AEC 2015 Prospects: Services Integration

(Third in a five-part series)

THE PHILIPPINE economy is driven by the services sector. The country’s banks, telcos, malls, and call centers all hum with a level of frenzied activity, unmatched by farms and factories. Just last year, the sector accounted for roughly 60% of Gross Domestic Product (GDP).

It is therefore understandable that the planned integration of services into the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) has caused firms and professionals to worry about foreign competition, falling market share, and a race for jobs.

This anxiety is largely unfounded or misplaced at best. The Philippines has in fact not made substantial commitments to open up its services market, a development which some have tagged as the true cause for concern.

Under the AEC Blueprint, members of the regional bloc are meant to “remove substantially” all restrictions on priority sectors -- air transport, e-ASEAN (information communication technology), health care, tourism, and logistics -- by 2013, and by 2015 for all the other sectors. Members are also supposed to allow ASEAN equity participation of 70% for all service sectors by 2015. This ambitious goal, however, is tempered by the provision that “pre-agreed flexibility shall be accorded to all ASEAN member countries.”

The Philippines has made use of this leeway. As such, it ranks second only to Brunei in promising the least services liberalization among the 10 member countries, according to a study published in 2012 by the Economic Research Institute for ASEAN and East Asia. Furthermore, what few commitments the Philippines signed are not substantially different from what it already offered under the 1995 General Agreement on Trade in Services (GATS).

UNCHANGED RESTRICTIONS
A closer look at the country’s package of commitments under the ASEAN Framework Agreement on Services (AFAS) confirms this. From the get-go, the Philippines has stated in its horizontal commitments that market access is to be limited “in all activities expressly reserved by law to citizens of the Philippines (i.e. foreign equity is limited to a minority or zero share.)”

Furthermore, it has also limited the entry and temporary stay of natural persons supplying services by stating: “Non-resident aliens may be admitted to the Philippines for the supply of a service after a determination of the non-availability of a person in the Philippines who is competent, able, and willing, at the time of application, to perform the services for which the alien is desired.”

These blanket conditions effectively narrow the liberalization expected from the Philippines in terms of the so-called Modes 3 and 4 deliveries of services. The two modes refer to provision of services either through the physical presence of a foreign company (by way of equity in a local firm) or an alien worker on Philippine soil -- areas where liberalization makes a greater impact. Modes 1 and 2 -- the consumption of services abroad or cross-border transactions, say, through online transactions -- are generally liberalized already but are useful only for those services which by nature do not require physical presence.

The restrictive conditions thus maintain the status quo for service subsectors. For instance, the transport, construction, energy distribution, and telecommunications sectors -- among the more vibrant sectors perceived critical to economic growth -- remain restricted with foreign equity permitted up to 40%.

Some subsectors are granted a higher foreign equity ceiling but actually entail steep requirements for the practice of the very professionals these businesses rely on. The Philippines’ AFAS annex states that wholesale and retail trade, publishing, management consultancy, property management, and research and development are among those where up to 51% foreign equity participation is allowed. However, foreigners who want to work in the companies they establish must secure government determination of non-availability of local labor.

ASEAN professionals, meanwhile, are allowed to set up firms or partnerships in the Philippines for the practice of architecture, civil engineering, and auditing, among others. However, the AFAS annex further states that they must not only acquire Philippine licenses and public practice experience, their own country must also admit Filipinos to “practice the same profession without restriction or allow Filipinos to practice it after passing the exam on equal terms with foreign citizens, including unconditional recognition of degrees/diplomas.” These sub-sectors are also covered by the blanket condition of local labor non-availability.

It is important to note, however, that temporary permits are nonetheless granted to foreign workers if they are business visitors, intra-corporate transferees, or investors.

OPPORTUNITIES IN THE PHILIPPINES
That is not to say that there are absolutely no opportunities for foreign investors (or local firms seeking foreign infusion). Perusing the AFAS annexes reveals three bright spots.

First, there are those subsectors for which the Philippines declared that 100% foreign equity participation is allowed: computer services, foreign-funded, internationally-bid construction projects, hospital services, international freight forwarding by sea, oil and gas exploration (subject to the President’s approval) and construction of power plants under the build-operate-transfer scheme.

A second opportunity to access the local market is through the delivery of certain services without the presence of the commercial entity or alien worker in the Philippines. Most of the service subsectors have been liberalized in this respect. Although this is not a new development with online transactions now commonplace, it is nevertheless an opportunity that can be explored. These specific services are detailed in the Philippines vertical commitments as part of the 8th AFAS package, which can be found on the Invest ASEAN Web site.

The third, albeit harder won, opportunity for market access is through reciprocity. As mentioned, ASEAN professionals may be allowed to practice locally if their country extends the same courtesy to Filipino counterparts. The Philippines is signatory to eight mutual recognition arrangements (MRAs), which pave the way for ASEAN members to accept accreditations and allow the practice of professionals in the following services: engineering, nursing, architecture, surveying, medicine, dentistry, accountancy, and tourism.

However, more work is needed to transform these frameworks into implementable procedures. According to a report from the Philippine Institute for Development Studies (PIDS), the government think tank, progress varies for each profession. For architecture and engineering, a registration mechanism is in place to qualify as an ASEAN architect or engineer, with a few more assessment policies left to be ironed out. For accounting, surveying, medical, dental, and nursing services, the MRA implementation mechanisms are reportedly still in the works. On top of these, PIDS has noted that “domestic laws and regulations need to be changed in order to align with and support the specific MRAs.”

As such, drastic policy changes for the service sector are not expected in the near term, even as the AEC is meant to be officially established next year. This at least provides the Philippines more time to assess its services strategy and also to take advantage of the existing offers from its neighbors, which will be detailed in the next installment of this series.

Indeed, competitive pressures may be felt if the services sector is opened up to our ASEAN neighbors but, at the same time, a well-planned liberalization effort that is coordinated with the rest of the region could also mean increased opportunities for Philippine firms and the world-class Filipino worker.

J. Carlitos G. Cruz is the vice-chairman and deputy managing partner of SGV & CO.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.