: Super User; Philippines; 10 August 2011; Hits: 1097

Philippines should not just rely on call centre business

LAST month, as local players were trumpeting the achievement of the Philippines in displacing India as the call centre of the world, the United Nations Conference on Trade and Development (Unctad) issued a warning. Developing countries, it said, should guard against too much dependence on non-equity modes (NEMs) of foreign direct investment.

NEMs involve contractual agreements that do not oblige a foreign party to purchase fixed assets. Popular forms include contract manufacturing, business-process outsourcing (BPO), contract farming and franchising.

The Unctad report recognised the role NEMs play in providing employment, boosting local economies and providing important links to the global marketplace. But it also pointed to the footloose nature of such industries. The investment may be easy to obtain, but a country could also lose it just as quickly if international circumstances changed.

Transnational companies, the report added, might simply be looking to outsource some of their job requirements to circumvent social and environmental standards at home. Heavy reliance on such industries therefore carried significant risks.

Figures released by the Business Processing Association of the Philippines show that the BPO industry generated revenues of US$8.9 billion ($10.8 billion) last year, with year-on-year growth reaching 26 per cent. Call centres, also known as contact centres, constituted by far the biggest sub-sector. It grew over 21 per cent to US$6.1 billion.

Manila’s success in attracting call centres has been attributed to several factors. These include the idea that the accents of English-speaking Filipinos are closer to those of their American clients, the superiority of the Philippines’ telecommunications network compared to countries such as India, and the fact that Filipinos have a greater affinity with American culture.

A 2009 study of the BPO and information technology industries by the Congressional Planning and Budget Department of the Philippine house of representatives was generally positive. It noted that the young professionals working in BPO companies were usually paid more than twice the minimum wage. It also pointed out that BPO companies helped to prop up demand in the commercial real estate and telecommunications sectors.

Recognising the increasing importance of the industry in providing employment, the Philippine government has been offering various incentives to attract foreign involvement since the announcement of the 2007 Investment Priorities Plan.

Even so, the Philippines’ growing reliance on this rather narrow segment of the services sector is worrying. The problem is not simply that foreign investors can terminate contracts quickly should economic circumstances change. Rather, it is that among all the services traditionally offered by outsourcing firms, the voice- based or the traditional call centre sector is the one with the lowest profit margins. And this is the one that is expanding the most rapidly in the Philippines.

Philippine policymakers also need to look for ways to minimise the negative impact of the increasing reliance on the BPO industry. One suggestion in the Unctad report is for governments to promote model contracts that ensure a fair sharing of risks and benefits.
The government should also follow India in gearing policies towards attracting the more value-added sectors. In the case of the Philippines, this probably means playing to the country’s strengths in financial services and computer animation.

There is also the wider question of whether the Philippines should be encouraging the further expansion of the services sector at all. The service sector’s contribution to the gross domestic product (54.8 per cent) is already well in excess of that displayed by countries such as China (43.6 per cent), Indonesia (37.1 per cent) and Vietnam (38.2 per cent). The latter countries, which have been growing far more rapidly than the Philippines in recent years, have chosen to focus on the agriculture and industry sectors. There seems no compelling reason why the Philippines should have more success by avoiding this well-trodden road to economic development.

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Key Political Risks

President Benigno Aquino has stepped up efforts to lure foreign investors into the country, so far without much success. The country continues to be hobbled by widespread corruption and several long-running insurgencies.

However, the government has had some success in reducing the budget deficit. The president also remains popular with voters.

WHAT TO WATCH FOR:

Extent to which foreign and domestic investors show interest in big ticket infrastructure projects.
Increased spending on the air force and navy to counter Beijing's territorial claims in the disputed Spratly Islands. The issue could become an important point of contention at the East Asia forum in Indonesia in November.
The implementation of the "framework agreement" between Manila and the insurgent Moro Islamic Liberation Front announced in early October. If all goes well, a final peace deal may be signed by 2016.