PHILIPP I NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Vol. XXIII No. 5
DEVEL O PMENT RESEARCH NEWS September - October 2005
ISSN 0115-9097
Editor's Notes If agriculture has historically been the engine of economic growth of the Philippines, it looks like a new engine is driving it these days--services. Services is where the real growth is actually coming as this issue's banner article discusses. Not only does it contribute significantly to economic output, it also creates millions of jobs. Services is also where substantial amounts of foreign direct investment are being poured in these days. Whether we are on the road to becoming the second India-today's no. 1 in terms of services, particularly backoffice outsourcing--remains to be seen. But with our relatively developed infrastructure, cost advantage, and skills and creativity, many analysts say that we can even surpass the Indians. Recognizing the vital role of services in the economy, this
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What's Inside The future looks bright for health tourism 7 Outsourcing: the next big thing 11 Narrowing the digital divide: a must for the ICT sector
Services: Today's most prolific industry Gloria O. Pasadilla*
S
ervices, by World Trade Organization (WTO) standard, covers a wide range of intangible and heterogeneous products and activities such as transport, telecommunication and computer services, construction, financial services, wholesale and retail distribution, hotel and catering, insurance, real estate, health and education, professional, marketing and other business support, government, community, audiovisual, recreational, and domestic services.
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Due to the intangible nature of services, many are unaware of their contribution to the economy. It does not come as a surprise, therefore, that the prominent role of services in international trade has
not been widely appreciated for a long time. For more than 50 years, multilateral trading rules have focused mainly on creating a free flow of goods across countries. But it was only in the last decade or so that the spotlight has focused on services. This is in recognition of the increased contribution of services to economic output. In the global economy, services sector has emerged as the fastest growing sector, providing more than 60 percent of global output and an even larger share of employment in many *PIDS Senior Research Fellow and Leader, Research Project on Services.
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Table 1. Share of agriculture, industry, and services to GDP, and sectoral growth A. Share (%)
1990-1995
ASEAN 5 (average) Agriculture Industry Services
1996-1999
13.14 37.83 49.03
Philippines (average) Agriculture Industry Services
2000-2003
11.08 39.52 49.40
10.92 39.43 49.65
22.44 34.96 42.61
20.36 35.33 44.31
19.97 34.17 45.87
ASEAN 5 (average) Agriculture Industry Services
0.55 8.86 7.81
0.75 2.91 2.82
1.87 3.96 4.36
Philippines (average) Agriculture Industry Services
1.49 2.12 2.97
1.74 2.69 4.84
3.91 3.47 4.88
Another reason for the growing importance of the services sector is the increased globalization of services. Data show dramatic increases since the 1980s, at about the same time that the computer and telecommunication revolution was taking place. New transmission technologies have also made many services become tradable, for example, educationon-line or website design, or even answering phone inquiries.
Source: IMF International Financial Statistics.
Table 2. Average share (%) of agriculture, industry, and services on employment
ASEAN 5 Agriculture Industry Services Philippines Agriculture Industry Services
31.733 11.770 4.882 15.080
1991-1995
1996-1999
an average rate of 4.88 percent, higher than the growth rates of agriculture and industry. In terms of share to GDP, services sector contributed nearly 46 percent, about 12 and 26 percent higher than the shares of industry and agriculture, respectively. Services sector is also creating a substantial number of jobs. It is now the biggest employer, outpacing agriculture. In the Philippines, about 47 percent of the labor force is in services as compared with 37 and 16 percent in agriculture and industry, respectively (Table 2).
B. Growth Rate (%)
2004*
2005
2000-2003
34.67 23.18 42.09
38.02 21.36 40.60
36.96 21.15 41.88
45.06 15.78 39.11
40.27 16.16 43.54
37.36 15.67 46.96
*No. of employed (in millions).
countries. Even with global investments, there has also been a marked shift of foreign direct investments from manufacturing to services. In the Philippines, services sector has outpaced industry and agriculture in terms of growth rates and shares to the gross domestic product (Table 1). Similar trends have been observed in the ASEAN. In the Philippines, services sector grew at
There are a number of reasons why the services sector is thriving well in the Philippines. Particularly in terms of service exports or IT-related service jobs, the Philippine labor force maintains a strong comparative advantage over many other Asian countries. In the first place, the labor intensity of many of the service industries bids well for the country’s large population. It has a skilled labor force of 29 million, majority of whom can speak English; management capacity is high; easily trainable; with natural inclination for artistic designs; customer-oriented, etc. The bottom line is that the Philippine manpower is “nice� and sufficiently talented. Infrastructure is also considered sufficient and adequate. There are nine dedicated IT parks, seven in Luzon and two in the Visayas; IT-enabled floor areas are available; and high-quality and low-cost bandwidth is present. Plus, the country remains a strategic location and a critical entry point to the ASEAN market of over 500 million people.
DEVELOPMENT RESEARCH NEWS
Services have four modes of supply, or the means of delivering services to foreign consumers, as indicated in the WTO General Agreement on Trade in Services (GATS). The GATS is the first set of multilaterally negotiated and legally enforceable rules covering international trade in commercial services. One important feature of the GATS approach is that it basically identifies most services as tradable. Modes of supply are defined based on the origins of the service supplier and the consumer, and the type of territorial presence that both have when the service is delivered (Figure 1). Mode 1 is the standard cross-border transaction wherein only the service crosses the border. Services take place through telecommunications or the sending of documents, disks, tapes, etc. Call centers are an example, whereby the service is being carried out in the Philippines to a consumer in the United States. Mode 2 is consumption abroad. This occurs when consumers travel outside their country and consume services in another country. An example is a FilipinoAmerican who comes back to the Philippines to undergo surgery in a hospital here, for example, in Asian Hospital. Chinese students coming to the country to take up nursing is another example. Mode 3 is commercial presence. It occurs when a service supplier sets up its commercial presence in another country through, for example, branches or subsidiaries. Foreign-owned banks, insurance companies, and hospitals establishing branches or subsidiaries in the Philippines are examples. Model 4 is movement of natural persons. It occurs when an individual has moved temporarily into the territory of the consumer to provide a service, whether as self-employed or as an employee. Examples are nurses, software engineers, and construction
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Figure 1. Modes of supply under the GATS
COUNTRY A
COUNTRY B
Mode 1: service transactions Consumer from A
The service crosses the border
Supplier
Mode 2: service transactions The consumer goes abroad
Consumer from A
Consumer from A
Service supply
Supplier
Mode 3: service transactions Consumer Service from A supply
Foreign affiliate
Direct investment in country A
Company
Mode 4: service transactions Consumer from A
Service supply
Natural person
Self-employed goes to country A or employee sent by firm from B
Natural person
Mode 4: employment Service firm
Temporary employment
Source: Measuring trade in services (WTO training manual)
workers leaving the Philippines temporarily to work in companies abroad. Yet what do we really understand about services? How can the sector be analyzed? What are its characteristics and how different is it from manufacturing? To respond to this, PIDS has embarked on a few studies of the services sector to hopefully begin a more in-depth understanding of this burgeoning part of the Philippine economy. It commissioned studies on information and communication technology (ICT), business process outsourcing (BPO), health and related services, educational services, and audiovisual services—areas where the country has considerable competitive advantage. Articles discussing the highlights of some of these studies 15 are published in this issue.
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The future looks bright for health tourism Many years ago, the Philippines was known for the unbelievable ability of some people who performed surgical operations using their bare hands, or treated various diseases of patients just by drinking prayed-over water, or simply being prayed over coupled with a few chantings. They are the country’s faith healers and they had believers coming from all walks of life and even from distant places. In fact, at present, quite a good number of terminally ill foreign patients still come here to seek treatment from these faith healers (Philippine Daily Inquirer 21 January 2006). Modern times, however, have somewhat changed all that. Borrowing today’s parlance, the “in” thing now is health tourism. These days, people are not only looking for cures for their illnesses; they are crossing the borders for cosmetic purposes, wellness programs, surgery, and even for retirement.
www.knowsleylibdems.co.uk
Health tourism goes with holiday packages that often consist of spa retreats, cosmetic
The inexpensive cost of living and healthcare in the Philippines poses major gains for developing the country as an alternative retirement destination for the rapidly increasing population of eldely people in many developed countries.
treatments, diagnostic services, and therapies for recuperation and rehabilitation availed outside a person’s own country. In Asia, the major players of this market are Malaysia, Singapore, and Thailand. These countries have successfully enticed steady clients from wealthy nations to provide their health and medical needs at low cost but excellent quality. The health tourism market has indeed proven to be a high-repeat-user business that the economies of these countries have been significantly helped by this program, Profs. Jovi Dacanay and Maria Cherry Lyn Rodolfo of the University of Asia and the Pacific noted in their paper, “Trade and liberalization of health and related services,” a PIDS commissioned study. Specifically, health tourism is divided into three main programs: spa industry, medical treatment, and retirement. The spa industry is one of the fastest growing businesses in the health and wellness market. An example is Thailand’s spa industry that has attracted 33.3 million users, 2.5 million of whom came from overseas and contributed US$85 million to its foreign exchange revenues. Medical wellness packages, on the other hand, cover consultations or secondopinion diagnosis with specialists. They also consist of non-invasive medical procedures such as simple cosmetic, dental or eye surgery, and invasive procedures such as heart and cancerrelated operations, knee and hip replacements.
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Retirement in another country has also cropped up as an alternative to the aging population in many developed countries particularly the United States, Europe, and Japan given the higher cost of their medical care. To date, there are about 126 million who are 65 years and older in OECD countries with an average pension of US$2,000 per month. Even if only 20 percent of their population decides to retire in developing countries, it would mean 25 million retirees cashing in US$50 billion in their economies. Dacanay and Rodolfo also noted that the higher cost of living in the developed countries is driving retirees to move to developing nations where cost of living is less expensive. One such example is the cost of cardiac by-pass surgery in the United States and the United Kingdom, which amounts to US$90,000 and US$20,000, respectively. Availing a similar medical procedure in India and Thailand, on the other hand, would cost only less than US$5,000. The Philippine scenario Despite the country’s huge potential to make it big in the health tourism industry, it is still trailing behind neighbors Malaysia, Singapore, and Thailand, which have been actively getting the bigger share of the market. It has been four years since the Department of Tourism (DoT) started to advocate and promote health tourism in the Tourism Related Industries Congress in 2001. To accelerate industry growth, the government formed the Task Force on Export Competitiveness under Executive Order No. 372 in 2004 tasked to mobilize public and private initiatives for health and wellness as an advocacy campaign for health tourism. Prioritization of the establishment of health and retirement zones, in partnership with the private sector, was also highlighted in the Medium Term Philippine Development Plan 2004-2010. The 2005 Investment Priorities Plan also included health zones in its list of priority sectors and its implementing rules and regulations also
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www.thefarm.com
DEVELOPMENT RESEARCH NEWS
Spa resorts like The San Benito Farm in Lipa, Batangas continue to make their mark on the world health and wellness destination map.
spelled out incentives such as tax holidays and duty-free importation of equipment. Wellness spas The last five years saw the establishment of spas in the country and the DoT has been in the forefront of promoting these facilities in the international market. In terms of numbers, the Philippines still pales in comparison with Thailand and Indonesia. However, the country has proven that it can provide unique and high-quality products and services as evidenced by the awards that the San Benito Farm in Lipa and the Mandala Spa in Boracay received from the International Spa Association in 2004. Not only have these spas gained international recognition but they have also been elevated to the status of popular spas in Asia. Medical tourism Can the Philippines compete with its Asian neighbors that are already leaders in the industry? Dacanay and Rodolfo believe so, especially since the country’s rates in terms of cosmetics or surgical packages and rates per room per night are competitive compared with Thailand and Malaysia. Actually, an area that the country can
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easily tap, the authors noted, is cosmetic surgery. As early as the 1990s, surgeons such as Dr. Francisco Lucero and Dr. Carlos Lasa already have their own websites promoting health tourism. Unfortunately, it has been only recently that tourism and health packages are branded and sold to the international market. In addition, the DoT has started to facilitate the accreditation of hospitals that offer world-class but cost-effective medical services. These include St. Luke’s Hospital, Asian Hospital, Makati Medical Center, and the New Medical City. Under a highly competitive global environment, hospital accreditation is a necessary tool to attract clients who are looking abroad for their health care solutions. The prestigious Joint International Commission for the Accreditation of Health Care Organization, a US-based accreditation service, gives the quality stamp on the health care provider, which will signify that it has acquired the highest international standard for health care service and is comparable to other reputable hospitals worldwide. In 2003, St. Luke’s Medical Center acquired this recognition and is the first in the country and only second in Asia to Bumrungrad International, Thailand’s major hospital when it comes to health tourism. The other major hospitals such as Medical City (Professional Services, Inc.) and Asian Hospital have applied for accreditation as well.
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share of the country in health tourism. Success in this endeavor would not only mean financial and economic surges for the Philippines but also benefits that will trickle down to the development of the health sector. Revenues generated by these export services may be used for the improvement of basic health services for the benefit especially of the needy population. Improving the quality of health services export, however, would require upgrading of the support industries: the firm or provider infrastructure, human resources management and training, and technological infrastructure. Dacanay and Rodolfo stressed the importance of establishing networks through the firm infrastructure. The tourism and healthcare industry are closely linked in the establishment of a health tourism sector, as well as the telecommunications and tourism sectors. This would then require the need to link or network customer support services to improve market access. As a first step, the DoT website has to be linked to umbrella associations such as the Philippine Hospital Association so that potential tourists visiting the website would have a ready menu of hospital facilities and services to choose from. This type of clustering is the strategy pursued ahead by Thailand and Malaysia.
A significant barrier, however, that can slow down the entry of patients and retirees is the nonportability of insurance. US citizens cannot use their Medicare for medical treatment or for retirement in the country. As for the portability of private insurance, the issue is more on the accreditation of the healthcare facility.
Additionally, human resource management and training is important. Careful selection of health care professionals and constant professional development are crucial since health tourism is a service-oriented area. Dacanay and Rodolfo said that a new compensation scheme for service provision to foreigners may be introduced without undermining the price advantage of the Philippines.
Suggested next steps The Philippine government for its part, along with the help of the private sector, is committed to increasing the market
Sizeable amounts of funds would also be needed to upgrade the sector’s medical equipment and facilities. Advancement in technology, research and development, 15
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Outsourcing: the next big thing
BPO, as defined by the World Bank, refers to “the contracting of a service provider to completely manage, deliver and operate one or more of a client’s functions (e.g., data centers, networks, desktop computing and software application.” (World Bank E-Commerce Development Report 2003). The Philippine Department of Trade and Industry (DTI) provides a more focused description in that it limits BPO to the outsourcing of service-type activities that are information technology intensive. Over the past five years, the BPO sector has grown tremendously, fueled primarily by strong global demands. In 2004, the sector reached a size of about $1.65 billion from just about $350 million in 2001, the DTI reported. Nevertheless, doubts are being raised about the sustainability of this hypergrowth phenomenon. Is it just a passing fancy or indeed the future trend of business? All indications are pointing to the latter, as Rodolfo asserted. More and more companies are beginning to adopt this business strategy. With the opening up of markets worldwide, coupled with rapid technological developments, competition has become more intense, prompting companies to look for more innovative ways by which to enhance their competitiveness.
Outsourcing is not actually new. Especially in the manufacturing sector, companies have long practiced “subcontracting.” But in recent times, outsourcing has been extended to services. The information and communication technology (ICT) revolution has made it physically possible for certain activities and services to be digitized and transmitted over the Internet. Services outsourcing rapidly evolved into offshore outsourcing—locating or moving part of an organization’s activities to lowwage countries. These countries are typically less developed economies with a large base of educated workforce. The two concepts, outsourcing and offshoring, actually overlap, for example, when outsourcing work to a supplier located offshore. But not all businesses that migrate to least-cost countries are outsourced. Companies can choose to still do these service activities internally by assigning them to an affiliate. What is thus emerging is a mix of options open to companies: to outsource or to perform
www.e-servicesphils.com/
At the rate that the business process outsourcing (BPO) sector is growing, it may indeed be the next big thing in this country. This was surmised by Prof. Ceferino Rodolfo of the University of Asia and the Pacific in “Sustaining Philippine advantage in business process outsourcing,” another PIDS commissioned study on the services sector.
A key industry in the country's booming BPO business is animation. Major local animation studios continue to expand their niche market through their participation in trade shows such as the International Market Conference for TV, Video, Cable and Satellite Entertainment Content or MIPCOM, considered the largest audiovisual content trade show in the world, held annually in France.
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Especially for the call center industry, the country stands to gain from its cultural affinity with the major major that is the United States. A result of this affinity, strengthened through the country's public educational system patterned after that of the United States, is the functional level of English-speaking skills of the Filipinos. Only next to the United States and the United Kingdom, the Philippines is the third largest English-speaking population in the world. Human-resources wise...its demographic structure also ensures the continued flow of workers into the labor force. the activities internally and to either do them in their home countries or locate these activities abroad. The exact size and growth of the BPO phenomenon is actually difficult to measure—a problem that many governments, including the United States, and multilateral institutions have yet to solve. Rodolfo noted that this is partly attributable to definitional issues arising from the confusion in the use of the terms outsourcing, offshoring, nearshoring, right-sourcing, and others. Another major impediment is the general difficulty in capturing the whole value chain of the services sector, especially of IT-enabled services. What’s hot The DTI predicts bright prospects in five BPO subsectors: customer care, medical transcription, software development, animation, and shared services. All registered cumulative growth rates of above 25 percent from 2001 to 2004, with medical transcription the fastest growing at 130 percent, followed by call centers at 50 percent, software development at 30 percent, and animation at 25 percent. A profile of the subsectors is given in Table 1. The Philippines is widely recognized as the emerging best location for call centers, posing serious competition to Australia, India, and China. The country currently stands fourth to these countries in terms of industry size. The
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opportunities for the Philippines, however, remain strong as offshoring is predicted to gain momentum in the coming years. The medical transcription industry is likewise gaining ground. The surge in the growth of the industry is mainly due to a unique opportunity offered by federal regulation in the US that required hospitals to store digital copies of patients’ records. The demand is expected to grow as health systems in other developed countries begin to discover the benefits of outsourcing or offshoring the other administrative aspects of their operations. Additionally, although only third and fourth to call center and medical transcription in terms of market size, the country is increasingly developing its niche in outsourced software development and animation. The growing market for English-based educational content materials for Asian countries such as China, Taiwan, and Korea poses tremendous opportunities. The biggest stumbling block, however, is the high cost of computer hardware and software. A big potential is also seen in the area of shared service operations particularly finance and administration. The country is in fact already providing these services for such companies as Proctor and Gamble, Maersk, and Caltex. A key reason is the educated workforce. An example is the area of accounting, where the country has been a constant source of accountants for overseas assignments. Why we click In Rodolfo’s assessment, the Philippines' competitive advantage in BPO services is attributable to a number or reasons. Especially for the call center industry, the country stands to gain from its cultural affinity with the major market that is the United States. A result of this affinity, strengthened through the country’s public educational system patterned after
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RP
Table 1. Summary of Philippine BPO segments (from Rodolfo 2005)
‘01 ‘04
Existing Market
RP Value Proposition
Current Players
Trends
Growth
Contact Centers
Medical Transcription
Animation
Shared Financial & Acctg Services
US$ 173 M US $ 864 M 50% (CAGR) "The Philippines is set to be among the largest markets for contact centers in Asia Pacific in the next 5-7 years." 37 Firms
US$ 40 M US$ 483 M 130% $10-$16B industry, growing at a cumulative annual average of 20%. In the US, only 47% of the market is outsourced, the rest is inhouse. Anticipated surge as there are hospitals which have yet to convert records as required by law.
US$ 21M US$ 40 M 25% Global animation revenues projected from US$16B to US$50B by 2004-2005 (~25% p.a.); new China market for education, design, and marketing services.
Approximately 16 firms
Approximately 22 firms, including 11 direct exporters
Approximately 5 -6 Finance & Administration centers today + other backroom operations
Service ethic/attitude (vis India); cost, turnover (vis Australia); language (vis China).
Familiarity with medical standards, terminology and practices of the USA; pool of health-related skilled workers.
We are considered a competency center for intangibles such as artistry, creativity (vis India), ability to interpret cultural nuances (vis China, Korea, Taiwan).
United States, United Kingdom
United States
a. Entertainment – US, Japan & Australia / Canada / France; b. Education / business Malaysia, China, Korea, Thailand
"Among the best accountants in the world"; Ranked 16/49 for "International Business Experience" by the World Competitiveness Report 2001 (India is no. 38) ; 80,000100,000 BA / Comm graduates; cost savings of 20% -40% Regional HQs – in HK/Singapore; Financial Community (East Coast, Brussels)
No data Consolidation of backroom operations on a regional level.
Source: Department of Trade and Industry.
that of the United States, is the functional-level of English-speaking skills of the Filipinos. Only next to the United States and the United Kingdom, the Philippines is the third largest Englishspeaking population in the world. Human-resources wise, not only is the Philippines enjoying a robust population growth, its demographic structure also ensures the continued flow of workers into the labor force. The Philippine
public and private university system combined produces about 360,000 graduates per year; an estimated 30,000 to 50,000 graduates of these are holders of computer science and programming degrees. Another 50 percent are also knowledgeable in the fields commonly required in BPO operations such as business administration, mass communication and other related courses. That wages in the country are cheap is also an advantage.
Software Development Services US$ 115 M US$ 268 M 30% India moving out of legacy systems; ebusiness, mobile applications.
Approximately 52 BOIregistered firms and 24 PEZA-registered firms
USA/India (as locators/sellers), Corporate USA (as buyers), Singapore (as partner for India/China and US)
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The physical environment is also conducive to BPO operations. There are readily available locations and infrastructure to support the IT-enabled services industry. Currently there are five options: (1) Metro Manila, specifically the central business district of Makati, Ortigas, Fil-invest Alabang, and Fort Bonifacio; (2) technology parks within and outside Metro Manila; (3) the two re-purposed military bases in Subic and Clark; (4) the regional growth centers of Cebu in the Visayas and Davao in Mindanao; and (5) the geographic centers of academic activity such as, in addition to the locations earlier mentioned, Baguio, Naga and Dumaguete. Additionally, compared to other countries in the Asia-Pacific region, there is also a good telecommunications infrastructure for both voice and data. There is redundant international connectivity, including fiber optic cable and satellite communication. High-quality, low-cost bandwidth is available. Compared to India, the Philippine telecommunications market also offers lower prices (by 30 to 60 percent), and has shorter procurement periods (3 weeks as opposed to 3 months) and lesser transmission delays. What’s lacking and what should be done But while the Philippines fares favorably in all these factors, there is admittedly much to be improved, according to Rodolfo. Many factors hamper its growth. The fluid political situation, intermittent threats to physical security, and increasing reports of graft and corruption are factors that often discourage BPO investors. Efforts should be done to improve the general business environment particularly by creating a stable political condition. Though not often cited, the high power rate is also a source of disadvantage for BPO companies as most of them operate all day, seven days a week, at climatecontrolled environment. The Philippines has one of the highest tariffs for
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electricity rates in Asia. Possible shortterm measures, Rodolfo suggested, can include “peak-load� pricing for electricity consumption, which will translate to lower electricity bill for BPOs at night when most of them usually operate to coincide with the working hours in the US. Additionally, the sourcing of qualified BPO professionals is increasingly becoming a problem, which is predicted to worsen in the long term as the quality of the country’s educational system further deteriorates. The government—primarily through the DTI—and the industry are already addressing this problem by partnering with educational institutions. These partnerships, at present, include offering BPO-related courses in selected colleges and universities to provide critical skills to prospective BPO professionals while they are still in college. Rodolfo, however, cautioned that these initiatives should be complemented by improving the quality of education, especially for critical subjects such as Math and Science. The government should place sufficient priority in improving basic social infrastructure (e.g., education). It should also review the pedagogical basis for shifting the language of instruction to Pilipino. However, while there are obvious benefits in retaining English as the language of instruction especially from the perspective of call centers, Rodolfo reminded that these benefits should be studied in the context of the overall role of language in the country’s development strategy. Local government units, including those outside of Metro Manila, are also becoming increasingly active in promoting their localities as viable BPO sites by improving their critical public services such as the public transportation systems and protective services needed by the 24/7 nature of BPO operations. 15
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Narrowing the digital divide: a must for the ICT sector The information and communication technology (ICT) sector continues to show signs of steady, robust growth. In 1993, ICT-related business ventures approved by the Board of Investments totaled US$60 million. In 2002, they were over US$2.5 billion. ICT companies located in export processing zones also continue to attract foreign investments for the country while providing a stable flow of foreign exchange earnings. For instance, export levels were only about US$52 million in 2002 but jumped more than two folds in the following year, climbing close to US$130 million. Not to forget, these ICT companies continue to provide employment to many Filipinos. Prof. Winston Conrad Padojinog of the University of Asia and the Pacific noted, however, that the benefits from this sunrise industry of the Philippines could be even more. In a paper entitled “Philippine information and communication technology sector: evolving structure and emerging policy issues” commissioned by PIDS, Padojinog noted that the still-large digital divide hampers the sector’s growth. Digital divide refers to the “gap between individuals, households, businesses and geographic areas at different socioeconomic levels with regard to both their opportunities to access information and communication technologies (ICTs) and to their use of the Internet for a wide variety of activities” (OECD Glossary of Statistical Terms). “Policies must promote on one hand a high degree of accessibility to the ‘infostructure’ by promoting competition,
interconnection and convergence in the ICT sector. On the other hand, policies must also seek to increase the capabilities of the users to absorb their usage of ICT. Promoting skills on language, literacy and learning as well as improving their access and affordability can lead to high levels of ICT penetration and utilization,” Padojinog stressed in his paper. Revisiting the divide To a great extent, digital divide exists in the Philippines. This divide is apparent in the country’s Internet penetration rate of only 2.6 per 100 residents in 2001, which stands below the median of 3.6 for Southeast Asia. Closing the divide involves dealing with both the supply side and the demand side of ICT. Analyzing the supply side requires looking at the infrastructure and its accessibility to the users; the infrastructure, however, is affected by the industry structure and the regulatory environment. Analyzing the demand side involves looking at the users of the technology and their ability to access it, which is determined by the technology’s affordability as well as the skills of the users. The deregulation and liberalization of the telecommunications industry, through the issuance of Executive Order 109 (and the subsequent enactment of RA 7925), paved the way for the entry of new players in the market, availability of more ICT services, and, to some extent, lower prices. Yet ICT penetration has remained low. Estimates by different agencies, although lacking in consistency, showed that the number of ICT users in the country is still very small (Table 1).
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http://www.usaid-ph.gov/images/
connection, mobile phones are typically used only for texting and voice calls. The technological capabilities of the mobile wireless Internet in the Philippines are also limited. In terms of volume and speed of data, mobile wireless Internet remains inferior to an Internet-enabled PC.
Strengthening ICT education in both private and public schools is an important measure to raise ICT literacy and access.
If cellular mobile telephone system (CMTS), however, will be the indicator of ICT usage, then a large portion of the population has access to ICT, as Table 1 shows. The high adoption rate of the CMTS technology is in most part due to the popularity of the short messaging system (SMS) in the country, combined with advertising and massive capital investments on ICT. The availability of prepaid cards has also made the CMTS more affordable to the lower income classes. As a result of the market preference for the CMTS, the demand for fixed lines has gone down. This would not have been a problem as far as raising Internet penetration is concerned had Filipinos been using their mobile phones to access the Internet. But due to the high cost of
Internet access among large-scale establishments was, however, high based on a survey by the National Statistics Office. But Padojinog cautioned that these establishments do not represent the total establishments in the country. He added that small and medium establishments may exhibit a different landscape in terms of ICT usage or diffusion than that of large establishments. The diffusion of ICT in businesses also varies from one industry to another. The ICT sectors of telecommunications, computer and related services, and motion picture, radio and TV, and ICT education would expectedly have a higher ICT usage. ICT diffusion among educational institutions also proved to be low. For instance, a survey of schools conducted by the SEAMEO-INNOTECH on both public and private primary and secondary schools showed that only 18 percent have teachers who are computer literate and only 7 percent of these schools offer ICTrelated instruction. Additionally, in a survey of 100 schools randomly chosen from among 661 public secondary schools conducted in 2001-2002
Table 1 Estimated individual users of ICT (from Padojinog 2005) Number
Internet users
Mobile and fixed line users Broadband users
Penetration rates per 100 persons
Source
4.2 million
5.25
APT (2002)
800,000 1.54 million 18.6 million
1.01 2.00 23.34
NTC (2002) ITU (2002) NTC (2002)
10,000
Nil
ITU (2001)
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by the Foundation for IT Education and Development to determine the levels of ICT utilization, only 15 percent of the teachers were reported to have used computers. Student-computer ratios were also very low, ranging from 12 students per computer to 1,098 students per computer. Also, based on estimates by the International Telecommunications Union, only 31 percent of public schools have access to PCs and only 2 percent have Internet access as of 2002.
high school students in all public and private secondary schools to assess their abilities and skills, showed very poor scores in math, science and English— important basic foundations to building a pool of ICT-literate population. English tests have also shown the dismal state of English communication skills among the existing labor pool in the country, especially among technical and general office personnel, and university graduating students.
Availability and affordability are major factors that impinge on ICT usage. Data from the National Telecommunications Commission (NTC) revealed that only 3.3 million fixed lines are subscribed to owing in part to high upfront costs and the growing popularity of mobile communications. Telephone distribution also remains uneven and highly skewed to metropolitan areas. Access to fixed line, which is important for dial-up users, is also concentrated in highly urbanized regions like Metro Manila, Southern Tagalog, and Central Visayas (where Cebu province is located).
Effects of changing industry structure Access to ICT is also affected by shifts in the industry structure particularly along the ICT value chain. The ICT sector is broadly composed of the providers of connectivity (telecommunications), content (contact centers, business process outsourcing or BPO), and the ICT enablers (hardware and software, Internet-based data carriers). Although intricately linked, it is ideal to have separation in terms of service provision among these three structures to prevent market dominance especially by large companies.
More advanced technologies, such as broadband, a high-speed Internet connection much faster than the dial-up modems, are also beyond the reach of the average Filipino household. Broadband technologies in the Philippines have been in existence since the early 1990s in the form of digital subscriber line (DSL) and fixed wireless systems. With their prohibitive costs, only corporate and high-end residential users could afford them.
To reduce costs and increase margins, many telecommunications companies are increasingly adopting the twin strategies of achieving scale and scope. The most commonly pursued is vertical integration or getting more control of the downstream industries that are part of the primary support activities provided by telecommunications companies. These
Accessibility and affordability do not, however, guarantee ICT penetration and utilization rates. Another important factor, Padojinog noted, is literacy specifically on ICT skills and knowledge. Literacy studies are unanimous in pointing out the dismal state of the Philippine educational system reflected in the poor showings in national admission tests. Scores in the National Secondary Achievement Test, the national examination administered to fourth year
2005
...vertical integration or getting more control of the downstream industries...has the potential of bringing the ICT industry back to a monopoly structure. These strategies can increase the market power mainly that of the telecommunications industry. If remained unchecked by the regulator, the National Telecommunications Commission (NTC), this could only compound the existing digital divide as dominant firms, especially highly integrated telecommunications and ICT companies, could block new entrants or their existing rivals and employ predatory pricing strategies.
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DEVELOPMENT RESEARCH NEWS
September - October
Figure 1. Presence of telecommunication companies in the ICT value chain (from Padojinog 2005)
Connectivity Fixed line Wireless (fixed and mobile) Cable Satellite ICT enablers Internet Broadband Internet exchange Hardware and software Content Contact center Video/VOIP Data storage E-commerce Wireless programming
PLDT
Globe
Benpres Digitel Belitel
PT&T
downstream industries include the Internet service providers, Internet exchanges, Internet data centers, broadband wire and wireless Internet, and content services like contact centers and BPO. A case in point is the Philippine Long Distance Company (PLDT), the country's largest telecommunications company. PLDT is now virtually present throughout the entire ICT value chain through its exposure in different but complementary markets (Figure 1). Other telecommunications companies in the industry, which, like PLDT, are also actually at the most upstream portion of the value chain, have also gone downstream to extract more value. While it is justifiable for companies to pursue scale and scope economies, an industry structure built along vertical integration strategies, Padojinog assessed, has the potential of bringing the ICT industry back to a monopoly structure. These strategies can increase the market power mainly that of the telecommunications industry. Their control of the critical backbone (infrastructure and network services) is almost tantamount to their control of the distribution channels needed by any content or application providers.
2005
If remained unchecked by the regulator, the National Telecommunications Commission (NTC), this situation could only compound the existing digital divide as dominant firms, especially highly integrated telecommunications and ICT companies, could block new entrants or their existing rivals and employ predatory pricing strategies. Since they control the backbone, they could offer services to the general public at prices that independent ISPs cannot possibly compete with. And with a few dominant firms controlling the industry, the accessibility of ICT is restricted to those who can afford the prices set by these firms and thus could only intensify the existing divide. Problems have started to surface actually. Of late, the Philippine Internet Services Organization (PISO), the association of independent ISPs in the Philippines, has lodged a complaint against the PLDT purportedly for its anticompetitive practice. The PISO also noted that connectivity services, such as the digital subscriber line, are made available by telecommunications companies like the PLDT only to their sister companies. Padojinog likewise took note of the dwindling number of nontelecommunications affiliated ISPs. Of the over 150 ISPs registered, only less than 50 are operating. The latest report by ComputerWorld also showed that less than 20 independent ISPs are operating in the country today. Required policy framework Foremost in Padojinog’s list of policy recommendations for the development of the ICT sector is the creation of a separate department that will be solely dedicated to the ICT sector. The bill for the creation of said department has been, however, pending in Congress since July 2004. The proposed department will absorb the communication functions of the Department of Transportation and Communication, and several ICT-related government agencies such as the National Computer Center, Telecommunications Office, and NTC. Besides policymaking and exercising regulatory functions, it will
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assume a ministerial role in facilitating cooperation and coordination among various private and public entities to be guided by an overarching ICT policy framework. Sustaining the growth of the ICT sector would also depend on the promotion of ICT use. Narrowing the existing digital divide should thus be the primary goal of any ICT policy. Improving universal service, especially in the rural areas, may be carried out through institutional channels such as public universities and libraries and town centers. Improving ICT literacy through the formal education system, while should be strengthened, is not sufficient. The government must expand ICT courses beyond the classrooms to reach a broader segment of the population. In the short term, Padojinog suggested putting up subsidized basic training courses on the use of ICT not only to teach but also to broaden people’s awareness of the importance of ICT.
the National Statistics Office, the NTC, and the future DICT should coordinate with one another to come up with more accurate data and information. DRN ○
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Lastly, Padojinog underscored the importance of developing a system of measuring for ICT. The present one, which treats ICT as part of telecommunications or communicationsrelated statistics, can lead to inaccurate measurements particularly of the sector’s real economic contribution and performance. Pertinent agencies such as
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Services... from page 3 Moreover, the main motivation of PIDS for undertaking research in services is the increasing pressure to open up many of these sectors through multilateral or regional trading negotiations. Negotiations are knowledge-intensive. Without clear back up of information, negotiators would really find it difficult to make trade positions. These studies are, by no means, the final word on services but rather just the beginning. We expect that many other research works are going to follow and will build on these sectoral studies, perhaps refocusing them directly for negotiation purposes and covering a wider set of sectors. DRN ○
Continuously promoting a competitive ICT industry is also necessary for the sector’s growth. On this, Padojinog noted that NTC should have a set of clear-cut guidelines on mergers and acquisitions that would ensure that these strategies, if carried out by a company, would not lead to market dominance. These guidelines should also provide safeguards that would regulate anti-competitive behavior. RA 7925, or the Public Telecommunications Act of 1995, has explicit provisions on anti-competitive behavior but its existing implementing rules and regulations lack precise guidelines on mergers and acquisitions.
September - October
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A bright future... from page 6 and information technology services can contribute much to improve the sector. Indeed, while faith healing has been the common concept of health tourism in the country years ago, this has now been replaced by health facilities gaining international accreditations, and expert physicians being known for quality service. These are positive strengths crucial for the Philippines to conquer the vast potentials of health tourism. DRN ○
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Outsourcing... from page 10 Lastly, Rodolfo noted the need for improving the country’s national system of economic accounts. Specifically, he cited the need to fully implement the use of the Centralized Product Classification system developed by the National Statistical Coordination Board. This is an important measure to come up with more accurate determination and analysis of the BPO sector particularly its contribution to the economy. DRN
2005
DEVELOPMENT RESEARCH NEWS
16
DEVELOPMENT RESEARCH NEWS Vol. XXIII No. 5 September - October ISSN 0115 - 9097
STAFF BOX
Editorial Board: Dr. Josef T. Yap,
September - October
2005
DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS
President; Mr. Mario C. Feranil, OIC
seminars. PIDS is a nonstock, nonprofit government research
Vice-President and Director for
institution engaged in long-term, policy-oriented research. This
Project Services and Development;
publication is part of the Institute's program to disseminate information to promote the use of research
Ms. Jennifer P.T. Liguton, Director
findings. The views and opinions expressed here are those of the authors and do not necessarily reflect
for Research Information; Ms.
those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the
Andrea S. Agcaoili, Director for
PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and
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Editor's Notes...from page 1 ○
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year's celebration of the Development Policy Research Month carried the theme, "Services industry: growth driver for economic competitiveness." The highlight was a two-day seminar on the services industry, which featured studies written on five services industries where we appear to have a competitive advantage: cross-border education, health, business process outsourcing (BPO), information and communication technology (ICT), and audiovisual services. Other relevant studies were also presented as shown in the box at the right. From these studies, three were selected and their highlights published in this issue--BPO, ICT, and health services, particularly the aspect of health tourism. DRN
Papers presented during the PIDS-GTZ Seminar on Services, September 27-28, 2005, Dusit Hotel Nikko, Makati City 1.
Overview of the project and papers
Gloria Pasadilla
2.
Does the Philippines need a trade representative office? Ma. Christine Liao
3.
International trade in services and development: the contribution of bilateral technical assistance Anja Gomm
4.
Cross-border transactions in higher education: Philippine competitiveness Ma. Andrea L. Santiago
5.
Trade liberalization and health services
6.
Philippine audiovisual services sector: delayed take-off? Angelina Lantin
7.
The Philippine information and communication technology sector: evolving structure and emerging policy issues Winston Conrad B. Padojinog
8.
Sustaining Philippine advantage in business process outsourcing
9.
Measuring the impact of services on the economy
Gloria Pasadilla and
Cherry Lyn S. Rodolfo and Jovi Dacanay Gloria Pasadilla and
Ceferino Rodolfo
Iluminada Sicat
The full text of these papers may be downloaded from http://dirp3.pids.gov.ph/dprm3/ papers.html.