9 Proofs that it’s Tough to do Business in the Philippines
Hope springs eternal in the Philippines as among the most promising in the world when it comes to being a newly industrialized economy. Still, doing business, there remains a tricky task, especially for foreign players without local assistance from the ground.
Opportunity remains there, as the country is ranked 12th in terms of population but whose economy is only 43rd most significant in the world. The Philippines has taken large strides in overcoming that “sick man of Asia” billing.
From an agricultural base, the country leaned towards a service-based economy, propelled by a steady supply of fresh graduates joining the labor force every year. As of 2011, approximately 52% of the economy was based in the service sector. About 33% in the agricultural sector and 15% in the industrial and manufacturing industry, according to the CIA World Factbook.
More investments poured in, mostly from multinational companies wishing to lower their operation costs and tap into the Filipino skillset.
But despite the rapid modernization the Philippines has embarked, there are still glaring deficiencies it needs to overcome. For example, in the World Bank’s Ease of Doing Business Report 2019, placing 124th out of 190 countries from 113th previously, primarily due to higher business registration costs and increased time for import inspection.
This issue and others we will highlight for your added knowledge.
It’s a maze-like process to start a business
For someone who wishes to establish business presence — laundry, pharmacy, or supermarket, it requires 16 different steps to follow, taking on average about 36 to complete the entire process. Multiple signatories, unnecessary, and redundant clearances are some of the features of this procedure. Such a complex process shows in the 161st ranking worldwide — it seems like the Philippines doesn’t like businesses to come in! Someone has to stand up to this bureaucratic red tape and cut it.
Construction permits take 29 procedures to complete
Whether you’re setting up a new factory, manufacturing plant, or a commercial building, obtaining construction permits is a painful process. It takes up to 84 days to complete a task of a 29-step journey, which starts with filling up of forms (building permit, sanitary, electrical). Add the provision of additional documents (certificate of title, tax receipt, tax declaration), detailed plan, consent from owner and contract of lease, structural analysis, and so on.
Obtaining an electrical connection is longer than expected
In a country where the cause of many fires is faulty electrical wiring, one wonders if the site inspection for electrical connection is a critical process or if it ever helps at all.
A typical procedure is that once in touch with a local power distributor, notably Meralco in Metro Manila and nearby provinces. A typical application begins with the gathering of documents (lot title, identification, application form) to submit to Meralco, secure additional permits at the city hall while proving barangay wiring permits, property tax, and the same of the other set of requirements. Wait for inspection, pay additional fees (some of which may not appear on the receipt), buy accessories (wires, circuit breaker).
So there’s a bit of back and forth to get this simple request done.
Registering property is a lengthy and costly exercise
No surprise here. When you acquire a piece of land where you plan to establish your business, it takes an average of 39 days to complete a property registration, which includes trips to the Assessor’s Office, City Treasurer’s Office, Bureau of Internal Revenue, Registry of Deeds and so on. Some of these steps have little or nothing to do with setting up the business and makes everyone do more work that does not provide incremental value.
Why does the business have to deal with both BIR and Treasurer’s Office if only one should be enough? They not only delay the entire process; businesses have to pay extra for something they don’t benefit.
Investors take a long while for an entrepreneur to get credit
The Philippines languished near the bottom of rankings for ease of getting a loan, defined by the World Bank as the sum of the strength of legal rights index and the depth of credit information index, getting credit indicators which make it possible to compare economies in different parts of the world.
There is an effort from the government to address this business concern. It aims to facilitate the opportunity for entrepreneurs to use movable collateral such as stock inventory, receivables, crops, livestock, and equipment to back up their loan applications.
Before the bill’s passage, lenders generally accept only real estate as collateral. This results in smaller, family-run businesses experiencing constraints by credit lack.
Paying taxes is a tedious thing to do
As if the Philippines’ taxation system not being business-friendly is not enough, it takes quite an effort to settle tax payments, 20 times to make each year (as of 2018 PwC rankings), equivalent to an average of 182 business hours.
Employee-paid tax requirements involve the most payments per year, and corporate income tax – flat rate of 30% – and VAT take the longest time to process.
It takes a longer time to move goods in an island economy
In a country composed of over 7,000 islands, and no robust linkage in an efficient transport of goods, time is one area of concern. The current method of delivering raw materials (fresh produce, marine products, minerals, etc.) from source to processing and manufacturing centers may take a long while and cost more than using more traditional means such as bulk railway carriages.
Although the Philippine government is now embarking on a massive infrastructure build-up, other countries had done the same years ago, thereby making them more attractive for foreign investors than the Philippines can provide.
(It’s not too late for these projects to make an impact, though.)
It is costly and takes a long time to enforce contract claims
Enforcing contracts in the Philippines is prolonged. A study by the World Bank / International Finance Corporation (PDF download) revealed that it takes an average of 842 days — more than two years — to complete such process in cases of court litigation. The majority of the delay is at the trial and judgment part, which takes an average of 580 days. It just shows that the justice system is beset with a backlog of cases which can effectively discourage some businesses from investing.
In addition to the significant amount of time required for enforcing contracts in the Philippines, cost is also quite prohibitive. The same study showed that up to 26% of claims would cover legal (attorney fees, legal and enforcement) costs.
That’s not much of a protection towards businesses who encounter breach of contract from partners.
Resolving insolvency results in tiny yields
When companies experience financial ruin, fail to pay its debts, and unable to stay above the surface, they can be classified as insolvent. Such a situation can lead to insolvency proceedings, in which legal action is taken against the bankrupt entity, and its assets may be liquidated to pay off outstanding debts.
Resolving insolvency cases in the Philippines takes more than three times the average times required for Organisation for Economic Co-operation and Development countries.
Insolvent firms can expect to recover only 4.9 cents on the dollar, compared to the OECD average of 70.6.
Just as typical Filipinos find it easy to complain about slow Internet connection, power interruptions, and other inefficiencies experienced in daily life, businesses also have their share of problems. For the Philippines to attract enterprises and competitive enough to keep them from bolting for countries with better support and a more conducive business environment, it needs to upgrade the way it handles business needs.
The problems are known, and all it needs to do is find the solutions, and execute them. Such a chronic problem has been plaguing the Philippines for decades, so it’s about time to untangle this mess and make our country a bit more attractive to businesses.