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E-Commerce & Infotech Matters

ISP.COM: The Internet Strategy of the Philippines

Over the next decade, the market for IT-enabled services and e-commerce worldwide is expected to be valued at billions of dollars, with internet users growing ten-fold every five years. Andersen Consulting estimates that global e-commerce totaled $150 billion in 1999. That market is expected to grow to $700billion in the next five years, with 80 percent of it accounted for by Business-to-Business (B2B) e-commerce. In the Asia-Pacific region, B2B spending is estimated to reach $29.9 billion in 2000, $93.4 billion in 2001, $258.5 billion in 2002, overtaking Japan, $510.7 billion in 2003, and $1 trillion in 2004. IBM forecasts Business-to-Consumer (B2C) e-commerce in the region to amount to $108 billion in three years from now. By 2004, Fortune magazine estimates that the worldwide B2B market could reach $7 trillion, where the Asia Pacific accounts for roughly 14%.

To seize IT industry's potent opportunity for fuelling economic growth, the government and private sector have developed the Internet Strategy for the Philippines or ISP.COM. The ISP.COM embodies a comprehensive strategy to develop an environment conducive for the investments in, and growth of e-commerce. The plan identifies a focus market where Filipino companies can concentrate initially, and immediately, to maximize inherent advantages of the country's human resources. At the same time, it outlines how government will create the physical, educational, financial, logistical and legal/institutional environment conducive for IT development and e-commerce.

This plan takes into account previous or existing IT plans of the government, such as IT21 (The National IT Action Agenda for the 21st Century that was approved in October 1997 and launched in February 1998), but is not meant as a replacement of these. Rather it intends to provide focus on the imperative of attracting investments into the IT industry and IT-enabled services and identify a priority list of actions with the growth of e-commerce/e-business in mind. The government agencies that are indicated as directly responsible are DTI, DOTC, NTC, DOST, CHED, DECS, SEC, DBM and BSP.

ISP.COM is meant to be a very dynamic document, one which will benefit from a constant updating, mirroring the industry's own dynamic. top

Background

The articulation of ISP.COM is one of the more recent private-public activities to promote and focus on the New Economy - an effort that can be traced back to 1994. The ISP.COM is the result of a process initiated in March 2000 by DTI to reactivate and consolidate the E-Commerce Promotion Council. Among the various initiatives that were brought together was an activity of the Economic Mobilization Group (EMG) to articulate an E-Commerce/Internet Strategy for the Philippines. This proposal was adopted by the E-Commerce Council and private-sector conveners were designated by the DTI Secretary to lead the discussion in the following topics: Physical Infrastructure, Financial Systems, Manpower Development, Legal Infrastructure, Market Niche and Communications (Conveners were Dr. Bill Torres [Niche], Gus Lagman [HRD], Ramon Garcia and Paco Sandejas [Financial Systems], Chito Kintanar and Ricky Banaag [Physical Infrastructure], and Rey David [Communications]. The knowledge Institute acted as "convener" for Legal) . A conference was held on April 13 to present the groups' output and a preliminary draft prepared by the Knowledge Institute was presented in May. A second draft was disseminated to the members of the E-Commerce Council for their comments in June 2000.

The spearheading and monitoring of this plan now falls under the ITECC (Information Technology and E-Commerce Council), which is jointly chaired by the Department of Trade and Industry (DTI), the Department of Science and Technology (DOST) and the private sector. Members include the Department of Transportation and Communication (DOTC), through the National Telecommunications Commission (NTC), Department of Budget and Management (DBM), National Economic Development Authority (NEDA), Department of Education, Culture and Sports (DECS), the National Computer Center (NCC) and the Department of Interior and Local Government.top

Framework

How the country participates in the new economy will depend on five (+1) factors: Physical/Network Infrastructure, Human Resources, Financial Systems, Logistics, Legal/Governing Institutions and, as a business imperative, Marketing/Communications, that is, its ability to position and market itself in the global economy.

The development of e-commerce should be led by the private sector, with government intervention limited to what is essential and manifested in a manner that is non-discriminatory, flexible and technologically neutral. The speed by which technological change takes place, the nature and architecture of the internet, as well as other factors, points to the efficacy of letting the market “do its thing” rather than attempting to control or even regulate what is – by design/structure – largely ungovernable.

However, the Network Economy has peculiar features, which require that government – while maintaining distance – is not absent from the game. Particularly, the “public goods” nature of knowledge/information and the Internet, the digital divide or equity issue, and, in this country, the practical matter of economies of scale due to our small domestic market.

The role of government therefore is to provide a favorable policy environment, one that is compatible with international norms, to promote trust and confidence among e-commerce participants, and to help jump start e-commerce and encourage its mass use. top

The ISP.COM

A. Market Niche

The market vision is for the Philippines to be a leading regional center for E-Services hosting a variety of global enterprises in information technology and other professional services (E-services included tasks accomplished for Philippine-based enterprises as well as those outsourced for local or foreign companies. The work is done by IT-enabled individuals or groups based in the Philippines and is (i) delivered to the client through electronic means, (ii) largely dependent on electronic communications for cost-effective delivery to the client, (iii) directly accessible by end-users through the internet).

As an E-Services Hub, companies located in the Philippines will be able to extend world-class IT Services and IT-Enabled Services to clients worldwide. IT Services include IT project management, application systems development, applications services provider, web development and management, data-base design and development, computer networking and data communications, software development, ICT facilities operations / management, and other services directly tied to the information technology industry.

IT-enabled services, on the other hand, refer to other business lines that can be transformed through the means of information technology. These include any business process outsourcing and shared services, call centers and other customer services, engineering and design, animation and content creation, knowledge management, remote education, market research, travel services, finance and accounting services, human resource services and other administrative services (e.g. purchasing).

IT-enabled services worldwide are expected to reach US$142.2 billion by 2008 according to McKinsey & Co. Specifically, human resource services ($44 billion), customer interaction ($33 billion), data search, integration and management ($18 billion), remote education ($15 billion), finance & accounting services ($15 billion), engineering and design ($5 billion), network consulting and management ($5 billion), website services ($3 billion), animation ($2 billion), transcription ($1.2 billion) and market research ($1 billion). Likewise, revenues from the traditional outsourcing market, that is, from data processing and business process outsourcing (BPO) is estimated to increase to US$120 billion by 2002, from US$99 billion in 1998.

IT-enabled services is the niche where the Philippines can attain market leadership. The Philippines is the 3rd largest English-speaking nation in the world and has an IT skill set 2nd only to India (due to population). At the same time, costs of technology workers (which represents the biggest recurring costs for, say, a B2B site) in the Philippines is only around 16% to 25% that of comparable workers from the United States.

Although China and Bangladesh may have labor cost advantages for the data processing market, the Philippines can be preferred site for business process outsourcing (BPO). Americans and other Foreigners are already in the Philippines for software & solutions services. America Online, Barnes & Noble, People Support, Caltex Corp., Parsons, Fluor Daniel, Bechtel, Procter & Gamble, Citibank, Andersen Consulting, Mitsubishi Heavy Industries, Sumitomo Corp., Chiyoda Corporation, among others have established backroom service / centers in the Philippines. Business process outsourcing and e-commerce are natural partners.

Other advantages of the Philippines include the inclination of Filipinos toward mobile technology and the regulatory environment, i.e. the industry remains less regulated than other countries in the ASEAN.top

B. Enabling Factors

To create an environment conducive for IT development and E-Commerce, attention must be given to Physical/Network Infrastructure, Human Resources, Financial Systems, Logistics, Legal/Governing Institutions and Communications.

1. Physical Infrastructure: The Public Telecommunications Act of 1995 (RA 7925) deregulated the telecom sector and kicked off rapid growth in terms of access to and penetration of IT facilities. However, fixed-line density is low and PC and Web penetration/access lower still (at below 1%). The country ranks second from the bottom in terms of IT facilities, only better than Indonesia.

1993/94
12/31/99
% change
Land Lines
.785 M
6.8 M
766%

Density
· NCR

1.4%
6.9%
9.4%
29.6%
571%
328%
ISP
1
160+

Number of Operators

1998
Local exchange carriers
76
International Gateway Facility
11
Public Trunk Line Operators
10
Cellular Mobile Telephone
5
Paging Service
15
Satellite Service
3
Public Calling Offices
857
Private Calling Offices
420
  • There was a 570% increase between 1994 and 1998 in fixed-line density; as of December 1999, the ratio of telephone lines to total population (of 72 M) was 9.4 %, with approximately 43% of lines subscribed to. Out of 12 M households, 71% had a TV and 85% had radios. The number of ISP rose from 19 in 1995 to 160 in 1997 and Internet subscribers also increased from 63,000 in 1997 to around 600,000 today (or approximately 2,000,000 users). Average annual sales of personal computers were estimated at 350,000, 20% of which was for home use.

  • There are 1.01 Internet hosts per 10,000 people in the Philippines, versus 108 (HK), 37.66 (Korea), 18 (Mal), 187 (Sing), 4 (Thailand), 107 (Jap) and 975 (USA). Market size as a percentage of GDP is 0.5, falling way behind HK (1.2), Mal (1.3), Singapore (1.9), Korea (1.6), although it is at pace with Thailand, China and Indonesia.

On the upside, mobile phone penetration and usage is phenomenal. There are about 2.82 M users, up from 782,000 in 1996, and Globe alone handles 10 M text/day, higher than all of Europe. Moreover, the rate of increase in the penetration of the Internet is such that by 2003/2004, there will be more people on the net than the entire population of Singapore.

Access and connectivity for anyone, at any time, and at an affordable cost, is the objective of the Philippine Information Infrastructure (PII). While there seems to be considerable capacity to meet foreseeable demand nationwide, local access remains a challenge, as it is too costly for the average Filipino family.

2. Human Resources: Filipino talents are among the best in the world. Studies in 1999 and 2000 show that with respect to the quality and availability of knowledge workers, the country is number 1, topping developed countries like the USA, and the UK (Rubin Report, June 2000).

However, the Philippines is losing its edge and may be missing out because (i) there are not enough qualified entrants, (ii) the brain drain continues relentlessly and (iii) new graduates are less skilled, specifically in English and Math. Teacher competencies in core subjects are low, e.g. about 8% for physics; 24% for chemistry; 40% for math; 60% for English.

In the fast-paced, unstructured world of the Network/Knowledge Economy, everyone from students to corporate CEOs will be playing on similar parameters where there are no barriers such as age, race, sex, size or economic status. The only potent force will be the depth of one’s knowledge and the ability to use it. In other words, the quality and availability of people will be the major constraint to growth.

3. Financial Systems: Capital, more than technology, is the driving force of the IT sector. The challenge therefore is how to improve access to capital as well as how to attract new capital.

With respect to increasing access to capital, there are two options: Venture Capital, which is a key success factor to the growth of the IT industry in other countries, and the capital market, which is the most prudent method of raising capital and distributing ownership in the widest possible manner. Unfortunately, VC is scarce in the Philippines and local IT firms are snubbing the local exchange and listing elsewhere. Among the reasons listed are the uncompetitive PSE conditions and incentives:

  • The required minimum capitalization is Ps 100 M here vs. 0 in Singapore. The required ROE is 15% for each of the last three years, whereas Singapore only requires a 3-year operating record. Firm underwriting is required here, whereas it is not required in Singapore. There is an annual fee of Ps 100,000-500,000, whereas in Singapore it is only 16,000 – 80,000.00.

  • Cost and Time: in Singapore one can register in one day with $3. Here, it takes 3 months and several thousands of pesos.

With respect to attracting new capital, “IT Services” has been included under the 2000 Investment Priorities Plan of the Board of Investments. This will qualify certain IT investments for fiscal and non-fiscal incentives under the current Omnibus Investment Code.

1. Software development projects, e.g. (i) Application software products – packaged software programs that provide solutions or address problems and functions specific to an industry or business, (ii) Middleware products – computer programs used as a) interface among disparate application systems; b) develop and manage new applications, (iii) System Software Products – the development of operating system-type and software tools-type packaged programs.

2. IT-enabled services – services related to data encoding, digital directories/catalogues, legal records, financial/accounting records, hospital/medical records, engineering/design, customer-interaction services, unified messaging services and voice over IP.

3. Support and knowledge – based services – consulting services, software maintenance and other similar services.

4. Business process outsourcing (BPO) services – business process and operating function where the services are performed by another enterprise remotely located from it, regularly and continuously and are delivered electronically to the recipient.). However, fiscal incentives offered under this regime cannot compete with that offered by other ASEAN countries. Thus, amendments to the Code have been proposed to Congress.

4. Logistics: Logistics includes transportation and distribution facilities by air, sea and land. For e-business/e-commerce to prosper, “order fulfillment” – the actual delivery of goods to a buyer – must be assured.

“Logistics” as an area of concern was not on the original agenda of the working groups convened for the ISP.COM but was later observed as a necessary part of any e-commerce promotion strategy. Identifying the issues with respect to logistics should be the subject of a new working group to be convened by the Council.

5. Legal regime and institutions. In 1997, 6% with Internet access bought $1.6 M worth of goods and services from the Internet and in 2002, it is estimated that 30% with access would buy $387 M worth of goods. Utilization has been, until recently, largely constrained by the absence of a legal infrastructure to govern transactions. But the passage of the E-Commerce Act (ECA) last June is expected to address this.

The ECA addresses the very basic of concerns such as validity and admissibility of electronic documents, contracts, signatures and transactions, and penalties for hacking and other cyber crimes. It is a legal framework for e-commerce; as such a number of more complex issues, e.g. security, privacy, taxation, evidentiary issues and territorial jurisdiction, were not- by design – covered by the law. While international consensus is being formed on some of these topics, the law’s implementing rules and regulations provide principles to help guide the settlement of issues as they arise. These principles cover tax treatment, user protection, dispute mechanisms and others.

Aside from the ECA, the Intellectual Property Code of 1997, the Public Telecom Deregulation Act of 1995 and the Regional HQ Act of 1998 all contribute to the legal regime for the promotion of e-commerce in the country.

On the institutional side, much progress has been made. Short of creating a new department (which is a very remote possibility), EO 264, which formed the ITECC, is expected to consolidate what was described as a “fragmented” institutional approach to ICT (Austria, 2000). EO 265, on the other hand, promulgates the GISP (Government Information Systems Plan) that seeks to put Government “on-line” within 5 years.

6. Communications. To date, attempts to articulate and popularize the “industry scenario” have not been effective. As a result, high-level and popular appreciation for the urgency and necessity of investing in ICT has been wanting. top

C. Implementation Strategies

A number of implementation strategies were suggested for each of the areas of concern discussed above. However, only the few simple but high impact actions were selected for inclusion in the ISP.COM.

1) Physical Infrastructure. In the immediate term, efforts to increase access to ICT infrastructure will be focused on:

a) Promoting community access mechanisms, with focus on:
i) Schools, e.g. through the PCs for Public Schools Program
ii) Internet cafes and other commercial establishments. The use of public calling offices or other barangay centers, such as Barangay Health Centers, where the demand for public information/services can be leveraged, should also be explored.

b) Lowering costs of access through ongoing improvements in the regulatory framework:
i) Deregulating the price and technology of Convergence (Aggregating of access, such as by the linking of IT parks, was also discussed. Relatedly, the suggestion to e-liberalized special zones, for example, in SUBIC, suspend the international gateway rules and allow as many international calling providers in provided the services do not extend beyond the base'’ boundaries. Or allow direct satellite telecom links to other countries, and so forth.)
ii) Strengthening NTC
iii) Enactment of Anti-trust law

2) Human Resources. To ensure a constant stream of technology workers into industry, ensure the retention of these workers, and acquire skills that are higher-up in the technology value chain, activities shall be:

a) Teacher training in Math, Science and English through IT.
b) Support and expansion of academe-industry bridging program, e.g. of CHED, with a target of 100,000 IT professionals in 5 years.
c) Public support for basic research.

3) Financial Systems. Improving access to capital will entail:

a) Improving the listing conditions of the PSE and extending trading hours.
b) Strict implementation of IPO requirement for BOI registered IT initiatives.
c) Improving the VC and angel environment by developing an incubator network and providing incentives for VCs, such as RHQ incentives or government counterpart funds.

On the other hand, attracting new capital can be facilitated through:
d) Benchmarking incentives with that of India, Israel and others in order to identify “compensating incentives” while the amendments to the Omnibus Investments Code are being pursued.
e) Removing the foreign-ownership restrictions for IT firms and amending the BOO/BOT law to include IT.
f) Streamlining the basic regulatory functions like business registrations and permits.

4) Legal regime. A number of laws to further strengthen the existing legal frame have been suggested, including laws to deal with privacy, security, certification authorities, and other issues. Although a priority list has yet to be drawn up – the sentiment seems to be to wait and see how the ECA affects the development of e-commerce – policy discussions continue with the private sector, e.g. PICS, PCS, at the helm.

The more immediate task is the implementation and enforcement of existing laws. For instance, certain provisions of the IPC remain unimplemented and sections of the ECA still require the issuance of implementing rules (from the Supreme Court).

Also, note that in most countries, the institute that began the IT boom was Government. Not because government came in and performed the job of the private sector, but because it was the IT industry’s largest customer. When the government needed to upgrade itself to make it an IT-enabled government, this was a windfall for the industry. The implementation of “Philippine Government On-Line” – including building the databases, setting up the web pages, using e-commerce for government services, and so forth – is key, therefore. However, it is equally important to demonstrate quickly the resolve of government to go on-line and the efficacy of e-government. Rather than try and spread out resources over the entire bureaucracy therefore, it will be both practical and strategic to select just a few key agencies and/or services which can be invested in for demonstration purposes.

5) Niche/Communications. To better articulate the industry story, including customized messages for each segment (global and domestic, for instance, the highlighting of role models – i.e. “from geeks to heroes.”), the following will be undertaken:

a) An inventory of human resources in IT. The industry groups pool resources in order to undertake this inventory. A proposed design is already available from the Philippine Software Association.
b) Inventory of Filipino e-services companies. This is in line with the mandate to DTI by the IRR of the ECA to institute a voluntary listing system of e-commerce participants.
c) Information from the above surveys are necessary for investment promotions. A number of IT promotions missions are already lined up until mid-2001. These include Japan (October 2000), Australia (November), Europe, specifically, UK, Ireland, Scotland, An inventory of human resources in IT. The industry groups pool resources in order to undertake this inventory. A proposed design is already available from the Philippine Software Association.
d) Inventory of Filipino e-services
companies. This is in line with the mandate to DTI by the IRR of the ECA to institute a voluntary listing system of e-commerce participants.

Information from the above surveys are necessary for investment promotions. A number of IT promotions missions are already lined up until mid-2001. These include Japan (October 2000), Australia (November), Europe, specifically, UK, Ireland, Scotland, Germany, Sweden, Finland (January or April 2001), and Korea (February 2001). top










   
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