Starting a business in the Philippines

Michael Alan Hamlin

Posted on November 3, 2012

There’s been so much good news coming out of the Philippines in recent months—three upgrades by international ratings agencies; Finance secretary Cesar Purisma was named 2012 Finance Minister of the Year by Euromoney; the economy is forecast to be the sixth fastest-growing in the world between 2010 and 2050; there’s a new, credible peace agreement in the south; IT-BPO looks set to attain its stretch target of $25 billion in revenues in 2016; and, competitiveness is on the rise according to the World Economic Forum—that it was a bit of shock last week when the International Finance Corporation (IFC) and The World Bank announced that it’s still too difficult to set up a business here.

And it got tougher this year, not easier.

According to the IFC report, Doing Business 2013: Smarter Regulations for Small and Mid-Size Enterprises, the Philippines fell to 138 of 185 companies in the report, down from 136 of 183 companies in the previous report. Of the 10 categories, the Philippines scored more poorly than last year in seven. Particularly notable was the number of procedures to start a business—16—up from 15. In Malaysia, there are just three. In New Zealand, it takes a day to set up a business.

Why, you have to ask, can’t the Philippines do in three procedures what Malaysia does? Not unexpectedly, the National Competitiveness Council (NCC) took issue with the IFC report, particularly the days required to perform the 16 procedures, arguing that it takes “just” 27 days to set up a business in the Philippines, not the 36—up from 35—claimed in the IFC report. NCC co-chairman Guillermo “Bill” Luz added that, “‘we will continue to make changes in the (number of) days (it takes to start a business) and cut it back,’” according to one report.

“‘We have a fighting target to take that down below 10 days next year and to also drastically reduce the steps from 16 to fewer than 10 also in the coming years,’” he said. The Philippines is competing with Malaysia for jobs and investment—including in the high-stakes IT-BPO industry. Malaysia reported foreign direct investment (FDI) of $4.4 billion in the first six months of the year, compared to less than a billion dollars for the Philippines.

There are many reasons for this contrast in investment receipts, but don’t underestimate the impact of a stubborn, change-resistant bureaucracy that is loath to see any revenue opportunity pass it by—no matter the stakes involved. While Mr. Luz has his work cut out for him battling, cajoling, and pleading with the bureaucracy, the goal should not be 10 days or 10 procedures. It should be one day, and one procedure.

But there are six other urgent ways the Philippines needs to make setting up a business easier. First, the shocker. The Philippines not only has the most expensive electricity cost in Asia, it’s way too difficult to get connected to the grid, and it’s getting worse. The Philippines fell to 57 from 53 in this category. How about registering property? Not easy. The Philippines fell to 122 from 120.

And forget about getting credit. The Philippines is 129, down from 127. So bring your own cash and leverage your international banking network. But oh, that’s kind of hard for local entrepreneurs. For international investors, protecting your investment through good corporate governance is also iffy. The Philippines fell to 128 from 124. Wonder why the Philippines doesn’t have more resources available for infrastructure? The Philippines ranks 143, down from 136 in paying taxes.

Enforcing contracts is another challenge, thanks to a troubled judiciary and a toxic, litigious legal environment in which cases take decades to wind themselves through the courts. While the Philippines has a lot going for it, it’s not hard to understand why investors are shy. Even in categories the Philippines improved, its showing is poor. Resolving insolvency? 165, 5.7 years, and the most costly. Trading across borders, 53. Dealing with construction permits, 100, mostly as a result of a process that involves 29 procedures.

These results show that no matter how swimmingly things are going, there’s always something left to fix. While the administration of President Benigno S. Aquino III understandably must prioritize reforms, those impacting investment and job creation should be at the top of the list. To be fair, in many respects they have been. But the Philippines is still not addressing the bureaucracy and the roadblocks it erects to prosperity.

That needs to change.

(Michael Alan Hamlin is the managing director of TeamAsia and a Manila-based author and commentator. His latest book is High Visibility: Transforming Your Personal and Professional Brand. Write him at mahamlin@teamasia.com and follow him on TwitterFacebook and LinkedIn. Copyright © 2012 Michael Alan Hamlin. All Rights Reserved.)

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