Attracting high-tech investors is fast becoming the top priority amid government efforts to make the Philippines a haven for IT ventures.
Among the more significant moves this year, the Estrada administration has designated IT as a priority business, making IT companies eligible for incentives under this year's Investments Priorities Plan (IPP). The government is also drawing up even more attractive incentive packages to draw in high-tech investments.
The Board of Investments (BOI), which formulated this year's IPP, also finally separated IT from the electronics sector in its investments and trade classifications. This provides high-tech investors access to incentives offered under the plan.
Aside from income tax holidays (ITH), the new IPP entitles domestic-oriented IT projects to the same perks as export-oriented IT projects. Pioneer projects under the IPP are entitled to an eight-year ITH, while non-pioneer projects are entitled to a six-year ITH.
Among the IT projects that can be considered for incentives are the following:
- Software development (system and application software, middleware);- IT-enabled services;- Support- and knowledge-based services; and- Business process outsourcing.
NEW CARROTS
Earlier this year, Trade and Industry Secretary Manuel Roxas II and Finance Secretary Jose T. Pardo also endorsed to congress a seven-point fiscal incentive program to bring in more foreign direct investment (FDI) into the Philippines and put the country on par with its neighbors in the Association of Southeast Asian Nations (ASEAN). The new set of carrots include these:
- Income tax holiday extension to 12 years;- Five-year net operating loss carry-over;- 2 percent minimum corporate income tax (MCIT) deferral on the sixth taxable year;- 10-year double deduction of training, research and development expenses from taxable income;- Accelerated fixed-asset depreciation;- Five-year investment tax allowance -- deduction of up to 50 percent of total investment from the taxable income; and- Restoration of the capital equipment incentive.
The government has also been upbeat about developing IT parks and zones.
E-COMMERCE
Amid these efforts, Congress is considering a bill that will make it even easier for IT investors to locate their operations here.
Under the bill, IT and e-commerce efforts will be exempted from the required minimum investment of $500,000.
"The pending bill seeks to provide a 12-year ITH as well as net operating cost carry-over on top of other incentives and special exemptions for IT, ICT and e-commerce," Roxas said. "The $500,000 requirement was part of the bill conceived in an earlier life. Congress is now working to remove this minimum investment with respect to IT and e-commerce."
In a meeting with the members of the Economist Intelligence Unit last April, Roxas said the government is also banking on the development of industrial parks to drive e-commerce.
"These industrial parks are gold mines to attract investors. Many call centers are already up in these places and if more incentives are given to these types (of ventures), e-commerce will accelerate in the country," he added.
With back-office operations or shared services fast gaining ground, the Estrada administration is positioning the country as the e-services hub of Asia.
Among the first high-tech companies to have such operations in the country are America Online Inc., which provides technical and billing support to its members 24 hours a week via e-mail and online services. Citibank and Caltex also have shared service centers in the country to handle the finance and accounting transactions of their respective groups in Southeast Asia, Hong Kong and the rest of Asia-Pacific.
In addition, incubator funds for e-business startups have also emerged, and e-businesses are now rising at an accelerating pace both among established and new businesses.
Roxas said the government prefers to step back and allow the private sector to take the lead in the high-growth IT sector. "I'm wary of having the government come in as an interventionist. But if after a while, our IT and e-commerce posture is still driven by real estate developers, clearly government will need to move," he said.
Businessman Jaime Zobel De Ayala, president of Ayala Corp., agrees that private entrepreneurs must take on a bigger role to develop the country's high-tech industry.
"Without entrepreneurs, this revolution will go nowhere," Zobel said.
SOFTWARE AND SEMICONDUCTORS
Although much of the attention has been going to online services, investment activities in the electronics sector continue to be strong. In fact, the semiconductor industry is expected to represent 75 percent of the country's total exports this year, up from 72 percent last year.
The government estimates electronic exports will reach $47 billion by 2004 as the industry grows at an annual average of 20 percent to 30 percent, said Science and Technology Secretary Filemon Uriarte. He said export sales last year rose by 24 percent to $21.6 billion from $17.4 billion in 1998. This year, the sector is expected to grow by 20 percent or 25 percent to $30.7 billion.
About 600 companies are in the electronics and IT sector, with total investments of $7 billion.
Meanwhile, Philippine software exports are projected to hit the $1 billion mark over the next five years with the implementation of the $4.9 million (200 million-peso) Virtual Center for Technology Innovation in Information Technology. The program is designed to produce at least 5,000 certified IT professionals in the next five years.
OTHER ATTRACTIONS
Roxas believes incentives are only one tool or element in an investment decision. In a press interview early in the year, he said: "Incentives are generally financial in nature, through tax breaks or some other mechanism. But it's not all money -- there are other things that figure in an investment decision."
The secretary said another tool is to have a stable policy framework that is dependable, "because most projections are based on series of assumptions that are obtained from these frameworks."
"There are other factors apart from just tax incentives that will attract investors to come in," Roxas said. "These would include infrastructure and a stable exchange rate policy. What would drive investments, too, is the ability to make a reasonable profit."
Ayala, for his part, believes IT investments in the Philippines will flourish because of the country's adaptable work force. "There are a number of industries blossoming in this area, a whole new series of wealth creation. The abundance of knowledge workers gives us a competitive advantage," Zobel said.
Asked if he thinks foreign investors are still largely attracted by the country's low labor cost, Zobel said the labor cost advantage, in general, is a fleeting one. Instead, he believes the Filipino work force's main advantage now in the new economy is its creativity.
"In Hong Kong, for example, they find it hard to promote creativity. We have that -- in the fields of music, movies, TV, software design. I believe all the components needed to succeed and be a leader in this industry are here. We should develop our work force's knowledge and creative sides. The cost advantage is still there, but we have to have a value-added work force, too." Zobel said.
At the Global Information Infrastructure Commission (GIIC) conference earlier this year, Michio Naruto, a high-ranking GIIC officer, echoed this view, praising Filipino IT workers as being "very global".
At a press conference, Naruto said the Philippines is an incubator for knowledge workers, and said the brain drain only proves that Filipino IT talent is global.
"Brain drain is something I admire, it means Philippines is very global," Naruto said. "The Japanese can't go out, though we have good brains, too. We're knowledgeable in semiconductor development, cars, and hardware, but we can't go global in software. Brain drain can be something good and the Philippines should develop high-tech (business)."
NEW CHALLENGES IN THE NEW ECONOMY
Meanwhile, as the government and the private sector work to encourage high-tech investments, Zobel said the country must also address the following far-reaching issues relating to the new economy:
- How to realize its great promise in the country's own quest for progress;- How to enable Filipinos to master the new technologies and the ceaseless innovations being aggressively developed;- How to create a national environment that is hospitable to change but safeguards citizens' interests; and- How to secure the maximum economic, social, cultural and political benefits from the veritable economic revolution.
Zobel stressed, however, that it is imperative for the country to hone its technical competence to win in the new economy.
"As one business executive has described it: ``in the industrial revolution, the driving force shifted from people to capital. In today's information revolution, the driving force is shifting from capital to technical competence. Capital without competence is increasingly of no avail. Competence without capital is increasingly not a problem,'' said Zobel.