Labor Policy Issues in the Philippine Context

PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

DEVELOPMENT RESEARCH NEWS March - April 2010

Vol. XXVIII No.2

Editor's Notes Filipinos are generally hardworking people.

That is why, whenever there are opportunities to take a break, say for example, enjoy a long weekend or extended holiday, we welcome these to have a breather and to spend a little more time for family bonding and recreation.

However, as our feature article in this issue of the DRN describes, the additional holidays during the Christmas season, Holy Week, or during election periods have created a bias for vacations which gives a misconception that our country’s working policy is designed to create slack in the workplace.

Premier economist Dr. Gerardo Sicat shared this and other findings in a recently completed research on labor market which analyzes the responses of surveyed Philippine companies on prevailing policies on minimum wage setting, hiring and firing, training, and holidays.

The study highlights the fact that while these policies are widely accepted by the companies to protect the welfare of employees, employment creation is still one of the most pressing challenges of the Philippine

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ISSN 0115-9097

Labor policy issues in the Philippine context http://susty.com/image

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hilippine labor laws that are currently in place such as minimum wage setting, hiring and dismissal practices, training, and holidays tend to harm Filipino-owned enterprises more heavily than foreign firms that operate in the country.

This is one of the major points that Dr. Gerardo P. Sicat, Professor Emeritus at the University of the Philippines School of Economics, noted in his paper “Labor Policies and Philippine Companies: Implications of Survey Responses on Post-2010 Economic Policy.� In a Pulong Saliksikan held recently at the Romulo Hall of the NEDA sa Makati Building, Dr. Sicat presented and analyzed the survey responses of operating enterprises in the Philippines regarding their opinion of current labor policies in the Philippines. While the paper dealt with fourteen specific questions during the survey covering specific labor market issues, Dr. Sicat focused his discussion during the Pulong on three labor policies: the minimum wage setting; freedom to employ workers on a fixed-term basis; and restrictions on dismissal or regular workers.

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Looking at government subsidies for urban rail systems

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Revising national accounts to cope with changing times

The survey: what it deals with In early 2009, a total of 157 commercial and industrial companies located in Metro Manila, Metro Cebu, and CALABARZON (Southern Tagalog region) participated in a survey of Philippine enterprises on labor market issues.

The survey was conducted with financial support from the Asian Development Bank. The respondents were asked to rate the various issues of labor policies according to a scale of one to five, with 1 being very poor and 5 meaning excellent.

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APEC amidst the emerging regional architecture

The survey looked at 14 different labor policies, namely: 1) the minimum wage setting as a consultative process; 2) the cost of severance pay regulation;

What's Inside

DEVELOPMENT RESEARCH NEWS

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3) freedom to employ workers on fixed-term contracts; 4) restrictions on dismissal of regular workers; 5) regulations on work hours per week; 6) regulations on overtime pay rates; 7) industrial relations and harmony; 8) government regulation for settling labor disputes; 9) inspections by officials of the Department of Labor and Employment (DOLE); 10) performance of public employment service office; 11) the types of amounts of government incentives for training workers; 12) the quality of vocational schools in the respondent’s sector; 13) number of mandatory national holidays; and 14) number of discretionary national and local holidays.

Dr. Sicat said that the main motivation for the survey is to identify from among the mentioned existing labor policies which elicited “very poor” and “poor” responses.

Such responses, he noted, revealed a disagreement with the present policies and are considered by these firms as “hurting” their economic operations.

They imply possible hindrances to the firms’ flexibility which could add to the cost of doing their businesses. These policies could lead to not being able to compete with services and products offered by other local and foreign firms.

In addition to summarizing and analyzing the overall findings of frequency distribution, degree of variation of the responses, and the extent to which answers to the questionnaire are correlated with one another, Dr. Sicat went one step further in the paper by discussing the various influences arising from firm characteristics.

Because he wanted to understand how reforms of existing labor policies could be made, it was important to have a specific knowledge about the nature of the respondent firms to understand how they would respond to specific policies. As such, various characteristics of the firms were introduced to see how these characteristics influence their opinions of specific policies.

Hence, the survey design allowed the various respondents to be regrouped by specific characteristics as follows: a) response to

March - April 2010 government investment incentives (recipient or nonrecipient); b) economic sector of activity (manufacturing or services); c) by market orientation (domestic or export); d) by ownership of enterprises (100% Filipino, joint venture, or foreign direct investment); e) by age of the enterprise; and f) by employment size of the firm (micro, small, medium, or large).

Results The labor policies with the highest approval ratings are the regulation of working hours and the payment of overtime work beyond regular hours. Other labor policies that scored well included questions about the quality of vocational schools in the local area of the respondent firm, the evaluation of industrial labor-management relations, the role of public employment assistance, training of workers, and public holidays.

Meanwhile, restrictions on dismissal of workers, the process of setting minimum wage, labor inspections by the government, settlement of labor disputes, payment of severance cost for workers, and the restrictions on the use of fixed term contracts were rated with the lowest scores. These are the areas of grievances among companies regarding labor policies.

In analyzing the results of the survey, emphasis is given to those respondents who gave poor marks to certain labor market policies. This is to highlight the nature of the firms that find the policies unattractive as such firms are likely to be adversely affected by the policy.

Minimum wage setting Responses to the minimum wage relate to the level at which it is set and the practice of setting that level. It is mandated by law as a regional wage setting process, even though it is often that the national level is led by what the rate is in Metro Manila. All the regional wages are set below that of the Metro Manila level, and the region takes action only after the Metro Manila level is determined.

The sample of respondents is mainly drawn from the two major cities of the country— Cebu and Metro Manila—two different regions that have different wage-setting

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DEVELOPMENT RESEARCH NEWS schemes. The Metro Manila rates are slightly higher than those for Cebu. A few firms were likewise picked from CALABARZON because of the wide presence of firms in this region. CALABARZON firms are close enough to Metro Manila and economic and local conditions appear to be similar with the latter. Table 1 presents the results of the survey indicating outlier responses.

From the 82 firms receiving fiscal incentives, 12 or 14.6 percent of them gave a “very poor” or “poor” rating. On the other hand, nonrecipient companies are more hurt by the minimum wage with 75 or 24 percent of the respondents.

About one-fifth of the firms in the manufacturing and service sectors gave a very poor and poor rating to the minimum wage issue.

This showed that there is no significant dif-

March - April 2010

ference in the attitude of respondents from the manufacturing and services sectors. On the other hand, export firms are more affected by the minimum wage policy, with 4 of 15 export firms or 26.7 percent giving a “poor” rating compared to only 17.9 percent of the 123 domestic-oriented firms.

Meanwhile, Filipino-owned firms are critical of the minimum wage law. For foreign firms, this is not an issue. Foreign companies in fact tend to find minimum wage rates low.

This established the main point that Filipino firms are more hurt by the minimum wage law.

Older and larger firms which have been in the business for 20 years or more are not that vocal in their negative view compared to younger firms. The larger the size of the firm by employment size, the more they are criti-

Table 1. Minimum wage setting: is it consultative enough?

Score

1=Very Poor

2=Poor

Total

Ratings of 1&2

Respondents

as % of Total

No Response

% of Responses

(a) By Fiscal Incentives Recipients Recipient

6

6

82

14.6

0

100.0

Nonrecipient

6

12

75

24.0

0

100.0

Manufacturing

6

4

50

20.0

0

100.0

Services

6

13

101

18.8

0

100.0

(b) By Economic Sector

(c) By Market Orientation Exports

3

1

15

26.7

0

100.0

Domestic

6

16

123

17.9

0

100.0

100% Fil.

9

15

118

20.3

0

100.0

60% Fil.

1

3

16

25.0

0

100.0

60% FDI

2

0

6

33.3

0

100.0

100% FDI

0

0

17

0.0

0

100.0

New: 1 to 5 years

3

1

17

23.5

0

100.0

>5 to 10 years

3

8

56

19.6

0

100.0

>10 to 20 years

4

4

48

16.7

0

100.0

>20 years

2

5

36

19.4

0

100.0

Micro (1 to 9 workers)

1

1

13

15.4

0

100.0

Small (10–99 workers)

7

4

63

17.5

0

100.0

Medium (100–199 workers)

1

4

31

16.1

0

100.0

Large (200 and more workers)

3

9

50

24.0

0

100.0

(d) By Enterprise Ownership

(e) By Age of Enterprise

(f) By Size of Employment

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March - April 2010

cal of the minimum wage policy. Among micro-, small-, and medium-sized firms with less than 9 to 199 workers, the percentage of the respondent firms gave the minimum wage a poor rating which varies from 15.4 percent to 17.5 percent. Meanwhile, from 50 large firms, 12 gave a poor rating to the minimum wage policy.

Freedom to employ on a fixed-term basis In order to protect employees from being employed on a temporary basis for long periods, labor policy requires that temporaryhired workers become regular workers after six months of employment. Some enterprises, however, favor greater freedom to use fixed-term contracts for greater flexibility, to control costs, and for specific and nonrecurrent projects. Most types of firms gave a very

poor and poor rating among the group of respondents surveyed. Table 2 shows the enterprise responses to the policy on restrictions to fixed-term labor contracts. There are no marked differences in the attitudes from firms that received or did not receive fiscal incentives. Among respondents, 20 percent in either class of firms rated this policy either very poor or poor. According to the survey results, this is a fairly high rate of disapproval to the restriction of the use of fixedterm contracts.

Meanwhile, the manufacturing sector rated this policy very poor or poor, slightly higher than the services sector. The level of dissatisfaction constitutes a sizeable group of firms, with 20 percent of the respondents. The export sectors are more hurt by this policy compared to firms that cater to the local market.

Table 2. Freedom to employ workers on a fixed term basis Score

1=Very Poor

2=Poor

Total

Ratings of 1&2

Respondents

as % of Total

No Response

% of Responses

(a) By Fiscal Incentives Recipients Recipient

6

10

82

19.5

2

97.6

Nonrecipient

5

11

75

21.3

3

96.0

Manufacturing

4

7

50

22.0

0

100.0

Services

7

13

101

19.8

5

95.0

(b) By Economic Sector

(c) By Market Orientation Exports

2

3

15

33.3

1

93.3

Domestic

9

13

123

17.9

4

96.7

100% Fil.

11

15

118

22.0

3

97.5

60% Fil.

0

2

16

12.5

1

93.8

60% FDI

0

1

6

16.7

0

100.0

100% FDI

0

3

17

17.6

1

94.1

New: 1 to 5 years

2

3

17

29.4

2

88.2

>5 to 10 years

2

8

56

17.9

2

96.4

>10 to 20 years

5

8

48

27.1

0

100.0

>20 years

2

2

36

11.1

1

97.2

Micro (1 to 9 workers)

0

1

13

7.7

0

100.0

Small (10–99 workers)

4

7

63

17.5

3

95.2

Medium (100–199 workers)

1

8

31

29.0

1

96.8

Large (200 and more workers)

6

5

50

22.0

1

98.0

(d) By Enterprise Ownership

(e) By Age of Enterprise

(f) By Size of Employment

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DEVELOPMENT RESEARCH NEWS

Out of the 15 respondents, 5 firms or 33.3 percent of the export respondents gave a poor rating. On the other hand, only 22 of the 123 respondents or 16.7 percent from the domestic front gave a poor rating.

Filipino-owned enterprises, in the meantime, are inclined to be most vocal against this labor policy. Among the 118 Filipinoowned enterprises, 29.4 percent or 26 respondents gave a rating of very poor and poor to this policy. For foreign-owned firms, this policy is more discomfiting than the minimum wage policy.

Respondent firms that are more than 10 years and up to 20 years old are the most critical of this policy. Of the 17 respondent firms in the new age group, meanwhile, 5 of them or 29 percent rate the policy as poor. It is, how-

March - April 2010

ever, less significantly viewed by firms operating for more than 20 years. The problem of restrictions against hiring workers on fixedterm contracts affects the large companies more. Among large firms with more than 200 workers, 11 of 50 respondent firms or 22.0 percent, rate the policy poor.

Regulations protecting against dismissal of regular workers Of the 14 labor policies, regulations protecting against dismissal of regular workers elicited the most negative reactions from survey firms that responded (Table 3). Enterprises find dismissing workers complex and time consuming even if they have valid reasons to dismiss a certain worker. In the very competitive world of business, this could negatively affect a firm’s business productivity. It is worth noting that manufacturing firms (32%) are

Table 3. Ease of dismissal of regular workers Score

1=Very Poor

2=Poor

Total

Ratings of 1&2

Respondents

as % of Total

No Response

% of Responses

(a) By Fiscal Incentives Recipients Recipient

7

15

82

26.8

3

96.3

Nonrecipient

9

9

75

24.0

1

96.0

Manufacturing

5

11

50

32.0

2

96.0

Services

10

12

101

21.8

4

96.0

Exports

1

4

15

33.3

0

100.0

Domestic

13

17

123

2.4

6

95.1

100% Fil.

12

16

118

23.7

0

95.8

60% Fil.

3

3

16

37.5

0

100.0

60% FDI

1

1

6

33.3

0

100.0

100% FDI

0

4

17

23.5

0

94.1

New: 1 to 5 years

1

4

17

29.4

0

88.2

>5 to 10 years

4

9

56

23.2

0

98.2

>10 to 20 years

6

7

48

27.1

1

97.9

>20 years

5

4

36

25.0

1

94.4

(b) By Economic Sector

(c) By Market Orientation

(d) By Enterprise Ownership

(e) By Age of Enterprise

(f) By Size of Employment Micro (1 to 9 workers)

1

3

13

30.8

0

92.3

Small (10–99 workers)

5

11

63

25.4

1

96.8

Medium (100–199 workers)

6

4

31

0.0

0

96.8

Large (200 and more workers)

4

6

50

20.0

1

96.0

DEVELOPMENT RESEARCH NEWS

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March - April 2010 sector has no distinguishing role. It is only the domestic market-oriented firms which gave the poor rating. Still, one respondent from among 15 exporters is 6.7 percent of the sample. Only four of 118 or 3.4 percent of respondents rated the policy poor and those who gave the ratings are 100 percent Filipino-owned enterprises. Foreign-owned firms did not give poor ratings. By age of the enterprise, no marked poor ratings were received for this policy. By employment size of the firm, there are only three from 63 firms or 4.8 percent which gave a poor rating.

Photo: G. Manuel

Dr. Gerardo P. Sicat, Professor Emeritus at the University of the Philippines School of Economics, said that the labor policies with the highest approval ratings are the regulation of working hours and the payment of overtime work beyond regular hours. On the other hand, of the 14 labor policies, regulations protecting against dismissal of regular workers elicited the most negative reactions from survey firms that responded.

hurt most by this policy while domestic firms (19.8%) in the services sector are hurt as well.

Among the labor policies studied in the survey, firms regard the restrictions to the dismissal of workers as needing the most attention for reform.

The other labor policies Labor rules employ a regulation on work hours per week and use the 40-hour per week routine or the 8-hour per day work day as basis for salaries. This working hour standard is considered a humane limitation for the hours of work in the workplace. This work hour requirement regulates the amount of time that workers are expected to stay at their station and it sets the stage for the imposition of additional pay should there be need to extend work.

As a whole, there is a broad approval of the regulation of hours of work as a labor policy and industrial enterprises in general appear to have adopted it without complaint. No respondent firms gave a very poor rating.

Only two firms among nonrecipients gave a poor rating, while the nature of the economic

Cost of severance pay regulation is part of the cost to regular employees who are leaving the service of the firm. Surveyed firms react more strongly against the minimum wage than the cost of the severance pay. This is a right of regular workers while temporary workers do not enjoy this benefit. Also, firms which have only been existent for five years or less are more affected by this labor policy as compared to older firms. Export businesses show greater concern than businesses that cater to the local market.

On the other hand, while overtime pay increases the per hour cost of labor, it is one way of paying productive employees working beyond the 8-hour working hours. An insignificant number of surveyed firms rated the policy on regulation of overtime rates of work poor. The same with the labor policy on regulation of work hours per week, in general, this is considered a just policy by the surveyed firms.

According to Dr. Sicat, industrial relations (labor-management relations) has become more peaceful in recent years. From a more protected set of domestic industries, there has been a decline of protectionism due to the country’s entry to the World Trade Organization and the actions toward a free trade area spearheaded by the Association of Southeast Asian Nations. Survey results also showed that respondent firms indicated little dissatisfaction on the state of industrial relations in the country.

In contrast, the regulatory mechanism for the settling of labor disputes is considered as one of the most controversial. Litigation is costly for both firms and employee(s) when

DEVELOPMENT RESEARCH NEWS

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March - April 2010

grievances cannot be settled easily among concerned parties. The manufacturing sector and the export enterprises gave the poorest ratings for this policy. In general, there is no marked difference in the ratings given by Filipino- or foreign-owned companies. The respondents gave the same proportion of poor ratings to the mechanism for labor disputes.

Government labor inspections of the enterprise range from labor and employment to tax laws and grant of fiscal support. While the survey particularly centered on the performance of the DOLE, survey responses made mention of firms’ interactions with tax collection agencies, custom bureaus, and other regulatory agencies. In general, firms report these interactions to be problematic. The survey results, then, suggest that government regulatory agencies should improve their interactions with all types of firms.

As for the performance of the public employment service officer, this has reference to DOLE’s effectiveness as an agency formed to support labor employment creation and was also rated. The answers to the question are a reflection of the answers to the labor policy on labor inspections.

However, it has to be emphasized that there are a number of respondents mostly in the domestic and service sectors and the medium-scale enterprises that did not respond to this particular question. Dr. Sicat offered some reasons for this: either the respondent has no opinion on the matter, or the matter is too sensitive to discuss, or they have no experience and knowledge about it. Some of these reasons, he cited, are mutually exclusive.

Survey firms gave a high rating for the policy on government incentives for enterprises for the training of workers. On the other hand, there is also a high rate of no response from other surveyed firms. There is then an implication that there may be high level of local supply of trained workers among the surveyed firms. Moreover, for these firms, there is a high level of unemployed educated workers and they are easily trainable when employed.

Photo: http://www.manilaheadlines.com

Survey firms gave a high rating to the policy on government incentives for enterprises for the training of workers.

The policy on quality of vocational schools ranked 12th among the 14 labor issues and survey respondents showed a degree of discomfort with the quality of vocational schools in the country. Filipino- and foreign-owned firms as well as big firms with 200 and more employees also rated the quality of vocational schools poorly.

In terms of the number of mandatory national holidays, it is said that the Philippines has more holidays compared to other countries.

For the business part, employers have raised their concern that this runs counter to the country’s efforts to promote employment and to encourage a work-oriented labor force. Respondents, in general, however, have rated this policy favorable and only foreign-owned firms are critical of this policy.

As an addition to the mandatory holidays, the policy on the number of other discretionary national and local holidays, according to the survey analysis, has raised labor cost and reduced opportunities for poor people to earn more income during normal working days of the year.

The responses to this question are generally the same with the mandatory holidays. Again,

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March - April 2010

It is the government’s role to listen to the enterprises’ views on current labor policies because understanding the feedback and opinions of surveyed firms is a crucial step in understanding the impact of these policies on labor costs which affect the international competitiveness of the country. foreign firms are more critical of this labor policy. Perhaps, compared with their awareness of holidays in other countries, they think that the Philippines has too many of them or that some of the holidays are too unpredictable in occurrence. The additional holidays during the Christmas season, Holy Week, or during election periods have created a bias for vacations. It is as if the country’s working policy is designed to create slack in the workplace.

Reactions On the issue of domestic firms being affected by minimum wages, Deputy Executive Director Esther F. Guirao of the National Wages and Productivity Commission (NWPC) said that this is expected. According to her, too, in most cases, foreign companies come to the country to offer wages higher than the minimum wage to get the best workers. This is especially true in the business process outsourcing and in the high end Information Technology sector.

“Republic Act 6727 or the Wage Rationalization is now 20 years old and its relevance is

being put to the test, in light of the very rapid changes in the labor market,” the deputy executive director added. Ms. Guirao also shared that the NWPC is doing a comprehensive assessment of the policy and practice of minimum wage fixing, toward more relevant policy reforms, as an offshoot of the 2009 National Policy Forum on Wages and its recent Strategic Planning Exercise.

Concluding remarks Results of the survey convey important signals for policy reforms. While there are policies that have gained wide acceptance as a means of protecting the welfare of workers, it is still important to recognize the nature of criticisms about the labor policies and to pinpoint the types of firms making these comments. Focusing on the favorable opinions of these policies only leads to a judgment that all is well with the policies and no reforms would be needed. But this is not the message from the analysis of the types of firms and their reactions to these policies when the respondents are examined more closely.

According to Dr. Sicat, employment creation in the country continues to be wanting and as such, current labor policies need reevaluation.

Thus, it is the government’s role to listen to the enterprises’ views on current labor policies because understanding the feedback and opinions of surveyed firms is a crucial step in understanding the impact of these policies on labor costs which affect the international competitiveness of the country. He added that a major point arising from the survey is that present labor policies tend to hurt Filipinoowned firms as compared to foreign enterprises.

Photo: A. Garcia

The additional holidays during the Christmas season, Holy Week, or during election periods have created a bias for vacations. It is as if the country’s working policy is designed to create slack in the workplace.

Moreover, the government has also failed in attracting foreign direct investments in the country. In reality, these showed the failure of economic policies to make domestic firms competitive as well to make the country a place for more foreign capital that would help to increase growth, employment, and sustained prosperity in the Philippines.CSM

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March - April 2010

Looking at government subsidies for urban rail systems

M

etro Manila is the most populous metropolitan area in the country with 12 million inhabitants riding cars, buses, and other forms of public transportation every day.

On the other hand, the Epifanio de los Santos Avenue (EDSA), the metro’s main thoroughfare, is also considered as one of the most congested areas in the city. Thus, in order to alleviate traffic congestion in EDSA, the Manila Metro Rail Transit System, more commonly known as the Metrostar Express or MRT 3, was established.

Under a build-lease-transfer (BLT) contract, the MRT 3 was constructed by the Metro Rail Transit Corporation (MRTC), a private company. The infrastructure is being leased to the government through the Department of Transportation and Communication (DOTC) while the facilities are being maintained by MRTC subcontractors. The MRT timeline is shown in Box 1.

Encompassing 13 stations within a 16.9kilometer stretch, MRT 3 runs in the middle of EDSA on a combination of elevated, atgrade, and subgrade tracks. The central section opened on December 15, 1999 while the southern section connecting the Light Railway Transit (LRT 1) was opened on July 20, 2000. The line starts at Taft Avenue in Pasay City going up north traversing Makati City, Mandaluyong City, the city of San Juan, and Quezon City, and ends at a depot station in North Avenue in Quezon City. In 2005, the recorded actual maximum capacity of MRT 3 was 24,000 passengers per hour per direction.

While the MRT 3 is meant to decongest traffic along EDSA and provide relief to many of our “traffic-harassed” riding public, there are a couple of issues being raised with regard to the operation and maintenance of the system.

For one, a major concern stems from the huge amount of subsidy required for the government to cover the capital cost, aside from the operation and maintenance cost of the MRT 3.

In a recently held Pulong Saliksikan at the Carlos P. Romulo Hall of the NEDA sa Makati Building, Philippine Institute for Development Studies research consultant Ms. Ruzette Morales-Mariano looks at this and other related issues in a presentation of her paper titled “Policy Directions in Providing Government Subsidies for Urban Rail Systems.”

According to Ms. Morales-Mariano, with 400,000 persons per day using the MRT 3, it is now at the peak of its capacity and expansion through procurement of additional train units is needed to maximize the benefits of the transport system.

However, concerns have been raised on the government’s continuing subsidy for these capital acquisitions for the system as well as for the operation and maintenance expenses of the MRT 3. Moreover, given the present setup, market risks are also being shouldered by the government. Because of these high costs involved, there have been pressures imposed on the government to raise the system’s fare level.

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March - April 2010

the busiest thoroughfares in Metro Manila without having to spend public funds. But was this the case for the MRT 3? As noted above, part of the costs were shouldered by foreign loans. And in the end, it was the government that guaranteed all the foreign loans, commercial risks, and the 15 percent ROE of the MRTC after all. It has also given its 16-hectare land in North Triangle, Quezon City that is now being used as a depot.

Photo: http://ofwnow.com

Railway enterprises normally experience negative cash flows for a number of years before they reach a breakeven point. Fare box revenues may also only cover daily operating and maintenance costs. Thus, the need for government subsidy.

Is there a need to subsidize?

Ms. Morales-Mariano explained the reasons for having the government subsidize the operation and maintenance of the MRT 3. She said that railway enterprises normally experience negative cash flows for a number of years before they reach a breakeven point.

Fare box revenues may also only cover daily operating and maintenance costs. Thus, the need for government subsidy.

In the case of the MRT 3, while the MRTC was designated to design, construct, equip, test, and maintain the MRT 3 (through a subcontractor), the government, for its part, agreed to pay MRTC for the equity capital that it has invested along with a guaranteed 15 percent return on equity (ROE) per annum, and the cost of operations and maintenance.

“Rental fees” refer to the sum of the equity capital of MRTC, ROE, and operations and maintenance fees that are annually amortized. Records, then, state that 29 percent of the project cost was financed by the MRTC while the remaining cost was funded by official development assistance (ODA) loans.

The government entered the contract with the aim of providing railway service in one of

At the same time, the share of rental fees to the annual subsidies paid for MRT 3 has been rising in recent years. The guaranteed 15 percent ROE imposed by MRTC to their dollar-denominated equity contribution has been putting a significant toll on public funds. For 2005 and 2006, the government could have saved 27 percent and 26 percent, respectively, of the subsidies paid had the government acquired ODA loans instead of entering into a BLT agreement.

Nevertheless, private sector participation in rail projects would do best in participating in nonbulky cost component such as in the operations and maintenance cost of MRT 3.

The private sector should also be encouraged to finance the cost component that can recover investments through revenues. In the MRT 3 case, operation and maintenance cost could have been covered by the fare box revenue starting 2003, according to the estimates of Ms. Morales-Mariano.

Government subsidy vs. fare level Should government continue to subsidize?

Or should the MRT 3 fares be increased to cover these costs? Ms. Morales-Mariano shared a simple benefit-cost analysis guideline which states that a subsidy is not justifiable when the amount of subsidy is more than the externalities alleviated by MRT 3.

In a reverse situation, the subsidy is justifiable in achieving its goals of minimizing road congestion and air pollution, but it may not be efficient in a sense that the amount of subsidy may still be scaled down without compromising the system’s quality of service.

Minimizing the level of subsidy, Ms. MoralesMariano stressed, should still be highly encouraged.

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DEVELOPMENT RESEARCH NEWS

Among policymakers, there has been a clamor for guidance on the reasonable level of subsidy that could be allocated to the existing MRT line in the interim (eventually, there is a need to look into alternatives that could meet the required level of service provision in terms of traffic congestion). To help make subsidies reasonable and efficient, it is important to identify how the rest of the cost items are funded by the government.

In financing MRT systems, Ms. MoralesMariano emphasized that it is best to unbundle cost items. Bulky and hard-to-liquefy components should be financed by government while cost components that can be recouped by fare box revenue (such as operating and maintenance costs) can be financed by a private partner.

Proper pricing of railway facilities is obviously one of the direct ways of influencing the level of subsidy and changing the behavior of roads and rail-based traffic. Fare pricing is key in maximizing revenue collection and the first step in benefit-cost matching for rail projects.

At present, the minimum fare for MRT 3 is PHP 10.00 and the maximum is PHP 15.00 with an average of PHP 12.50. At this level, subsidy was PHP 47.50 per rider in 2006. For the same year, 135 million passengers rode the MRT 3 and if the riders paid PHP 60.00 on the average, fare box revenue could have covered all of the project cost in that year.

However, requiring higher tariffs affects the ridership level since willingness to pay varies across riders. It is important to identify the highest level of tariff that results in the highest fare box revenue without compromising the economic benefit that should be derived from the MRT system.

Fare level should then be raised to PHP 15.00–PHP 20.00 from the current PHP 10.00–PHP 15.00 range, as this price yields the highest annual revenue which in turn results to the lowest subsidy requirement, without compromising the level of social benefits, Ms. Morales-Mariano said. To properly determine the correct level of fare pricing, ridership surveys should be conducted

March - April 2010

Box 1. The MRT Timeline 1990

The Build-Operate-Transfer Law (BOT Law) was signed and the DOTC awarded the contract to the MTRC.

1992

The Feasibility Study for the MRT Line 3 was submitted for evaluation.

1996

After four years of revisions in project cost and scope, the project was approved. The BOT scheme was adopted through a BuildLease-Transfer Scheme (BLT) for a span of 25 years. The total project cost amounted to US$675 million.

1997

The BLT agreement was signed. The MRTC supervised the design, construction, equipping, testing, and commissioning, while the DOTC managed the technical supervision of the project activities covered by the BOT contract between the DOTC and MRTC. The DOTC has the ownership of the system and assume all administrative functions, including the regulation of fares and operations. The MRTC, on the other hand, is responsible for the construction and maintenance of the system and the procurement of spare parts for trains. In exchange, the DOTC will pay the MRTC monthly fees for a certain number of years to reimburse any incurred costs.

intermittently (approximately every 2–4 years). This would allow government to get a feel of the riders’ current willingness to pay as well as the resulting fare box revenue and social benefits associated with an increase in the tariff level.

Recommendations Ms. Morales-Mariano emphasized that subsidies alloted to MRT systems are often ‘justifiable’ but are not necessarily efficient. Subsidies can be justified if costs due to air pollution are considered. Minimizing subsidies, where possible without compromising quality of infrastructure and service, should always be advocated.

She recommends that the strategy for the transit system is to gradually raise the fare price. She also recommends the installation of well-planned feeder services that may be supplemented with park-and-ride facilities to encourage car users to ride the MRT more.

Consequently, the level of service of the public transport system must match the benefits that private car users enjoy.

Before deciding to commit to a huge investment project such as a railway system, the government needs to ensure that all the ex-

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DEVELOPMENT RESEARCH NEWS

12

March - April 2010

Revising national accounts to cope with changing times

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t is imperative to shift to a new system in order to cope with the changing times.

These were the words that Sec. Augusto Santos, Acting Director General of the National Economic and Development Authority (NEDA), emphasized during the Second Forum on the Revised/Rebased National Accounts of the Philippines held on January 13, 2010 at the Philippine Institute for Development Studies (PIDS) Romulo Hall in Makati City.

Sec. Santos commended the National Statistical Coordination Board (NSCB) for coming up with the revision of the Philippine System of National Accounts (PSNA) despite the difficulty of getting the data and/or despite the unavailability of the

data needed for said revision. At the same time, Sec. Santos, in his keynote speech, expressed the hope that the users of the national account system would have a common understanding on the need for the revision and urged them to constantly challenge the NSCB to produce relevant data.

The forum marked the last of the set of public consultations conducted by the NSCB as part of its undertaking, with support from the World Bank Trust Fund for Statistical Capacity Building (TFSCB). on “Improving the Quality and Usefulness of the Philippine System of National Accounts (PSNA).” The undertaking is aimed toward revising and rebasing the PSNA from the 1985 to the more updated 2000 base year.

Complimenting Sec. Santos’ speech, PIDS President Dr. Josef T. Yap, in his opening remarks, commended the collaboration between the World Bank and the NSCB. He said that this collaboration is needed, especially in terms of analysis required to be done, in order to overcome the kind of anxiety felt before during the 1993 PSNA revision when the base year of 1972 was shifted to 1985.

Photo: V.F. Belizario

According to National Statistical Coordination Board Secretary General Romulo A. Virola, the revision is vital because the present PSNA is no longer enough/adequate to present a total picture of the life in the country.

T he need for revision Dr. Romulo A. Virola, Secretary General of the NSCB, said that the revision is vital because the present PSNA is no longer enough/adequate to present a total picture of the life in the country. At the same time, the NSCB faces a lot of constraints such as insufficient finances to compensate for the needed expertise in maintaining the system. as well as the added demands and expectations from various stakeholders in the coun-

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DEVELOPMENT RESEARCH NEWS try as their needs become more sophisticated and can no longer be addressed by the data available in the current PSNA. The TFSCB project therefore hopes to address these.

According to Ms. Regina Reyes, Chief of the Economic Indicators and Satellite Accounts Division of the NSCB, the TFSCB project, which will run from 2009 to 2012, primarily aims to enhance the capacity of the NSCB and the National Statistics Office (NSO) in undertaking a major revision of the PSNA based on the issues raised by experts and stakeholders on the quality and usefulness of the said accounts.

March - April 2010

Box 1. Features of the Revised and Rebased PSNA 1. New base year of 2000 from the previous 1985; 2. New concepts and definitions due to the adoption of the 1993/2008 SNA international guidelines for the compilation of national accounts; 3. New standards and classifications used; 4. Captured other industries/commodities like steam and not just electricity; 5. Highlighted relevant industries/commodities like the business process outsourcing (BPO) activities; 6. Existing industries/commodities reclassified like military equipment as durable equipment (2000-based) from general government consumption/expenditure (1985-based); 7. Use of updated and new data from different agency surveys as well as other administrative data; and 8. Use of updated parameters and price/price indices.

Specifically, the PSNA revision needs to capture the changes in the way economies work and in the manner that economic circumstances have affected user needs and views as well as in the face of theoretical developments. It is also important to revise the PSNA to have greater harmonization with the Balance of Payments Manual 6 and Government Finances Statistics Manual and to provide the need to have common standards critical for international comparisons.

Project updates and comparison of old and new estimates Based on the preliminary work and latest available survey results, administrative-based data, and other sources, the NSCB saw some concerns in the compilation of the preliminary estimates, specifically on data concerns and results of estimates.

Using the Annual Survey of Philippine Business Industry (ASPBI) and Census of Philippine Business and Industry (CPBI), the computed ratios for the industries of mining and quarrying, construction, and trade were seen to be erratic from year to year. The appreciation specifically on the construction and trade industries is important in providing trends in the sectors and in showing their contribution to the GDP. The given results of the ASPBI and CPBI posed a big challenge in the compilation of national accounts because the total capital formation showed much lower estimates when compared with the old series. This compelled the NSCB to undertake further analysis of the causes of the statistical dis-

Presented by Mr. Candido J. Astrologo, Jr., OIC Director of National Statistical Information Center (NSIC) and Subnational Statistics Office (SnSO), NSCB during the Second Consultative Forum on the Revised/Rebased National Accounts of the Philippines.

crepancy (SD) and to start with zero SD for the base year.

Ms. Vivian Ilarina, Chief of Expenditure Accounts Division of NSCB, provided a comparison of the old and new estimates, which showed that the new GDP estimates are lower than the old GDP estimates. Except for 2002 and 2007, the growth rates were revised downward for most of the years. GDP ratios at constant prices have more than tripled while GDP ratios at current prices are closer to 1.00.

Looking into the major industries, the services sector has the highest contribution in the revision in GDP levels by industry at constant prices. New estimates on major expenditures showed that government consumption has the highest ratio on expenditures at constant prices. In terms of type of expenditure, household consumption has the highest contribution to revision in GDP levels at constant prices.

Feedback from stakeholders One of the major concerns raised during the consultations was the need to have a separate tracking and data for the unorganized and organized sectors.

Dr. Felipe Medalla, a leading academic and economist who was once the director general of NEDA, emphasized the need for data

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March - April 2010

APEC amidst the emerging regional architecture

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he year 2010 marks the Asia-Pacific Economic Cooperation (APEC) milestone of assessing the progress of industrialized economies toward the achievement of free and open trade and investment under the Bogor Goals launched in 1994 in Bogor, Indonesia.

In assessing such progress, experts consider regional economic integration to proceed as the emerging regional architecture that poses the challenge of being mutually beneficial and sustainable for the Asia-Pacific region.

APEC at 20: Lessons for Regional Integration and Way Forward was the focus of the symposium during the Philippine APEC Study Center Network’s (PASCN) 14th General Assembly held on April 14, 2010 at the Philippine Institute for Development Studies (PIDS) Romulo Hall in Makati City.

PASCN members, representatives from the academe, government institutions, and nongovernment organizations attended the annual event wherein the Network continues its role in deepening the government’s perspective on various issues that are currently part of the APEC agenda through the conduct and support of APEC-related studies.

PIDS President Josef T. Yap, in his welcome remarks, said that it is important for APEC to form dialogues with the G20 countries and that the United States must be involved in these debates and discussions in order to answer the problems and issues of international economic architecture.

Hon. Edsel Custodio, the Philippines’ APEC Senior Official from the Office of the Undersecretary for International Economic

Relations of the Department of Foreign Affairs (DFA), said in his keynote speech that the Asia-Pacific region is in a crossroads due to the collapse of the Doha Round talks and the onset of the economic crisis.

Like Dr. Yap, Usec. Custodio considered open dialogues between APEC and developed countries as instrumental in bringing continuous and fruitful discussions on various issues. Engaging in open dialogues is more beneficial than APEC enforcing binding organization commitments, he added.

The economic crisis of 2008 is a good source of lessons to bridge the development gaps, which have been one of the complex demands of the 20th century. A more balanced regional growth strengthens the role of capacity building and prepares developing economies to greater challenges and competition toward a stronger, wiser, and more prosperous Asia-Pacific.

Facing the emerging regional architecture The global architecture has changed a lot the past decade, creating a multipolar power base. This multipolarity is reflected in the Asia-Pacific region, with the rise of China and emerging economies of East Asia,1 and the emergence of Russia as a rising power.

Added to this is the increasing trend toward forming RTAs/FTAs, either through bilateral or plurilateral arrangements. It could be expected that the regional architecture will continue to evolve in the years ahead as emerging economies take part in the com1

Association of the Southeast Asian Nations (ASEAN), ASEAN plus Three (APT), East Asian Summit (EAS), Asian Regional Forum (ARF), Six-Party Talks, and Asia-Pacific Economic Cooperation (APEC).

DEVELOPMENT RESEARCH NEWS

petition for regional leadership, raw materials, and market share.

Amidst the complex and multilayered economic structures, PIDS Senior Research Fellow Dr. Erlinda Medalla emphasized the need to be part of this evolving economic architecture. However, she emphasized that acceding to RTAs/FTAs should be a strategic move, and not merely driven by bandwagon mentality, given the country’s resource limitations and long -term economic agenda.

Economic and Technical Cooperation (ECOTECH) is an important agenda for APEC, according to Dr. Medalla, as it aims to reduce the regional disparities among APEC members and to contribute to sustainable growth and balanced development while improving economic and social welfare. It also aims to intensify technical assistance to developing countries to achieve the Bogor Goals and competitively act in a free economy.

The APEC gains from ECOTECH are: open dialogue; development of procedures, policy, and frameworks; sharing of best practices; and training for skills creation and institutional strengthening. The Philippines’ gains from ECOTECH are funding for projects, maximized participation in hosted projects, and participation in all APEC projects.

According to Ambassador Lumen Isleta, Senior Special Assistant from the Office of the ○

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Undersecretary for International Economic Relations of the DFA, trade and investment liberalization facilitation (TILF) has given APEC five-fold increases in trade, three-fold increases in GDP and per capita income, tariffs that are less than one-third of the 1989 level, reduction of transaction costs, and investment facilitation action plan.

Notable Philippine gains from TILF are the payment abstract secure system (PASS) for electronic payment of duties and taxes (at the border), strengthened enforcement of laws protecting intellectual property (IP) (behind the border), and strong republic nautical highway (SRNH), and the roll-on, roll-off (RoRo) ports system (across the border).

The way forward At the regional level, APEC has to face major challenges for economic integration such as bridging development gaps and coping with changing institutions and processes. APEC also has to prepare for emerging concerns and issues of security, climate change, and disaster management. For the Philippines, Dr. Medalla said that there should be general guidelines in dealing with the different trade groups. Trade, in particular, should be placed high in the agenda in order to stay connected and have easy participation—but neither aggressive nor passive—in the regional economic integration. In this way, as Dr. Yap said in his concluding remarks, there will be more opportunities open for the Philippines.APQ

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Looking at government...from p. 11 ○

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isting options and alternatives are explored.

This includes making sure that the specifications of the project are addressed toward the interest of the target market. More importantly, contracts have to be written clearly and without bias. Of equal importance is the selection of a partner/contractor that can deliver the appropriate and desired level of service at the lowest cost. Another issue that government has to scrutinize is the source and type of financing to be used for such lumpy investments.

The growing transport demand and the government’s efforts to address this is an ever-evolving challenge considering the pressing need to curb urban congestion and lower air pollution costs. The need to balance what the government should spend for with what the riding public can afford and are willing to pay for cannot be overemphasized. At the end of the day, the public in general will benefit from a carefully planned and efficiently implemented mass transport system. CSM

March - April 2010

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DEVELOPMENT RESEARCH NEWS

STAFF BOX

DEVELOPMENT RESEARCH NEWS Vol. XXVIII No. 2

Editorial Board: Dr. Josef T. Yap,

publication of the PHILIPPINE INSTITUTE FOR and recommendations of PIDS research projects and important

ISSN 0115 - 9097

Vice-President and Director for Project

DEVELOPMENT RESEARCH NEWS is a bimonthly DEVELOPMENT STUDIES (PIDS). It highlights the findings

March - April 2010

President; Mr. Mario C. Feranil, OIC

March - April 2010

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Editor's Notes...from p. 1 ○

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economy. As such, there is a need to have some of the country's labor policies reevaluated.

Meanwhile, another article featured in this issue takes a closer look into government subsidies for the country’s urban rail system, an issue which has recently gained attention in the light of rising transportation costs. Using the case of the Metro Rail Transit System or the MRT3, the article explains the reasons for having the government subsidize its operation and maintenance. At the same time, it emphasizes the need to review the proper pricing of railway facilities and the subsequent raising of fare prices, if needed. D R N

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Revising national...from p. 13 ○

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on the said sectors as well as their distinction from the formal and informal sectors.

Dr. Virola responded, however, that unfortunately, there are no available data on the separate groups. The little known considered data on the unorganized group came from whatever difference or residual there is from the organized sector.

Professor Solita Monsod from the University of the Philippines School of Economics commented that despite the reasons for the revisions, as presented in the consultation, there is lack of documentation on the services or goods produced at home.

Thus, this has totally or deliberately made women "invisible" in the Philippine economy. Prof. Monsod emphasized that the national accounts continually ignore women by not including data specifically on the household services sector. There is a need to get consultants, said Monsod, who will institutionalize the system that includes, and not sacrifices, women.

As the project proceeds, the NSCB will continue to assess the comments and suggestions put forward during the public fora to be able to finalize the annual 2000-based estimates for 1998 to 2008. Moreover, the NSCB deemed it necessary to adopt the chain volume measure (CVM) estimates that can more accurately reflect economic growth compared to the fixed base year estimates which were previously used.

In conclusion, World Bank Country Economist Karl Kendrick Chua commended the efforts of the NSCB and the NSO for the project and for continually producing timely statistics despite a depleting supply of statisticians. He added that instead of giving ad hoc funding, the World Bank fully supports the statistical development program in the Philippines to be able to develop new statistics needed by users.

There is also a need for cooperation because what is important is for the PSNA to be able to gather accurate data. APQ