Sunday, September 20, 2009

Are we creating too many ecozones and free ports?

Opinion Written by Manny Villar / The Entrepreneur - Business Mirror

THE way things are going, the whole Philippine archipelago will be dotted by economic zones and free ports within a short period. This makes me wonder, why not just declare the whole country as an economic zone and free port?

Data from the web site of the Philippine Economic Zone Authority (PEZA) show that as of June 2009, there are a total of 195 operating economic zones, consisting of 64 manufacturing economic zones, nine tourism economic zones, two medical tourism parks/centers, 118 information technology (IT) parks/centers, and two agro-industrial economic zones.

There are 83 new zones being developed now, consisting of one agro-industrial zone, 50 IT parks/centers, 30 manufacturing economic zones and two tourism economic zones. And we already have five free ports—Clark, Subic, Cagayan, Zamboanga and Poro Point (La Union).

The House of Representatives has approved on third reading five bills seeking to establish new ecozones in Bataan, Ilocos Sur, Cebu, Davao Oriental and Samal Island.

Twelve other bills, which have been approved on the committee level, propose to establish ecozones in San Jose del Monte City, Pasqui and Burgos in Ilocos Norte, Bacolod, Iloilo, Romblon, Southern Palawan, Negros Occidental, General Santos, Davao, Misamis Occidental and Southern Leyte.

And 12 bills, pending with the committees on economic affairs, trade and industry, ways and means, and appropriations, also intend to put up ecozones.

The benefits we receive from economic zones and free ports are significant. In 2008 alone, total investments in economic zones totaled P154.8 billion, up 16 percent from 2007. During the period 1995 to 2008 economic zones attracted about P1.33 trillion in investments.

This year, the PEZA is targeting total investments of P170 billion, despite the global crisis that restricted investment pledges to P13.7 billion during the first three months of 2009, compared with P27.7 billion in the same period last year.

In terms of employment, companies operating in ecozones and free ports employ more than 600,000 workers. Economic zones also account for the bulk of manufactured exports.

Investors are lured to local economic zones and free ports through fiscal incentives like income-tax holidays and duty-free importation of equipment. It means that the government is forgoing tax revenues in exchange for the investments and other benefits generated by ecozones and free ports.

That, in turn, creates a predicament for the Department of Finance, which is tasked with generating revenues to support government expenditures, including money used to develop ecozones and free ports.

So I understand the apprehension of the finance department, including Secretary Gary Teves, about the bills seeking to establish more ecozones and free ports. I recall receiving a letter from the finance secretary last year in which he expressed concern over the numerous bills seeking to establish more free ports and economic zones in the country.

At that time, more than 20 bills were already pending in Congress seeking to establish economic zones and free ports, each one proposing generous grants of tax and duty exemptions to investors. Teves warned that putting up more free ports and economic zones would make it difficult for the government to pump-prime the economy while two-thirds of the world was reeling in recession.

Based on the rule of thumb used by the finance department, the government stands to lose P3 billion for every new ecozone. Thus, the department estimates that if all the bills proposing to create ecozones and free ports were approved, the government would lose as much as P90 billion in revenues.

Not an insignificant amount, considering that deficit that is expected to widen to P250 billion this year, which is equivalent to 3.2 percent of our total gross domestic product (GDP). The deficit in 2008 reached only P68.1 billion, or 0.9 percent of GDP.

I sympathize with Secretary Teves. Raising revenues in a slow economy to support a growing budget is not easy. But I also support the ecozone and free-port programs, which other countries have used successfully to attract investments from major economies, generate jobs and develop their export industries.

As to the number of ecozones and free ports, there should be a comprehensive feasibility study to determine how many do we really need, and the sites where these should be located. That should help Congress weed out proposals that are driven by personal agenda, like using ecozones and free ports as fronts for smuggling. For starters, we have to assess the performance of existing ecozones and free ports: Were they used for smuggling?

Everybody knows the controversy over the importation of used, right-hand-drive motor vehicles through the Subic free port, which local automotive manufacturers brought to the courts.

Recently, the Department of Finance announced the adoption of new measures to curb smuggling at the Subic free port and Clark special economic zone. These include a fuel marking technology to prevent the smuggling of petroleum products, tighter monitoring of importations and grant of tax privileges to enterprises inside ecozones and free ports and post entry audit on imported cigarettes, alcohol products, and motor vehicles.

I really hope these efforts succeed; otherwise, the illegal practices of unscrupulous investors and their cohorts will defeat the objectives of economic zones and free ports: attract investments, create jobs for our people and generate foreign exchange.

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