‘PEZA – Successful foreign investment attraction, export diversification and growth’

The Philippine Export Zone Authority (PEZA) is the one successful agency that has helped to attract foreign direct investments (FDIs) to the country, increased the employment of Filipino workers, and expanded and diversified our exports to the world.

“Most successful in promoting FDIs.” The export processing zones were initially established to attract foreign direct investments to manufacture for export markets.

The basic enticement was the presence of a relatively trainable and skilled labor  force that could be hired at inexpensive cost. The outcome of this was the rapid growth of semiconductor assembly in the country, accompanied by the entry of associated computer parts assembly which depended on abundant labor.

Somewhat earlier than the semiconductor plants, the garment and textiles sector had benefited from this labor advantage. However, the earlier advantage in this sector was blunted by sharp rises in minimum wage rates (as well as labor unrest). This led foreign firms already located to move out and migrate to other East Asian countries that offered cheaper labor costs.

The PEZA today administers the incentives for enterprises engaged in offering international services for back-office processing operations (BPOs). The boom that accompanied the influx of information technology companies providing call centers services and other BPO activities took hold to affirm  the Philippine’s labor advantage.

Today, PEZA also provides incentives for the establishment of tourism estates and for hospitals providing medical tourism services.

“Early history.” The investment incentives for export promotion,  as crafted within the laws that established the Board of Investments, were failing to produce export winners among domestic industries.

In fact, the investment incentives were mainly designed to promote industries that sold only to the domestic market. Likewise, the export incentives law contained many “nationalistic” guidelines that turned off the entry of manufacturing firms with world class levels of competitive efficiency.

The government opened the economy to foreign investment capital by establishing export processing zones. This program was instantly successful. By the early 1980s, four export processing zones were in operation – in Mariveles, Bataan; in Cavite; in Mactan, Cebu; and in Baguio.

When Fidel V. Ramos became president, one of his main legislative priorities was to expand the export processing zones, to establish more of them in different locations of the country, and to make them more private sector-led. This made it possible to consolidate land for industrial estates in established communities much more easily.

In 1995, the Special Economic Zone Act (RA 7916) was passed by Congress. The Philippine Export Zone Authority succeeded the government Export Processing Zone Authority (EPZA). While the four zones remained under PEZA administration, the future zones became private-sector-led and financed.

The PEZA incentives for locators come in a package. The zones were intended to attract processing of labor and raw materials for export to foreign markets and to provide opportunity for foreign companies to lease factory space easily.

PEZA incentives welcome fully owned foreign direct investments to locate in the export processing zones to set up their manufacturing plants. In addition, the basic rights of investors to remit profits, pay their obligations, and repatriate their investments are guaranteed. Investment procedures are simplified.

Special income tax holidays for the initial investments are allowed. At the expiry of these incentives, special five-percent gross income taxation in lieu of all national and local taxes; employment of foreign nationals needed for the operations are allowed.

Export processing zones would not be needed if the whole domestic economy were less beset by heavy rules and regulations and restrictions that lengthen business transactions unnecessarily.

The reality is that restrictive policies pertaining to foreign direct investments are quite pervasive in the domestic economy, principally in the incentives granted by the other major investment incentive granting agency of the government to investors in industry: the Board of Investments. In the presence of these restrictions and regulations, the export processing zones enabled investors to invite fully owned FDIs in industrial projects in production for export markets.

The export processing zones made it easy for business locators to operate smoothly on a day-to-day basis. They could clear imports of raw materials and supplies and exports of their goods with relative ease, and their dealings with the tax authorities relatively streamlined. Also, they were freed from the intricacies of the land controls on investments, which were restricted by constitutional prohibition. 

“Dimensions of success.” Exports from the PEZA zones have risen dramatically as a percent of total Philippine exports.

In 1995, 25 percent of total exports of $17.4 billion was produced in the zones; in 2006, 74 percent of the total exports of $47.4 billion; in 2013, 63 percent of the $53.9 billion total exports.

The cumulative exports from the export processing zone enterprises have been dominated by electronics and semiconductors, accounting for 38 percent of total exports; metals fabrication, 9.6 percent; tourism, 9.5 percent; IT services, 8.8 percent; shipbuilding and transport, 5.9 percent; and electric machinery and apparatus, 4.6 percent, and the rest are .

Investments in the export zones have come mainly from foreign companies. Philippine investments in the zone, comprising mainly of the value of land that had been part of the export zone investments, have consisted of around 22 percent of investments. Japanese investors have dominated, 31 percent. American investments amount to 16 percent. Then we have investments from Dutch, Korean, British, Singaporean. German and Swiss investments follow next, but these are not as extensive as the earlier cited nationalities.

The private economic zones were set up mainly where access to infrastructure such as roads, ports, communications and power were readily available. This explains the quick transformation of the CALABARZON countryside into areas where pockets of private export-oriented companies located.

The following foreign companies, many of them Japanese, have helped to develop the following major zones with local partners: Marubeni (Lima Technology Center and First Cavite); Sumitomo (First Philippine Industrial Park); Mitsubishi-Kawasaki Steel (Laguna TechnoPark); Mitsui (Light Industry and Science Park); Nissho Iwai (Carmelray Industrial Park 1); Jurong Town-Ascendas (Carmelray Industrial Park 2); Itochu (Luisita Industrial Park); Tsuneishi (West Cebu Industrial Park); Kao Corp. (Jasaan Misamis Oriental Ecozone); and Samsung (Calamba Premiere).

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