PHILIPPINES Country Profile

General Information

The Political Climate


The Philippines became a democracy in 1946 when it gained independence from the US. Today the country is considered the oldest democracy in Asia and is often defined as a pluralistic democracy with a market-based economy. The Philippines has an abundance of agricultural resources, significant light industry and service sectors, and a vibrant economy, as indicated by its GDP growth of 7.3% in 2008. While the Philippines now enjoys relative political and macroeconomic stability, it was not always so. The country suffered an interim period (1972-1986) under an authoritarian regime led by President Marcos. Democracy was re-established in 1986 when President Aquino came to power following a People Power Revolution that toppled the Marcos regime. Following a period of political instability involving several unsuccessful coups, the Philippines is now led by President Gloria Macapagal Arroyo.

Arroyo became President in 2001 after the still popular President Estrada was ousted because of his failure to address and combat large-scale corruption. In September 2007, Estrada was found guilty of corruption and malfeasance charges, only to be given a full pardon by President Arroyo a few weeks later. This pardon has fuelled speculations of a secret deal between the two politicians after it was revealed that the pardon was granted following a promise by Estrada not to run for office again. Nevertheless, President Arroyo won a political victory out of the affair, as Estrada's guilty verdict lent legitimacy to her taking over the presidency. However, President Arroyo's claim to legitimacy has since been weakened by allegations of corruption in her own administration. Political corruption is reportedly undermining people's trust in the country's leadership. This is supported by the Social Weather Stations (SWS) Surveys of Enterprises on Corruption 2006-2007 that shows that Arroyo is considered to be the most corrupt Philippine President in history, while a scandal over government kickbacks in a telecommunications deal that broke in the beginning of 2008 led to demonstrations and popular demand for the President's resignation. The scandal had further eroded the public trust in Arroyo and put her in danger of having to face impeachment by Congress to launch impeachment proceedings against her for a less serious charge while allegedly, at the same time offered Member of Congress bribes to vote against it. According to the Philippine Law, the President can only be impeached once a year.

The Philippines has a history of corruption, and practically all governments have had to struggle with the problem. Corruption in the Philippines is characterised by a combination of societal factors, institutional factors and an incentives system that contributes to corruption. According to Transparency International 2009, the level of petty corruption has decreased in the Philippines with 7-12% of Filipino households surveyed reporting that they paid bribes the previous year. However, according to the same household survey report, nearly 77% stated that the government's anti-corruption initiatives are ineffective. Of the business executives surveyed by the Transparency International Bribe Payers Index 2008, 92% identify the government's anti-corruption initiatives as either 'very ineffective' or 'ineffective'. Furthermore, the SWS Surveys of Enterprises on Corruption 2006-2007 conclude that the general public is dissatisfied with the Arroyo administration. Business executives surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 perceive the level of public trust in politicians to be very low in the Philippines.

Business and Corruption

According to the World Economic Forum Global Competitiveness Report 2009-2010, companies identify corruption as the most problematic factor for doing business in the Philippines. Other surveys indicate that bribery has been an increasing problem for companies. According to the SWS Business Survey on Corruption 2007, three out of five managers were asked for a bribe in at least one transaction the previous year, with the amount paid being higher than previously. Corruption is often encountered when interacting with public officials. Half the companies surveyed by SWS report that they are discouraged by the systemic nature of corruption, which forms an integrated part of the way government works. Areas where bribes or facilitation payments are often expected are when dealing with taxes, obtaining operating licences, construction permits and import licences. For example, nearly 28% of companies in the Philippines report that bribes are solicited in their meetings with tax officials. Although the level of corruption in the private sector is reportedly not as high as in the public sector, one out of five company managers claim that bribes are needed to win a private contract. According to the SWS Surveys of Enterprises on Corruption 2006-2007, only 7% of the managers reported corruption to the authorities. More than 66% of managers state that it is futile to report corruption, while 49% were afraid of reprisals, thus indicating the need for a reliable whistleblower mechanism to which companies can report corruption.

Other common types of private sector corruption in the Philippines are illegal donations to political parties and bribery in order to influence policy-making. According to the SWS Business Survey on Corruption 2007, 25% of companies said that a typical company within their sector would make an average political donation of PHP 245,000 during the 2007 election campaigns. It is a common feature for companies in the Philippines to support politicians directly or to donate to their parties. Some companies also report that politicians expect them to make campaign donations. The concentration of wealth within a small group of elite families, coupled with political donations, has led to concerns as to their undue influence on both Philippine politics and business life.

According to Transparency International 2009, the Philippine business sector is highly affected by corruption, although the level of corruption is perceived to have declined from the previous surveys. Moreover, one-fifth of households surveyed believe that the business sector almost always bribe to influence the government policies or laws and regulations. Business executives surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 report that public funds are fairly commonly diverted to companies, individuals or groups due to corruption and that government officials often favour well-connected companies and individuals when deciding on policies and contracts. Surveyed business executives also identify the lack of ethical behaviour of companies in their interactions with public officials, politicians and other companies represents a competitive business disadvantage for the Philippines.

Companies that are planning to invest in or are already doing business in the Philippines are highly recommended to implement integrity systems and conduct extensive due diligence when entering into business partnerships or contracting agents to facilitate business transactions in the country. Controlling corruption risks is essential in order to avoid cases like that of a US company that had to pay a large penalty under the US Foreign Corrupt Practices Act in 2008. The company was subsequently forced to close for having been in a partnership with a Philippines-based company that had made numerous illegal payments to foreign government officials. According to the SWS Business Survey on Corruption 2007, two out of five Filipino managers spend an average of PHP 292,000 to combat corruption and fraud in their own companies, and one out of five donates an average amount of PHP 136,000 to an anti-corruption fund. The Philippine private sector thus acknowledges that corruption is a huge problem that companies need to work towards solving.

Regulatory Environment

The Philippines is characterised by cumbersome bureaucracy. Business executives surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 perceive the level of government administrative requirements to be quite burdensome. According to the World Bank & IFC Doing Business 2010, starting a business in the Philippines costs 28% of income per capita on average, involves 15 procedures and takes 52 days, which is more costly, complicated and time-consuming than the East Asia & Pacific region's corresponding averages. However, the minimum capital required is competitive at 5.5% of income per capita. Foreign companies should note that foreign investment is restricted in many sectors of the economy. The government has set up a Board of Investments (BOI, link somewhat unstable) in an effort to counter this and promote foreign investment. The BOI offers investors regulatory and incentive system guidance.

Post-Marcos structural reforms implemented in order to benefit economic development locally, such as deregulation, privatisation and decentralisation, have reportedly resulted in decentralising corruption as well. Due to a lack of transparency and accountability in the decentralisation process, local officials have been given additional authority which has increased their opportunity for personal enrichment. It is reportedly common for civil servants to supplement their relatively low salaries by extracting bribes, a possibility that is greatly facilitated due to the country's complex and sometimes contradictory regulatory regime. Moreover, business executives surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 indicate that it is quite challenging to obtain information about changes to government policies and regulations affecting their industries. The level of corruption in dealing with inspectors from various government agencies is quite high in the Philippines. In the process of deregulation, companies have offered bribes to government officials in order to protect their market and ward off competition. The privatisation process has resulted in irregular and corrupt bidding practices in order to acquire government-owned or government-controlled companies. Companies should note that a lack of transparency still prevails in the public procurement process. Political deals are made where politicians can secure the allocation of resources from the centre to their local districts as a reward for their political support. As these deals are included in the procurement budget, it blurs the transparency of the procurement process and results in substantial losses to the state budget. Although a Philippine Government Electronic Procurement System (PhilGEPS) has been set up to increase transparency of the procurement regime, companies are still recommended to conduct extensive due diligence during the procurement process in order to mitigate the corruption risks associated with public procurement in the Philippines.

According to the US Department of State 2009, companies generally have little confidence in the Philippine judicial system. The main reasons for this are the allegedly incompetent and understaffed court personnel, corruption and long delays of court cases. Serious concerns have been raised as to the sanctity of contracts and of property rights based on allegations that judges accept bribes to rule in favour of one or the other party in a trial. Many foreign companies view the judiciary as a disincentive for investing in the Philippines, as settling a court case may take 5-6 years or longer if there are appeals. Therefore, many companies seek out alternative dispute resolution possibilities. The Philippines is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and of the Convention on the Recognition and Enforcement of Foreign Arbitrage Awards. Nevertheless, it is reported that Philippine courts are disinclined to abide by the arbitration process and that the enforcement of decisions may take several years. Several disputes have been raised over water rights in relation to agricultural and industrial production. Companies should note that exploration and utilisation rights of natural resources such as water can only be legally bestowed on companies that have at least 60% Filipino ownership under the 1987 Constitution. Access the Lexadin World Law Guide for a collection of legislation in the Philippines.