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Balance of Payment in the Philippines: An

Assessment of from 1999 to 2008

A Research Report Presented to the


Graduate Studies in Management
Pamantasan ng Lungsod ng Maynila

In Partial Fulfillment of the Requirements in


International Economics

Submitted by:
Christine Aldeguer
Leticia Belliodo
Jericho Bragado
Jude Edmon Anthony Ola
2

Introduction

The balance of payments (BOP) is the method countries use to monitor all

international monetary transactions at a specific period of time.

It is a systematic record of a nation's total payments to foreign countries,

including the price of imports and the outflow of capital and gold, along with the

total receipts from abroad, including the price of exports and the inflow of capital

and gold.

It also draws a series of balances between inward and outward

transactions; provides a net flow of transactions between residents of one

country and the rest of the world; and reports how that flow is funded. Economic

transactions include:

 Exports and imports of goods, such as oil, agricultural products, other raw
materials, machinery and transport equipment, computers, white goods
and clothing;
 Exports and imports of services such as international transport, travel,
financial and business services;
 Income flows, such as dividends and interest earned by foreigners on
investments in a country and by such country investing abroad;
 Financial flows, such as direct investment, investment in shares, debt
securities, loans and deposits;
 Transfers, which are offsetting entries to any one-sided transactions listed
above such as foreign aid and funds brought by migrants to the country.

As defined by the Selected Philippine Economic Indicators, Bangko


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Sentral ng Pilipinas, balance of payment systematically summarizes, for a

specific time period, the economic transactions of an economy with the rest of

the world.

This paper deals with the study of improving the Balance of Payment of

the Republic of the Philippines.

The researchers hope that this paper will be helpful to the Philippines, as

well as government officials and other stakeholders who will be involved in

implementing some of the strategies as mentioned in this proposal. Valuable

insights from existing laws and theories in Management may also be considered

for purposes of analyzing the different categories that comprise the Balance of

Payment of the Philippines.

Background of the Research Study

Philippines Balance of Payment from 1999-2008(In Millions of US Dollars)

Current Account
Goods and Services
Income
4

The above table provides information of the Overrall BOP Position of the

Philippines for the years 1999-2008. In order to analyze the above table, let us

scrutinize each component that comprise the Balance of Payment in the

Philippines, specifically, the Current Account, the Capital Account and the

Financial Account.

Current Account

In summary this covers import and export of goods and services. Goods

which involves:

 General merchandise
 Goods for processing
 Goods procured in ports by carriers
 Non monetary gold

Services involves:
 Transportation
 Travel
 Communication services
 Construction services
 Insurance services
 Financial services
 Computer and information Services
 Royalties and license fees
 Other business services
 Personal, cultural and recreational services
 Government services

Another classification under Current Account is Income which includes

compensation for employees and investment income. Investment income


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consists of direct investment income, portfolio investment income and other

investment income.

Another classification under Current Account is Current Transfer where

no quid pro quo (economic value) is placed. It is classified as a current transfer

when it directly affect the level of disposable income and should influence the

consumption of goods or services. That is, current transfers reduce the income

and consumption possibilities of the donor and increase the income and

consumption possibilities of the recipient.

Included in the Current Transfer are:

 Cash transfers effected between governments for the purpose of financing


current expenditures by the recipient government;
 Gifts of food, clothing, other consumer goods associated with relief efforts
 Gifts of certain military equipment;
 Annual contributions made by member governments to international
organizations;
 Payments made by government or international organizations to
governments for salaries for technical assistance;
 Workers remittances (migrants who stay in an economy for a year or
more)
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Current Account (In Millions of US Dollars)

20000

15000

10000
Current Account
5000 Goods and Services
0 Income
Current Transfers
1999
2000

2001
2002
2003
2004
2005

2006
2007
2008
-5000

-10000

-15000

The above graph shows that from the years 1999-2008, our country has

consistently incurred a deficit on the trade of goods and services, averaging a

total amount of US$7 billion dollars every year. However, the graph will also

show that our country has consistently been incurring surplus in the Current

Transfer, increasing from US$5 billion dollars for the year 1999 reaching until

US$15 billion dollars for the year 2008.The remittances of our country's

Overseas Filipino Contract Workers (OFWs) are instrumental in providing a

satisfying result of our country's Current Account in the Balance of Payment.

Capital Account

This component covers all transactions that involve the receipt or payment

of capital transfers and acquisition or disposal of nonproduced, nonfinancial

assets. This comprises transactions associated with tangible assets that may be
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used or necessary for production of goods and services but are not actually

produced (e.g., land and subsoil assets) and transactions associated with

nonproduced, intangible assets (e.g., patents, copyrights, trademarks,

franchises, etc. and leases or other transferable contracts). However, in the

case of resident-nonresident transactions in land (including subsoil assets), all

acquisition or disposal is deemed to occur between resident units, and the

nonresident acquires a financial claim on a notional resident unit. Debt

forgiveness is included in this category as a Capital Transfer.

Capital Account (In Millions of US Dollars)

180
160
140
120
100
80
60
40
20
0
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

The above graph indicates that the Philippines is not that aggressive in its

capital account transactions within the years 1999 upto 2008, only reaching a

recorded maximum level of US$163 million in the year 1999. This is due to the

fact that the Philippines does not allow foreigners to buy real estate as prohibited
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under the Constitution. On the other hand, foreign investors may only be allowed

to lease real property owned by Filipinos for a maximum period of 5 years and

provided that these investors shall lease such real property which shall be limited

to investment projects with an investment of not less than US$5 million, 70% of

which shall be infused in said project within years from signing of the lease

contract.1

Financial Account

The financial account covers all transactions associated with changes of

ownership in the foreign financial assets and liabilities of an economy. Such

changes include the creation and liquidation of claims on, or by, the rest of the

world.

The following are the components of the Financial Account as a

Functional Type:

 Direct Investment
 Portfolio Investment
 Reserve Assets
 Other Investment

Direct Investment means a significant voice in the management of an

enterprise operating outside his or her resident economy, often having

substantial equity capital in the enterprise. Combined ownership is 10% or more.

Ownership of less than 10% of total equity in an enterprise is already classified


1
-- Republic Act No. 7652.
9

as Portfolio Investment.

Portfolio Investment includes equity securities and debt securities which

are traded and tradable in organized and other financial markets. Debt securities

include bonds and notes, money market instruments, and financial derivatives

that include a variety of new financial instruments. Equity securities covers all

instruments and records acknowledging, after the claims of all creditors have

been met, claims to the residual values of incorporated enterprises; holders of

preferred shares are also included.

Reserve Assets - consist of those external assets that are readily available

to and controlled by monetary authorities for direct financing of payments

imbalances, for indirectly regulating the magnitude of such imbalances through

intervention in exchange markets to affect the currency exchange rate, and/or for

other purposes.

The category of reserve assets, comprises monetary gold, SDRs, reserve

position in the Fund, foreign exchange assets (consisting of currency and

deposits and securities), and other claims.

Other Investment these are neither classified as direct investment,

portfolio investment and reserve assets. This includes short-term (contractual

maturity of one year or less) and long-term investments (contractual maturity of

more than one year or with no stated contractual maturity).


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Direct Investment (In Millions of US Dollars)

3000
2500
2000
1500

1000

500
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-500
-1000

The above graph indicates that our country is treading the waters in

encouraging foreigners to invest in our country. The following laws are

significant and worth considering for purposes of analyzing the component on

Direct Investment, a functional component under the Financial Account:

a) Foreign Investment Act of 1991 2--

The Law

The term Philippine national shall mean a citizen of the


Philippines, or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
2
-- R.A. 7042.
11

Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation
and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent
of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines, in
order that the corporation shall be considered a Philippine national.3

Small and medium-sized domestic market enterprises with paid-in


equity capital less than the equivalent of Two hundred thousand US
dollars (US$200,000.00), are reserved to Philippine nationals: Provided,
That if (1) they involve advance technology as determined by the
Department of Science and Technology, or (2) they employ at least fifty
(50) direct employees, then a minimum paid-in capital of One hundred
thousand US dollars (US$100,000.00) shall be allowed to non-Philippine
nationals.4

The phrase doing business shall include soliciting orders, service


contracts, opening offices, whether called liaison offices or branches;
appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization. Provided, however, That the phrase doing business shall
not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account;5

Discussion of the Law

Republic Act 7042, as amended by Republic Act 817 (March 25,


1996), also known as the Foreign Investments Act of 1991, provides for
the policy that foreigners can now invest in all activities and enterprises in
the Philippines, except those covered in the negative list.
3
-- Section 1, RA 8179.
4
-- Section 3, RA 8179.
5
-- Section 3 (d), RA 7042.
12

When a foreign investment in the Philippines is not covered or


does not seek incentives under the Omnibus Investment Code, the
foreign national or entity can ascertain the extent of allowable foreign
equity in the enterprise sought to be entered into by simply referring to the
Negative Lists, and filing the necessary requirements with the Securities
and Exchange Commission.

Under the Foreign Investment Act of 1991 (FIA 1991), a foreign


national or equity must determine the kind of enterprise sought to be
entered into, whether the enterprise is a Domestic Market Enterprise or
an Export Enterprise.

Domestic market enterprise shall mean an enterprise which


produces goods for sale, or renders service to the domestic market
entirely or, if exporting a portion of its output, continually fails to export at
least 60% thereof.6

In domestic market enterprises, foreigners can invest as much as


100% equity, except a) in areas included in the Negative List;7 or b) in
case the paid-in equity capital is less than the equivalent of Two hundred
thousand US dollars (US$200,000.00), such domestic market enterprises
is reserved to Philippine nationals, provided, that if (1) they involve
advance technology as determined by the Department of Science and
Technology, or (2) they employ at least fifty (50) direct employees, then a
minimum paid-in capital of One hundred thousand US dollars
(US$100,000.00) shall be allowed to non-Philippine nationals.8

If the activity is in the Negative List, foreign ownership in the


enterprise is generally limited to a maximum of 40% unless the
Constitution or other laws provide lower limit.

Export Enterprise shall mean an enterprise wherein a


manufacturer, processor, or service (including tourism) enterprise exports
sixty percent (60%) or more of its output, or wherein a trader purchases
products domestically and exports sixty percent (60%) or more of such
purchases.9 There are no restrictions on the extent of foreign ownership
(up to 100%) in export enterprises, unless the products and services fall

6
-- Section 1(k), Implementing Rules and Regulations of RA 7042 (October 23, 1991) as amended by RA
8179.
7
-- Section 2, RA 8179.
8
-- Section 3, RA 8179.
9
-- Section 1 (g), Implementing Rules and Regulations of RA 7042 (October 23, 1991) as amended by RA
8179.
13

within the Negative Lists A and B or utilize raw materials from depleting
natural resources.

Currently, the following areas of investment have limited foreign


equity participation:

 Small-Scale Mining (Section 3 of RA 7076) (No Foreign Equity)


 Exploration, development and utilization of natural resources,
unless foreign participation through financial, or technical assistance agreement
with the President of the Philippines (upto 40% foreign equity).10
 Agri-business or Agri-industrialization (upto 40% foreign equity
under the Investment Priorities Plan pursuant to the Omnibus Investment Code
of 1987)

b) Special Economic Zone Act of 199511

The Law

The law provides for the legal framework and mechanism for the creation,
operation, administration and coordination of Special Economic Zones in
the Philippines, creating for this purpose, the Philippine Economic Zone
Authority (PEZA) and for other purposes. On October 7, 2002, the
Department of Tourism (DOT) entered into a Memorandum of Agreement
(MOA) with PEZA that will grant Special Economic Zone status to tourism
development zones and tourism estates upon registration with PEZA
subject to the issuance of the required Presidential Proclamation. The
PEZA shall consider for registration tourist-oriented enterprises to be
located in PEZA-registered tourism development zones/tourism estates
which are enclosed by the DOT as enterprises that will be established
and operated with foreign tourists as primary clientele.

Discussion of the Law

Incentives available are:


a. Up to 100% foreign ownership of locator enterprises;
b. Income tax holiday (ITH) for six years for pioneer firms and four years
for non-pioneer firms. If a non-pioneer firm is located in a less developed
area, it shall generally be entitled to 6 years ITH.
c. After the ITH period, the option to pay a special 5% Tax on Gross
Income, in lieu of all national and local taxes, except real property taxes;
d. Tax and duty-free importation of capital equipment required for the

10
-- Article XII, Section 2 of the Constitution.
11
-- RA 7916.
14

technical viability of registered tourism activities;


e. Special Investor's Resident Visa;
f. Employment of foreign nationals; and
g. Other incentives as may be determined by the PEZA Board.

c) Omnibus Investment Code

The Law

On April 4, 2006, the Office of the President has approved the


2006 Investment Priorities Plan pursuant to Article 29 of the Omnibus
Investment Code of 1987. Under Book I of the Omnibus Investments
Code, an investor may enjoy certain benefits and incentives, provided he
invests in preferred areas of investments found in the current Investment
Priorities Plan (IPP).

The IPP, issued annually by the Board of Investments (BOI), is a


list of promoted areas of investments eligible for government incentives in
consultation with related government agencies and private sector.
Consequently, the following activities have been classified as Priority
Investment Areas:

a. Agribusiness -- this covers the commercial production and commercial


processing of agricultural and fishery products including their by-products
and wastes.

b. Healthcare and Wellness Products and Services -- this covers hospital


services, medical and dental services, other human health and wellness
products/services, retirement villages, medical zones and related
services. This also covers the manufacture of drugs and medicines in
accordance with the Philippine Drug Formulary of the Department of
Health (DOH) , supplements limited to Vitamin A, iron and iodine for use
in the Food Fortification Law, and herbal medicines.

c. Information and Communications Technology-- this covers IT and IT-


enabled services and ICT support services.

d. Motor Vehicle Products -- this covers the production and/or


manufacture of motor vehicle parts and components, and manufacture or
assembly of motor vehicles provided that the activity includes a program
for the development of motor vehicle parts and components.

e. Infrastructure -- this covers the development of infrastructures,


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telecommunications, logistics, transport systems and mass housing. This


also covers infrastructure projects under the BOT Law.

f. Tourism -- this covers the development of tourism economic zones,


tourist estates, eco-agri-tourism facilities, and the establishment of tourist
accommodation facilities. This also covers historic-cultural heritage
projects and services provided by tourist operators as endorsed by the
Department of Tourism (DOT).

g. Shipbuilding/Shipping-- this covers shipbuilding, ship repair, shipyard


operations (excluding shipbreaking), and overseas, domestic and RORO
shipping and terminal operations.

h. Jewelry -- this covers the manufacture of fine jewelry and costume


jewelry.

i. Fashion Garments-- this covers the production of fashion garments as


endorsed by the Department of Trade and Industry (DTI). Fashion
garments essentially refer to wearing apparel for a specific season with a
distinct style and color based on international trends.

By reason of the enactment of Memorandum Order No. 211 approving


the 2006 Investment Priorities Plan (April 4, 2006), tourism has been
classified as preferred activities pursuant to Article 29 of the Omnibus
Investment Code of 1987. Tourism covers the development of tourism
economic zones, tourist estates, eco-agri tourism facilities, and the
establishment of tourist accommodation facilities (i.e. hotels, resorts and
other tourism accommodation facilities such as apartel, pension houses,
tourist inns and similar establishments).

Discussion of the Law

Thus, in order to be entitled for registration under the Investment


Priorities Plan, an applicant must satisfy the Board of Investments that:

a) He is a citizen of the Philippines, in case the applicant is a natural


person, or in case of a partnership or any other association, it is
organized under Philippine laws and that at least sixty percent (60%) of
its capital is owned and controlled by citizens of the Philippines; or in case
of a corporation or a cooperative, it is organized under Philippine laws
and that at least sixty per cent (60%) of the capital stock outstanding and
entitled to vote is owned and held by Philippine nationals as defined
under Article 15 of Omnibus Investment Code, and at least sixty per cent
(60%) of the members of the Board of Directors are citizens of the
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Philippines.

(b) The applicant is proposing to engage in a preferred project listed or


authorized in the current Investment Priorities Plan within a reasonable
time to be fixed by the Board.

(c ) The applicant is capable of operating on a sound and efficient basis of


contributing to the national development of the preferred area in particular
and of the national economy in general.12

Under Book I of the Omnibus Investments Code, an investor may enjoy


certain benefits and incentives, provided he invests in preferred areas of
investments found in the current Investment Priorities Plan (IPP).

Fiscal incentives include the following:


a) Income Tax Holiday
b) Exemption from Taxes and Duties on Imported Spare Parts
c) Exemption from Wharfage Dues and Export Tax, Duty, Impost and
Fees
d) Tax Exemption on Breeding Stocks and Genetic Materials
e) Tax Credits
f)Additional Deductions from Taxable Income

Non-fiscal incentives are as follows:

Employment of Foreign Nationals


A registered enterprise may be allowed to employ foreign nationals in
supervisory, technical or advisory positions for five (5) years from date of
registration. The position of President, General Manager and Treasurer of
foreign-owned registered enterprises or their equivalent shall however not
be subject to the foregoing limitations.

Simplification of customs procedures for the importation of equipment,


spare parts, raw materials and supplies and exports of processed
products. Importation of consigned equipment for a period of 1years from
date of registration, subject to posting of a re-export bond. The privilege
to operate a bonded manufacturing/trading warehouse subject to
Customs rules and regulations.

d) Build-Operate-Transfer Law

The Law

12
-- Section 32, Executive Order No. 226, July 16, 1987.
17

Republic Act No. 6987 as amended by Republic Act 7718,


referred to as the BOT Law implements the declared policy of the state to
recognize the indispensable role of the private sector as the main engine
for national growth and development and provide the most appropriate
favorable incentives to mobilize the private resources for the purpose.
The coverage of the B-O-T Law extended not merely to government
infrastructure projects but also to government development projects. The
following are the schemes recognized under the law.

Build-and-transfer (BT). A contractual arrangement whereby the


Project Proponent undertakes the financing and Construction of a given
infrastructure or development facility and after its completion turns it over
to the Agency or LGU concerned, which shall pay the Project Proponent
on an agreed schedule its total investment expended on the project, plus
a Reasonable Rate of Return thereon. This arrangement may be
employed in the Construction of any Infrastructure or Development
Projects, including critical facilities which, for security or strategic reasons,
must be operated directly by the Government.

Build-lease-and-transfer (BLT). A contractual arrangement


whereby a Project Proponent is authorized to finance and construct an
infrastructure or development facility and upon its completion turns it over
to the Agency/LGU concerned on a lease arrangement for a fixed period,
after which ownership of the facility is automatically transferred to the
Agency/LGU concerned.

Build-own-and-operate (BOO). A contractual arrangement


whereby a Project Proponent is authorized to finance, construct, own,
operate and maintain an infrastructure or development facility from which
the Project Proponent is allowed to recover its total investment, operating
and maintenance costs plus a reasonable return thereon by collecting
tolls, fees, rentals or other charges from facility users; provided, That all
such projects upon recommendation of the Investment Coordination
Committee (ICC) of the National Economic and Development Authority
(NEDA), shall be approved by the President of the Philippines. Under this
project, the proponent who owns the assets of the facility may assign its
operation and maintenance to a Facility operator.

Build-operate-and-transfer (BOT). It is a contractual arrangement


whereby the Project Proponent undertakes the Construction, including
financing, of a given infrastructure facility, and the operation and
maintenance thereof. The Project Proponent operates the facility over a
fixed term during which it is allowed to charge facility users appropriate
tolls, fees, rentals, and charges not exceeding those proposed in its bid or
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as negotiated and incorporated in the contract to enable the Project


Proponent to recover its investment, and operating and maintenance
expenses in the project. The Project Proponent transfers the facility to the
Agency/LGU concerned at the end of the fixed term that shall not exceed
fifty (50) years. This build-operate-and-transfer contractual arrangement
shall include a supply-and-operate scheme which is a contractual
arrangement whereby the supplier of equipment and machinery for a
given infrastructure facility, if the interest of the Government so requires,
operates the facility providing in the process technology transfer and
training to Filipino nationals.

Build-transfer-and-operate (BTO). A contractual arrangement


whereby the Agency/LGU contracts out the Construction of an
infrastructure facility to a private entity such that the Contractor builds the
facility on a turnkey basis, assuming cost overruns, delays, and specified
performance risks. Once the facility is commissioned satisfactorily, title is
transferred to the implementing Agency/LGU. The private entity however
operates the facility on behalf of the implementing Agency/LGU under an
agreement.

Contract-add-and-operate (CAO). A contractual arrangement


whereby the Project Proponent adds to an existing infrastructure facility
which it is renting from the Government and operates the expanded
project over an agreed Franchise period. There may or may not be a
transfer arrangement with regard to the added facility provided by the
Project Proponent.

Develop-operate-and-transfer (DOT). A contractual arrangement


whereby favorable conditions external to a new infrastructure project
which is to be built by a Project Proponent are integrated into the
arrangement by giving that entity the right to develop adjoining property,
and thus, enjoy some of the benefits the investment creates such as
higher property or rent values.

Rehabilitate-operate-and-transfer (ROT). A contractual


arrangement whereby an existing facility is turned over to the Project
Proponent to refurbish, operate and maintain for a Franchise period, at
the expiry of which the legal title to the facility is turned over to the
Government. The term is also used to describe the purchase of an
existing facility from abroad, importing, refurbishing, erecting and
consuming it within the host country.

Rehabilitate-own-and-operate (ROO). A contractual arrangement


whereby an existing facility is turned over to the Project Proponent to
refurbish and operate with no time limitation imposed on ownership. As
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long as the operator is not in violation of its Franchise, it can continue to


operate the facility in perpetuity. 13

Discussion of the Law

Any individual, partnership, corporation or firm, whether local or


foreign, including joint venture or consortia of local, foreign or local and
foreign firms, subject to the limits herein set, may participate or apply for
pre qualification projects covered under the provisions of the Act.14

The limitation for the qualification requirements for an entity to engage in


any of the schemes under the BOT Law are as follows:

a. For projects to be implemented under the BOT scheme whose


operations require a public utility Franchise, the prospective Project
Proponent and the Facility Operator must be Filipinos or, in case of
corporations, must be duly registered with the Securities and Exchange
Commission (SEC) and owned up to at least sixty percent (60%) by
Filipinos. For projects other than these, the prospective Project
Proponent shall comply with the nationality and ownership requirements
under the Constitution and other applicable laws.

For projects to be implemented through a scheme other than the


BOT and requiring a public utility Franchise, the Facility Operator must be
a Filipino or, in case of corporations, must be duly registered with the
Securities and Exchange Commission (SEC) and owned up to at least
sixty percent (60%) by Filipinos. Consistent with existing laws, the Project
Proponent may be the operator but it may be allowed to enter into a
management contract with another entity, who may be 100% foreign
owned, for the day to day operation of the facility, provided that the
Project Proponent will assume all attendant liabilities of the operator.

In case the prospective Project Proponent is a joint venture or


consortium, the members or participants thereof shall already be
disclosed during the pre-qualification stage and shall undergo pre-
qualification. Further, the members or participants thereof shall execute
an undertaking in favor of the Agency/LGU that if awarded the contract,
they shall bind themselves to be jointly and severally liable for the

13
-- Rule 1, Section 1.3 (e). Revised Implementing Rules and Regulations of R.A. No. 6957, "An Act
Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the
Private Sector and for Other Purposes", as Amended by R.A. No. 7718
14
-- Rule 5.1, Revised Implementing Rules and Regulations of R.A. No. 6957, "An Act Authorizing the
Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector and
for Other Purposes", as Amended by R.A. No. 7718.
20

obligations of the Project Proponent under the contract. However, if


members of the joint venture or consortium organize themselves as a
corporation registered under Philippine laws, such corporation shall
execute such an undertaking binding itself to be liable for the obligations
of the Project Proponent under the contract, which shall substitute or be
in lieu of the undertaking submitted by the members or participants of the
joint venture or consortium.

For projects to be operated by the Project Proponent itself or


owned by the Project Proponent but operated through a Facility Operator
where operation of the facility does not require a public utility Franchise,
the Project Proponent or the Facility Operator may be Filipino or foreign-
owned.

For purposes of pre-qualification, the Contractor proposed to be


engaged by the Project Proponent to undertake the Construction of the
project must be duly licensed and accredited by Philippine Contractors
Accreditation Board (PCAB), in the case of a Filipino Contractor, or by an
equivalent accreditation institution in the Contractors country of origin, in
the case of a foreign Contractor. Once the Project Proponent is awarded
the project, such foreign Contractor must secure a license and
accreditation from the PCAB.

b. Experience or Track Record - The prospective Project Proponent must


possess adequate experience in terms of firm experience and key
personnel experience.

c. Financial capability -- The prospective Project Proponent must


have adequate capability to sustain the financing requirements for the
detailed engineering design, Construction and/or operation and
maintenance phases of the project, as the case may be.15

Period Covered

The contractor transfers the facility to the government unit


concerned at the end of the fixed term which shall not exceed fifty (50)
years.

Financing Allowed

For the construction stage, contractor may obtain financing from

15
-- Rule 5.4, Revised Implementing Rules and Regulations of R.A. No. 6957, "An Act Authorizing the
Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector and
for Other Purposes", as Amended by R.A. No. 7718.
21

foreign and/or domestic sources and/or engage the services of a foreign


and/or Filipino contractor. The financing of foreign or foreign-controlled
contractor from Philippine government financing institutions shall not
exceed 20% of the total cost of infrastructure facility or project. The
financing from foreign sources shall not require a guarantee by the
government or by government owned and controlled corporations.

Employment of Filipino Workers

In the case of foreign contractors, Filipino labor shall be employed


or hired in the different phases of the construction where Filipino skills are
available.

Priority Projects

All concerned infrastructure agencies, including government


owned and controlled corporations and local government units, shall
include in their infrastructure programs those priority projects that may be
financed, constructed, operated, and maintained by the private sector.
Under Joint Resolution No. 03 passed by Congress, the following have
been classified as national priority infrastructure projects related to
tourism:

 Highways, including expressways, roads, bridges,


interchanges, tunnels and related facilities;
 Rail-based projects packaged with commercial
development opportunities, e.g. use of government facilities;
 Non-rail based mass transit facilities, navigable inland
waterways and related facilities;
 Port infrastructure like piers, wharves, quays, storage,
handling ferry services and related facilities;
 Airports, air navigation and related facilities;
 Tourism, educational and health infrastructure;
 Land reclamation, dredging and other related
developments facilities;
 Industrial estates, regional industrial centers, and export
processing zones;
 Development of new townsites and communities and
related facilities.

Approval of the projects or the confirmation authority lies with the


National Economic and Development Authority and the local development
councils of the local government units concerned depending on the cost
of the project.
22

Preference to Filipino Contractors

In order to be accorded preference, a Filipino contractor is


required to submit an equally advantageous bid with the same price and
technical specifications as that of the foreign contractor. A Filipino
contractor will not be accorded preference unless his bid is at par, on both
price and technical aspects, with that of the foreign contractor.

Registration with the Board of Investments

Republic Act 7718 provides that projects costing in excess of P1.0


billion shall be registered with the Board of Investments (BOI) and entitled
to the incentives provided under the Omnibus Investment Code. For
projects undertaken as authorized under the Revised Internal Rules
costing P1.0 billion or less may, upon registration with the BOI, avail of
incentives provided under the Omnibus Investment Code, subject to the
inclusion of the project activity in the current Investment Priorities Plan of
the BOI.

Investment Incentives and Government Undertakings under the BOT Law

Subject to existing laws, policies, rules and regulations, the Government


may provide any form of direct or indirect support or contribution, such as,
but not limited, to the following;

a. Cost Sharing. This shall refer to the Agency/LGU concerned bearing a


portion of capital expenses associated with the establishment of an
infrastructure development facility, such as, the provision of access
infrastructure, right-of-way, transfer of ownership over, or usufruct, or
possession of land, building or any other real or personal property for
direct use in the project and/or any partial financing of the project, or
components thereof, provided, that such shall not exceed fifty percent
(50%) of the Project Cost, and the balance to be provided by the Project
Proponent. Such government share may be financed from direct
government appropriations and/or from Official Development Assistance
(ODA) of foreign government or institutions.

b. Credit Enhancements. This shall refer to direct and indirect support to


a development facility by the Project Proponent and/or Agency/LGU
concerned, the provision of which is contingent upon the occurrence of
certain events and/or risks, as stipulated in the contract. Credit
enhancements are allocated to the party that is best able to manage and
assume the consequences of the risk involved. Credit enhancements may
include, but are not limited to, government guarantees on the
performance, or the obligation of the Agency/LGU under its contract with
23

the Project Proponent, subject to existing laws on indirect guarantees.


Indirect Guarantees shall refer to an agreement whereby the Government
or any of its Agencies/LGUs assume full or partial responsibility for or
assists in maintaining the financial standing of the Project Proponent or
project company in order that the Project Proponent/company avoids
defaulting on the Project Loans, subject to fulfillment of the Project
Proponent/company of its undertakings and obligations under the project
agreement.

c. Direct Government Subsidy. This shall refer to an agreement whereby


the Government, or any of its Agencies/LGUs will(a) defray, pay for or
shoulder a portion of the Project Cost or the expenses and costs in
operating or maintaining the project; (b) condone or postpone any
payments due from the Project Proponent; (c) contribute any property or
assets to the project; (d) in the case of LGUs, waive or grant special rates
on real property taxes on the project during the term of the contractual
arrangement; and/or (e) waive charges or fees relative to business
permits or licenses that are to be obtained for the Construction of the
project, all without receiving payment or value from the Project Proponent
and/or Facility operator for such payment, contribution or support.

d. Direct Government Equity. This shall refer to the subscription by the


Government or any of its agencies or Local Government Units of shares
of stock or other securities convertible to shares of stock of the project
company, whether such subscription will be paid by the money or assets.

e. Performance Undertaking. This shall refer to an undertaking of a


department, bureau, office, commission, authority, agency, GOCC, or
LGU in assuming responsibility for the performance of the Agencys/LGUs
obligations under the contractual arrangement including the payment of
monetary obligations, in case of default.

f. Legal Assistance. This shall refer to the extension of representation by


government lawyers to a Project Proponent but only in cases, hearings,
or inquiries where the Agency/LGU and Project Proponent are party-
defendants/respondents therein including the adoption by such
government lawyers of positions and strategies consistent with upholding
the validity of the approved contractual arrangement.

g. Security Assistance. This shall refer to the deployment of government


security forces, either from the Philippine National Police (PNP) or the
Armed Forces of the Philippines (AFP) in the vicinity of the project site to
provide security during the implementation of the project up to
completion. LGUs may provide additional tax incentives, exemptions, or
reliefs, subject to the provisions of the Local Government Code (LGC) of
24

1991 and other pertinent laws.

Portfolio Investment

Portfolio Investment is an item under the Financial Account of the Balance

of Payment Structure. Portfolio investment includes to equity securities and debt

securities in the form of bonds and notes, money market instruments and

financial derivatives such as options. Excluded are any of the aforementioned

instruments included in the categories of direct investment and reserve assets.

Portfolio investment also covers transactions in equity in which the

investor holds less than 10% of the total equity of an enterprise. Also included in

this account are sale and purchase of bills, bond notes and money market

transactions.

Major Components (Covered as Assets [Debit] and Liabilities [Credit]),

traded and tradable in organized and other financial markets are as follows:

 Debt securities

 Equity Securities

Equity and debt securities are further subdivided by institutional sector

Residents Investments Abroad (resident creditor) for assets and the

Nonresidents investments in the Phils. (resident debtor) for liabilities.

Debt securities are subdivided into bonds and notes, money market

instruments, and financial derivatives that include a variety of new financial


25

instruments.

Debt securities cover (i) bonds, debentures, notes, etc.; (ii) money market

or negotiable debt instruments; and (iii) financial derivatives or secondary

instruments, such as options, that usually do not extend to actual delivery and

are utilized for hedging of risks, investment, and trading purposes.

Bonds, debentures, notes, etc. usually give the holder the unconditional

right to a fixed money income or contractually determined variable money

income. They also provide the holder with the unconditional right to a fixed sum

as a repayment of principal on a specified date or dates.

Included in the debt securities are nonparticipating preferred stocks or

shares, convertible bonds, and bonds with optional maturity dates. This category

also includes negotiable certificates of deposit with maturities of more than one

year; dual currency bonds; zero coupon and other deep discounted bonds;

floating rate bonds; indexed bonds; and asset-backed securities, such as

collateralized mortgage obligations and participation certificates.

Equity securities covers all instruments and records acknowledging, after

the claims of all creditors have been met, claims to the residual values of

incorporated enterprises. Shares, stocks, participation, or similar documents

usually denote ownership of equity (less than 10%).


26

Portfolio Investment (In millions of US Dollars)

6000
5000
Debit: Assets, Residents'
4000
Investments Abroad
3000
2000
Credit: Liabilities, Non-
1000
Residents' Investment in
0
the Philippines
-1000
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Total Portfolio Investment
-2000
-3000
-4000
-5000

The graph above indicates that the Philippines Portfolio investment in the

years 2000-2004 have not been aggressive. However, the country’s portfolio

investment in the years 2005 onwards indicates an aggressive and active

participation.

The foreign countries trust in the Philippines for possible investment has

increased dramatically in the mid-2004 onwards. It will be noted that in the mid-

2004, the Philippines have sought credit ratings from International Credit Ratings

such as the Standard and Poors, Fitch Group and Moodys. This move has given

the Philippines a perspective on how to improve its fiscal policies and

administration, at the same time an effort to reach out to foreign investors that

will help alleviate the Philippines current economic situation.

Financial Derivatives
27

These are financial contracts based on the performance of an underlying

financial asset, indexes, interest rates, currency exchange rates, or other

investment.

Financial Derivatives (In Millions of US


Dollars)

100
50
0
-50 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-100
-150
-200
-250
-300
-350

The above graph shows the unsatisfying performance of our country in

terms of investment in financial derivatives. However, our country’s weakness in

its participation on financial derivatives transaction, in addition to the country’s

primitive way in transacting money market transactions, could have saved our

country from the world financial crisis currently experienced by developed

countries like the United States of America, United Kingdom and some of the

country’s neighboring countries such as Thailand.


28

Identification of the different problems areas in the country’s Balance


of Payment

In summary, the main consideration of this research is to improve the

country’s Balance of Payment, with major emphasis on the improvement of the

Current Account component, more specifically on the following items:

 Goods
 Services
 Current Account (with emphasis on the plight of the country's OFWs)

The research proposal will also tackle the involvement of foreign investors

which might affect the Financial Account component of the Balance of Payment.

Laws such as the Foreign Investment Act, Omnibus Investment Code, BOT Law

and the Special Economic Zone Act will cover transactions that are classified as

Direct Investment and Portfolio Investment under the Financial Account. The

researchers of the study intend not to provide improvements which may affect

the country's transactions on financial derivatives. Our country’s monetary

policies are just enough to survive the future crises that the world might

encounter.

Statement of the Objectives

The study primarily aims to improve certain problem areas involving the
29

Balance of Payment of the Philippines, with special emphasis on the Current

Account component.

This study also aims to provide suggestions and insights on how to

improve these problem areas.

Scope and Limitations

This study is mainly concerned with identifying the problems areas in the

country’s Balance of Payment, with emphasis on the Current Account

component. Other components in the Financial Account, which includes Direct

Investment and Portfolio Investment are merely incidental in line with its ultimate

goal of improving the country’s balance of payment.

Suggestions for improvement are merely theoretical. Although most of the

data gathered for the background of the study are based on the BOP Manual, 5th

Edition and some legislation, the researchers can only make deductive reasoning

and analysis from limited data by reason of time and budget constraints.

Nevertheless, the researchers hope that this study will help improve our

country’s balance of payment.

Presentation, Analysis and Discussion

Recommendation #1. A feasibility study should be conducted on potential


industries or “dying industries” which the Philippines may consider and re-
consider for purposes of future exports.
30

Procedure:

In order to minimize cost, the government may tap business schools all over the

country to come up with various feasibility studies for potential industries and

industries that are dying in the Philippines. Government may come up with a

nationwide search for the "Best Business Plan". The winners may be given

incentives or cash prizes or the Government may tap sponsors or entrepreneurial

organizations whose main goal is to promote entrepreneurship in the Philippines.

Benefits/Advantages

What the country needs are various feasibility studies that the

Government may consider or reconsider for purposes of financing the same, for

providing funds for the training of affected stakeholders, and the possibility of

inspiring these affected stakeholders to become world class in their craft which

gives them a potential opportunity of exporting their products to various countries

all over the world.

In addition, this proposal will create local substitute materials, increase

domestic products, and with a possibility of providing additional training to

encourage Filipinos to enter an entrepreneurial livelihood program.

Recommendation #2. Government, through the local government units,


should be very vigilant in protecting various tourist spots in the Philippines.
31

Procedure:

Under the Tourism Act of 2009, the Tourism Infrastructure Enterprise

Zone Authority (TIEZA) is empowered to administer tourism zones, regulate

tourism zone enterprises and grant tax perks. In addition, the Department of

Tourism is given more regulatory powers in protecting the different tourist spots

in the Philippines. It is important that good governance should be exercised at all

time by the public officials involved. Close monitoring by the Department of

Tourism should be done on a regular basis. In this regard, rules and

regulations should be implemented effective immediately.

In addition, the government, through the Department of Tourism should

exert a proactive effort in terms of improving our tourism in the country.

Benefits/Advantages

Our country has a competitive advantage of speaking and understanding

English, the universal language. In addition, Filipinos are by nature hospitable,

especially to tourists. Therefore, we must make use of this competitive

advantage in order to attract more tourists, thus the possibility of improving the

country’s balance of payments on the export of services.

Recommendation #3. Create a tax incentive measure for enterprises that will
especially provide or input technology for the country. The tax incentive will
depend on the number of Filipino workers that will be employed by such
enterprise.
32

Procedure:

A feasibility should be conducted on this matter to determine areas of

investment that should be afforded tax incentive measures in case of employing

a minimum number of Filipino workers.

Be that as it may, let us consider the following labor practices that should

be employed by foreign investors to prevent any labor problems in their

enterprises:

1) There should be strict adherence to labor standard laws, rules and

regulations;

2) A labor management council (LMC) is should be employed every to

meet on a regular basis with representatives from the management and labor, to

discuss concerns between management and labor;

3) Regular departmental meetings are conducted to discuss the different

problems encountered by employees. By way of resolution, suggestions are

being discussed to be applied.

4) Extensive counseling programs are undertaken to help erring

employees reflect on mistakes committed.

5) Extensive information dissemination and education to employees are

being conducted to immerse employees of the culture, mission/vision statement

and philosophy of the company. Government agencies like the Department of

Labor and Employment are sometimes invited to provide information to


33

managers and employees on some of the applicable laws related to

management and labor.

6) Emphasis is given for training regarding results-oriented programs.

7) An open door policy with the General Manager and/or Human

Resources Department is highly undertaken to know directly concerns of the

employees down from the rank and file.

8) An appraisal of performance of employees are undertake every month

or quarter. Employees are given copies of their appraisal and is being

counseled on how these employees will be evaluated.

9) A copy of the code of conduct and job description is given to every

employee before he starts working.

10) The following are the guidelines in investigating erring employees:

a) A “show cause memo” is given to the erring employee

concerned based on the incident report given either by the

complainant or by the concerned supervisor. If the erring employee

is a manager or supervisor, it is the Director for Human Resources

who furnishes the “show cause memo.” A “show cause” memo is a

notice given to the employee showing the unlawful act or crime

committed, giving the erring employee an opportunity to answer or

rebut the same within a period from receipt of the memo.


34

b) A hearing shall be conducted through an investigating

committee which represents the management and labor. In this

venue, evidence shall be received and evaluated objectively by the

committee.

c) A report shall be prepared by the investigating committee

specifying in detail its findings and shall provide the corresponding

recommendation.

d) A notice of the finding shall be given to the employee

under investigation.

Benefits/Advantages

This concept will definitely create more jobs for Filipinos. In addition, this

is a way to attract foreign investors to put up their businesses in the Philippines,

with the possibility of not only creating jobs, but also providing technology for our

country. However, due to the complicated labor laws of our country, it is

preferable that foreign investors should study the country’s different labor

standards laws, taking into consideration the suggestions in handling employees.

Recommendation #4. Creation of a Mining Law or Amendment of the 1987


Constitution for the equity ownership of foreign investors who wish to invest in
mining activities in the country.

Procedure

This concept will involve approval of the lawmakers of the country. The
35

scheme of equity ownership of foreign investors will be based on the following:

First 20 years - 70% foreign


30% Filipino

Renewal for another 15 years


- 60% Foreign
- 40% Filipino

Renewal for another 10 years


- 49% Foreign
- 51% Filipino

However, qualification for foreign investors should be devised properly to

include, financial capability, vision of social responsibility, track record and

reputation so as to help the country develop, not to destroy, its natural resources.

Benefits/Advantages

This concept will attract foreign investors in helping explore and develop

our country’s wealth. The technology that the foreign investors will provide for

the utilization and exploration of the country’s wealth and natural resources will

create an open mind to the Philippines on how it will generate resources and

revenues for its growth and improvement.

Recommendation #5. Inclusion of Manufacturing companies classified as


Export Enterprises as defined under the Foreign Investment Act for purposes of
availing of fiscal incentives similar to activities classified as Investment Priority
Projects under the Omnibus Investment Code.

Procedure

This involves merely a Presidential Order or decree in implementing the


36

Foreign Investment Act. However, a feasibility study should be conducted by

the proper government agency to determine the viability of providing incentives

as much as possible to foreign investors which are 100% foreign owned.

Additional tax incentives should also be considered for the study in case of

employing more Filipino workers.

Benefits/Advantages

This concept will generate more jobs to Filipinos. In addition, this will also

attract foreign investors who wish to put up businesses in the Philippines that are

export-oriented, thus the possibility of improving the country’s balance of trade in

exports.

Recommendation #6. Entice foreign investors to engage in Built-Operate-


Transfer Scheme in improving the infrastructure of the Agribusiness (such as the
irrigation system) and providing incentives therefor.

Procedure

This concept can be implemented by means of an Executive Order or

Presidential Issuance in accordance with the BOT Law and the Omnibus

Investment Code. However, additional incentives to foreign investors should be

given in order to entice them to improve the agribusiness of the country.

Benefits/Advantages
37

Our country’s agribusiness has been deteriorating to the detriment of the

country’s balance of payment in terms of exports. The reason for this is that

affected farmers and enterprises engaged in agribusiness still utilize antiquated

and outdated technology. Hence, there is a need to improve the technology of

agribusiness. Enticing foreign investors to engage in a BOT scheme for the

agribusiness and providing these foreign investors incentives within a certain

period will not only improve the country’s agribusiness, but will also provide a

possibility of improvement in the country’s Balance of Payment in the current

account component, most especially in the exportation of goods.

Recommendation #7. Overseas Filipino Workers should be mandated by the


government to remit part of their earnings to the Philippine Social Security
System (SSS).

Procedure

In this regard, extensive lectures should be conducted on the need of

remitting part of the earnings at the SSS by the OFWs. The remittance of the

OFWs to the SSS shall be under the supervision and responsibility of the

Philippine embassy or consul of the affected country. The remittances of the

OFW at the SSS shall be classified as “self-employed.” However, criteria should

be provided in order for the concerned OFW to avail of the maximum benefits

under SSS Law.

Benefits/Advantages
38

The funds that have been remitted by the concerned OFW to SSS will

help him to enjoy a contingency benefit (such as retirement) upon his return to

the Philippines.

This proposal shall be the government’s response to the plight of OFWs

who have contributed much to the country’s Balance of Payment.

Recommendation #8. A law should be passed providing incentives for OFWs


(i.e. training for livelihood or optional livelihood) who were unexpectedly
displaced or who have chosen retirement from employment.

Procedure

This requires enactment by legislators. However, there should be

minimum criteria for qualification by the OFW who shall avail of the incentives.

(i.e. minimum remittances at the Social Security System, years of service, etc).

Benefits/Advantages

This is the government’s response in solving the plight of OFWs who

have significantly contributed to the country’s Balance of Payment.

Conclusion

The above recommendations is based on the following premises:

First, education still plays a primordial foundation in nation-building.

Hence, it is important for educational institutions (especially to higher educational


39

institutions) to align their curricula to the industry needs of the country. These

educational institutions should also establish network linkages with the different

industries, business organizations, professional organizations, as well as

educational institutions or industries of another country to be fully informed of the

current industry needs that will help devise a rich curriculum that will fully equip

graduates the enhanced training they need to be employed, useful and

productive.

Second, there is no substitute for good governance. Time and again, it

has been the ultimate goal of the government to have a balanced budget in terms

of its fiscal administration. This policy should be the primordial aim of every

leader of the country in properly managing the funds belonging to the Filipino

citizenry. As part of the principle that public office is a public trust, every leader

must bear in mind that graft and corruption is not a cancer sickness that cannot

be eradicated. Graft and corruption is only a state of mind which may be

prevented and eradicated provided every leader has the right mindset in doing

the right things all the time. Should this right mindset continue across public

office, our country will have a chance to have an opportunity to be a perfect place

to live in.