catering for the domestic market, relies heavily on higher priced exports to the United States under the preferential export quota. To avoid having to reduce the applied out-of-quota tariff rates of 65% on raw and refined sugar, increased bindings from 50% to 80% were negotiated within the ϲʹ from July 2003. Price support by the National Food Authority still exists for rice and corn, mainly to attain food security, and was more recently extended to sugar. However, trying to achieve food security through protection to support higher prices to raise farm incomes is inefficient and costly to the economy, distorting resource allocation by inducing production. It also taxes consumers, especially the poor, and is inconsistent with goals of maintaining affordable prices. Production in the manufacturing sector is concentrated in food, beverages and tobacco, electronics and communications equipement, and garments. Apart from mainly these latter two products, which represented almost 70% and 6% of merchandise exports in 2003, respectively, manufactured goods are produced for the domestic market. The Philippine tariff shows escalation in certain industries, which has promoted the development of a manufacturing sector concentrating on processing components. Export-oriented industries, such as electronics, are mainly located in export processing zones and operate under a preferential regime, taking advantage, inter alia, of duty-free imports. Textiles and clothing exports, which relied on preferential quota access to protected markets, especially the United States, are likely to be adversely affected by their removal in 2005. The Government has acknowledged the need to improve the industry's productivity so it can compete with lower-cost suppliers. The motor vehicle industry remains relatively highly assisted, despite the elimination of the export balancing and localcontent requirements as planned by mid 2003, and reduced tariff protection. The Motor Vehicle Development Plan continues to promote inefficient assembly operations and component manufacture by applying preferential tariffs of 1% and 3% on imported completely-knocked-down kits (provided they exclude locally available components) that are well below rates of mainly 30% on imported vehicles. Assistance will increase if the courts uphold the general import ban on used motor vehicles announced in late 2002. The Government supports the need to liberalize utilities and other key services to promote efficiency through competition and private sector participation. These reforms would be facilitated if supported by effective measures to stem anti-competitive behaviour. After lengthy delays, electricity restructuring and deregulation, including privatization, is continuing with renewed vigour. Generating plants representing 70% of the National Power Company's capacity will be privatized by end 2005. TRANSCO, the holder of the transmission monopoly, will also be privatized through concession to a single operator by mid 2005. A wholesale electricity market is planned to operate from mid 2006, and retail competition and open access in the Luzon grid is still scheduled for July2006. Cross subsidies between electricity users are being phased out. Foreign investment in utilities (apart from generation) is constitutionally capped at 40%, thereby restricting competition. Since 1999, the Government has taken substantial steps to strengthen the financial sector, especially banking, including revamping the regulatory and supervisory framework in line with BIS recommendations, such as introducing risk-based capital-adequacy requirements. Foreign ownership of domestic banks has increased since 1999; however, foreign banks, including branches, accounted for only 14% of total bank assets at the end of 2004, still below the 30% allowable limit (majority domestic-owned banks must hold at least 70% of total bank assets). Government policy has been directed at bank rationalization by reducing the number of smaller banks. A three-year moratorium against establishing new banks, including foreign subsidiaries, was implemented in June 2000 to encourage bank "buy outs", and was subsequently extended. The 60% ceiling on foreign ownership in domestic banks was also lifted until June 2007 to allow overseas investors to own up to 100% of onebank, subject to Monetary Board authorization. New foreign branches also remain effectively prohibited following the granting of the extra ten licences in the mid 1990s. These restrictions may potentially reduce competition. The banking sector suffers from high levels of non-performing loans (NPLs), equivalent to 12.5% of total loans at end 2004; these NPLs, along with deficiencies in loan classifications and continuing large Philippines Deposit Insurance Corporation (PDIC) support, raise prudential concerns, including possible bank under-capitalization. Market access remains unrestricted in most telecommunication services and competition is boosted by relatively unfettered market entry and exit. However, geographical separation of the market may restrict competition to the benefit of the dominant supplier Philippine Long Distance Telephone Company (PLDT). Interconnection, although mandatory, has been slow and may also have hindered competition somewhat. Currently, access charges provide cross-subsidies to fund unprofitable local services, which is not only inconsistent with a competitive market, but has made interconnection less transparent and raised access charges. Competitive wholesale cost-based interconnection charges are being adopted. Foreign equity in telecommunications is constitutionally capped at 40%; its relaxation would facilitate greater market access and efficiency. During the period under review, efforts have been made to liberalize air transportation services. However, Philippine Airlines (PAL) continues to be virtually the only domestic air carrier authorized to provide international services, and bilateral air service agreements remain relatively restrictive. Foreign equity in Philippine carriers is still constitutionally limited to 40%. Deregulation of maritime transportation is much more advanced, with rates (seemingly excluding third-class passenger fares and certain non-containerized basic commodities) and routes deregulated, except in cases of monopoly or ineffective competition. However, cabotage is prohibited and foreign equity is constitutionally capped at 40%. Investment incentives were introduced in 2004 to support domestic shipping and the shipbuilding industry; imports of vessels are also to be restricted progressively as of 2014, pending an evaluation of domestic shipbuilding capacity. Agriculture Overview Agriculture's share of GDP at current prices fell from 17.1% in 1999 to 15.3% in 2004 (14.8% in 2003), despite relatively high levels of protection aimed at promoting the sector's growth (TableI.2). Nevertheless, agriculture accounted for 36% of employment in 2004 (38.8% in 1999), and 70% of the poor depend on farming or related activities. Agricultural exports, mainly coconut products and fruit, rose slightly from 5% in 1999 to 6% of total exports in 2003. Agricultural growth is handicapped by low labour and land productivity, and the deteriorating competitiveness of traditional products undermines export performance. This is due mainly to small-scale farming, inefficient and inadequate public investment including in core services, poor farm policies, and an institutional framework that has distorted economic incentives. Smallholders dominate agriculture, with farms averaging about 2 hectares. Some 15% of farmland (the same as in 1990) is irrigated, about half of the potential area. Rice, corn, and coconuts cover about 85% of farmland. Some 60% of output is crops, mainly rice (22% of total agricultural value in 2003), coconut (7%), bananas (6%), corn (6%), sugarcane (4%), mangoes (3%), pineapples (2%), and coffee(1%). Coconuts (mainly as oil), fruit (bananas, pineapples, and mangoes) and sugar remain the main agricultural exports. Livestock production is mainly poultry (18%) and pigs (17%). Policy developments Agriculture protection increased substantially from 1994 to 1998 following "tariffication" of non-tariff barriers with high tariffs and/or out-of-quota rates, and these measures along with quantitative import restrictions for rice (and seemingly fish) and SPS arrangements for issuing import permits, contribute to relatively high agricultural protection. Rice is also subject to a 50% tariff, and tariff quotas on coffee, corn, live animals and meats, potatoes, and sugar are restrictive, often being unfilled and subject to relatively high out-of-quota duties of generally 40% (Chapter III). High tariffs, mainly up to 40%, also apply to certain vegetables, fruit, and meat products. The National Food Authority (NFA), the Government's grains marketing arm, controls rice imports, and provides price support to growers of rice, corn and, since 2004, sugar. Protection is aimed at self-sufficiency, especially in rice, and ensuring sufficiently high and stable food prices to enhance farm incomes and alleviate rural poverty, while also maintaining affordable consumer prices. High protection, however, has contributed to the sector's non-competitiveness by reducing incentives for farmers to minimize production costs and raise efficiency, and by lessening the perceived urgency for the Government to fund essential agricultural public infrastructure and support services. The 1997 Agriculture and Fisheries Modernization Act (AFMA) continues to govern agricultural (and fisheries) policies. It was aimed at improving competitiveness and promoting self-sufficiency through modernization. The AFMA provided for tariff exemptions on a wide range of imported agricultural (and fishery) inputs until February 2003. RA 9281 of 2004 prolonged the minimum annual public sector support of PhP20 billion to agriculture until 2015, and further increased it by at least PhP17 billion. This is to be at least partly funded by tariff revenues, and countervailing, anti-dumping and special safeguard duties on agricultural imports. Nominal rates of protection, which measure the extent to which consumers are penalized by domestic prices exceeding world levels, rose during the 1990s on rice, corn and sugar. From 1995 to 2000, the nominal rate averaged 71% on rice, 87% on corn and 106% on sugar, up from 19%, 76%, and 81% in 1990-94. Nominal rates on pork and chicken remained relatively high at 29% and 45%, respectively, in 1995-00, although falling from previous years. The continued use of tariff and non-tariff barriers to shelter farmers from import competition suggests that nominal rates have remained high in agriculture. Assistance through price support and import barriers is heavily distorting and inefficient, since higher farm prices directly encourage production. Contrary to policy objectives, protection that raises prices of staples may worsen poverty and detract from food security by reducing the capacity of the poorest to purchase food. Disparities in effective rates of protection (derived from nominal protection levels and measuring net protection to the activity's value added) between activities and sectors tend to misallocate resources both inter- and intra-sectorally. Although effective rates of protection for manufacturing once exceeded agriculture, the reverse is now true (Table IV.1). Thus, while overall effective protection had declined to 16% in 1999 and to 14% in 2004, it fell more slowly in agriculture during the 1990s, partly due to higher levels of protection for rice, corn and sugar. Relative protection between agriculture and manufacturing shifted from one biased against agriculture in 1990-95 to one increasingly for agriculture since 1996. In 2004, effective protection in agriculture was 19.8% compared to 15.2% for manufacturing. Average agricultural tariffs (based on out-of-quota tariffs) significantly exceeded manufacturing in 2004 (Chapter III). Thus, the current assistance structure favours agricultural over manufacturing activities and import-competing products over exports, especially of manufactured products. Protection disparities appear also to have widened, including between and within the agriculture and manufacturing sectors, thereby suggesting less efficient resource use and potentially offsetting at least some of the economic gains associated with reduced levels of protection. The Agricultural Modernization Credit and Financing Program (AMCFP) provides farm credit using market-based mechanisms, including market interest rates. The AMCFP serves as the umbrella financing and credit guarantee programme for agriculture and fisheries, and is replacing the fragmented subsidized directed credit programmes (DCPs) operated by non-financial government agencies to assist, among other sectors, agriculture. Over 85 DCPs existed in the late 1990s, administered by 21 agencies. While credit provided to agriculture through the DCP's amounted to almost PhP20 billion in 1996 (almost 40% of total DCPs), such subsidized credit policies were costly and ineffective in improving farmers' access to credit, due to large-scale loan defaults and consequent dwindling of credit funds. Under the AMCFP, government financial institutions act as administrators of wholesale credit funds to encourage private institutions to provide rural loans. Its implementation has slipped substantially. DCPs in agriculture were to be phased out over four years (i.e. by 2002). The Agricultural Credit Policy Council, responsible for DCP consolidation, started consolidating the Department of Agriculture's 38 DCPs in 2002, for which funds are expected to total PhP5.5 billion. Supplementary government funds have been delayed, and some agencies still provide subsidized credit to farmers. Table IV.1 Effective rates of protection, 1999-04 (Per cent) Sector199920002001200220032004Agriculture, fisheries and forestry14.814.815.713.814.014.4Agriculture19.619.621.520.019.319.8Fisheries6.36.34.30.73.94.3Forestry2.82.82.83.11.51.5Mining0.40.40.40.20.40.4Manufacturing17.817.814.315.314.415.2Food processing32.532.527.032.630.531.6Beverages and tobacco13.713.77.81.94.28.5Textiles, garments and footwear11.811.98.46.23.13.4Wood and wood products15.915.910.05.67.77.0Furniture and fixtures10.310.412.19.09.49.4Paper, rubber, leather & plastic products10.510.08.66.57.06.8Chemical & chemical products6.76.75.34.14.24.9Non-metallic mineral products3.73.73.33.13.33.3Basic metals and metal products8.37.96.64.34.94.9Machinery8.28.26.25.04.44.2Miscellaneous manufactures4.94.93.52.63.13.0Overall16.316.314.114.313.714.4Note: EPR estimates are based on the 1988 Input/Output table. Source: Philippine Tariff Commission. Uncertainties exist over land reforms. Land certification has slipped below the annual target of 100,000 hectares. Beneficiaries of agrarian reforms cannot sell or transfer land within tenyears from certification, and then can only dispose of up to five hectares; the remainder must be sold to the Government. This has prevented the development of efficient land markets and limited the use of land as collateral for loans, thereby discouraging investment in agriculture. Foreign investment in agriculture is generally prohibited. Foreigners (including corporations with 60% or less domestic equity) cannot own farmland, but can lease it for 25 years (extendable for another 25 years) subject to area limitations. Selected activities Rice The Philippines is nearly self-sufficient in rice; production rose almost 2% to 13.5 million tonnes in 2003 (11.8 million tonnes in 1999) and there are minimal exports. Rice is protected by a tariff of 50% and an import quota, set annually by an inter-agency committee (chaired by the Secretary of the Department of Agriculture), to reflect the shortfall in domestic production. In 2004, the quota level of approximately 800,000 tonnes was fully utilized and substantially exceeded the minimum access volume committed under the ϲʹ Agreement on Agriculture (238,940 in 2004, up from 134,400 tonnes in 2001). The Philippines has therefore met its multilateral commitments on rice, which was exempted from "tariffication" until 2005. However, the import quota is unlikely to be removed as scheduled in 2005. The authorities indicate that the use of imported rice is unrestricted and sold to consumers through licensed and accredited retailers. The NFA commenced paying the 50% rice tariff in 2002, and despite minor deregulation, effectively remains the sole importer (and exporter) (Chapter III). NFA procures paddy rice nationally from individual and organized small-scale farmers at support prices (currently PhP10 per kg.) that are set as the minimum needed to achieve a "reasonable" return on investment (Chapter III). It also operates several indirect market intervention programmes, such as the Farmers' Incentive Rice (FAIR) Purchase Programme, to encourage sales to NFA. Rice subsidy programmes exist for the poor, such as the Targeted Rice Distribution Programme (TRDP), whereby rice is distributed to targeted beneficiaries in depressed regions. In 2001, the latest year for which figures are available, the Philippines spent PhP3.1 billion (PhP4.3 billion in 2000) to support rice prices. In 1999, the NFA's annual cost to the economy on top of its annual budget was estimated at PhP49 billion. It continues to require additional public funding because of its poor financial position. Sugar Sugarcane production rose by 16% in 2003 to 24.0 million tonnes (production was 23.8million tonnes in 1999). Exports have declined over the longer term, but increased substantially to US$53 million (f.o.b.) in 2003 (US$33.1 million in 1999), representing some 10% of the value of production. The Sugar Regulatory Authority (SRA) tightly manages supply, including growing, processing, and exporting. The industry relies heavily on exports at above world prices to the U.S. market under its preferential quota; sales to other markets are minimal. The U.S. export quota has remained at approximately 137,350 tonnes by cane weight (around 142,000 tonnes of refined sugar), equivalent to about 6% of production volumes. The authorities indicate that the quota is regularly filled unless otherwise directed by the U.S. authorities, as happened for the three consecutive quota years 1999-00 to 2001-02, when quota utilization fell to 55%. This situation was expected to occur again in the 2004-05 quota year, when only about 97,000 tonnes (about 70% of the quota) is likely to be exported owing to U.S. requests. Sugar remains relatively highly protected. A tariff quota (62,627 tonnes in 2004), with in-quota rates for raw and refined sugar of 50% and out-of-quota rates of 65% (50% for beet sugar), restricts imports. In response to pressure from domestic sugar producers, the Philippines concluded ϲʹ Article XXVIII negotiations to raise to 80% the bound out-of-quota tariff rates on raw cane sugar (tariff item 1701.11) and cane or beet refined sugar (tariff item 1701.99) from the final level of 50%, agreed in the Uruguay Round, starting 1 July 2003. The SRA divides sugar into several categories to control production and share the price premiums on U.S. exports and domestic sales among cane growers and processors. Production quotas are implemented through the "quendan" system. Sugar is classified as "A" (U.S. market sugar), "B" (domestic sugar), "C" (reserved sugar as needed), and "D" (world market sugar). It must be deposited in registered mill-owned warehouses and only quendan holders can withdraw sugar. According to authorities, this system ensures the industry's economic viability by allowing cane growers and millers to receive a "fair" return on investment. However, such supply management distorts incentives and generates growing and milling inefficiencies. In particular, averaging prices across the higher priced U.S. and domestic markets distorts price signals and hence production. The revenue-sharing arrangement that allocates 60-70% of returns to growers and the rest to millers (RA809) is also distorting, and reduces incentives to investment. However, the authorities indicate that while this system needs improvement, mill efficiency has increased. Measures being considered to encourage efficiency include applying a base payment on cane quality. In 2004, the NFA extended market price support to stabilize sugar prices. According to the authorities, growers needed better returns to prevent surplus production from depressing prices to unacceptable levels. The NFA procured "C" sugar at a total cost of PhP612 million (44,248tonnes at a "gross liquidation" price of PhP700 to 720 per 50 kg. bag). While this is being continued in 2005, it is considered temporary. Other Coconut production in nut terms rose by 1% in 2003, to 14.3 million tonnes (12.1milliontonnes in 1999). The Philippines is a major exporter of coconut products. Coconut oil, its leading agricultural export, increased sharply in 2003 to US$505 million (US$342 million in 1999), representing 1% of total exports and 22% of agricultural exports. Imports of coconuts and coconut products are dutiable at MFN tariffs of generally 15%. The Philippine Coconut Authority (PCA) is responsible for the industry's development. Its marketing functions include matching importers and local buyers with the right producers/suppliers; investment, product and marketing promotion; and monitoring and disseminating market data. Growers, processors, and traders must register with the PCA. It issues export and commodity clearance requirements. These requirements are currently suspended in order to promote exports, except for coconut planting materials, such as seedlings and seed nuts, which require SPS certificates to export. The Government's interests in processing plants (oil mills, refineries, and desiccating plants) were sold in the 1970s. Private operators acquired several oil mills using funds from the Coconut Consumer's Stabilization Funds, a tax levied on processors until 1982 to subsidize prices of mainly copra and cooking oil. According to the authorities, the only remaining processing regulation is on the establishment and capacity of desiccating plants to ensure that new plants are located in non-saturated areas with ample coconut supplies, in order to avoid excessive competition and inferior products. Bananas and pineapples, the main fruit exported, accounted for 21% of agricultural exports (22% in 1999) and 1% of total exports in 2003. Production of bananas rose by 2% in 2003 to 5.4million tonnes (4.6 million tonnes in 1999) and that of pineapples by 3% to 1.7 million tonnes (1.5million tonnes in 1999). Fruit has a tariff of up to 15%, e.g. bananas 15% and pineapples 10%. Imported fresh fruit requires an import risk analysis and a phytosanitary certificate. Entry restrictions into banana cultivation effectively allow growers to determine export levels, and support a cartel. Fisheries In 2003, fishing and fish processing contributed some 2% of GDP and 4% of employment. Exports of fish products amounted to US$524 million in 2003 (US$480 million in 1999), and accounted for 1% of total exports. Imports of fish products are negligible, at least partly due to government regulation, including import (and export) controls to ensure food security. Fishing continues to be regulated by the 1998 Fisheries Code and implementing rules and regulations passed in 2000. The Code aims to preserve, protect, and manage fisheries in a sustainable manner, and to optimally utilize offshore resources to ensure food security. Despite efforts to introduce sustainable fisheries management, over-fishing has heavily depleted fishing stocks. Special incentives were extended to commercial fishermen for five years (until 9 February 2005) to encourage fishing further offshore. These included long-term loans to build or improve fishing vessels and equipment, tax- and duty-free importation of fishing vessels not older than five years, and equipment. Tax and duty rebates on fuel consumed were also provided indefinitely. Board of Investments incentives are also available to registered fish processors. A fisheries access licensing system, to be implemented by the Department of Agriculture (DOA), based on catch quotas set according to scientifically determined maximum sustainable yields (MSY) was envisaged in the Fisheries Code to avoid over-fishing. However, this has not been implemented and fishing licences are still issued largely unrestricted, including by municipal governments, even though according to the authorities most of the pelagic and demersal fisheries have reached MSY levels. The current access regime and licensing policies are still being reviewed as part of the Government's "precautionary approach" to fisheries management, and the authorities indicate that the proposed licensing system will be implemented when the national fishing fleet inventory and one-year moratorium on issuing new commercial fishing vessel and gear licences, planned to have commenced from 30 October 2005, are completed. Provisions to raise fees for Commercial Fishing Boat Licences (CFB) to reflect "resource rents" of fish stocks as part of sustainable fisheries management have also not been implemented. Sustainable fishing is presently enforced through various laws, such as regulations on net mesh size and prohibiting destructive fishing methods. The 1991 Local Government Code and the Fisheries Code guide the division of responsibilities between municipalities and the national government. Preferences on the use of marine resources are given to local communities adjacent to municipal waters. Small and mediumsize commercial fishing boats require a permit from the local chief executive to fish certain species in the subzone of municipal waters. Tariffs on live fish ranged from 1% to 15%, and averaged 6.9% in 2004, down from 9.5% in 1999. Respective rates on processed fish were 3% to 15%, and 9.8%, also lower than the average rate in 1999 (13%). Non-tariff barriers mainly restrict fish imports. They are only allowed when certified as "necessary" by the DOA in consultation with the Fisheries and Aquatic Resources Management Council (FARMC). A "certificate of necessity" will be issued if importation is essential for achieving food security (taking into account demographic changes, domestic and international trends in fish trade, and supply and demand) and imports would not injure or threaten injury to the domestic fishing industry. Once issued, any importer may file an application to import fresh, chilled or frozen fish, which also requires an import permit from the Bureau of Fisheries and Aquatic Resources (BFMR). Fish imported for canning or processing, including by institutional buyers, does not require a certificate but must have a permit. All imported fish products must pass microbiological analysis and physical examination to be issued a Fishery Sanitary and Phytosanitary Certificate per shipment. The regulation of imported live exotic species and live prawn and shrimp is based on "import risk analysis" and existing biosafety laws. Fish exports are regulated to ensure food security, to protect human health, and to meet the sanitary requirements of export markets. They require a permit per shipment from BFMR. Permits are valid for 30 days, and unused permits are automatically cancelled. While live fish exports are prohibited, unless from accredited hatcheries and ponds, this has not been implemented according to authorities. Exports must be processed in establishments certified by BFAR as compliant with the Sanitation Standard Operating Procedures (SSOP) and the HACCP system. The BFMR conducts preshipment inspection. The use and exploitation of fishery and aquatic resources is reserved exclusively to Filipinos. The Constitution prohibits foreign equity in fisheries, and it is capped at 40% for deep-sea commercial fishing vessels. Fish processing plants in special economic zones can be fully foreign owned. Mining And Energy The main goals of the 2004-13 Energy Plan are to secure a stable energy supply at "fair and reasonable" prices that allow recovery of "just" costs and a reasonable return, and to diversify energy sources, including doubling renewable energy capacity. It aims to further raise self-sufficiency from 55% to 58% by 2013. In 2004, imported oil (36%) and gas (8%) were important energy sources, and it is planned to reduce their relative importance to 30% and 4% respectively, by 2013, and to use substantially more domestic gas (11%). The Department of Energy (DOE) continues to oversee the sector's performance. It monitors supply, demand, inventory levels, and the prices of certain products. The DOE has no regulatory powers or functions, including over energy prices. It tries to ensure competitive behaviour in the sector. Tariffs on petroleum products in 2004 generally ranged from 3% to 7%, and averaged around 4%. Coal and most mineral tariffs were 1%, 3%, 5% and 7%, and averaged 5%. Tariffs on oil and refined products of 3% were raised to 5% from 2005; according to the authorities, this is a transitional revenue-enhancing measure until additional oil taxes are enacted. Special investment incentives apply to energy contractors and developers of oil, gas, and geothermal projects. These cover exemption from all non-income taxes, including taxes and duties on imported machinery, equipment, and spare parts, and a Filipino Participation Incentive Allowance (FPIA). Mining operators and developers are eligible for tax incentives under the Omnibus Investment Code. Exploration, mining, quarrying, minerals processing, and development of renewable energy sources are preferred activities listed in the IPP and are eligible for BOI and non-tax incentives. Mineral exploration and processing licences are open to full foreign equity participation. Foreign equity in mineral agreements, such as production-sharing agreements (the most common), joint venture agreements (not operational) and co-production agreements is capped constitutionally at 40%. However, foreign investment in mining is likely to be boosted by the recent court decision that 100% foreign equity in financial or technical assistance minerals agreements was constitutional. These are reserved for large projects (over US$50 million) in which the Government receives 50% of net mining revenue (revenue less gross mining costs), including direct taxes and fees paid by the project. Small-scale mining is reserved for Filipinos. Petroleum and petroleum products There have been no major changes in the downstream oil industry during the period under review. RA 8479 deregulated the industry in February 1998. This removed the transitional automatic import parity pricing mechanism to enable the market to set prices, and abolished the Oil Price Stabilization Fund administered by the Energy Regulatory Board (ERB) to absorb differences between administratively set domestic and international prices. Accompanying measures were introduced to strengthen competition: cartelization, predatory pricing, and other acts restraining competition were prohibited. The DOE and DTI promote fair trade to try to prevent anti-competitive practices. A joint DOE and Justice Department Task Force examines consumer complaints of "unreasonable" price increases. The DOE is currently reviewing RA 8479. Domestic prices reflect import parity prices (subject to excise taxes, tariffs, and transport costs); no cross-subsidies exist. DOE monitors domestic wholesale and retail prices of refined products as well as supply, demand, and inventory levels. Refiners and importers are required to maintain minimum inventories at their own expense. The Minimum Inventory Requirement (MIR) was activated in January 2003 to ensure adequate supply of reasonably priced petroleum products given geopolitical tensions in the Middle East. It was lowered after the Iraq war to 15 days of stocks for refiners and 7 days for bulk and LPG suppliers. Since the market (retailing, bulk marketing, distribution, and storage) was deregulated, new entrants need only notify in advance and provide a business plan to the Oil Industry Management Bureau, and obtain "normal" business and other permits and clearances. Operators must notify import/export shipments and submit monthly and annual reports on sales, inventory (by crude and product), local purchases, and imports. New entrants have mainly relied on imports to compete with the traditional refineries (Shell Petroleum Corporation and Petron Corporation, which is still 40% state owned). New competitors (over 80 companies) include local firms such as Flying V and Unioil, and foreign firms, such as PTT of Thailand, Petronas of Malaysia, Total of France and Liquigas of the Netherlands. They held 14% of the overall market in 2004 (over 40% of the LPG market). The number of gasoline stations has increased substantially; entry, including unrestricted foreign equity, was deregulated in 2000. The Government plans to pass the Bioethanol Fuel Act in 2005 requiring oil companies to use 5% ethanol within two years and 10% before 2010, for environmental and rural development reasons, with sugar to be the main ethanol source. Improved tax and contractual terms for oil exploration and development were introduced recently, especially for deepwater activities. Full foreign equity is allowed in petroleum exploration and extraction. Service contracts, subject to the Presidents approval, may cover any area, including national reserves, and are granted by public bidding or by negotiation with DOE. However, the past practice of issuing them by negotiation for areas defined by the contractor on a "first come first serve" basis was replaced with a system of "competitive public contracting rounds" in 2003, whereby the DOE awards exploration licences by offering large areas and allowing bids on selected sub-areas. The service contractor receives a stipulated fee while the Government retains ownership of all discovered reserves and provides financing. The first round opened in August 2003 and covered 46offshore blocks. Bidding by domestic and foreign investors meeting specified technical and financial requirements, such as minimum working capital levels and a maximum debt/equity ratio of 3:1, closed in March2004. Bids are evaluated based on the work programme and other factors, such as local content (10%). The state-owned Philippine National Oil Company (PNOC) is responsible for maintaining stable oil supplies. It has also diversified into non-oil and gas exploration, such as petrochemicals, energy development (geothermal, natural gas, and electricity), coal mining, and shipping. While no plans exist to privatize PNOC, some subsidiaries are being divested. The sale of 49% of its stake in the Malampaya gas project (through PNOC-EC) is being finalized, and its geothermal arm (PNOC-EDC) is to be privatized in 2005. PNOC Shipping and Transport Corporation (PSTC) and PNOC Development and Management Corporation (PDMC) are also slated for privatization. Coal Total coal reserves are estimated at 330 million tonnes. Coal output rose from 2milliontonnes in 2003 to 2.7 million tonnes in 2004. Imported coal accounted for 71% of total coal requirements in 2004 (down from 90% in 2000). Consumption of 9.4 million tonnes in 2004 is expected to rise to 16.9 million tonnes by 2013, mainly due to electricity generation. Small-scale coal mining is widespread, and most coal is low grade. Coal is procured by the PNOC-EC and blended with higher-grade imported coal and sold to the state-owned National Power Corporation (NPC) and other users, such as cement manufacturers. NPC complies with DOE policy to buy at least 10% of its coal domestically. The rest is imported, mainly from China and Australia at an MFN tariff of 7%, and from Indonesia at a lower preferential (ASEAN) tariff of 3%. Imported coal must have a maximum 1% sulphur content. The authorities indicate that the same standards apply to domestic coal. Natural gas The gas industry is in its early development. Government policy is to promote gas self-sufficiency as a cleaner energy source and to reduce reliance on fuel imports. This will require an expanded pipeline network and other substantial investment. A single gas supplier owns one of the two pipelines from the gathering facilities to the power stations. A consortium of Shell, Chevron, and PNOC is developing significant offshore natural gas reserves. Piped gas has supplied three electricity plants since 2002, which account for about 20% of the country's total capacity. Gas demand is projected to rise from 103 billion cubic feet (BCF) in 2003 to 198 BCF in 2012, mainly from converting thermal power generation plants to gas. A pipeline network to supply such plants is planned from 2006. Imports of liquefied natural gas (LNG) will commence following the opening of an LNG import terminal planned for 2006, and are forecast to rise to 23 BCF in 2008 and to 194 BCF in 2012. Connection to the Trans-ASEAN Gas Pipeline may also enable natural gas to be imported. The DOE is the lead agency for developing the natural gas industry. It issues permits for the construction, operation, and maintenance of pipelines and related supply facilities. The Government will confine its primary role to policy and regulation, and leave the private sector to finance, construct, and operate natural gas infrastructure projects in the downstream sector. PNOC-EC may take a lead role, however, to start a strategic project, if needed. This is happening in several projects, such as the Bat-Man 1 project (due for completion in 2007), for which the DOE granted PNOC-EC the permit to construct-own-and-operate the pipeline in 2003. Competition is to be enhanced by liberalized entry and adopting pro-competitive and fair-trade measures. Natural gas is considered a public utility, and private operators must first obtain a statutory non-exclusive franchise from Congress to supply gas for 25 years (extendable for another 25 years). Only Filipino citizens or locally incorporated companies may hold a franchise. Foreign equity is limited constitutionally to 40%. The Natural Gas Law is due to be passed in 2005. Interim rules and regulations governing transmission, distribution, and supply of natural gas were promulgated in August 2002. Vertical integration or cross-ownership in different industry segments (transmission, distribution, and supply) is allowed in order to promote economies of scale and to mitigate risks for new investors. The Energy Regulatory Commission (ERC) will set charges for services (transmission, distribution, and supply) and retail gas prices based on a methodology that allows recovery of just costs and a reasonable rate of return to ensure the entity's viability. Price regulation will continue until the DOE deems the market to be competitive. Cartels and other collusive and anti-competitive behaviour that restrict, prevent or distort competition are prohibited, including predatory and excessive pricing, misuse of dominant position, bundling and other vertical restraints, denial of access to essential facilities on fair terms, and discriminatory conditions. The DOE will issue regulations to promote competition and will be required to adopt necessary measures to restore competition. Non-discriminatory third-party access to essential facilities is mandatory (gas transmission and distribution systems) on terms consistent with an access code to be developed by DOE; however, it can be deferred by DOE in "early years" for up to three years (transmission) or five years (distribution), subject to reasonable extensions. Third-party access is to be negotiated between operators. The DOE must first approve proposed access conditions, such as technical and economic feasibility of access and procedures for negotiations in good faith. Access charges are to be set by the ERC using a prescribed methodology. The DOE is developing a third-party-access code. Electricity Since the last Review of the Philippines, the Government has undertaken substantial reforms aimed at deregulating and restructuring the electricity market. The Electric Power Industry Reform Act (EPIRA), enacted in 2001, stipulated the industry's restructuring by separation into generation, transmission, distribution, and supply. However, implementation, including privatization, has proved difficult and slow, but is again a top government priority. The DOE is overseeing the industry's restructuring and setting policy for the electricity sector. Replacement of the Energy Regulatory Board with the ERC in 2001, as the independent quasi-judicial regulator of the electricity market, separated the regulatory function from the DOE's policy formulation role. The ERC's functions are to promote competition, encourage market development, ensure customer choice, and to penalize abuse of market power, including by issuing cease and desist orders where appropriate. ERC draft competition rules are being finalized after further industry consultations. It also released a Magna Carta to protect rights of residential electricity consumers in June2004. According to the 2005-14 Power Development Plan, substantial new investment in generation is required to raise capacity by the 40% needed to meet the forecast annual demand growth (7% by 2014). In 2003, after the opening of three natural gas power plants, the share of electricity generated from natural gas increased to 24.9% from 18.1% in 2002, while coal-based generation fell from 33.3% to 27.5%. This raised the country's power self-sufficiency from 33% in 1998 to 53% in 2002. Policy is to raise the relative share of electricity generated by natural gas at the expense of oil and coal plants. The NPC provided 75% of electricity in 2003. Well over half of production (62%, up from 42% in 1999) was by private generators (independent power producers) that have been allowed to sell electricity to NPC on contract since 1993. Most non-NPC generated electricity is from natural gas (64%). Distribution to consumers is undertaken under franchise by privately owned utilities, such as the Manila Electric Company (Meralco), numerous electric cooperatives, and a few local government-owned utility companies. The National Electrification Administration (NEA) provides electricity cooperatives with credit, loans, and other financial help as well as technical assistance, such as design and maintenance of distribution systems. The DOE is promoting investment management contracts (a type of concession contract for accessing private capital and management expertise) to help electricity cooperatives restructure and raise efficiency. The NPC has suffered large losses. These rose to 1.5% of GDP in 2004, on average PhP1.27 per kWh. A provisional rise of 40% in the NPC's average electricity tariffs awarded by the ERC in September 2004, along with expected lower interest costs on debt, should reduce its losses to 0.75% of GDP in 2005. NPC profitability is also reduced by the requirement for distribution utilities to provide low-income households an ERC-set lower "lifeline rate" for at least ten years. About 35% of consumers are eligible and receive discounts of between 10% and 50%. The ERC is to eventually include an additional component in the universal charge on consumers that will fund the removal of all other cross-subsidies. This charge currently covers only missionary electrification and the environmental charge. Generation Entrants to the generation market require only a certificate of compliance from the ERC. Foreigners may invest in electricity generation without equity limits. To promote competition, no company or related group can own, operate or control more than 30% of the grid's installed generating capacity and/or 25% of the national installed generating capacity. The EIPRA stipulated progressive privatization of the NPC by divesting its power generation plants. The Power Sector Assets and Liabilities Management Corporation (PSALM) was created to manage the disposal of its assets. The EIPRA required that at least 70% of NPC's generation capacity in Luzon and Visayas be privatized within three years (by June 2004), and the rest within eight years. However, the privatization plan approved in October 2002, to have commenced in December 2003, has slipped. The 70% privatization target is now due to be met by end 2005 (30% by end2004). The first of 12 power plants to be privatized in the first half of 2004, covering some 16% of installed capacity in Luzon and Visayas, were fully divested in March, and another plant was sold in June2004. To date PSALM has sold five mini-hydroelectric power plants and a coal-fired plant, totalling about US$570 million, and corresponding to 11% of generating assets. However, PSALM still intends to meet the end 2005 target, and expects to privatize 50% of NPC's generation capacity by mid 2005. Filipino participation is encouraged but foreigners may purchase NPC plants. NPC has retained responsibility for electricity generation in rural areas (missionary electrification) through its state-owned Small Power Utilities Group (SPUG). The Government's goal to electrify all villages (barangays) by 2006 has slipped to 2008. As of May 2004, some 91% had been electrified. Private investment in missionary areas is encouraged, and guidelines prescribing the transfer of SPUG's generation function to the private sector in several provinces/islands have been issued. A DOE programme to competitively select new private providers (NPPs) for these locations is to be completed for three pilot areas by mid-2005. The ERC will continue to regulate generation prices until the Wholesale Electricity Spot Market (WESM) starts operation to allow power to be competitively traded (see below). In September 2003, the ERC provisionally approved the introduction of the long run avoidable cost (LRAC) methodology for setting generation rates in the Luzon, Visayas, and Panay/Bohol grids. This was subsequently reversed in January2004 due to failure to comply with certain legalities, and the ERC instructed NPC/PSALM to make refunds. Generation rates continue to be set using the NPC's generation rate adjustment system (GRAM) and the incremental currency exchange rate adjustment (ICERA), which allow regular adjustments for costs of fuel and purchased power from IPPs. Transmission The ERC regulates transmission and sets rates. The National Transmission Corporation (TRANSCO), which is owned by the PSALM, was created in 2001 to run NPC's national transmission monopoly. TRANSCO must provide all electricity users with open and non-discriminatory access to the grid. TRANSCO is to be privatized by sale to a single operator. This was scheduled for early 2005, but has been delayed by several months following the Government's decision in October 2004 to terminate bilateral negotiations with potential investors and to proceed again with competitive bidding. This is to be conducted in the first half of 2005. As transmission is regarded as a public utility, the franchise needed from Congress will be transferred to the selected concessionaire for 25years, renewable for a further 25 years, and foreign equity is constitutionally capped at 40%. The Government, through PSALM, will retain ownership of the grid and related transmission assets, but will not fund the transmission network. Instead, the concessionaire will be expected to invest in accordance with TRANSCO's tenyear Transmission Development Plan (2004-13). Long delays in enacting the enabling legislation (TRANSCO Franchise Bill) to allow the automatic transfer of the franchise to the concessionaire have created uncertainty among potential bidders. However, to facilitate privatization until then, a two-phase concession structure is being applied to allow TRANSCO to be sold without the transferable franchise. Initially, the concessionaire will undertake only functions that do not require a franchise and will provide consultancy services to TRANSCO on non-delegated functions until these are transferred. The ERC applies an incentives-based price control formula to set transmission charges (so-called "wheeling" rates). It is subject to a revenue cap (known as the maximum allowed revenue or MAR) and rates are set to recover costs and provide a reasonable rate of return based on the weighted average cost of capital. During the first regulatory period (2003-05), the MAR is based on the revenue from September 2002 tariffs, adjusted annually by the CPI. In the second and third regulatory periods (2006-10 and 2011-15) the MAR is to be based on yearly revenue and adjusted annually. Distribution The ERC continues to regulate the distribution of electricity to end-users and to approve distribution charges. Distribution will continue to be undertaken under franchise by private companies, local governments or organized as cooperatives. As this is a public utility, foreign equity is capped constitutionally at 40%. Distribution utilities must provide open and non-discriminatory access to end-users, including to suppliers and "aggregators" (purchasers and sellers to end-users on a group basis), and provide universal services. Supply Competition in the retail sector to allow consumers to choose among suppliers was originally scheduled for June 2004, at least for large consumers. Franchises to supply power will not be required. Suppliers will need only a technical licence from the ERC to operate. No restrictions will apply on foreign equity and suppliers' prices will be unregulated. A key requirement for retail competition is the formation of the WESM to enable short-term buying and selling of bulk electricity. The Philippine Electricity Markets Corporation was established to run WESM in November 2003. However, WESM's operation has been delayed until mid 2006. Competition in the sector is now scheduled to start by July 2006 for the Luzon grid and by January 2007 for the Visayas grid. In the Luzon Grid competition will initially cover end-users with a monthly average peak demand over 1 MW, to be reduced to 750 kW from July 2008. Manufacturing Introduction Manufacturing as a share of GDP increased slightly to 23% in 2004 (21.6% in 1999). Its employment share has remained at around 10% since 1999. Labour productivity in manufacturing has fluctuated, but substantially exceeded other sectors during the 1990s. Food, beverages and tobacco, which, on average, receive among the highest effective rates of protection along with "furniture and fittings", continue to dominate manufacturing, accounting for over 40% of output. The contribution of other labour-intensive industries, especially electronics and clothing, to output has increased since the early 1990s, while that of heavy industries has contracted. Manufacturing exports increased during the 1990s, almost entirely from electronics, which accounted for almost 70% of merchandise exports in 2003, and from clothing (5%). FDI is significant in manufacturing, with foreign-owned firms generating well over half of output and a high share of exports. Policy developments Trade liberalization during the 1990s changed the sector's output structure. It benefited labour intensive industries in which comparative advantage is strongest, and placed competitive pressures on heavy industries that had difficulties adjusting to lower tariff protection. The unilateral trade reforms since the 1980s have improved resource allocation and competitiveness. However, the long-standing unilateral tariff reduction programme, boosted by the passing of the Tariff Reform Programme (TPR IV) in January 2001 (EO 334), which was aimed at lowering rates to a low and nearly uniform maximum of 5% by July 2004 (excluding a few sensitive agricultural and manufactured products, such as certain meat products, rice, corn, and sugar) was put on hold. In March 2002 (EO 84), January 2002 tariff rates were extended to 2004 on various agricultural products. Tariffs were subsequently frozen at 2002 levels in January 2003 (EO 164) on a substantial number of products, and rates were substantially "recalibrated" in October (EO 241) and December 2003 (EO 264) to selectively raise many agricultural and manufacturing tariffs (covering 11% of tariff lines), largely at the request of local producers (Chapter III). This followed a review of tariff levels that recommended, in November 2003, the rolling back of tariffs for many industries to their 1998 levels. Further tariff increases have occurred, such as on certain petrochemicals (EO 161) and steel products (EO 375), again seemingly to protect domestic producers by more actively using tariffs to promote industrial development. Average MFN tariffs, after falling from 9.7% in 1999 to 5.8% in 2003, rose to 7.4% in 2004, increasing in manufacturing from 5.0% to 6.9% (ChapterIII). While the authorities do not rule out the possibility of reinstating the uniform tariff programme, the priority is on recalibrating the tariff structure consistent with national development goals, and they do not preclude the possibility of further tariff rises consistent with ϲʹ commitments. Policy is also aimed at promoting ten priority sectors selected on competitiveness grounds. Selected activities Electronics While exports declined slightly in 2003, to US$24.2 billion, they have grown by about 12% annually since 1999. Most growth has come from foreign-owned multinational firms assembling imported components in export-processing zones (EPZ). The electronics industry covers mainly semiconductors (70% of electronic exports in 2003), electronic data processing equipment, office equipment, telecommunications equipment, automotive and consumer electronics. MFN tariffs on electronics and other electrical goods generally ranged in 2004 from zero to 15%, and averaged below 5%, compared with rates ranging from 3% to 20%, and an average of almost 8% in 1999. The Government intervenes minimally in the sector. As a preferred activity listed on the BOI's Investment Priority Plan (IPP), registered electronic firms as well as those located in EPZs that export at least 70% of production are entitled to tax and non-tax incentives (Chapter II(4)). Textiles and clothing Exports of textiles and clothing peaked at US$3.1 billion in 2000 (US$2.3 billion in 1999) and declined by 4.3% in 2003 to US$2.6 billion; clothing accounted for almost 90% of these exports in 2003. Clothing exports were mainly to the quota-protected markets of the United States (74% in 2003), EU (13%), and Canada (2%) under the Agreement on Textiles and Clothing (ATC). The Garments and Textile Export Board (GTEB) of the Department of Trade and Industry allocated export quotas using a complex system based essentially on the exporters' past performance as determined by value of exports and local value added (Chapter III). The minimum level of local value added (f.o.b. value less cost of imported raw materials) was 34% of f.o.b., and a financial penalty of 10% applied to any value added shortfall. Export quotas had to be surrendered within a prescribed time period to avoid penalty for unutilized balances. Exporters could temporarily or permanently transfer or swap quotas (up to 40%). Incentive programmes provided extra quotas to manufacturer-exporters undertaking productivity enhancement activities. The GTEB launched the Garment Export Industry Transformation Plan and Assistance package in 2002 to prepare the industry for greater competition from low-cost suppliers in the United States and other key markets following quota removal in 2005. It also provided development assistance to improve productivity and eliminated quota fees in 2004, saving the industry some US$3.2 million. Textiles and clothing exports were deregulated from 2005 when export quotas were removed, and all quota-related preshipment licensing/documentation procedures eliminated. The GTEB is being abolished. Motor vehicles Traditionally highly assisted, the industry has failed to become efficient and internationally competitive. Assembled motor vehicles and components are mainly sold domestically where the relatively small domestic market has become a major limitation to efficiency as firms cannot reap economies of scale. Substantial excess capacity exists, and several measures, such as the Export Development Programme, have been used to try to address this problem. There are no foreign investment restrictions. Japanese firms dominate, mainly as joint ventures, some with majority equity. Assistance to motor vehicles remains relatively high, with an effective rate of protection of 76% in 2004 (lower than in 1999). In 2000, MFN tariffs on imported passenger cars, trucks, and motorcycles were reduced from 40% to 30%, and on buses from 30% to either 15% or 20%. However, the Motor Vehicle Development Plan (MVDP) continues to assist assembly by allowing plan participants to import completely-knocked-down (CKD) kits at preferential tariff rates of 1% and 3%. The incidence of vehicle excise taxes may also still be heaviest on imports, which, as well as having bigger engines, are more expensive, even with the changed tax base from an ad valorem rate levied according to engine capacity to a progressive rate scale applied to purchase price. New MVDP guidelines were issued in December 2002 under EO 156. These provided for the removal by 30 June 2003 of export-balancing and local-content requirements, which assisted component producers by requiring assemblers to meet minimum local content on cars, commercial vehicles, and motor cycles in order to import CKD kits at lower duties (Chapter III). The number of models assembled is no longer restricted, as long as they are registered with BOI. New domestic and foreign assemblers must have a technical licensing agreement with the overseas CKD supplier to provide technical assistance, and are required to invest at least US$10 million in assembly operations and associated parts manufacture within one year to produce passenger cars, US$8 million for commercial vehicles, and US$2 million for motor cycles. At present, CKD kits can be imported at preferential tariff rates if they promote efficiency in the motor vehicle industry, increase value added, create jobs, and transfer skills and technology. Granting preferential tariffs on CKD kits is also contingent on the availability of domestic components, which is determined by BOI. To be included in a CKD kit, components must not be produced domestically; these must be imported separately under individual (non-preferential) tariff rates. This assists component suppliers in much the same way as a local-content plan. In addition, semi-knocked down (SKD) kits may no longer be imported. According to the authorities, MFN rates under the MDVP have been modified to the extent allowed by law taking into account its objectives and rates in neighbouring countries. The Philippines is also adopting relatively uniform tariffs of 3% on components and 5% on passenger cars under AFTA-CEPT, which may increase competitive pressures on the industry and require restructuring. EO 156 banned all imports of used motor cycles, components, and motor vehicles, except for certain trucks (gross vehicle weight above 6 tonnes), buses (gross vehicle weight above 12 tonnes), and special purpose vehicles. However, the ban, which authorities indicated was for environmental and safety reasons, is not operating since the Court of Appeal ruled it unconstitutional. Used and new vehicles therefore continue to be imported at the same tariff rates, pending the Supreme Court's decision of the ban's legality. Some government and industry bodies are monitoring used vehicle imports, although not legally required to do so. All imported vehicles must comply with emission standards. Special export incentives on cars and components are being implemented in accordance with "international commitments" and "existing laws". These are all projects under the ASEAN Industrial Cooperation Scheme and as provided under EO 244 (as amended by EO 312). Manufacture of parts and components is a BOI IPP and is entitled to income tax holidays and other investment incentives. Services The services sector accounted for 60.7% of GDP and well over half of total employment in 2004 (Table I.2). The main sectors are trade (14.1% of GDP in 2004, helped, according to authorities, by entry of foreign retailers), private services (12.5%), government services (8.1%), transport and communications (7.6%), ownership of dwellings and real estate (6.1%), construction (4.5%), finance (4.4%) and electricity, gas, and water (3.2%). The Philippines' commitments under the General Agreement on Trade in Services (GATS) included financial services, communications, transport, and tourism and travel-related services. The Philippines significantly expanded commitments on financial services under the ϲʹ financial services negotiations and on basic telecommunications under the ϲʹ negotiations on basic telecommunication services. However, it has not accepted the Fourth (basic telecommunications) or Fifth (financial services) Protocols of the GATS. The Philippines' GATS commitments have not changed since its previous Review as services negotiations are on-going. Financial services The financial services subsector has grown by on average 7% since 1999. Banking is the predominant activity, and accounts for about three quarters of total financial sector assets. The main change in market access arrangements in financial services during the period under review has been the moratorium on new bank offices and branches, from September 1999, and its extension to include new banks in June 2000, initially for three years, but extended indefinitely. Significant reforms have also been made to the regulatory and supervisory framework covering financial services. The Central Bank (BSP) is the principal regulatory and supervisory body, regulating all banks; however, many quasi-banks, and affiliates engaged in allied activities (e.g. investment houses, securities dealers and brokers and finance companies), are regulated by both the BSP and the Securities and Exchange Commission (SEC), or by the Insurance Commission (IC) in the case of insurance companies. This has created a comprehensive, but complex and fragmented regulatory framework, causing duplication and uncertainty of regulatory responsibilities in certain areas. To share joint supervisory responsibilities more efficiently, BSP and SEC signed a Memorandum of Agreement in July 2002, operative from July 2003, which, inter alia, delineated jurisdictional responsibilities. For example, it gave BSP sole regulatory power over investment houses affiliated with banks. They also agreed to conduct joint inspection of non-bank financial intermediaries, to consult on respective findings, and to extend technical assistance and to share relevant information. A Supplementary Memorandum of Agreement was signed in May 2004; and the Financial Sector Forum (FSF) was created in July 2004, to improve cooperation and exchange of information among supervisory and regulatory agencies (BSP, SEC, IC and Philippine Deposit Insurance Commission (PDIC)), and to help avoid regulatory gaps. The FSF operates with three technical working groups or multilateral committees: the Supervision Methodology and Regulatory Policy Coordination Committee, the Reporting, Information Exchange and Dissemination Committee, and the Consumer Protection and Education Committee. Banking Banks include universal banks, commercial banks, thrift banks, rural banks, cooperative banks, and Islamic banks. Banking is dominated by commercial banks, especially universal banks, which accounted for 90% and 73% of total banking assets, respectively, at end-2004. There are 42commercial banks (18 are universal banks), 87 thrift banks, 720 rural banks, and 44cooperative banks. Foreign banks (covering 3 universal bank branches, 11 commercial bank branches, and 4foreign commercial bank subsidiaries) hold 13.8% of total bank assets (13.4% at end-March 2003 and 6.2% in 1995). Market structure The BSP prevented the opening of new bank offices and branches from September 1999, and the entry of new banks from 13 June 2000 (except in areas with no banking services), to slow down expansion of the banking system and to consolidate the industry. Several commercial banks, including the two biggest foreign banks (Citibank and HSBC), also acquired thrift banks, and a number of mergers were implemented. The number of private domestic commercial and universal banks fell from 30 in 1999 to 21 in 2004 (Table IV.2). The top five commercial banks accounted for almost half of total commercial, including universal, bank assets in 2004. Table IV.2 Number of head offices of commercial banks, by bank type, 1999-04 Type of bank199920002001200220032004Total524544424242Private domestic bank302323202121Universal161212121212Commercial141111899Branch of foreign bank131313141414Universal223333Commercial111110111111Foreign bank665544Government bank333330Domestic exita010000Mergers & acquisitions160300Foreign entry000200Foreign exitb001110a Refers to bank closures. b Due to mergers with or acquisitions by other commercial banks. Source: Central Bank of the Philippines. Greater foreign participation in the banking sector is reflected in the ownership structure of private domestic commercial and universal banks. In 2003, less than half were 100% Filipino owned, and of the top 20 banks, only seven remained fully Filipino owned (Table IV.3). However, the share of foreign equity is generally moderate, with only 4 of the top 20 banks having more than 20%. There are three government-owned commercial banks, and these accounted for 11.1% of total bank assets at end 2004. Table IV.3 Ownership structure of private domestic banks, 2003 (Per cent) Name of bankFilipinoForeignName of bankFilipinoForeignAllied Banking Corp.1000MetroBank & Trust Co.8713Asia United Bank7030Phil Bank of Communications7426Banco de Oro1000Philippine National Bank8119Bank of Commerce8416Philippine Trust Co.99.90.1Bank of the Philippine Islands7030Philippine Veterans Bank1000China Banking Corp.919Prudential Bank8911East West Bank1000Security Bank Corp.919Equitable PCI Bank937Union Bank of the Philippines1000Export & Industry Bank7723United Coconut Planters Bank1000International Exchange Bank1000Rizal Comm'l Banking Corp.8713Source: Pasadilla and Milo (2005). Non-performing loans (NPLs) and bank efficiency The banking sector proved quite resilient to the Asian financial crisis. There were no major bank collapses and there was no need for publicly funded rescue plans. However, banks currently hold an important amount of non-performing assets (NPAs). These have substantially raised intermediation costs and have become a prudential concern, particularly given the banks' low provisioning, thus contributing to the banking system's fragility. NPA's as a share of total bank assets were 11.8% at end 2004 (13.2% end 2003). These consist of non-performing loans (NPLs) and real and other properties owned or acquired (ROPOAs). Bank NPLs totalled 12.5% of total bank loans (14.2% at end-June 2004). This decline largely reflected the successful "auction" of NPLs valued at PhP16.4 billion to foreign asset management companies via Special Purpose Vehicles (SPVs). The Special Purpose Vehicle (SPV) Act of 2002 (RA 9182) allowed for the creation of private asset management firms as stock companies (with a minimum authorized share capital of PhP500 million) to acquire NPAs of financial institutions, thereby enabling banks to voluntarily dispose of bad loans and other assets. Tax exemptions (e.g. stamp duty, capital gains, and VAT) and 50% reductions in certain registration and transfer fees were extended to qualified SPVs until 8April2005 to encourage such acquisitions. The price of NPAs is negotiated between the bank and the SPV. Despite an initial unwillingness by banks, BSP had approved transfers of NPAs totalling PhP4.5 billion for 18 banks to SEC-registered SPVs as at October 2004, and was processing applications from 19 banks to transfer further NPAs totalling PhP34.4 billion. An SPV may be fully foreign owned, except if it intends to acquire land assets from banks, in which case it must be at least 60% Philippine owned. Competition in the sector, especially in the later 1990s (prior at least to the moratorium), seemed to have increased with entry of new (including foreign) banks, and there is no evidence of monopoly or collusive behaviour. This has helped reduce interest rate spreads between bank deposit and lending rates, on average, from 5.9 percentage points (based on savings rate) and 4.2percentage points (based on short-term time deposit rate) in 1998-99 to 4.6 percentage points and 3.5 percentage points, respectively, in 2000-03 (Table IV.4). This possibly reflects greater bank efficiency and dissipation of possible monopoly profits of large banks following bank liberalization during the 1990s. Table IV.4 Interest rate spreads of commercial banks, 1998-99 and 2000-03 (Per cent) YearBank average lending ratea (1)Savingsb (2)Short-term deposit rate (3)Bank spread (1) (2)Bank spread (1) (3)1998-9915.079.1410.925.934.162000-0310.415.826.944.593.47a Starting December 1992, monthly rates reflect the annual percentage equivalent of sample commercial banks' actual monthly income on their peso-denominated loans to the total outstanding levels of their peso-denominated loans, bills discounted, mortgage contract receivables, and restructured loans. b Refers to the annual percentage equivalent of the ten sample commercial banks' actual monthly interest expenses on peso-denominated deposits to the total outstanding levels of these deposits. Source: Pasadilla and Milo (2005), Effect of Liberalization on Banking Competition, PIDS. Restrictions on bank entry and branching Following the liberalization of the banking sector in the 1990s, a moratorium on new bank offices and branches, was established from September 1999, and applied from 13 June 2000 to new commercial banks for three years (i.e. until 13 June 2003) under the General Banking Law of May2000, RA 8791, subject to Monetary Board authorization (as per implementing guidelines issued pursuant to the Foreign Banks Liberalization Act, RA 7721). Subsequently, the moratorium was extended indefinitely, except for "microfinance-oriented" banks, especially in areas without such services. The moratorium, aimed at bank consolidation, encouraged mergers and entrants to acquire existing banks in order to reduce the number of small banks. Buying an existing bank is the only means of entry for nationals and foreigners. Foreign banks can no longer establish a local subsidiary with less than 60% ownership of voting stock. However, to facilitate foreign "buy outs", the 60% ceiling on foreign ownership of voting stock allowed in a domestic bank was lifted temporarily to allow overseas banks to acquire up to 100% of only one bank within seven years (i.e. until 13June2007), subject to Monetary Board authorization. New foreign branches remain effectively prohibited following the establishment of an additional ten foreign bank branches in the mid 1990s. The moratorium, along with mandated increases in minimum capital requirements, reflects the BSP's policy of encouraging bank consolidation, including encouraging mergers and foreign "buyins", to promote greater financial stability. The rules and regulations on bank mergers have been rationalized, and the package of incentives was extended in 2000 including, with Monetary Board approval, possible temporary relief from certain prudential obligations. Foreign banks, including branches, can perform the same functions and enjoy the same privileges as domestic banks of the same category, and are subject to the same limitations. However, RA 8791 and RA 7721 require the banking system to remain "effectively controlled by Filipinos", with majority domestic-owned banks holding at least 70% of the banking systems resources or assets. Currently, foreign-controlled banks hold about 14% of the banking sector's assets, less than half of the allowed limit. The Philippine banking arrangements in 1999 were more liberal than its GATS commitments, and this still seems to be the case. However, while the moratorium might have reduced bank competition, assessing its impact is difficult. While overseas banks are no longer allowed to establish domestic subsidiaries with up to 60% ownership, this limit on foreign ownership of domestic banks has been temporarily lifted to allow 100% ownership, but only in one bank. Prudential and supervisory requirements The New Central Bank Act (RA 7653, 1993) defined the BSP's general functions, operations and powers relating to the banking sector and other financial institutions subject to BSP supervision under special laws. RA 8791 of 2000 further extended these and was a major step, according to the authorities, towards "institutionalising" banking reforms, such as providing a strong legal basis for consolidated banking supervision. Banks, domestic and foreign, are required to obtain a licence from the BSP prior to starting operations. The BSP issues rules and regulations on conduct and standards of operation, and monitors compliance through regular investigations to ensure that banks operate on a sound financial basis. RA 8791 also stipulated the BSP's regulation of banks, quasi-banks, and trust entities. It tightened licensing requirements by including an assessment of a bank's ownership structure, directors and senior management, and required banks to appoint two independent directors. It also incorporated BIS and other internationally accepted standards and practices into the BSP prudential and supervisory processes. RA 8791 defined bank exit procedures and reinforced enforcement aspects to ensure prompt corrective action, including placement of banks and quasi-banks under "conservatorship", receivership and involuntary liquidation. Other legislation relevant to bank supervision, which seems to be still in force, includes the Thrift Banks Act of 1995 (RA 7906) and the Rural Banks Act of 1992 (RA 7353). The Philippine Deposit Insurance Corporation (PDIC) also monitors bank activities, using BSP data. Although BSP supervises rural banks, the PDIC also oversees them. The Authorities indicate that there is no distinction in the application of prudential requirements between foreign and domestic banks, except for the pegging of the minimum capital levels for foreign bank branches at the U.S. dollar equivalent of PhP210 million, and PhP35 million for every new office, and limiting the number of offices of foreign bank branches to six (the location of three of which is determined by the Monetary Board). The same minimum capital requirements, which differ between bank type and are highest for universal banks, are applied to domestic and foreign banks. The current minimum capital requirements of PhP4.95 billion for universal banks and PhP2.4 billion for commercial banks have applied since 1999. BIS-prescribed risk-based capital adequacy requirements (Basle I) were adopted from July 2001, and from 1 July 2003 were extended to include the BIS market-risk-based capital adequacy requirements. The minimum risk-weighted capital adequacy ratio was set at 10% (two percentage points above BIS recommendations). The average ratio for all banks (excluding rural/cooperative banks) was 17% (on a non-consolidated basis) at end June 2004 (15.7% end 2001). Proposed amendments to the BSP Charter are intended to provide bank supervisors with adequate legal protection for effective regulation. Deposit insurance The Philippine Deposit Insurance Corporation (PDIC), attached to the Department of Finance, provides mandatory deposit insurance covering all peso and foreign currency savings, and time, current demand or cheque deposits. All banks, including foreign, operating as subsidiaries or branches must belong to the PDIC. As of September 2004, there were 893 members, comprising 42commercial banks, 88 thrift banks, and 763 rural banks. The maximum deposit insurance cover was raised from PhP100,000 to PhP250,000 from August 2004. This increased insurance cover from 91% in December 2003 to 95% of deposit accounts as of September 2004 (from 21% to 27% by value). The PDIC's Deposit Insurance Fund (DIF) stood at PhP41.6 billion as of November 2004 and, according to authorities, is deemed adequate to meet deposit insurance calls from high-risk banks. The PDIC's authority was also reinstated to examine banks with prior approval from the Monetary Board. This allows PDIC surveillance of banks in close coordination with BSP to better assess and manage the risks to the DIF by enabling on-site examination and prompt remedial action, such as providing financial assistance, where necessary. The PDIC extends assistance to rehabilitate distressed banks through direct loans, deposit placements, temporary or permanent purchase of non-performing loans (NPLs), assuming obligations to settle certain liabilities, and providing "quasi-equity" when its operation is seen as essential to provide adequate services or to maintain financial stability. Financial assistance from 1970 to 2004 covered 50 banks and totalled PhP110.2 billion, of which 65% was direct loans and 33% NPL purchases. Some 96% of assistance has been provided since 1999. Funds are sourced from the DIF except for large sums required in systemic cases, which are funded by the BSP. On-going PDIC liquidity support is of prudential concern. Insurance The sector consists of life, non-life, and professional reinsurers and remains underdeveloped. Although insurance company assets represented 7% of GDP in 2003, insurance penetration (premiums as a per cent of GDP) is low (1.3% in 2003). In 2003, there were 141insurance companies (32 life, 102 non-life, 4 composite, and 3 professional reinsurers). None were state-owned (except for the 30% state-owned National Reinsurance Commission); 119 were domestic companies, 17 were foreign controlled (i.e. had 50% or more foreign equity) and 5 were domestically incorporated foreign branches. Foreign insurance companies can operate as branches, subsidiaries or joint ventures provided they have been in the top 200 world foreign companies for the past ten years. There are no limits on foreign equity. Foreign branches provide mainly non-life insurance, while foreign-owned companies offer both life and non-life policies. The life insurance market is concentrated, with the top five firms taking 70% of total premiums (the top two 40%) in 2003. The top five non-life firms account for about 35% of total premiums (top two 18%). The non-independent but operationally autonomous Insurance Commission (IC), attached to the Department of Finance, regulates and supervises the industry, including licensing. It monitors the solvency of companies and their intermediaries to protect policyholders. The 1978 Insurance Code continues to provide the regulatory framework. The IC is revising the Code, and the latest proposed amendments cover mostly prudential and solvency requirements. Companies need to meet prudential requirements, including minimum capital levels to obtain a licence. Prudential requirements do not seem to have changed since 1999. These are the same for life and non-life companies, and increase according to the share of overseas ownership, from PhP75million for 40% or less foreign equity, to PhP150 million for 40% to 60%, and to PhP250million for over 60%. Composite companies (offering both life and non-life) require minimum capital of PhP150 million. Reinsurance companies are subject to higher minimum capital requirements, which also vary according to foreign equity. In addition, foreign companies and domestic and foreign reinsurance companies must deposit with the IC approved securities valued at PhP300 million and PhP500 million, respectively, for each branch. Other prudential requirements, such as minimum solvency requirements and limits on investment portfolios, apply uniformly to companies irrespective of domestic equity and do not discriminate against foreign companies. The authorities indicate that insurance laws apply equally to domestic and foreign firms. The IC must approve all life and non-life premiums and products, including policy forms, certificates and contracts, application forms, warranties, and endorsements. Policy forms must not contravene law, morals, and public policy, and are approved in accordance with standard clauses in the "Pattern Book". Non-life premiums are approved generally based on recommendations by the Philippine Insurance Rating Association (PIRA). The authorities indicate that there are no incentives, such as tax deductions, to encourage insurance. The "pre-need" industry (providing future payments at the time of need for health, education or pensions) partially competes with insurance and is regulated by the SEC. This had been relatively liberal compared with the IC's regulation. However, in 2000, the SEC introduced steps to remove disparities in regulation, such as setting limits on the investment portfolios of pre-need companies. Also, in August 2001, the SEC implemented new rules on registration and sale of pre-need plans under the Securities Regulation Code to strengthen prudential requirements. These raised the minimum paid-up capital requirements for new pre-need companies to PhP100 million and extended the moratorium on registration of such companies to 30 April 2002; existing firms had until then to meet revised capital levels. All pre-need plans must be registered with the SEC and a permit obtained. The SEC must approve the selling price, terms and conditions of plans, and the opening and closure of branches. At least 10% of pre-need plans investments must be in government securities. Telecommunications Telecommunications was deregulated during the 1990s with the introduction of a regulatory framework implemented by the National Telecommunications Commission (NTC) that included mandatory non-discriminatory interconnection to network facilities. There have been few changes in this regulatory framework since 1999. The principal legislation governing telecommunications remains RA7925, the 1995 Public Telecommunications Policy Act. However, the communications policy function of the Department of Transportation and Communication (DOTC) was transitionally transferred to the Commission on Information and Communications Technology (CICT) in August 2004 pending the formation of the Department of Information and Communications Technology (DOICT). The NTC still regulates the sector and was transferred as an "attached agency" for administrative purposes to CICT (until DOICT's establishment). The authorities indicate that the quasi-judicial NTC is fully independent and decisions are challengeable through the courts. Reforms during the 1990s created market entry opportunities, lowered prices, and improved the availability, quality, and choice of service. The industry has benefited from relatively unfettered market entry and exit, and increased competition. Market access was liberalized in most services: local, national long-distance, international, mobile, data, telex, leased line, paging, cable television, and satellite. There are at least two operators of fixed line services in every region. The tele-density of subscribed fixed lines was 4.1per 100 persons in 2003 (3.9 in 1999). Mobile services have grown rapidly ahead of fixed services. In 2002, there were 22.5 million mobile subscribers (6.5million in 2000), corresponding to a teledensity of 27.8% (8.5% in 2000). Some 70% of the population has access to a mobile signal. Substantial excess capacity exists in fixed lines, with only 48% of lines subscribed in 2002; this partly reflects past regulatory requirements for mobile and international gateway providers to install fixed lines. The privately owned (with 40% foreign equity) Philippine Long Distance Telephone Company (PLDT) remains the dominant provider and the largest national long-distance operator. It had 64% of the fixed line market in 2003, and through its subsidiary, Smart, 51% of the mobile market (45% in 2000). Its dominance is greatest in Metro Manila, the most lucrative service area. The next largest supplier of mobile services is Globe, with 45% of the market in 2003 (40% in 2000). Digital has expanded, especially in Luzon, and had 12% of the fixed line and 2% of the mobile markets in 2003. The Government's commercial involvement in telecommunications is limited to providing "pioneering" services in unserved or underserved areas through the Telecommunications Office. These services account for under 2% of the market. To install, operate, and maintain a public telecommunications service, a franchise issued by Congress is required (normally for 25years) along with a Certificate of Public Convenience and Necessity (CPCN) issued by the NTC. The NTC requires applicants to be legally, technically, and financially qualified and for the service offered to be economically viable. The CPCN specifies geographical area, and type or classification of activities. NTC usually grants provisional approval, initially for 180 days, if the proposed service is economically feasible, sufficiently in demand, and in the "public interest". This provides adequate time to verify that the installed service is compliant, after which a three-year extension is provided, during which the operator must comply with all requirements and show that the service is commercially viable, efficient, and in the public interest. This appears to be a type of economic needs test. If satisfied, the NTC extends permanent authority by issuing the CPCN, which is generally valid for the term of the franchise. The CPCN contains the rates chargeable and the regulations for providing the service. NTC approval is needed to terminate any service. Although carriers have national franchises, only the PLDT operates local exchange services (including public calling offices) nationally. Other franchised carriers can supply these services in specific geographic areas. The authorities indicate, however, that any person holding a national franchise could apply to the NTC for authority to operate these services. Geographical market segmentation may prevent new carriers from gaining scale economies and network externalities, limiting their potential to compete with PLDT. The NTC may exempt specific telecommunications services from rate regulation in markets sufficiently competitive to ensure "fair and reasonable" prices. It must otherwise adopt administrative processes to facilitate entry of qualified providers, and a pricing policy to generate sufficient returns to encourage them to operate basic services in unserved or underserved areas and to establish "fair and reasonable" rates for the entities' economic viability. It sets price ceilings based on the findings of an independent analyst, and operators must submit tariffs to the NTC for approval. Cross-subsidies, such as charging higher prices on international calls to maintain lower local call rates, are allowed. Local calls are generally free and covered by a monthly subscription. Interconnection, although mandatory, has been slow and may have somewhat hindered competition. Complaints against PLDT, the network owner, and other entities on interconnection are common; these include being too slow, insufficient or with unequal access settlements. The level and structure of access charges vary depending upon the type of interconnection, and are either per minute or based on revenue sharing. Interconnection charges, which have to be "reasonable and fair" and provide for the "cross subsidy of unprofitable local services" to promote telephone access, are negotiated between parties or by the NTC if an agreement cannot be reached. Access charges are thus set to cross-subsidize users to meet universal service goals. This is inconsistent with a competitive market, and helps PLDT maintain higher access fees to squeeze margins of entrants. In July 2002, the NTC issued new rules and specific guidelines on competitive wholesale charging for interconnection. Interconnection agreements are negotiated commercially on a cost-recovery basis taking into account the attributable costs of the service, share of business overhead costs, and rate of return, estimated on a fair and reasonable basis. Interconnection agreements must be reported to the NTC, which determines access charges if agreement cannot be reached. The NTC aims to foster fair and efficient market conduct, including protecting entities from "unfair trade practices" of other carriers and consumers from the misuse of monopoly or quasi-monopoly powers. It must approve mergers and transfers of leases. Entities must provide reasonable and non-discriminatory services to end-users and not impede competition, such as engaging in unhealthy and unfair competition e.g. price or output fixing. Call-back services, "refilling", international simple resale (ISR) or leasing of licensed networks are prohibited. Carrier number portability and pre-selection are unavailable. Telecommunication services are regarded as a public utility and foreign equity is limited constitutionally to 40%. This restricts market entry, especially in more capital-intensive segments, such as broadband. Foreign ownership is already at this limit in PLDT and some other firms. Foreigners cannot become executives or managers and the number of foreign directors of a telecommunications firm must be proportionate to its aggregate share of foreign capital. Cross-ownership restrictions apply in telecommunications. No entity can have a franchise in both telecommunications and broadcasting (radio or television), either through airwaves or by cable. Foreign equity in a private radio communication network is limited to 20%. Operation of cable TV and other forms of broadcasting and media are constitutionally reserved for Filipino nationals. The NTC authorizes the operation of cable TV. Transport Air transport The Philippines has 85 airports. International airports are located in Manila (Ninoy Aquino International Airport, NAIA), Clark, Subic and Cebu. National passenger movements fell from 6.1million in 1999 to 5.5 million in 2003, but increased to 7.1 million in 2004. International passenger movements rose from 7 million in 1999 to 7.9 million in 2004, when they accounted for just over half of total passenger movements. Total freight carried increased from 348,000 tonnes to 432,000 tonnes in the same period; in 2004, over two thirds was international cargo. Some 65% of total passenger traffic and 10% of cargo pass through NAIA. Air transport services are considered public utilities and foreign equity in Philippine Airlines (PAL) and other carriers is capped at 40%. EO 219 of 1995 remains the policy framework for progressively liberalizing air transportation. Domestic services were liberalized from the mid 1990s. Removal of PAL's monopoly allowed new entrants and its passenger market share fell to 49% by 1999; after rebounding to 67% in 2003, it fell to 50% in 2004. Restrictions on domestic routes and frequencies were also removed, and airfares de-controlled (subject to filing), except on routes with a single operator. Policy is to have at least two operators on all except unprofitable routes. Scheduled domestic airline services and route distribution are managed through a permit system in which traffic rights are granted on a first-come-first-served basis. Carriers must have a franchise issued by Congress, or have a Certificate of Public Convenience and Necessity (CPCN) issued by the Civil Aeronautics Board (CAB). Carriers must also meet safety and other technical regulations set by the Air Transportation Office (ATO) of the Department of Transport and Communication (DOTC). Strong competition seemingly exists on major routes. Liberalization of international air services was also envisaged, inter alia, to allow new Philippine carriers to compete with PAL. EO 219 provided for withdrawal of an airline's approval if it did not fly within six months so that other parties could operate. However, few reforms appear to have been implemented. PAL is still the sole designated official flag carrier on most international routes. In 1999, the Government launched the progressive liberalization of bilateral air services agreements (ASAs), largely to facilitate tourism. The Philippines currently has some 60 ASAs, of which about half operate. However, ASAs remain generally restrictive, controlling capacities and frequencies, and requiring fare approval by both partners. The authorities note, however, that liberalization has occurred through "open skies" by increasing capacity or frequencies gradually according to market demand. Since 1999, new ASAs have been concluded with Mongolia, Nepal, UAE, New Zealand, and Papua New Guinea, and several agreements have been reviewed offering more capacity, greater frequencies, and multiple airline designations. Charter arrangements are also restrictive unless scheduled services are not significantly affected. Cabotage is prohibited. The DOTC formulates air transport policy. The CAB, an "attached agency" of the DOTC for administrative purposes, is a quasi-judicial body responsible for the regulation of air services, including licensing of domestic and international airlines, regulating fares, enforcing the economic provisions of the legislation, arranging franchises, and participating in the negotiation of ASAs. Carriers may employ foreigners in technical positions within the first five years, and each foreigner employed should have at least two Filipino understudies. CAB is also responsible for eliminating rate discrimination, unfair competition and deceptive practices, and for approving airline mergers. These matters are handled by public hearings, particularly if there are opposing parties or complaints. Separate airport authorities manage international airports, for example, the Manila International Airport Authority (MIAA). Only the MIAA and Mactan-Cebu International Airport have been corporatized. The ATO manages other airports and sets airport fees and charges. Landing fees for international flights are higher than for domestic flights. According to the authorities, auxiliary services are provided privately and there are no limits on foreign equity. Maritime transport Maritime transport accounts directly for about 0.5% of GDP. Some 99% of Philippine freight (66% in value terms) is transported by sea. About 54% of cargo was domestic in 2003. Most cargo (71% in 2003) is non-containerized (bulk or loosely packed). Passenger traffic numbers reached 51.7million in 2003. The reported high inter-island shipping costs undermine efficiency and competitiveness. The Maritime Industry Authority (MARINA), an "attached agency" of the DOTC, is responsible for the regulation, supervision, promotion, and development of the four maritime sectors (domestic and overseas shipping, shipbuilding/repair, and manpower). National regulations and international conventions, such as that of the International Maritime Organization (IMO), govern maritime safety; and other international vessel standards, such as the International Maritime Safety Management (ISM) Code and the International Ship and Port Facility Security (ISPS) Code, apply to Philippine-registered vessels. Only Filipino nationals or locally incorporated entities authorized to engage in overseas shipping and with a maximum of 40% foreign equity may register a vessel. Philippine-registered vessels must be completely manned by Filipino crews except in approved cases where a "supernumerary" may be allowed for up to six months, provided the functions performed are not those of the crew and do not interfere with the ship's management. Cabotage is prohibited, and national (including inter-island) shipping is limited to Philippine-flagged and owned vessels engaged in domestic trade; in specific cases, however, MARINA may issue Exemption or Special Permits temporarily allowing Philippine-registered ships engaged in international trade to conduct domestic trade. Special permits of up to one year (renewable for one year) are also required for Philippine vessels to switch from domestic to international shipping. This enables vessels engaged in domestic trade to expand operations globally under certain conditions. Government cargo (including that paid for by government loans and credits) is still reserved to Philippine-flagged vessels. Investors in overseas shipping are entitled to a ten-year income tax holiday and tax and duty exemptions on imported vessels until 27 July 2014. Ports There are about 950 private and public ports. The Philippine Ports Authority (PPA) administers, operates, and develops most major ports; the rest are mainly municipal public ports run by local government units, including fishing ports and wharves. PPA-administered ports currently number 507, of which 114 are state-owned and 393 are private. Private ports handled 51% of total cargo in 2003, comprising mainly oil, petroleum products, and wheat. Independent port authorities run some public ports, such as Cebu and Subic Bay, mainly formed as part of special economic zones. The PPA encourages private sector investment and participation in port management and operation, cargo handling, and port services, subject to requirements of national security, public safety and rules and regulations governing the operation of private ports. Incentives are provided to private operators of PPA-registered ports, such as a 50% reduction in port charges for wharfage, berthing, and usage fees. As ports are regarded as public utilities, foreign equity is constitutionally capped at 40%. PPA also regulates certain auxiliary port services, excluding pilot services. The authorities indicate that port competition, including between private ports regulated by the PPA and public ports, has increased. The largest ports, the Manila ports of the Manila International Container Terminal (MICT), South, and North Harbours, are publicly owned, but privately operated under long-term concessions using the "landlord" model. Nevertheless, while the largest commercial private port, the Harbour Centre Port Terminal Inc (HCPTI), also in North Harbour, competes with the privately run public ports of South and North Harbours by operating both domestic and foreign services, including for grains handling, it has no permit for handling foreign containerized cargo and thus cannot compete fully with MICT. The PPA, however, has increased competition by allowing its South Harbour port, privately run by Asian Terminals Inc (ATI), to also service domestic ships since November 2002, and to construct a super terminal. Competition appears to remain restricted, however, particularly between private and public ports, and among cargo handling operators. The PPA, by regulating private sector entry through the issuance of permits to construct and operate ports, functions as a port developer, operator and regulator, thereby creating potential conflicts of interest between its commercial and regulatory functions that may stifle competition. The PPA generally designates only one cargo-handling operator per port, generally for 25 years (renewable for 25 years). It also fixed port handling charges, but the authorities indicate that private commercial ports can now set these rates without PPA approval. The PPA may also encourage private investment in the development, operation, and management of infrastructure projects at public ports through build-operate-transfer (BOT) arrangements. These must conform to BOT legislation. The Passenger Terminal Building (PTB) project at the Calapan Port was initially considered such a project. Another option is a PPA joint venture with the private sector to develop port infrastructure. Such arrangements must be initiated by top management and are limited by relevant laws. Maximum PPA equity would be 49%. Domestic shipping Shipping is the major means of coastal and inter-island cargo and passenger transportation. Deregulation of cargo and passenger shipping rates was completed in 2000. Since then, rates have not been set, except for third class passengers and class C non-containerized basic commodities (mainly rice, corn, cereals, fruit, and vegetables). The Domestic Shipping Development Act (RA 9295 of May 2004) reaffirmed that ship operators are authorized to set their own rates provided there is effective competition and the public interest is served. MARINA will intervene on monopoly routes: where competition is ineffective, or where practices restrain trade; if justified complaints are received against the rates charged and/or services provided; if its monitoring activities detect adverse findings; and in any other "analogous" instances. Routes have also been liberalized. All routes that had been serviced by a single operator for at least five years were opened in 2000 to allow entry of at least another operator, unless this would cause "ruinous" competition. However, it seems that MARINA still provides licences to operate any given route based on traffic volumes. It also approves sailing schedules and frequency of service. In addition to the licence, operators require a Certificate of Compliance (CPC). They must be financially capable of providing and maintaining a safe, reliable, and adequate service, and prove to MARINA that the proposed service would promote the public interest. Such considerations cover the economic and beneficial effects of the proposed service to the region, including expected port dues and charges, increased volume of passengers and cargo, taxes paid to local government units, and job creation. Despite the beneficial effects of deregulation, such as improved quality of service, and certain rate reductions, domestic shipping remains relatively expensive and highly concentrated, both for passenger and cargo services. Many major routes appear to have ineffective competition. Fiveshipping lines have 90% of passenger and cargo business on almost all primary and secondary shipping routes. No separate competition laws or regulations apply to maritime transport except for the Constitution, which prohibits restraint of trade or unfair competition. The authorities believe that the deregulation of entry and exit from routes reinforced by RA 9295 will boost competition. However, RA 9295 reaffirmed that cabotage was prohibited. Allowing cabotage so as to expose domestic shipping to international competition would improve efficiency and reduce shipping costs. Government policy is to develop domestic shipping based on private investment and a competitive environment. RA 9295 introduced a range of investment incentives, including accelerated depreciation and exemption for ten years from VAT on purchases of passenger and cargo vessels of 150 gross tons and above. Imports are only eligible for the exemption if they are not manufactured domestically in sufficient quantity and of comparable quality at reasonable prices, and are imported directly by a MARINA-registered domestic shipping operator. Shipbuilding and ship repair There are no foreign equity limits in shipbuilding and ship repair. All Philippine vessels must be repaired or dry docked at domestic shipyards or ship-repair facilities registered with MARINA. Exemptions apply, subject to a waiver from MARINA, such as when emergency repairs are required while overseas, or when the Philippines is not a port of call. In order to promote the industry, VAT relief and other tax incentives were extended to shipbuilding and ship repair in 2004. In addition, imports of vessels will be restricted progressively after ten years (i.e. 2014) if comparable vessels can be constructed domestically. These restrictions will be based on annual assessments by MARINA of the capacity of registered shipyards to build sufficient vessels below 500 gross tons to meet demand. If found sufficient, domestic ship operators will be discouraged from importing such vessels, and those built in MARINA-registered shipyards will be given priority for entry in the Philippine registry. Tourism The Government has identified tourism as a "pillar for growth and development." It accounts for some 9% of GDP and is one of the top foreign exchange earners. Tourism has been adversely affected by international developments, internal security concerns, and the SARS epidemic. Nevertheless, foreign tourist arrivals, which had decreased from 2.2 million in 1999 to 1.9 million in 2002, rebounded in 2004 to 2.3 million visitors, due largely, according to the authorities, to the aggressive marketing efforts by the Department of Tourism (DOT) and stronger support by the private sector. Most are from the United States (20.4% in 2004), Japan, and Korea; Asian arrivals accounted for over half of visitors. The DOT is responsible for policy formulation, and has "super cabinet" status, giving it greater avenues to coordinate with relevant government agencies, the private sector, and local government units in implementing national tourism marketing and development programmes. The 1991-2010 Tourism Master Plan (TMP) remains the blueprint for tourism development. Policy reforms and programmes in the TMP have been integrated into the various Medium-Term Philippine Development Plans (MTPDP). MTPDP 2004-10 focuses on key tourism markets, such as China, Japan, Korea, and North America. Eight priority destinations have also been identified for aggressive promotion, including Cebu/Bohol/Camiguin, Palawan, Manila, and Tagaytay. "Tourism enterprise zones" identified by the DOT are being established, according to authorities, to remove barriers and promote the free flow of investment and tourists to and within the country. Tourism marketing and promotion will be complemented with development of tourism-related infrastructure and major policy revisions affecting visa entry, air services, and necessary infrastructure. Visitor numbers are targeted to rise to 2.7 million in 2005 and to 5 million in 2010. Construction and development of new resorts are being led by the private sector. There are no foreign investment restrictions on ownership of tourism infrastructure or resorts and 100% foreign equity is allowed in accommodation facilities, travel agencies, tour operators, and organization of professional conferences. Full foreign equity is also allowed in restaurants and "domestic market enterprises" provided minimum paid up capital exceeds US$2.5 million and US$200,000 respectively; otherwise it is limited to 40%. Tourist transport services are constitutionally limited to Filipinos, and some other businesses dealing with tourists classified as "retail services" may be subject to a 40% investment ceiling. For tourist projects valued at a minimum of $US5 million, foreigners (including companies with over 40% foreign equity) may lease land for 50 years (instead of the general period of 25 years), renewable for another 25 years. The Department of Labour and Employment regulates employment of foreign nationals in tourism. The DOT endorsed 30 tourist investment projects from January to August 2004 as eligible to receive tax incentives under the BOI's annual IPP. These covered accommodation and tourist transport facilities with aggregate investment of PhP767.8 million. Tourism enterprises located in "tourism enterprise zones" may also receive investment incentives. The Philippine Tourism Authority (PTA), an attached agency of DOT, is responsible for implementing infrastructure programmes. The PTA also manages a range of fully and partially owned resorts and other tourist facilities; some are already being offered for privatization. PTA collects the travel tax levied on departing Filipino citizens and resident and non-resident aliens who have lived in the Philippines for more than one year. REFERENCES Abrenica, M.J. and G.M. Llanto (2003), Services, A. M. Balisacan and H. 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(2001a), Competition in the Domestic Air Transport Industry: Can it be sustained without competition policy, Policy Notes No. 2001-06, August, Philippine Institute of Development Studies, Manila. Austria, M.S. (2001b), Liberalization and regional integration: The Philippines' strategy to global competitiveness, Discussion Paper No. 2001-09, Philippine Institute of Development Studies, Manila. Austria, M.S. (2001c), Liberalization of the Philippine International Air industry: Qu Pas?, Policy, Policy Notes No. 2001-17, August, Philippine Institute of Development Studies, Manila. Austria, M.S. (2002), Philippine Domestic Shipping Industry: State of Competition and Market Structure, PASCN Discussion Paper No. 2002-04, Philippine APEC Study Centre, June. Bautista, R. and G. Tecson (2003), "International Dimensions", in A. M. Balisacan and H. Hill (eds), The Philippine Economy, Development, Policies and Challenges, Chapter 5. 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Discussion Paper No. 97-13, Philippine Institute of Development Studies, Manila. David, C. (2003), "Agriculture", in A. M. Balisacan and H. Hill (eds), The Philippine Economy, Development, Policies and Challenges, Chapter 6. New York: Oxford University Press, and Quezon City, Philippines: Ateneo de Manila University Press. Department of Trade and Industry (2003), 2002 Annual Report, Manila. Department of Trade and Industry (2004a), Implementation of the Consumer Act (R.A. 7394). Available at: http://www.dti.gov.ph/contentment/7/11/696.jsp [24 March 2004]. Department of Trade and Industry (2004b), Investment Priority Plan (2004). Available at: http://www.boi.,gov.ph/Docs/2004%20IPP%20complete.pdf [3January 2005]. Department of Trade and Industry (2004c), Trade and Investment Data: BOI FDI Statistics. Available at: http://www.dti.gov.ph/contentment/9/61/71.jsp#2. Department of Trade and Industry (2004d), What are the requirements and procedures in applying for an Import Commodity Clearance (ICC)? Available at: http://www.dti.gov.ph/contentment/7/11/ 696.jsp [24 March 2004]. Dun and Bradstreet (2002), Exporters' Encyclopaedia 2001/02, Baltimore M.D. Europa (2004), ASEM 5: The Fifth Asia-Europe Summit Meeting Hano, Viet Nam, 7-9 October 2004. Available at: http://europa.eu.int/comm/external_relations/asem/asem_summits/asem5/index_sum_ concl.htm [28October2004]. Government of the Philippine Republic (2004a), Medium Term Philippine Development Plan 2004-2010. Available at: http://www.neda.gov.ph/ [25 October 2004]. Government of the Philippine Republic (2004b), The President's Budget Message FY2004. Available at: http://www.neda.gov.ph/ [25 October 2004]. Hill, H. (2003), "Industry", in A.M. Balisacan and H. Hill (eds), The Philippine Economy, Development, Policies and Challenges, Chapter 7. 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Available at: http://imf.org/external/ pubs/ft/scr/2005/cr05105.pdf. IPO (undated(a)), Intellectual property-related questions. Available at: http://www.ipophilippines. gov.ph/faq.asp?id=1 [8 April 2004]. IPO (undated(b)), Invention Patent Application Procedures. Available at: http://www.ipophilippines. gov.ph/services.asp?id=1 [7 April 2004]. IPO (undated(c)), Patent-Related Questions. Available at: http://www.ipophilippines.gov.ph/ faq.asp?id=1 [8 April 2004]. ITU (2002), Pinoy Internet: Philippines Case Study, March, Geneva. Llanto, G.M. (2001), Sustainable Rural Finance: Policy and design issues, Policy Notes No. 2001-04, July, Philippine Institute of Development Studies, Manila. Llanto, G.M., P. Geron, and C. Tang (1999), Directed credit programs; issues and framework for reform, Department of Finance, National Credit Council, Manila. Manasan, R. (2002), Explaining the Decline in Tax Effort, Policy Notes No. 2002, Philippine Institute for Development Studies, Manila. Medalla, E. (1998), Trade and Industrial Policy Beyond 2000: An Assessment of the Philippine Economy. Discussion Paper No. 98-05, Philippine Institute for Development Studies, Manila. Medalla, E. (2002), Fiscal Incentives Revisited. Policy Notes No. 2002-18, December, Philippine Institute of Development Studies, Manila. Medalla, E., and R. Aldaba (2003), R.M., "No" to policy reversalBacksliding in Tariff Policy Can Do More Harm than Good, Policy Notes No. 2003-10, September, Philippine Institute for Development Studies, Manila. Milo, M.S. (2000), Analysis of the State of Competition and Market Structures of the Banking and Insurance Sectors, Philippine APEC Study Centre Network, PASCN Discussion Paper No. 2000-11), Manila. Milo, Melanie S.(2002), Financial Services Integration and Consolidation Supervision: Some issues to Consider in the Philippines, PIDS Policy Notes No. 2002-19, December. Milo, M.S. (2003), State of Competition in the Insurance Industry; Selected Asian Countries, Discussion Paper Series No. 2003-13, September, Philippine Institute of Development Studies, Manila. NEDA (undated), Medium-Term Development Plan 2001-2004 Governance. Available at: http://www.neda.gov.ph/ads/mtpdp/mtpdp_part4.htm [25 October 2004]. OECD (2001), Report on the Observance of Standards and Codes: Corporate Governance Country Assessment Republic of the Philippines. Available at: www.oecd.org [6 September 2004]. OPS (2004), "Backgrounder: The Philippines and ASEM". Available at: http://www.ops.gov.ph/ asem2004/backgrounder.htm#The%20Philippines. Pasadilla, G., and M. Milo (2005), Effect of Liberalization on Banking Competition, Discussion Paper DP 2005-03, Philippine Institute for Development Studies, Manila. Philippine Senate (undated), Legislative Process. Available at: http://www.senate.gov.ph/ about/legpro.htm [24March2004]. Philippine Tariff Commission (2001a), Competition Law and Policy. Available at: http://www.tariff commission.gov.ph/competit.html [23 March 2004]. Philippine Tariff Commission (2001b), Duties and Functions. Available at: http://www.tariff commission.gov.ph/duties&.html [21 October 2004]. Philippine Tariff Commission (2001c), New Trade Laws. Available at: http://www.tariff commission.gov.ph/pilipino.html [23 March 2004]. Philippine Tariff Commission (2001d), Tariff and Customs Code of the Philippines - Harmonized Commodity Description and Coding System (Volume 1), Quezon City. Philippine Tariff Commission (2001e), The Asia Pacific Economic Cooperation (APEC). Available at: http://www.tariffcommission.gov.ph/asia.html [23 March 2004]. Philippine Tariff Commission (2003a), A Primer on New Developments in Trade and Tariff Policy, Quezon City. Philippine Tariff Commission (2003b), Tariff and Customs Code of the Philippines (Volume II) Quezon City. Philippine Tariff Commission (undated), Safeguard Measures. Available at: http://www.tariff commission.gov.ph/safeguar.html [23 March 2004]. PricewaterhouseCoopers (2004), Investment incentives in the Philippines. Available at: http://www.pwcglobal.com/extweb/pwcpublications.nsf/docid/C0BD40E741CF069385256E6D002947A0 [8October 2004]). Roumasset J. (2000), "Market Friendly Food Security: Alternatives for Restructuring NFA", Unpublished, Department of Economics, University of Hawaii, Honolulu. SEC (2002), Manual on Corporate Governance: Model Corporation, Manila. Soesastro, H (forthcoming), The Evolution of ASEAN+X Free Trade Agreements: Implications for Canada, CSIS, Jakarta, Asia Pacific Foundation of Canada. UNCTAD (undated), A National Competition Policy for the Philippines. Available at: http://r0.unctad.org/en/subsites/cpolicy/gvaJuly/docs/en9.doc [4 April 2004]. UNCTAD, World Investment Report 2004. Available at: http://www.unctad.org/Templates/Web Flyer.asp?intItemID=3235&lang=1]. World Bank (2000), Combating Corruption in the Philippines. Available at: http://www.wds. worldbank.org/servlet/WDSContentServer/WDSP/IB/2000/06/17/000094946_0006020538276/Rendered/PDF/multi_page.pdf [1 November 2004]. World Bank (2001), Combating Corruption in the Philippines: An Update. Report No. 23687-PH, 30September 2001. World Bank (2004a), Agriculture Modernization. Available at: http//www.worldbank.org.ph/ WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/PHILIPPINESEXTN/0,,contentMDK:20250461~pagePK:141137~piPK:217854~theSitePK:332982,00.html [8December 2004] World Bank (2004b), Doing Business Snapshot of Philippines Business Environment. Available at: http://rru.worldbank.org/DoingBusiness/ExploreEconomics/BusinessClimateSnapshot.aspx?economyid=153]. World Bank (2004c), Draft Discussion Briefs: Restoring Fiscal Sustainability, September. Available at: http//www.worldbank.org.ph/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/ PHILIPPINESEXTN/0,,contentMDK:20250461~pagePK:141137~piPK:217854~theSitePK:332982,00.html [8December 2004]. World Bank (2004d), Philippines: New World Bank Report Cites Importance of Improving Investment Climate. Available at: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK: 20263418~menuPK:34463~pagePK:34370~piPK:34426~theSitePK:4607,00.html[1November2004]. World Bank (2004e), World Bank Ink Grant to Support Ombudsman's Anti-Corruption Activities. Available at: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20270207 ~menuPK:34463~pagePK:34370~piPK:34426~theSitePK:4607,00.html [1November2004]. World Bank (2004f), Reforms in Ports and Shipping. Available at: http//www.worldbank.org.ph/ WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/PHILIPPINESEXTN/0,,contentMDK:20250461~pagePK:141137~piPK:217854~theSitePK:332982,00.html [8December 2004] World Bank (2004g), Sustaining Trade Liberalization. Available at: http//www.worldbank.org.ph/ WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/PHILIPPINESEXTN/0,,contentMDK:20250461~pagePK:141137~piPK:217854~theSitePK:332982,00.html [8December 2004] World Economic Forum (2004), The Global Competitiveness Report, 2004-5, [Online]. Available at: http://www.weforum.org/pdf/Grc/ Business_Competitiveness_Index_Porter. ϲʹ (1999), Trade Policy Review The Philippines, Geneva. ϲʹ (2004), Trade Policy Review Singapore, Geneva. Yap, Joseph T.(2004), Philippines 2004, a 2003 replay, pids development research news, vol.xxii no.1, January-February, 2004.  Includes forestry and fishing, which are relatively minor. GDP shares given in this chapter are nominal, based on current prices.  World Bank (2004a). GDP and employment shares in 2003 suggest that agricultural labour productivity was just over one third of the national average.  David (2003).  Clarete (2005); and David (1997).  Clarete (2005), p. 12.  Nominal rates of protection were estimated as the percentage difference between the domestic wholesale price and the border price at the official exchange rate (David, 2003).  Hill (2003).  Clarete (2005). In 1988, manufacturing protection of 55.5% was well above agriculture of 5.2%.  David (2003); Aldaba (2005); and Clarete (2005).  Llanto, Geron and Tang (1999).  Llanto (2001).  At end October 2004, Quedancor, a government financial institution, had released credit totalling PhP171 million to 33 private financial institutions (including cooperatives and rural banks) of PhP300 million received from the AMCFP.  The 1988 Comprehensive Agrarian Reform Law (RA 6657) caps farm interest rates on preferential loans, and the 1992 Magna Carta for Small Farmers (RA 7607) limits them to 75% of market levels.  David (2003).  Up to 40% foreign equity is allowed in the production, milling, processing, and trading (except retailing) of rice and corn. Full foreign ownership is allowed if, within 30 years, a minimum of 60% of foreign equity is divested to Filipinos.  The Philippines is negotiating the continuation of the special treatment for rice and the extension of the import quota for up to ten years with nine ϲʹ Members.  The authorities indicate that the NFA's rice import monopoly was lifted in July 2003 when the Farmers as Importers Programme (FAI) was introduced to allow palay farmers and other private bodies to import some of the country's requirements, subject to payment of tariffs. This was done to share the financial burden of importing rice with the private sector, to release scarce NFA resources to more aggressively procure domestic production, and to prepare the domestic market for possible eventual opening. However, such imports are relatively minor, and the NFA utilizes any remaining quota.  FAIR encourages farmers to sell paddy to NFA by allowing them to buy back within six months from date of sale up to 25% of the rice equivalent of total palay stocks for their own consumption.  ϲʹ document G/AG/N/PHL/23, 22 August 2002.  Roumasset (2000).  The Philippine authorities indicate that the current average price per tonne of sugar exported to the United States (about US$864) exceeded the domestic price (US$725), which itself was well above world levels.  ϲʹ document G/MA/TAR/RS/93, 1 July 2003; and Clarete (2005), p.9. The Philippines Uruguay Round commitment was to reduce the bound out-of-quota rate on the two tariff items in equal annual instalments from 100% in 1995 to 50% in 2000. The applied out-of-quota rate was reduced from 80% to the current level of 65% in 1999. Since the applied rates exceeded bound rates, the Philippines requested ϲʹ negotiations in January 2000 to raise bindings. By raising the bound rate to 80% instead of to the applied rates of 65%, it has retained scope to increase rates in future to pre-1999 levels.  Quedans are permits proving ownership and must be given to the SRA to release sugar.  The SRA estimates sugar production and consumption at the start of the crop year to allocate "B" and "A" sugar. Surplus production is allocated as "D" sugar. During production peaks, "seasonal excess" of "B" sugar is classified as "C" sugar, and is not consumed domestically until reclassified to "B" sugar, usually in the off-milling season.  David (2003).  On-going litigation is determining whether these oil mills are state owned.  David (2003).  The registration inventory of all (licensed and unlicensed) Philippine commercial fishing vessels and gear was to have been completed by 21 July 2004 to enable the moratorium to start from 22 July 2004 (BFAR, Fisheries Administrative Order No. 2003, 29 December 2003). However, these dates were extended to 29 and 30 October 2004, respectively (BFAR, Fisheries Administrative Order No. 223-1, 27 July 2004). No clearances to import fishing vessels are to be issued during the moratorium, which excludes fishing vessels operating in distant or international waters or waters of other countries, which allow such fishing operations and those imported for distant water fishing, and long line fishing vessels.  If imported products do not meet the required quality standards, the entire shipment is stored for further random laboratory examination. Shipments found unfit for human consumption or not meeting required standards are returned to the exporter.  Grants of up to 7.5% of gross proceeds are paid if there is a minimum Filipino interest of 15%.  The Supreme Court ruling in December 2004 reversed a January 2004 court decision that provisions of the 1995 Mining Act permitting 100% foreign equity were unconstitutional.  The review will examine ways to improve the legislation, including the balance between industry and consumer interests (The Philippine Daily Inquirer, "Gov't names oil deregulation review panel", 1 March 2005).  Specific excise taxes are highest for gasoline and other non-socially-sensitive products. Kerosene and diesel have lower rates, while household (LPG) and industry products (fuel oil for electricity generation) are untaxed. The Government is proposing to raise petroleum excise taxes as part of its revenue reforms.  Previous levels were 30 days for refiners, 15 days for bulk suppliers and 7 days for LPG suppliers.  The authorities indicate that there are no plans to divest Petron, since this enhanced the Government's strategic role in ensuring continuous and sufficient supply of reasonably-priced petroleum products. Caltex closed its refinery in late 2003 and now imports petroleum products.  The Philippine Star, "GMA to certify bill mandating oil companies to use ethanol", 28February2005.  The Manila Bulletin, "Coal utilization up 28.7%", 3 March 2005.  Permits are to be issued provided the pipeline or facility is consistent with overall policy, the applicant has the necessary financial resources and technical capacity, and it is to be operated competitively.  The Constitution also limits participation of foreign investors in the governing body of any public utility enterprise to their proportionate capital share, and all executive and managing officers must be Filipino.  Rates for transmission, distribution or supply shall be "just and reasonable" and be set on an "unbundled" basis. Prices between gas supplier and large end-users, such as power plants, are contracted via sales purchasing agreements without requiring ERC approval.  Deferment is granted when it can be shown that it is necessary to enable efficient planning of the infrastructure and aggregation of the initial demand necessary to justify investment in transmission or distribution systems, and is necessary to ensure stable supply.  They will retain ownership and control of assets and continue to be regulated by the ERC.  Since about one third of NPC's liabilities are in foreign currency loans and bonds, it is heavily exposed to exchange rate movements, especially the peso's depreciation against the U.S. dollar. Its borrowings have accounted for about half of total contingent liabilities of state-owned entities.  NPC, Power Hotline, 30 August 2004.  To facilitate privatization the Government absorbed PhP200 billion of NPC's debt from 2005.  Cross-subsidies apply, for example, between Luzon and especially Manila customers, who pay much higher prices than those in the Visayas and Mindanao grids, and between industrial and commercial users to residential users. Grid cross-subsidies are due to be fully phased out by October 2005, and as of August 2004 some 56 distribution utilities had phased out cross-subsidies to varying degrees between customers (ten fully and another eight by two thirds). These are due to be fully removed by July 2006. After liberalization and commencement of the competitive spot market the UC will also include a consumer levy to cover NPC's "stranded" debt, and rural electrification.  The EPIRA required a universal charge on end-users to cover (a) stranded NPC debts and contract costs, including distribution utilities, (b) missionary electrification, (c) the equalization of taxes and royalties between indigenous or renewable resources of energy and imported energy fuels, (d) environmental charge, and (e) "mitigation" fund for removal of cross-subsidies.  Two hydropower stations are excluded from privatization until 2010. The NPC will continue to operate all unsold generation assets on behalf of PSALM under an operation and maintenance contract.  The authorities hope to raise US$4-5 billion to help repay NPC's debts of US$9 billion (Financial Times, "Manila power plant sell-off delayed amid transport strike", 26 November 2004).  The LRAC methodology sets prices to ensure the long-term viability of the generation sector. It incorporated (a) average weighted cost of capital, (b) capital costs from plant construction, (c) fixed and variable operating and maintenance costs, (d) fuel costs, (e) insurance, and (f) variations in the peso-U.S. dollar exchange rate.  Generation and transmission tariffs have been set separately by the ERC since June 2002.  The EPIRA provides for competitive guidelines to ensure the independence of the transmission provider (section 45). No generation company or distribution company is allowed to hold an interest in TRANSCO or its concessionaire directly or indirectly.  Initial biding in 2003 was rejected as only one bid was received. PSALM then invited submissions from interested parties, and in August 2004 received four offers, but these were subsequently terminated.  For 2005, TRANSCO will be allowed to increase the MAR by the changes in the weighted index (composite of local and U.S. CPI and exchange rate movements) and to recover any shortfall in 2004.  The MAR is to be set by reference to the utility's (a) regulated asset base, (b) operating and maintenance expenditure, (c) company and other tax payments, (d) regulated depreciation, and (e) return on capital. It will be adjusted annually using the change in the weighted index (local and U.S. CPI), exchange rate movements, and actual adjustment factors to correct for over or under recovery in the previous year.  Charges are to be based on full recovery of "prudent and reasonable economic costs, or such other principles to promote efficiency" as determined by the ERC (EIPRA, Section 25).  Other EIPRA reforms needed before retail competition could be introduced included approval of unbundled transmission and distribution wheeling charges; initial implementation of the cross-subsidy removal scheme; privatization of at least 70% of the total capacity of generating assets of NPC in Luzon and Visayas; and transfer of at least 70% of management and control of the total energy output of power plants under contract with NPC to IPP Administrators.  Hill (2003). GDP and employment shares in 2003 suggest that labour productivity in manufacturing was more than double the national average.  Aldaba (2005), e.g. meat processing, and rice and corn milling have effective rates over 40%.  Medalla and Aldaba (2003).  Previous trade policies had created an "imperfectly competitive structure characterized by unrealized scale economies and poor economic growth performance" by favouring heavy over light industry, import competing manufacturing over exports and agriculture, and of consumer goods over capital and intermediate goods (Medalla, 1998).  Austria (2001b).  Medalla and Aldaba (2003); and Aldaba (2005), p. 3. TRP IV, enacted before President Estrada was impeached, was short-lived as the incoming administration responded to pressure from special interest groups by delaying tariff restructuring either by raising tariffs or postponing scheduled rate reductions.  Medalla and Aldaba (2003); and Aldaba (2005).  Such tariff reversals may undermine efficiency gains from previous trade liberalization (World Bank, 2004g); and Clarete (2005).  Clarete (2005). For example, increased MFN tariffs from 3% to 7% on hot-rolled and cold-rolled steel coils were reportedly linked to expansion of steel facilities in Iligan City after the sale of the financially insolvent National Steel Corporation to a consortium seeking protection (Today Business, "DTI pushing to review ϲʹ commitments", 6 February 2005). Similarly, the relatively high tariffs, including an increase from 7% to 10% on certain finished plastic products of downstream industries were reportedly linked to establishing the country's first naptha cracker facility, which has not yet occurred (The Philippine Star, "TRM rejects JG Summit Petrochems bid for another extension", 28 February 2005).  APEC (2005b), p. 10.  Construction materials, electronics, food, giftware and holiday decor, home furnishings, IT and IT-enabled services, marine products, motor vehicle parts and components, organic and natural products, and "wearables" e.g. leather goods, footwear, jewellery, and hats.  In 2004, the average quota utilization rate was 52.4% for 53 product categories subject to specific restraints; 54.9% for the United States (30 product categories, but averaging 92.6% for 14 of these), 46.2% for the EU (9 product categories), and 38.3% for Canada (14 product categories).  Aldaba (2000).  Aldaba (2005), p. 12.  The tariff rate on CKD kits used in assembling passenger cars was reduced from 10% to 3% in 2004.  The excise rates are 2% up to PhP600,000; 20% from PhP600,000 up to PhP1.1 million; 40% from PhP1.1 million up to PhP2.1 million; and 60% from PhP2.1 million.  The local-content plan contributed to the high cost of assembly since many domestic parts were not competitive (Aldaba, 2000). Local-content plans primarily determine the distribution of total assistance, which is set mainly by tariffs on vehicles imports, between assemblers and component manufacturers.  Registration is needed, according to authorities, to avoid assemblers copying models (i.e. having one model/brand registered to one authorized assembler) and to ensure the model's marketability and viability.  Aldaba (2000).  The President is reportedly planning to raise tariffs on imported used vehicles if the Supreme Court rejects the Government's appeal and confirms the ban's illegality (The Philippines Star, "Palace seeks tax hike on used vehicle imports", 1 March 2005).  Under the Constitution, ratification requires acceptance by the Senate. Both protocols were sent to Congress for approval in December 2004; it is expected in the near future (APEC, 2005b, p. 13).  Quasi-banks are engaged in borrowing funds through issuing, endorsing, or accepting deposit substitutes for re-lending or purchasing receivables and other obligations.  IMF (2004c), p. 9; and Milo (2002).  Universal banks are commercial banks that have expanded functions, such as: performing activities of investment houses; investing in non-allied enterprises; owning up to 100% of a thrift bank, rural bank, or allied financial or non-financial enterprise, or 51% of insurance companies. Regular banks (commercial banks) can do likewise, except that they may not own insurance companies and their equity in other NBFIs (e.g. leasing and credit card companies) is capped at 40%. Thrift banks comprise savings banks, private development banks, and stock savings and loan associations. One Islamic bank exists (Al-Amanah Islamic Investment bank of the Philippines), and is supervised by the BSP. There are also two other specialized government banks (Development Bank and the Land Bank), which provide finance to specific activities or sectors, such as agricultural and industrial development.  Private domestic universal banks account for 57.6% of total bank assets.  The total number of universal and commercial banks declined during this period from 52 to 42, as did the total number of banking institutions, from 976 to 893.  The top five banks and respective shares of total bank assets were Metropolitan Bank (13.6%), Bank of the Phil Islands (10.4%), Land Bank (8.3%), Equitable PCI Bank (8.3%), and Citibank, N.A. (6.5%).  Another bank, Philippine Trust Company, was 99.9% Filipino owned.  The three specialized government banks were upgraded to universal banks in the mid 1990s. The Philippine National Bank (PNB) was partially privatized in 1989 (30%) and in 1996 (24%). Its remaining 46% state equity was subsequently divested, and it is currently 19% foreign owned.  Two commercial banks suffered difficulties due to the crisis but were acquired by two new foreign banks. Two other commercial banks failed in the aftermath of the crisis (Orient Bank in 1998 and Urban Bank in 2000), but mainly due to fraud/insider abuse (Milo, 2002)  IMF (2004a), pp. 11 and 18.  ROPOAs are property and chattels used as collateral and acquired by banks to settle loan defaults.  The Philippine Star Business, "Banks NPL ratio down to 12.72% as of Dec 04", 28 February 2005.  There is a bill proposing the extenson of the SPV legislation.  Pasadilla and Milo (2005).  Bank of China was granted a licence in 2000 to replace the Development Bank of Singapore, which surrendered its licence in order to buy 60% of Philippine-based Bank of Southeast Asia in 1998.  This provision also allowed foreign banks that acquired 60% of the voting stock of a domestic bank prior to RA 8791 to acquire up to 100%, again subject to Monetary Board Authorization. Four banks have done this and raised their ownership to 100%.  Future policy is to subject all applications for mergers and consolidation to stress testing to ensure their viability without such incentives.  The Constitution expressly assigns the supervision of banks to the BSP.  Banks' articles of incorporation must be registered with the SEC. This requires a certificate of authority to operate issued by the Monetary Board.  Quasi-banks are engaged in borrowing funds through issuing, endorsing, or accepting deposit substitutes for re-lending or purchasing receivables and other obligations.  The Monetary Board may appoint itself as conservator of a troubled bank until it is satisfied that the bank can operate on its own. For an insolvent bank, it may appoint the PDIC as receiver, which has 90 days to decide whether to rehabilitate or liquidate the bank. Assets of liquidated banks are sold to pay creditors in accordance with the Civil Code.  RA 7653 transferred receivership and liquidation of rural banks from the BSP to the PDIC.  Minimum capital requirements are PhP325 million within metro Manila, and PhP52 million elsewhere for thrift banks, and range from PhP2.6 to PhP26 million for rural banks, depending on location.  Possible weaknesses in accounting practices, such as valuation of ROPOAs, and understatement of distressed assets due to deficiencies in loan classifications, may conceal much lower true capital adequacy ratios, and re-capitalization may be needed to increase the sectors resilience (IMF, 2004a, p. 11; and IMF 2005, p. 14).  Includes Islamic banks; but, because only conventional deposits are covered, general and special investment deposits with these banks are excluded from deposit insurance.  Should unexpected bank failure lead to a drain on the DIF, the PDIC may borrow from the BSP or any bank designated as a government depository or fiscal agent, and issue notes (with Presidential approval).  Deposit placements involve PDIC depositing funds, usually as time deposits, with distressed banks. Financial assistance is only to be provided where the PDIC determines its estimated cost is below that of deposit insurance pay-offs, receivership, and liquidation expenses net of recoveries should the Monetary Board close the bank, or when the Board decides there are systemic consequences of bank closure.  IMF (2005).  Milo (2003), p. 14.  Minimum capital requirements are PhP150 million for up to 40% foreign equity, 300 million for 40%-60% foreign equity, and PhP500 million for more than 60% foreign equity.  Milo (2000). Reinsurance companies are to invest in government bonds, unless approved by the Department of Finance.  Milo (2000).  The moratorium excluded companies acquiring existing firms meeting the new capital levels.  APEC (1998).  ITU (2002).  In 2002, there were 74 local exchange operators (76 in 1999), 14 inter-exchange operators (12), 11international gateway providers, 7 mobile phone operators (5), over 180 providers of value-added services (128), including 53 Internet service providers, and 19 satellite operators.  The target was for 100% mobile coverage of provincial capitals and cities by 2004.  Each international gateway and mobile provider had to install 400,000 and 300,000 fixed lines, respectively, within five years, and the nine operators concerned installed some 4 million extra lines by 2000, only 29% of which were used. Thus, while teledensity of installed fixed lines rose rapidly, and was targeted to rise from 9.1% in 2000 to 12.7% in 2004, teledensity on subscribed lines has increased much more slowly.  Its franchise to offer any telecommunication service nationwide was extended in 1991 until 2028.  Abrenica and Llanto (2003).  While "sufficient competition" is not defined, the legislation provides for a "healthy competitive environment" whereby "carriers are free to make business decisions and to interact in providing services with the end in view of encouraging their financial viability while maintaining affordable prices".  ITU (2002).  Abrenica and Llanto (2003).  PLDT's agreements provide for per minute access charges on international gateway and mobile interconnection for local calls, and revenue sharing on toll calls for inter-exchange and mobile carriers.  Abrenica and Llanto (2003).  Charges are to recover only attributable shares of the efficient operating and maintenance costs; the return of an efficient level of investment in assets used to provide the service over their reasonable economic life (i.e. economic depreciation); and to encompass a reasonable return on investment.  Austria (2001a).  An additional carrier was to be permitted to ensure at least two international carriers, and more allowed if the designated carriers could not service existing ASA entitlements.  Austria (2001c).  In 2004, PAL had 28% of the international passenger market and foreign carriers had 70%. The domestic carrier, Cebu Pacific, operated limited international flights and had a 2% share of this market  Austria (2001c), p. 4.  The main traffic rights negotiated are third, fourth, and fifth freedoms.  Austria (2001c).  APEC (2005b), p. 14.  World Bank (2004f).  Special permits can be issued when (a) no existing vessel is operating in the proposed route or area, (b) no suitable local vessel is available that meets the shipping requirements, (c) the proposed vessel is contracted by private/public entities, and (d) for tourist passenger vessels, the itinerary includes operating calls at domestic ports. Cargo rates are not taken into account in determining the availability of suitable domestic services. Special permits are for up to three months and exemption permits are limited to one year.  Vessels engaged in domestic trade that may be issued Special Permits are those (a) operating in the Brunei-Indonesia-Malaysia-Philippines (BIMP)-East Asian Growth Area (EAGA), (b) engaged in liner operations that include foreign ports in their trading routes, or (c) involved in occasional overseas trading. Such vessels must be fully managed, operationally controlled, and manned by Filipinos.  Limited exemptions are permitted, such as when suitable Philippine-flagged vessels are unavailable at reasonable freight rates within a reasonable period.  Provided that (a) at least 85% of net income is reinvested in ship construction, modernization or acquisition, including of related equipment, and (b) such amounts remain invested either for the period of the income tax exemption or until fully paid, whichever happens first.  The MICT, for example, is managed and operated by International Container Terminal Services Inc (ICTSI) under a 25-year concession whereby it pays PPA fixed and variable fees.  The permit issued by PPA to HCPTI in June 2002 covers full domestic commercial operations, including all vessel types and cargoes whether or not containerized, but excludes foreign containerized cargo.  World Bank (2004f).  The process of rate setting by the Domestic Shipping Consultative Councils (composed of shippers, consumers, operators and government representatives) was eliminated.  Third-class passenger rates are fixed below cost and are cross-subsidized by cargo rates (Austria, 2002). Operators must allocate 50% of passenger capacity to third class unless exempted by DOTC for upgrading their vessels or facilities.  MARINA determines the "fairness" of passenger and cargo rates on monopolized routes and has authority to adopt necessary rules to ensure "reasonable stability of passenger and freight rates and to intervene to protect the public interest".  Competition would be ruinous if an existing operator (a) carried cargo below the "annual break-even load factor" as determined by MARINA or (b) made audited losses for the last two years or (c) for any other "analogous" circumstance determined by MARINA. It may still approve another operator if it is in the public interest. Pioneering operators, i.e. those providing a service on a new route or introducing a technologically-advanced service on an existing route, are protected from competition for up to five years.  World Bank (2004f).  Austria (2002).  World Bank (2004f).  Austria (2002).  The VAT exemption also applied to other items, such as engines and spare parts.  Imported vessels must also be "reasonably-needed", exclusively used by registered domestic shipping operators, and approved by MARINA. They must not exceed 15 years in age for passenger and cargo ships, 10 years for tankers, and 5 years for high-speed passenger craft.  APEC (2005b), p. 15.  Also applies to other priority land uses like establishment of industrial estates, assembly or processing plants, agro-industrial enterprises, and development for industrial or commercial use (APEC, 2005).  Foreigners can be employed as tourist guides only if no Filipinos are available (APEC, 2005). WT/TPR/S/149 Trade Policy Review Page  PAGE 94 The Philippines WT/TPR/S/149 Page  PAGE 105 Page IV. PAGE \* MERGEFORMAT 1 WT/TPR/S/149 Trade Policy Review Page  PAGE 108 The Philippines WT/TPR/S/149 Page  PAGE 107 Page IV. 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