Rapes: IT BPO - Manila displaced New Delhi; Cebu displaced Dublin, Ireland in the 2012

Philippines is the World leader for Business English Index in 2012 over USA, Canada, United Kingdom and Australia. 

Software developer pushes for Philippine tech talent

SAN FRANCISCO – As the overall performance of the Philippines inches up higher, more businesses are considering the Philippines as the first-option for their software development outsourcing initiatives–and not just for call centers, reported the chief executive of a Philippines-based software development firm.

"Call centers are still our top money makers but we're not encouraging them," explained Exist Global, Inc. CEO Jerry Rapes at the recent "Tech Innovation" greet and meet at the Philippine Consulate here.

Exist Global, Inc., an outsourced software development company in the North American and European market, provides architecture and design consulting, application development, independent quality assurance, application maintenance and technical support services.

"The Philippines has plenty of technical talent," he continued. "English-proficient and amazingly collaborative individuals not just in Manila, but also in IT hubs such as Cebu, (former US Air Force Base) Clark, (former US Naval Base) Subic and Davao."

Other least known Philippine IT-BPO hubs include Sta. Rosa City, Laguna, Bacolod, Iloilo and emerging Baguio City.

Philippine Trade Commissioner Michael Alfred Ignacio echoed Rapes' sentiment. "The Philippines used to be known as the Dark Horse of Asia. Now, not to be in the Philippines is to make a competitive risk."

Rapes made the numbers talk: "According to (the globalization advisory firm) Tholon, Manila displaced New Delhi, and Cebu displaced Dublin, Ireland in the 2012 Top 100 Global Outsourcing Destinations."

"Software services outsourced to the Philippines were posted at $1.5 billion, a 50 percent growth last year. There was also a 10 percent increase in the employment of Philippine IT professionals of about 55,000. And the IT-BPO revenue was at an all-time high of $13 billion– an 18 per cent growth, employing more than 780,000 in the Philippines last year."

Top in business English

Rapes revealed that (cloud-based English literacy provider) Global English Corporation ranked the Philippines number one in the world for Business English proficiency. "Some countries turn to the Philippines to learn (Business) English. There are six direct flights from Korea to Cebu," he added.

When language is not a barrier, negotiation is always "sweet." Rapes declared, "Some (outsourcing provider) countries nickel and dime you. But in the Philippines, they just charge you one fee. No extras for bandwidth and other details."

The Philippines has an annual average of 500,000 graduates every year, Rapes reported, some 200,000 them in medical/health sciences ("for your tele-medicine and transcription needs"). An estimated 180,000 are in engineering/IT related courses ("the IT courses in the Philippines are a little different in that they are apps heavy"). Almost 120,000 are in business courses. This sets the Philippines apart for scalability. "You will find your niche and the technology you want in the Philippines," Rapes claimed.

One admitted problem is the high churn (turnover) rate, or staff retention. Rapes said the Philippines needed more middle managers to retain growth momentum. "The churn rate is almost 75 percent a year. It drives up hiring expenses. You are in a place where you could come back from lunch with a new hire. There's no at will employment in the Philippines, and it's very hard to lay-off people."

Still, Rapes said, "the Full Time Engineering (FTE) revenue or bill per year for engineers in the Philippines is from $8,000 to $9,000, compared with $40,000 in India."

Incentives to tech investors

Rapes was in the council that put together the US-Philippine Business Support and Delivery last year, to bring jobs and project to the Philippines.  Among the results of this are the added benefits that the Philippine Economic Trade Zone Authority (PEZA) provides to foreign technology investors.

Aside from cutting out the bureaucratic red tape, PEZA grants foreign investors exemption from corporate income tax for four to eight years. After that expires, a five percent gross income tax can be opted instead of taxes.

Also granted are exemptions from duties on imported capital equipment, raw materials, supplies and even spare parts. Exemptions also include wharf dues and export taxes. There's a 50 percent total cost reduction on manpower training. And permanent resident status is given to foreign investors and their immediate family members.

PEZA has reportedly 137 economic zones in the Philippines with a reputation for a four-day turn-around time for electronics. Also, it is a 24/7 "non-stop shop." Rapes said, "It is one of the few government agencies I know where zone Director General Lilia De Lima will sign documents in front of you." Rapes added that Subic, Clark and the Board of Investments all grant the same benefits as PEZA.

Rapes believes that the Philippines is seeing its growing share of techno-alphas for several reasons.

"Successful US-based Filipino entrepreneurs like Dado Banatao; (Exist Global, Inc. co-founder and CEO of the world's leading cloud provider, Morphlab) Winston Damarillo;  (Founder of the largest and fastest growing service provider to find care givers, Care.com) Sheila Marcelo and others have decided to come to the Philippines to share their experiences and mentor our young entrepreneurs. "

The Philippines' IT sector can learn from being exposed to Silicon Valley, Rapessaid. "Our returning entrepreneurs have started the initiative of sharing this innovation mind set. We just need to be focused and consistent because it's a long term initiative."

The collaboration among government, industry and academe has been enhanced in the Philippines, creating the right ecosystem, business model, infrastructure and supply of talent. "The Philippines is currently in a perfect position to grab international recognition due to its sound business environment and performance."

And don't forget the fun factor. Rapes said, "We always keep our relentlessly happy psyche no matter if bad weather hits us or if projects hit a snag. I know there are hard-working engineers everywhere, but Filipinos have the most cheerful spirits of them all."

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Does The Philippines Deserve Its Investment Grade?

Over the past decade the Philippines' sovereign credit rating oscillated between "negative" and "stable", reflecting concern about the ability of the government to collect sufficient tax revenue, manage its budget, and sustain a high rate of GDP growth. Three years ago, President Aquino embarked on a long overdue path to correct what had become endemic deficiencies in the Philippine economy. Over the past 10 weeks, the country has been rewarded for its efforts, with Fitch, the Japan Credit Rating Agency, and S&P all categorizing the Philippines as "investment" grade. Does it really deserve that designation?

Moody's retains its rating at a notch below investment grade, but will undoubtedly follow the others in due course, reflecting a rising chorus of voices in the investment community expressing confidence in the country's future. The external position of the Philippine economy -- its current account balance, external payments position, and foreign exchange reserves -- has been solid under President Aquino's fiscal management. The public deficit (2 percent of GDP) and debt-to-GDP ratio continue to fall, inflation remains at 3 percent, and the country's GDP in 2012 grew at 6.6 percent -- higher than Indonesia (6.2 percent) and Malaysia (6 percent), and not far behind Asia's perpetual economic leader, China (7.6 percent). Year to date, the Philippine peso and stock market (ranked fifth best globally) are among the best performers in the world.

Clearly, much of the credit must go to the president, and his willingness to tackle some long simmering issues. Since taking office in 2010, President Aquino managed to pass the 'sin tax' law covering such items as alcohol and cigarettes, increased tax collection rates, and successfully impeached the now former Supreme Court chief justice of former President Arroyo, on grounds of undeclared wealth. Because of Aquino's "straight path" platform, the Philippines ranked 105th (out of 174) in Transparency International's Corruptions Perceptions Index in 2012, on par with such countries as Algeria and Mexico. When he assumed power, the country was ranked 134th, on par with countries such as Nigeria and Zimbabwe. Clearly, the country is making good progress in that regard.

But what progress has been made in terms of simply doing business in the Philippines? Despite its newly minted investment grade credentials, the World Bank's 2013 'Doing Business' indicators continue to give the Philippines a low grade. Out of 185 countries in its index, the Philippines ranks just 138th, sandwiched between Ecuador and Ukraine. In six of the ten categories, the country ranks in the lowest third, and particularly poorly in terms of both starting a business and resolving insolvency (at 161st and 165th, respectively). Also, the Philippine rankings actually fell in seven of the 10 categories since last year. This stands in stark contrast to what is implied by its investment grade ranking.

Beyond the ease in doing business, regulatory risk remains a challenge, and the country's judiciary remains notoriously corrupt. While the political risk associated with attempted coups over the past several decades has notably diminished in recent years, election-related killings and violence remain a problem. And the country's rising level of net foreign direct investment remains a fraction of that of its neighbors, or other investment grade countries throughout the world. Given all this, what explains the relative haste with which the three ratings agencies upgraded the Philippines?

Apart from perhaps wanting to maintain a sense of consistency, given that Indonesia was also recently upgraded to investment grade by Fitch and Moody's -- even though its currency has not performed as well and it incurred its first current account deficit in 15 years last year -- one explanation might be a tendency to overemphasize a country's external profile while under-emphasizing development indices such as the inclusivity of economic growth, per capita development across social strata, the Gini coefficient, and absolute poverty.

Recently, the Philippine National Statistical Coordination Board reported that despite the series of consecutive credit rating upgrades made by various agencies over the past three years, poverty levels in the Philippines remain unchanged. As of 2012, about 22 percent of Filipino households were considered poor by absolute standards, compared to 23 percent in 2009. A 2008 Asian Development Bank study stated that the Philippines has the largest number of higher education institutions in Southeast Asia, and the number of examinees in professional licensure exams continues to rise, yet passing rates continue to drop. In addition, the Philippine underemployment rate increased from 19 percent in 2011 to 22.7 percent in 2012. In other words, some important, under-appreciated indicators are going in the wrong direction.

The Aquino administration has been quick to focus on how long the "trickle down" process can take, but it did not dispute the findings of the report. To date, President Aquino's technocrats are struggling to reconcile high credit scores, on one hand, and inclusive growth, on the other. So far, there has been no adequate reason cited -- other than Kuznet's inverted-U curve (circa the 1950s), where income inequality should eventually decrease, but only after sustained growth in the long term. On that basis, the Philippines must have high sustained growth for many decades to make a real difference in the absolute poverty rate.

So this appears to be a "Tale of Two Countries" -- one with significantly improving economic indicators and an activist president determined to smash through some of the unfortunate legacies of the Post-Marcos era, and the other -- an unbroken legacy of poverty, regulatory ineffectiveness, and judicial corruption. The ratings agencies appear to have focused primarily on the former, presumably under the assumption that it will take time to address the latter.

Much will depend on what happens after President Aquino leaves office in three years time. Will his reformist legacy continue, or will the country slide back into its old ways? At least three ratings agencies appear to be saying that there is a better chance that meaningful reform will continue in the longer-term. Clearly, the Philippines has a great deal of untapped potential. Nouriel Roubini, a perennial pessimist, forecasted that should the Philippines continue to defy the global recession, and if it were to consistently register GDP growth rates between 7 percent and 9 percent annually, as one HSBC study claimed, the Philippine economy may be among the largest economies by 2050. This assumes an uninterrupted path to nirvana, however, which is rather unlikely to occur, particularly given the vicissitudes of the global economy and the plethora of challenges facing the Philippines.

More likely is that the country will encounter its share of obstacles along the way, some of which will be externally derived, but many of which will undoubtedly be self-imposed. To truly deserve its investment grade rating, the Philippines needs to achieve much outside the realm of economic indicators. Being rated, as it is, one notch above junk status, it wouldn't take much for the country to fall back below an investment grade rating. Rather than beating its chest too much about what it has just achieved it, the government would be wise to focus on how best to avoid losing it.

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School. Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consulting firm based in Connecticut (USA), and author of the book "Managing Country Risk."

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