The Philippines' business processing outsourcing (BPO) sector is fast
developing into one of the pillars of the nation's economy, with both
earnings and employment levels soaring in recent years -- though there
are concerns that international competition, rising costs and staff
shortages could undermine future growth.
Last year, the Philippines' BPO sector posted growth of 26% and
generated export earnings of about $9 billion, according to the Business
Processing Association of the Philippines (BPA/P), giving the industry a
5% share of gross domestic product (GDP).
Estimates by the World Bank suggest that the BPO and associated IT
sector have the potential to generate export earnings of up to $55
billion by 2020, equivalent to about 11% of GDP and directly providing
employment for more than 1.8 million Filipinos.
While BPA/P's own projections are not quite so optimistic, the
association has said that, over the coming five years, the industry will
continue to expand at an average rate of 15% per annum, with the sector
expected to earn some $20 billion and generate roughly 1.5 million new
positions by 2016.
The strength of the BPO industry was one of the reasons cited by ratings
agency Standard & Poor's (S&P) for maintaining the Philippines' stable
outlook forecast and its BB foreign currency long-term bond rating. In
its latest appraisal of the Philippines' credit ratings, issued on July
29, S&P said that BPO revenue, along with earnings from remittances, was
offsetting the country's weak fiscal profile and high public debt.
"The stable outlook encapsulates our expectation that remittances and
BPO receipts will continue to drive current account surpluses, while
prevailing government debt and interest burdens and the weak fiscal
profile will take time to resolve," explained S&P credit analyst Agost
Benard.
Successive Philippine governments have seen BPO as having the potential
to become a major revenue earner and source of employment. To help
achieve this, the government has implemented a series of measures to
assist the sector's further development, most recently with President
Benigno S. C. Aquino III's announcement in mid-July that his
administration would strengthen the industry's favorable environment
with extended tax holidays on BPO-related investments of up to eight
years and a reduction in bureaucratic procedures.
However, there has been criticism that the government's enthusiastic
support for the BPO sector is coming at a cost, with claims that not
enough emphasis is being placed on the development of local industries
and that much funding intended for the science and technology sector is
instead being directed to strengthening the ICT backbone of the BPO
industry.
In late July, the UN Conference on Trade and Development (UNCTAD) warned
that there was a danger of countries such as the Philippines becoming
too dependent on non-equity modes (NEMs) of foreign direct investment
like BPO. While there are distinct advantages to NEMs, such as high
income and low investment requirements, by their nature they are easy to
establish but also easy to lose, UNCTAD said.
Though BPO and IT-related activities accounted for a growing slice of
GDP last year and provided employment for 525,000 people in the
Philippines, the UNCTAD report noted that more needed to be done to
maximize developmental benefits from NEMs so as to protect against what
it called their "footloose" nature.
Diwa C. Guinigundo, the deputy governor of the Bangko Sentral ng
Pilipinas (BSP), agrees, saying in late July that while increased BPO
investments have been advantageous for the economy by creating new
revenue streams and boosting employment, there is also an increasing
need to pursue investments in manufacturing and other industries.
"Let's get more NEM investments, but let us create an environment where
we can rely less on them and more on industries," Mr. Guinigundo said.
The Philippines also faces increasing competition in the global BPO
industry, with Asian powerhouses India, China and Malaysia increasingly
taking on more BPO business. Other regional rivals such as Vietnam,
Indonesia and Thailand are also gaining momentum, thanks in part to
their lower labor costs.
Another issue that the Philippines must address is the need to deepen
the pool of trained staff working in the sector. The industry has a high
turnover of employees, with some estimates putting the rate at close to
50% per year. Even considering BPA/P's low-end projected annual growth
rate of 15% for the sector, this translates into hundreds of thousands
of new personnel required each year.
The government has made clear its commitment to grow the BPO industry.
But without working with the private sector to create better tailor-made
training programs that meet the needs of industry, the sector may not
achieve the ambitious goals set for it. Still, should all the pieces
come together, the sector has the potential to generate significant
levels of revenue that can then be ploughed back into other areas of the
economy.
Charles A. Colón is the Philippines Editorial Manager of Oxford Business
Group.
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