The engines of growth
A speech delivered at the BusinessWorld Economic Forum
Shangri-La at The Fort, Bonifacio Global City
9:00 a.m., Friday, 19th May 2017
Good morning to all of you.
I would like first, to thank BusinessWorld and Miguel Belmonte for this opportunity to be with you today. No, i did not invite myself to speak — but i guess it helps to be a proud owner of the paper.
Our group invested in BusinessWorld six years ago. So yes, technically our reporter Janina Lim works for me! God bless you, hija!
Let me congratulate Miguel, the editors, reporters and staff of BusinessWorld. For the first time in many years, BW has turned profitable for the full year 2016 — a feat, which Prime Minister Virata and Prof. Raul Fabella noted took more than a decade to sccomplish!
So i guess there is hope for TV5!
Let me also thank the sponsors of this forum. And special congratulations to sponsor Turkish Airlines in particular. Turkish Airlines has been named Europe's best airline for six years straight. But now it has a new title: Turkish Airlines — official airlines of the ASEAN.
I understand the ambassador of Turkey is here. Welcome, Mr. Ambassador.
I have only one request if Turkey is to become a member of ASEAN. Turkey can join ASEAN — but it may not join SEABA!
This forum seeks to identify the engines which could drive long-term growth of our country.
I may suggest three drivers:
First, the government’s tax reform for acceleration and inclusion; second, infrastructure; and third, investment in businesses which could propel growth. There could be a fourth game changer — gas in the South China Sea.
First driver — tax reform package.
Let me now speak to the first driver: the government's comprehensive tax reform program, or CTRP. CTRP will reconstitute our tax system to make it:
Simpler and fairer — by decreasing the number of income tax brackets from seven to six, reducing the rate in most brackets, especially for those with lower incomes, simplifying requirements for small taxpayers.
More efficient — limit exemptions of VAT to necessities like raw food, education, and healthcare; raise excise tax on fuel and automobiles
More friendly for business — lower the tax rates for corporates. With these changes, CTRP aims to raise the requisite funds to finance infrastructure in part, as well as education, social safety nets, and health. The goal is to raise incremental resources by 2.2 trillion pesos over six years — or 366 billion pesos a year.
CTRP is central to Dutertenomics; it is in fact the catalyst to the government's 10-point economic program. That is why I believe the business sector should support it. President Duterte and Sec. Dominguez, and the DOF team, should be congratulated for crafting this pivotal tax policy.
Second growth driver — infrastructure
The fiscal space which CTRP could provide, complemented by ample liquidity here and abroad, could mean financing available for infrastructure — the second growth driver I turn to now.
We all know the government plans to spend a massive 8.4 trillion pesos on infrastructure until 2022, with spending rising from 5.4 percent to 7.4 percent of GDP by the time President Duterte leaves office.
To cover this prodigious outlay, the plan is to combine the resources raised by CTRP with local borrowings and ODAs, in the proportion of 80-20, respectively. The budget deficit will therefore rise from 2.7 percent of GDP in 2016, to about 3 percent between now and 2022.
Central to this financing plan is the assumption that GDP will continue rising robustly over the period, to accommodate government's rising debts. The plan is of course not totally without risks — if for some reason, our growth targets are missed, the 3% debt cap could get breached, with possibly unpleasant consequences. That's why it's important for business to support in whatever way it can to keep the GDP engine going at 6 to 7%, or better.
As well, government has decided to adopt the “hybrid PPP approach” to infrastructure — government to build the projects and, upon completion, bid out the operations and maintenance of it.
This hybrid approach has prompted some conversation: first, do we have the capacity to execute these large projects? Are there enough local contractors and sub-contractors with the necessary size, experience and skills to execute them? And within the contracting and supply context, can the private sector participate and help? Second, considering that a good portion of infra spend will be financed by debt, how can these be effectively serviced?
In regard this hybrid PPP, let me speak to the Subic-Clark Expressway model. This tollway was built by government on JICA financing, and ultimately privatized by way of a concession agreement, not O&M.
From our perspective, this was a win-win formula for both government and business: first, the tollways got done; second, tollway fees paid to government are sufficient to service JICA’s long-term loan; third, the concessionaire, and not the government, shoulders the O&M expenses; fourth, the concession agreement
enhances the equity value of our tollways group because it confers a quasi-ownership interest in the business — which an O&M contract doesn’t.
We’re also aware that certain existing infra requires immediate attention — NAIA and MRT-3, in particular. The government appears to be leaning towards Clark Airport — frankly, this is the only viable option we have for now. NAIA is filling quickly to the brim, and a new airport will take years to complete.
As to MRT-3, what more can be said? In 2016: 2,619 trains removed from daily run due to glitches, 63 service shutdowns, 586 emergency passenger disembarkations.
Third growth driver — investing in business
The third driver refers to those businesses that infrastructure and CTRP intend to support. Remember that both infrastructure and taxes are enablers of business — an airport is built or expanded if tourism and other businesses in its vicinity can be established or developed. Investment in the tourism ecosystem — in hotels, inns, restaurants, markets, entertainment — has to be made principally by the private sector. Without these investments, an airport by itself cannot be economically justified.
Of course, infrastructure breeds its own collateral businesses to feed its requirements — cement and steel plants, aggregates, labor and contracting services.
So, which businesses? I say those which create jobs — businesses with significant labor input:
First, businesses unique to their geographic and resource advantages, such as tourism and mining. These are located in rural areas where most poverty exists. Tourism is labor-intensive and plays to the strength of our people’s service orientation. Mining is capital intensive, has significant export potential, and is located in outlying areas.
Speaking of mining, we welcome a break in the impasse on policy with the appointment of a new DENR secretary. I’m told Sec. Cimatu went to NU before going to PMA, then took his MBA at the Ateneo. Hopefully, we can have an open dialogue with him beginning with this topic — how to dethrone La Salle.
A second category are by-products of our people’s migration abroad, and of global ageing. These are medical tourism and retirement homes, both of which are labor-intensive.
Third, agriculture. Despite its critical place in our economy, it has regrettably been accorded step-child attention. Agriculture accounts for about 27% of our labor force, but only 8.8% of our GDP. Most importantly, 70% of our poor live in rural areas. Of the estimated 21.6 million poor, some 17 million are directly and indirectly dependent on agriculture.
The anemic performance of agriculture must be attributable mainly to the comprehensive agrarian reform program, or CARP.
There are many reasons why CARP has failed in its almost 30 years of llife. With its five-hectare ownership limit, CARP has effectively discouraged private capital from agriculture. It has presumed that farmers will become entrepreneur-businessmen by owning their land. But with no more than a hectare under cultivation on average, how on earth can we expect our farmer-entrepreneur to make a living?
Dr. Fabella once wrote — “to everything there is a season, and now is the time to let go. We now have to redirect our agricultural focus from land equity to farm efficiency. Private capital must be attracted back into agriculture.”
It is time, in other words, to stop redistributing poverty.
Areas for commercial farming — to coconuts, cocoa, rubber, coffee and staples such as rice, sugar and corn — must be opened up and leased. When I was in China recently, I was told that China can buy
all the fruits we can produce. And right on our doorstep, Indonesia imports about four million tons of raw sugar each year.
Investing in productive, diversified agriculture will bring in agreprocessing plants and our ability to export agri-products. These will provide sustainable jobs to the countryside and deploy excess labor from small farms. We’re doing this by propagating coconut oil mills in various parts of the country where coconuts are
abundant. Remember world population will grow from 7.5 billion people this year to 11.2 billion by the year 2100. Food therefore must figure into our long-term planning.
Finally — the South China Sea
Finally, the South China Sea, and its resource potential.
We know that Malampaya will start depleting in 2024. It is imperative that we start looking for alternative sources of gas now — failing which, gas has to be imported. We simply cannot leave the three gas plants of 3,000 MW in Batangas stranded — brownouts will ensue, for certain. The first critical step is to determine if there are indeed commercial gas resources in the area.
In 2012, Philex Petroleum disclosed the highlights of an interpretation report of new 3D and 2D results, together with the vintage data acquired earlier, over service contract 72. A best estimate of contingent resources in the north bank was reported — equivalent to about 2.6 trillion cubic feet of gas — about the size of Malampaya — plus oil and condensate gas of 65 million barrels. There is of course no assurance at this time that these estimates are accurate until further drilling and technical evaluations are made.
But we’re encouraged that the duterte government has provided an accommodating environment with its open, constructive approach to China. A bilateral consultation mechanism has recently been formed to agree a code of conduct in the region.
It is time to close. But before I do, let me congratulate the two Gilas teams for winning the SEABA tournament.
Dutertenomics seem to represent a workable, actionable plan for the economy and its growth prospects. Combined with the president’s strong political will and bias for action, supported by his continued high trust rating, it stands a good chance of execution. So this inspires hope.
Leaders after all should be merchants of hope.
We must hope for a great future for our country — a future in which we can match our strength with our moral values, our wealth with wisdom, our power with purpose.
We must hope for a Philippines that provides the opportunities for, and raises the welfare of all our people, without regard to privilege or pedigree.
We must hope for a country which protects our environment, rewards fulfillment in sports, recognizes achievements in business, in arts, and in our armed services.
And we must hope for a Philippines that commands respect in the world — for our people, for our culture and our history.
Thank you for listening. I wish the forum much success.