Philippines:  Environmental Market Analysis

• Country Overview
• Market Estimates and Analysis
• Foreign Competition
• Regulatory Impact

COUNTRY OVERVIEW

The Philippine economy has turned the corner on the Asian financial crisis and is experiencing modest growth. The recovery has been led by the agricultural sector's bounce back from 1998's losses and merchandise trade. U.S. exports to the Philippines, which represented nearly 23% of total Philippine imports in 1998 (replacing Japan as the number one exporter to the Philippines), are projected to increase slightly in 1999.

The Philippines' GDP growth in 1999 is expected to reach 1.8 to 2.5 percent as the country recovers from the Asian economic crisis. In 1998, the Philippines had the highest export growth in Asia, led by the electronics, auto parts, and furniture industries.

Leading U.S. export markets over the near-term continue to be telecommunications equipment, information technology, power plant equipment and services, food processing equipment, hotel and restaurant equipment, and agricultural products. Sectors offering the greatest investment potential for U.S. firms are electronics/semiconductor assembly, energy, and information technology.

The environmental market, including environmental infrastructure projects in the pipeline, is estimated to be about $4 billion and is expected to grow at an average annual rate of 17% from 1999 to 2003.

Improved enforcement of environmental regulations is expected as a result of the upgrade of the Environmental Management Bureau of the Department of Environment and Natural Resources (DENR) to a line agency. It will have more funds and will establish regional offices with an increase in staff from 170 to 2,350 nationwide.

MARKET ESTIMATES AND ANALYSIS

Target Industries

Between 1997 and the first quarter of 1998, nine of the country�s 16 major sectors experienced a decrease in the value of production, resulting in a 2% decrease overall. Among the losers were transport equipment, basic metals, petroleum products, and textiles. Gainers included apparel, electrical machinery, and food manufacturing.  Based on production volume, these are the industries that U.S. environmental companies should primarily target.

Value of the Production Index 1998

Monthly statistics of production volume for 1998 shown in the table below provide some interesting, albeit worrisome, information: during the first quarter of 1998, all the major sectors posted monthly declines. Basic metals registered the largest drop of 34.7%. Textiles (-26.4%), food manufacturing (-4.8%), and petroleum refineries (-4.5%) also contributed significantly to that downward pull.

Value of the Production Index 1998

More than 50 percent of Philippine exports are from the electronics and semiconductor industry.  this means that there is a big market for environmental goods and services in this sector.  Other sectors like the food processing industry,chemical and petrochemicals, and textile manufacturers, cement industries, power plants, rubber products, and nonmetallic mineral products account for more than 50 percent of the environmental market.

Pollution Control

According to the 2000 U.S. Department of Commerce reporting estimates, the Pollution Control Equipment sector ranks tenth among leading industry sectors for U.S. exports and investment for non-agricultural goods and services in Philippines.

The air pollution control and monitoring equipment import market is expected to pick up this year. The Clean Air Act has been passed into law and the Asian Development Bank is funding the USD 298 million Metro Manila Air Quality Improvement Project. DENR is implementing this three-year Air Quality Action Plan to tackle Metro Manila�s deteriorating air quality. This project offers opportunities for both stationary and mobile air pollution control equipment vendors.

The following table depicts the total market size as well as the amount of imports from the U.S. for pollution control equipment and services.

Pollution Control Equipment (millions of US$)

Water Resource Equipment/Services ($ millions)

In the area of industrial wastewater, there is also demand for parts of filtering and purifying machinery and apparati for liquids.

In the area of imported equipment, the following U.S. developers and engineering firms are major players.

Water Supply and Wastewater Treatment

The market for the water supply and wastewater treatment equipment continues to offer opportunities for U.S. suppliers and service firms. Although 1998 reflected a 20 percent decline in imports, the market should recover because of the many water and wastewater infrastructure projects scheduled for implementation in 1999. Based on the local preference for imported equipment, U.S. imports should grow 10-15 percent in 1999-2000.

The following table depicts the total market size as well as the amount of imports from the U.S. for water resource equipment and services.

Multilateral agencies such as the World Bank (WB) and Asian Development Bank (ADB) have several loans lined up for water supply and wastewater treatment related projects.

Impact of the Asian Financial Crisis

The onset of the regional financial crisis in July 1997 brought many changes to the fortunes of manufacturing firms. Figure 16 shows manufacturing revenue growth rates for several months prior to the end of July 1997 through July 1998. Figure 16 illustrates how unequally the manufacturing sector absorbed the negative effects of the crisis. The economic impacts felt by industrial groups can greatly influence their interest in or ability to purchase imported goods. This has significant implications for the marketing efforts of U.S. environmental industry exporters and export-promotion agencies and programs that assist them.

The following table also shows that the average monthly manufacturing sector growth rates declined significantly from 2.9% before August 1997 to 1% in the months since. Those declines have been uneven across industry groups, and some industry groups have shown increased growth rates. The wide variation is likely due, at least in part, to the level of import or export dependency of a particular industry, as well as the geographic focus of those imports and exports.

Industrial Growth Before and During the Asian Currency Crisis

The next figure ranks manufacturing industry groups according to their pre-crisis average monthly growth rates. With the exception of food manufacturing, all showed positive average growth in the months leading up to the crisis; only three others showed average monthly growth rates at or below 1%.

Fastest Growing Industries Before the Asian Currency Crisis

In contrast, the following figure shows negative growth rates during the currency crisis for three industries (excluding food manufacturing) and growth at or below 1% for as many as eight. This figure also contrasts pre-crisis and in-crisis average growth rankings. Clearly, some potential buyers of imported environmental goods and services are less able to make purchases while some less likely buyers are more equipped to spend money.

Fastest Growing Industries Since the Onset of the Asian Currency Crisis

The following table provides comparative environmental market size estimates for 1995 and 1997 prepared by the Department of Commerce and California-based Environmental Business International, Inc. (EBI). All but one estimate (U.S. Department of Commerce) excludes revenues from water and wastewater utilities.

Comparative Estimates of Environmental Markets in the Philippines ($ millions)

FOREIGN COMPETITION

The market for environmental technologies and services is in an early stage of growth. While there is a growing domestic capability in wastewater treatment and other environmental equipment areas, the quality of locally produced equipment needs much improvement. There are substantial opportunities for foreign companies.

Imports still account for the bulk of market demand in environmental segments. U.S. and Japanese suppliers generally lead in environmental markets. U.S.-produced water/wastewater treatment equipment accounted for 39% of imports in 1993. Singapore followed with 30%, Japan with 8%, and China with 4%. American firms trailed behind Japanese suppliers in air pollution control equipment imports in 1992, but crept to the top in 1993 as supplies from Japan declined.

In Consulting & Engineering services, there is growing expertise among domestic consultants, particularly in environmental impact assessments, natural resources, air pollution control, solid waste management, and biodiversity studies. Although local expertise is still being developed in most other areas, such as GIS and risk assessments, Philippine consultants meet almost all local industry demand. However, foreign expertise is usually demanded by multilateral funding agencies for services valued beyond $250,000, although teaming or partnering with local consultants is the modus operandi under multilateral contracting procedures.

As shown in the figure below, the exporting countries� share of the Philippines� import market has been fairly stable for the last three years. In 1997, Japan was the largest exporter of goods and services to the Philippines, with approximately $7.4 billion worth of goods and services, capturing 20.6% of the country�s total import market. The U.S. followed closely behind, selling approximately $7.1 billion worth of goods and services, representing 19.9% of total import market. With exports of approximately $2.2 billion each, the Republic of Korea and Singapore were the next largest exporters to the Philippines. Korea and Singapore led Taiwan and Hong Kong.

During the first five months of 1998, the U.S. became the top exporter to the Philippines, surpassing Japan. Compared to the first five months of 1997, the U.S. increased its share by 3.34%, while Japan lost 10%.

The reasons behind this trend warrant further investigation, especially since the Philippine peso depreciated roughly 36% against the U.S. dollar, which certainly raised the cost of U.S. imports. Recent depreciation of the peso against the U.S. dollar (roughly 57% over the last 12 months) has inflated the cost of U.S. products and could price them out of the market if this trend continues. Against the Japanese yen, on the other hand, the peso has depreciated by 31%, possibly making Japanese environmental equipment a more economical choice.

Major Trading Partners of the Philippines 1996 to 1997

REGULATORY IMPACT

The link between regulation and demand for environmental technologies is enforcement of regulatory programs.  Comprehensive regulations for environmental protection do exist; however, enforcement of national programs is relatively weak.

Government officials show an awareness of the economic importance of better resource management through initiatives set by the Philippine Strategy for Sustainable Development and their response to Agenda 21. The Philippine Strategy consists of nearly 127 projects, but only eight of these, at a cost of  $12.3 million, targeted industrial pollution.

There are many impediments to enforcement of environmental regulations.  The dire need for foreign investment acts is a deterrent, as is corruption on the local level, which remains endemic. Pollution fines at their present levels provide no disincentives for polluters. Likewise, no incentives are provided to those firms that pollute less or manage waste better. Of 1,025 industries surveyed by the Environmental Management Bureau of DENR, only 20% were equipped with pollution abatement systems. Up to 80% of pollution complaints were water-related.

The country has strong nongovernmental organizations focused on environmental issues, but until recently, much of the emphasis has been on natural resource conservation such as forest management. Awareness of air, water, and soil pollution risks is lacking. This is a primary barrier to effective enforcement.

In the Philippines, regulatory enforcement generally follows the principle of crisis management. The following pie chart illustrates the distribution of active enforcement cases by media type in 1996.

Active Enforcement Cases by Media (March 1997)

Most agencies with enforcement authority, especially on the local and regional levels, do not have the budgets or manpower to institute regular monitoring, inspections, and detailed recordkeeping. Despite these limitations, certain agencies have made real progress in enforcement of environmental laws and regulations over the last two years. Among DENR regional offices, for example, the National Capital Region has been very active in issuance of Cease and Desist Orders for a wide range of industries, accounting for 39 of 79 orders issued in 1996. (Cease and Desist Orders are issued by the Pollution Adjudication Board at the request of DENR regional offices.)

This number can be attributed partly to the fact that Metro Manila remains the primary hub of economic activity in the Philippines. According to the Asian Development Bank (1996), this area accounts for 70% of all industrial establishments, 48% of the total registered businesses, and 56% of the country�s construction industry.  Of the 79 firms that received Cease and Desist Orders, the food processing industry and the sugar milling and refining industry had the most offenses.

Number of Firms with Cease and Desist Orders and/or Temporary Lifting Orders
by the Pollution Adjudication Board in 1996 by Industry

Department of Environment and Natural Resources

The Philippine Department Environment and Natural Resources (DENR) is at the center of the Philippine environmental regulatory and enforcement framework. DENR oversees conservation, management, development, and proper use of the country�s environmental and natural resources. DENR lacks manpower, financial resources, laboratory facilities, and equipment to effectively monitor pollution and punish violators. Despite these shortfalls, DENR has undertaken several antipollution initiatives. In 1990, the agency cracked down on industrial polluters by launching a "Dirty Dozen" campaign, which disclosed the names of the 12 largest polluters in each region. These industries were primarily sugar milling and refining, cement, lime and plaster, mining, piggeries, and poultry farms. Additionally, the powers of the Pollution Adjudication Board were expanded to close polluting plants.

In 1993, DENR proposed measures through 1998 such as reducing vehicle and industrial emissions, supporting local governments in solid waste management, promoting pollution management audits, and increasing penalties. These measures also addressed infrastructure developments related to environmental impact assessments.

Environmental Impact Assessment

The Environmental Impact Assessment (EIA) system was established in 1978, designating the EMB and the regional offices of DENR as the primary implementing agencies. Projects involving heavy industry, resource extraction, and large-scale development as well as projects in environmentally critical areas require an EIA.

EIA implementation has been slow and uneven due in part to the various institutional weaknesses and the underlying emphasis on economic development. In 1996, in the wake of the Marcopper Mining Company�s copper tailings spill on Marinduque Island, EIA approvals were delayed. A few proposed projects ran into delays because the government turned down their planning permits.

Analysis of the Regulatory System

A discussion of the major environmental regulations in the Philippines follows.

Regulations

Major environmental regulations address the following areas:

• Industrial Wastewater Treatement
• Hazardous/Toxic Waste, Storage and Disposal
• Air Pollution
• Environmental Impact Assessments
• Enforcement

The effectiveness of the current regulatory system for environmental issues is diminished by the absence of priorities for environmental management, unenforceable policies, and weak institutions.

Priorities

There are no clear priorities established for environmental management; existing structures often send conflicting signals or fail to address environmental problems in proportion to the environmental significance of the problem. Pollutants are strictly regulated, even when the costs of regulation are high and the pollutants are not significant problems for either health or productivity. Pollutants that do pose significant health hazards are not strictly addressed, although cost-effective technical means and policies are available to reduce their ambient levels.

Policies

Policy and regulatory instruments are unenforceable and would not be cost effective with better enforcement. This lack of cost-effectiveness arises from policies that ignore the nature of the pollution problems those policies address, conflicting signals between pricing policies and pollution control regulations, the use of regulatory methods that are costly to administer, and differences in compliance costs for different sources of pollution.

Institutions

The current institutional framework is hampered by numerous constraints and itself poses a threat to economic growth and sustainable development in the Philippines.

Click here to open the Environmental Market Analysis Addendum for the Philippines.

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