More Freeports, anyone?

I knew I was going to touch some raw nerves when I raised the issue of the proliferation of Freeports in a joint meeting of the Management Association of the Philippines, Makati Business Club and the Financial Executives Association of the Philippines. Secretary Cesar Purisima had just announced his plans to raise the Government’s tax efforts from a low of 13.6 percent by launching a no-nonsense campaign against smugglers and tax evaders. The objective was to reduce the projected fiscal deficit of P350 billion without having to raise or impose new taxes.

The public will certainly applaud if Government can pull it off, but they will also understand if some tax increases will have to be imposed. What they will not understand is if rampant smuggling and tax evasion continue  which brings me to the threat to the Government’s duty and tax collection efforts with the proliferation of Freeports. With the recent conversion of the Bataan Export Processing Zone into a Freeport (Authority of the Freeport Area of Bataan <AFAB>), I was sure that Bills providing for the conversion of the three other Government-run Special Economic Zones, namely, Cavite, Mactan and Baguio would not be far behind. I was wrong. There were more than two dozen Bills filed in the House creating new Freeports across the country, some as large as entire provinces!  

PEZA-supervised Special Economic Zones (SEZ) vs Freeports

There is no difference between an SEZ and a Freeport as far as their ability to attract job-creating manufacturing plants are concerned. Both grant income tax holiday and duty and tax-free importation of capital equipment, raw materials and supplies. But only a Freeport, being operated as a separate Customs Territory, guarantees a free and unimpeded flow of goods, including consumption goods, such as oil, liquor, cigarettes, chocolates, etc. without payment of duties and taxes, provided they are consumed within or exported out of the Freeport. They are brought to the warehouse without inspection unless a prior derogatory report or tip has been received about the shipment.

And herein lies the problem: unscrupulous traders will wait until they establish a “contact” that can facilitate the exit through the gate. The really nefarious ones would even misdeclare contraband goods, such as  prohibited drugs, as consumption goods. How else were the 746 kilos of metamphetamine chemicals brought in and warehoused inside Subic Bay Freeport until they were discovered? (President Arroyo created a Commission headed by Retired Justice Carolina Grino Aquino to investigate the incident. A report has been submitted but which, unfortunately, was not released to the public.)

On the other hand, a report by the Bureau of Customs showed that there was hardly any smuggling committed in the PEZA-operated SEZs. Capital equipment and raw materials find no buyer in the domestic market, while a certain percentage of the finished products are allowed entry inside the Customs territory provided duties and taxes are paid.

Why Subic, Cagayan and Zamboanga Freeports?

It was only Subic, Cagayan, and Zamboanga that were granted separate Charters in the early ’90s to operate as Freeports (Clark operates as one by virtue of an Executive Order). There were reasons for this: Mt. Pinatubo erupted and the US Military Forces had withdrawn from the Bases; there was need to stimulate the economy around Subic and Clark. Both Cagayan and Zamboanga are in the extreme periphery of the country, with the former in the north, close enough to attract investors from Kao Hsiung, and the latter, in the south, already a barter trade center. Both sites are far from the market of Greater Metro Manila.

Congress had since desisted from passing individual laws creating Freeports and Special Economic Zones but instead passed the Special Economic Zone Act of 1995 (R.A. 7916) known as the PEZA Law, to provide the legal framework and mechanism for the creation, operation, administration and coordination of special economic zones. As respective Chairs of the Economic Affairs Committee of the House and Senate, then Senator Gloria Macapagal Arroyo and I approved the objective criteria that would be followed by the Philippine Export Zone Authority (PEZA) in accrediting special economic zones. As politicians, we understood the desire of every Congressman to uplift the economic conditions of his district, but my private sector experience also told me that many proposed sites were not viable. The best test for viability is the willingness of the private sector to invest in developing the ecozone. If it does not think it is viable, Government cannot make it so by simply pouring funds on it. Each Bill carries a P2 billion budget proposal for the development and operation of an Ecozone. This is equivalent to 40 years of pork for the Congressman, in addition to his annual P50 million. All together, the 25 proposed Ecozones’ impact on the budget is P50 billion, apart from the holes they will punch into the Customs collection administration.

Private sector-funded special ecozones

The wisdom of leaving to the private sector the task of developing new ecozones was proven by the results: From P33 billion in 1994, investments in ecozones now totaled P1.563 Trillion, exports increased from $2.739 billion in 1994 to $373.54 billion accounting for 86 percent of total manufactured exports, and direct employment from 91,880 in 1994 to 697,187, all of these attained by the 225 special ecozones without Freeport status or funding from the National Government.

One reason why industrial parks in private sector-funded ecozones such as Laguna TechnoPark, Light Industry and Science Park, Carmel Ray, etc. are successful is they are managed by businessmen who know what fellow businessmen locators need for their businesses to succeed.

To have the Government fund ecozones and Freeports again would be a turn-about from the much touted policy of Public-Private sector partnership of President Noynoy Aquino.

What to do with the Bills now in various stages of approval in the House?

Congressmen, contrary to popular perception, are not unreasonable. If shown that the collective effect of their Bills will be tantamount to declaring the entire country a Freeport, thereby wreaking havoc to the economy, they will not insist in pushing for the passage of the Bills  provided there is no exception. Unfortunately, the Freeport in Bataan was already passed, followed by Aurora. One may argue for the case of Aurora because it is on the eastern periphery of Luzon along the Pacific Ocean, opposite Subic on China Sea. I understand that it will differentiate itself as an agri-business ecozone. But, even for a Bataeno, it is hard to argue against the superfluity of a Freeport in Bataan  only an hour away from the Seaport facilities of Subic and the Airport at Clark. Unfortunately, it also takes only a couple of hours crossing by a fisherman’s boat across the bay to Metro Manila where smuggled contraband goods, such as drugs, find ready market. Mariveles, the municipality where the Freeport is located, also hosts the depot of Unioil, Seaoil and Eastern Petroleum, from where barges can cross Manila Bay in even less time. By the mere expedience of expanding the metes and bounds of the Bataan Freeport to include the sites of the depots, Customs will have more headaches in collecting duties and taxes from the oil shipments into the Bataan Freeport, just as they do in Subic. In fairness to Cagayan and Zamboanga, I have not heard of oil smuggling from these Freeports partly due to the distance from Metro Manila.

Speaker Belmonte will have a problem with the Congressmen, but one cut out for his diplomatic and legislative skills.