Special Economic Zones and Local Governance

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Special Economic Zones and Local Governance
Presented by John C.T. Ko May 17, 2005
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Outline of the Presentation

• 1. Background
• 2. Ecozone Concessions Autonomy
• 3. Zone Autonomy vs. Local Autonomy

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Part I Background

• Philippine development policy considers the need
  to disperse industries from the metropolitan
  capital to the different regions throughout the
  country.
• Investment priority areas outside Metro Manila
  have been identified to decongest the heavily
  populated cities.
• Special Economic Zone Act of 1995 passed by
  Congress.

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Economic Purpose Objectives

• Establishing the requisite legal framework and
  mechanisms for planning the special economic
  zones, industrial estates and export processing
  zones.
• Transforming selected areas into highly developed
  industrial and commercial centers.
• Promoting local and foreign investors to invest
  in those economic zones to generate employment
  and establish industrial cluster.
• Stimulating the return of Filipino capital by
  providing sufficient incentives for business.
• Promoting international cooperation through the
  use of technology-intensive industries in order
  to improve production levels.
• Vesting in the special economic zones the status
  of separate customs territory within the
  constitutional framework.

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Comparison of Ecozones between RP Taiwan
The Philippines
Taiwan
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Part II Ecozone Concessions Autonomy
Definition of Terms

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

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Unfair Game?

• EPZs Free Trade Zones with import duty
  exemption gt Other local geographic areas
• EPZs FTZs Administration with one-stop shopping
  service.
• Grant of permanent resident status to foreign
  investors spouse and dependent children within
  Ecozone for an investment of US150,000.
• 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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Board Members of PEZA

• Chairman Secretary of Department of Trade and
  Industry
• Vice Chairman Director General and CEO of PEZA
• Undersecretaries 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

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Advisory body of PEZA

• The president of the association of investors in
  the ecozone
• The governor of the province where the ecozone is
  located
• Mayors of towns/cities where the ecozone is
  located
• President of the accredited labor union
• Representative of the business sector in the zone
• The PEZA representative

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Part III Zone Autonomy vs. Local Autonomy
Background

• 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.

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Contradictory Issues between Zone and Local
Autonomy
1. Legal status

• 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.

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Contradictory Issues between Zone and Local
Autonomy
2. Smuggling prevention

• 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. SubicClark
  ecozones backdoors for smuggling Undervalued
  misdeclared goods were seized. Transshipment-inten
  ded duty-free diverted to local market.
• These could ruin the economy decrease tax
  revenue.

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Contradictory Issues between Zone and Local
Autonomy
3. Peace order

• 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.

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Contradictory Issues between Zone and Local
Autonomy
4. Local government power deprivation

• 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.

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Contradictory Issues between Zone and Local
Autonomy
5. Discriminatory interest

• 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.

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Contradictory Issues between Zone and Local
Autonomy
6. Conflict of powers administrative functions

• 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.

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Contradictory Issues between Zone and Local
Autonomy
7. Tax exemption

• 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.

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Contradictory Issues between Zone and Local
Autonomy
8. Disaccord of the governances

• 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.

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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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National Palace Museum, Taipei, Taiwan
Thank you!