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Special Economic Zones and Special Economic Zones and Local GovernanceLocal Governance

Presented by John C.T. KoMay 17, 2005

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1. Background

2. Ecozone Concessions & Autonomy

3. Zone Autonomy vs. Local Autonomy

Outline of the Presentation

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Part I: Background

1. Philippine development policy considers the need to disperse industries from the metropolitan capital to the different regions throughout the country.

2. Investment priority areas outside Metro Manila have been identified to decongest the heavily populated cities.

3. Special Economic Zone Act of 1995 passed by Congress.

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Economic Purpose & Objectives

1. Establishing the requisite legal framework and mechanisms for planning the special economic zones, industrial estates and export processing zones.

2. Transforming selected areas into highly developed industrial and commercial centers.

3. Promoting local and foreign investors to invest in those economic zones to generate employment and establish industrial cluster.

4. Stimulating the return of Filipino capital by providing sufficient incentives for business.

5. Promoting international cooperation through the use of technology-intensive industries in order to improve production levels.

6. Vesting in the special economic zones the status of separate customs territory within the constitutional framework.

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Q’ty Zone Type Ownership

1 Subic Free Port State Owned

2 Clark + Bataan Ecozones State Owned

75 Proclaimed Ecozones PEZA

26 Industrial Estates PEZA

21 Private Ecozones Private Groups

Comparison of Ecozones between RP & Taiwan

The Philippines

Taiwan

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Zone Type Ownership

10 Export Processing Zones EPZ Admin.

3 Science-based Ind. Parks National Science Commission

60 Industrial Zones IDB

2 Environmental Tech. Parks IDB

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1. Special Economic Zones (SEZ) or Ecozones are selected areas with highly developed agro-industrial, industrial, tourist, recreational, business, banking and financial investment centers or having the potential to be developed into either of them.

2. An ecozone may be either an industrial estate or an EPZ or a free trade zone.

3. Industrial estates are large tracts of land, subdivided and developed based upon a comprehensive plan with provisions for infrastructure facilities for the use of the industrial community.

4. The EPZ is a specialized industrial estate primarily oriented to export production and is physically and administratively outside of the customs territory. Capital equipment and raw materials can be imported with free of duty.

5. The Free Trade Zone is an area adjacent to a seaport or airport of entry. In this area imported goods could be free from duties for transshipment or storage or repacking. But goods are subject to duties if moved to a non-free trade area.

Part II:Ecozone Concessions & Autonomy

Definition of Terms:

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Unfair Game?

1. EPZs & Free Trade Zones with import duty exemption > Other local geographic areas

2. EPZs & FTZs Administration with one-stop shopping service.

3. Grant of permanent resident status to foreign investor’s spouse and dependent children within Ecozone for an investment of US$150,000.

4. More autonomy is vested the Ecozones with PEZA management as a separate customs authority.

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PEZA - Managing the Ecozones

PEZA, attached to DTI, is a government corporation tasked with the establishment, operation & management of economic zones.

It is mandated to grant incentives to developers & operators of privately-owned ecozones.

The main responsibility of PEZA is to encourage private investment to develop ecozones of international standing and help create employment opportunities and accelerate export growth.

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Organization Chart of PEZA

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Chairman: Secretary of Department of Trade and Industry

Vice Chairman: Director General and CEO of PEZAUndersecretaries of:

– Department of Finance

– Department of Labor and Employment

– Department of Interior and Local Government

– Department of Environment and Natural Resources

– Department of Agriculture

– Department of Public Works and Highways

– Department of Science and Technology

– Department of Energy

Deputy Director General of the NEDA

One (1) representative from the labor sector

One (1) representative from the investors in the economic zone

Board Members of PEZA

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1. The president of the association of investors in the ecozone

2. The governor of the province where the ecozone is located

3. Mayors of towns/cities where the ecozone is located

4. President of the accredited labor union5. Representative of the business sector in

the zone6. The PEZA representative

Advisory body of PEZA

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The setting up of special economic zones was primarily designed to accelerate a balanced economic development, but the initiative taken depends on the support of local government whose territory is included in the zone.

However from the perspective of governance, there is an apparent overlap of jurisdiction between the zone administration and local governments.

Part III:Zone Autonomy vs. Local Autonomy

Background

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Contradictory Issues between Zone and Local Autonomy

The local municipals are overshadowed by PEZA and the national entities in policy-making. More so because the criteria for the creation of zones are already set by law without participation of the inhabitants of the areas concerned. (The setting up of ecozones therefore ignores the direct participative mechanism.)

The Local Government Code of 1991 stipulates that the creation, division, merger, or substantial alteration of boundaries of local government units require the majority plebiscitary decision of the inhabitants.

1. Legal status

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Contradictory Issues between Zone and Local Autonomy

The national government does not have a hand in the development of zones on the BOT arrangement, yet the national government must secure the area against smuggling activities, a responsibility vested to the law enforcement agencies of the national government.

Securing the zones against smuggling has not been effectively implemented. Ex.: Subic+Clark ecozones = backdoors for smuggling; Undervalued & misdeclared goods were seized. Transshipment-intended duty-free diverted to local market.

These could ruin the economy & decrease tax revenue.

2. Smuggling prevention

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Contradictory Issues between Zone and Local Autonomy

Defense & security is the joint responsibilities of the national government and PEZA, but the expenses for maintaining the military forces are borne by the national government.

There is no clear-cut responsibilities of the local police forces and the national military forces which could result in conflict of jurisdiction.

3. Peace & order

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Contradictory Issues between Zone and Local Autonomy

The law permits decentralized development with minimum government intervention, so the ecozones can establish directly economic relations with foreign enterprises. Besides, the general policies are formulated by PEZA leaving local government no choice but to approve what PEZA has decided on, especially regarding infrastructure, water system, etc.

Local governments are deprived of the power to decide on policy issues vis-à-vis development even only on a consultative basis, since they can not effectively participate in policy-making.

4. Local government power deprivation

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Contradictory Issues between Zone and Local Autonomy

PEZA manages these zones as separate customs territory and therefore empowered to issue C/O. But Filipino entrepreneurs do not have the competitive advantage over foreign investors who have the needed capital resources, investment advantage and preferential treatment.

Critics contend that this is discriminatory to the Filipino interest. Therefore, it is disadvantageous to traders outside the zone.

5. Discriminatory interest

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Contradictory Issues between Zone and Local Autonomy

PEZA can conduct investigations, issue the subpoena, compel the production of papers and other evidences, and even grant immunity to persons with vital information about a case under investigation.

This can be a potential ground for conflict between PEZA and local government in the exercise of policy powers and other relevant administrative functions.

6. Conflict of powers & administrative functions

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Contradictory Issues between Zone and Local Autonomy

The grant of exemption from national and local taxes on business entities operating within the zones is disadvantageous to businesses located outside the zone, so this explains the mushrooming of ecozones in order to take advantage of tax free incentives.

Outsiders lose their competitiveness vis-à-vis the locators in the zones. Maybe this could be one of the causes why the government revenue collection falls short of as expected.

7. Tax exemption

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Contradictory Issues between Zone and Local Autonomy

No explicit mention of pro-environmental and pro-sustainable development. Because ecozones are protected from local government intervention, implementation of environmental protection measures could be an administrative issue between local governance and ecozone governance.

Uncontrolled conversion of agricultural lands for non-agricultural purposes like construction of golf courses within or outside of the ecozone.

The extent of concessions granted by law could provide grounds for administrative and jurisdictional problems and conflicts between the local government units and the economic zones.

8. Disaccord of the governances

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Conclusion

The ecozone law needs to be re-studied to incorporate more specific and more clearly defined rules and guidelines regarding national government, LGU and ecozone relationships, so that role conflicts and overlapping jurisdictions in the governance of these areas can be avoided.

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Thank you!

National Palace Museum,

Taipei, Taiwan