Strengthening the investment climate for more vigorous private sector development remains a key challenge in the Philippines. Policy reforms and programs are needed to increase competitiveness and improve governance in order to attract more investment and thereby raise labor productivity and employment. Major constraints on improving the investment climate include the lack of infrastructure, a weak regulatory framework and limited access to finance.
ix.Promoting competitiveness
The Philippines can achieve much higher growth if it can tackle the long-standing bottlenecks that discourage private investment. While much progress has been made in eliminating trade barriers and improving trade logistics, the country has been less successful in reducing behind-the-border constraints, including the cumbersome procedures required to open and close a business, inadequate investor protection, and poor access to credit among small and medium-sized enterprises (SMEs). Consideration may be given to developing an explicit competition framework policy and implementing a series of measures designed to simplify business regulations within a transparent, rules-based business operating environment and facilitate greater access to credit for SMEs. Such measures include (i) expanding the scope, quality, and accessibility of credit information by setting up the public credit bureau, (ii) strengthening the legal framework for resolving non-performing loans, (iii) simplifying business regulations to reduce operational costs, (iv) developing an explicit competition framework and competition authority, and (v) strengthening the legal framework and enforcement mechanisms to protect property rights.
x.Developing better models of infrastructure finance and management
Expanding access to energy.Reliable availability of energy, including the elimination of brown-outs, is crucial to achieving a better investment climate in the Philippines. In the power sector the restructuring and liberalization of the electricity market sparked by passage of the Electric Power Industry Restructuring Act of 2001 has progressed well, but remains incomplete in several critical areas. This process needs to be brought to completion and a long-term debt management solution put in place to deal with the government’s sizeable contingent liabilities stemming from the Power Sector Asset and Liability Management (PSALM) finances. Meanwhile, the goal of universal electrification entails connecting over four million new customers. To achieve these goals, the authorities will need to (i) advance the private ownership/administration of power plants and manage the privatization of remaining National Power Corporation assets, (ii) accelerate transmission investment, (iii) reform the electric cooperative sector and address the issue of non-bankable electric cooperatives, (iv) take measures to lower operating costs, and (v) accelerate the development of renewable energy.
Improving transport infrastructure.Adequate transport infrastructure is another vital element for improving the investment climate and therefore economic growth, especially in an archipelago like the Philippines. Inland transport is deteriorating due to poor road conditions and weak intermodal integration. To meet these challenges does not simply require more public spending; it calls for greatly strengthened transport development planning, approached in an intermodal context, with a joint focus on trunk highways, ports, and airport development in relation to economic activity hubs and population centers. Much more attention also needs to be given to highway maintenance. Both sets of actions require a stronger policy presence at the national level to overcome the parochial interests at the local level, and a determined focus on strengthening governance and anti-corruption mechanisms in the sector.
Promoting ICT. Further development of the ICT potential in the Philippines can provide additional income-generating opportunities and help improve public service delivery. The ICT sector, including business process outsourcing, is already a significant and growing segment of the economy and policies can build on its strengths. Key policy areas for consideration include the establishment of clear sector leadership, reducing skills shortages to stimulate further development of IT-enabled services, improving access to broadband Internet particularly outside major cities, and using ICT to deliver public services in a more coordinated and cost-effective manner. Policy actions to consider are the (i) assignment of clear and accountable leadership for government-ICT/e-government, (ii) partial financing of ICT infrastructure through “smart subsidies”, (iii) leveraging of the government’s role as a major user of broadband Internet, and (iv) support of fast-track skills development programs in partnership with the private sector.
Because most of the country’s poor live in rural areas, robust agricultural growth and productivity increases will continue to be crucial to poverty reduction. There is much room for improving agricultural performance, and the sector has significant potential for income generation, job creation, and agro-business linkages. Critical constraints include a public policy and expenditure framework centered on the pursuit of food security with a particular bias in favor of rice, and the underdevelopment of land markets. Product diversification and improved competiveness are needed to support long-term growth in the agriculture sector and strengthen its linkages to agri-business activities. Policy areas for attention include reforming the rice-focused sector policy, ensuring more equitable access to land and addressing the barriers to competitiveness. Measures recommended for early action include (i) redirecting public expenditures away from subsidies (such as rice production support programs based on fertilizer and hybrid seed subsidies) to support services enhancing agribusiness competitiveness (e.g., market access and information, regulatory and supervision functions, extension services and research and development), (ii) developing a decentralized and participatory approach to agrarian reform, and (iii) ensuring security of land tenure.
