This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANILA 004503 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/EP, EB/TPP 
STATE PASS USTR FOR BWEISEL AND DKATZ 
STATE PASS USAID AND OPIC 
TREASURY FOR OASIA FOR AJEWELL 
USDOC FOR 4430/ITA/MAC/DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PREL KIPR TBIO TSPL RP APEC WTRO
SUBJECT: PHILIPPINES: SLOW PACE OF ECONOMIC REFORM 
 
REFS: A) MANILA 4278, B) MANILA 4112 
 
SENSITIVE BUT UNCLASSIFIED: NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary: Philippine government and private 
sector leaders told U.S. Senior Official for APEC Michael 
Michalak that the Philippines continues to face problems 
with inefficient courts and corruption in general.  Poor 
implementation and unpredictable enforcement of laws 
remain disincentives to investment.  They offered a more 
optimistic assessment of the country's fiscal situation, 
although many raised concerns about the implementation of 
the new expanded Value Added Tax (EVAT).  The Millennium 
Challenge Account (MCA), many said, is an encouraging 
development that could lead to much needed structural 
change.  End Summary. 
 
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Informing about APEC 
-------------------- 
 
¶2.  (SBU) During his September 19-20 visit to Manila, 
U.S. Senior Official for APEC Michael Michalak briefed 
GRP leaders on U.S. priorities in APEC.  He told them 
that the U.S. will pursue three key objectives at the 
high-level APEC meetings in November: 1) advancing the 
Doha Development Agenda in preparation for the December 
WTO Ministerial in Hong Kong; 2) addressing energy 
security in the region, especially related to high oil 
prices and the impact on the regional economy; and 3) 
formulating a strong response to the potential Avian 
Influenza pandemic.  He also sought their views on the 
U.S.-RP economic relationship and encouraged them to use 
the funds available under the MCA to implement needed 
structural reforms. 
 
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Good laws, lousy implementation 
------------------------------- 
 
¶3.  (SBU) Former Trade Secretary Senator Manuel "Mar" 
Roxas, who chairs the Trade and Commerce and the Economic 
Affairs committees in the Senate, told Michalak that 
implementing legislation and fighting corruption are the 
GRP's biggest challenges.  The GRP must take structural 
approaches to combating smuggling and improve the 
country's trade outlook, according to Roxas.  However, 
the level of corruption in the Bureau of Customs (BOC) 
makes reform progress difficult, he said.  Roxas was 
eager to explore possibilities of linking APEC security 
measures to initiatives detecting smuggling.  Because 
corruption is so much a part of the BOC culture, he said, 
the GRP must, in effect, create an external mechanism to 
police the BOC.  Michalak urged Roxas to partner with the 
business community on such initiatives and to solicit its 
input on which structural reforms are most needed.  Roxas 
was optimistic that some of the GRP's MCA programs could 
be used to address these issues. 
 
¶4.  (SBU) Roxas said there is a perception in the RP that 
trade liberalization has failed to deliver promised 
benefits, but acknowledged this is due largely to the 
oligarchic power structure and GRP's failure to implement 
necessary structural reforms.  The GPR should have done 
more to solidify reform and ensure competition in the 
domestic market at the same time it was lowering tariffs, 
he admitted.  Roxas told Michalak that he now espouses a 
more cautious approach to liberalization because of these 
structural shortcomings.  Citing the GRP's lack of 
expertise in trade negotiations, he said he is submitting 
legislation to create a "Special Trade Representative" 
similar to USTR.  The position may be an office in the 
Department of Trade and Industry or a separate official 
under the Office of the President, he said, but would 
focus exclusively on the RP's international trade agenda. 
 
------------------------- 
EVAT will be implemented 
------------------------- 
 
¶5.  (SBU) Senator Ralph Recto, chairman of the Senate 
Ways and Means Committee, told Michalak he is optimistic 
that the EVAT will be implemented in full within the next 
two to three weeks (ref B).  The conditions have already 
been met, said Recto, for President Arroyo to 
automatically trigger the VAT rate increase to 12% from 
10% in January 2006.  Recto estimated the EVAT will 
generate 80-100 billion pesos (1.4-1.8 billion dollars) 
in additional revenues in 2006 and will enable the GRP to 
address many of its current fiscal difficulties. 
 
¶6.  (SBU) Recto discounted attempts to pass a joint 
resolution delaying the imposition of VAT on fuel and 
electricity until June 2006.  He said the House will be 
too preoccupied with passing the budget and debating 
Constitutional changes to push the issue much further. 
He finds it frustrating, he told Michalak, that President 
Arroyo is now sending mixed signals on whether Congress 
should delay EVAT implementation, especially after she 
pressed lawmakers to pass a tax increase they did not 
favor.  Recto said he has always favored expanding the 
tax base over increasing rates and fears that a delay in 
lifting exemptions on fuel and electricity could erode 
the effectiveness of the new measure. 
 
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Cha-Cha could open markets 
--------------------------- 
 
¶7.  (SBU) Recto told Michalak that redrafting the 
Constitution could offer opportunities on trade and 
investment liberalization.  Michalak encouraged Recto to 
support liberalization and said this may be an 
opportunity to update provisions related to the business 
climate in a very positive way.  Recto agreed.  He linked 
the emigration of many talented Filipinos to investment 
climate problems that he said are related to 
constitutional limits on foreign ownership of land and 
certain businesses and the entry of non-Filipinos into 
certain professions.  Charter change does not currently 
have enough support to receive the necessary two-thirds 
of votes in the Senate, he said, but he and others may be 
open to the change if restrictions on foreign investment 
are lifted.  This is the only way, according to Recto, to 
increase foreign investment in the Philippines, which is 
lagging far behind neighboring countries. 
 
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GRP needs more revenue 
---------------------- 
 
¶8.  (SBU) House Committee on Trade and Investment 
Chairman Congressman Junie Cua told Michalak that, amidst 
the difficulties the RP now faces, even small statements 
of U.S. support help.  The Philippines continues to be 
interested in a free trade agreement with the U.S., he 
said, but would be very cautious in negotiating on 
agriculture issues.  Michalak replied that the U.S. will 
likely continue to work through the current Trade and 
Investment Framework Agreement (TIFA) instead of 
immediately engaging on FTA discussions, but emphasized 
that the Millennium Challenge Account is a sign of how 
serious the U.S. is about assisting the Philippines. 
 
¶9.  (SBU) The GRP budget deficit continues to be of 
concern, Cua said, and the government needs to generate 
more revenue.  However, the imposition of the EVAT will 
be "hard" and it might be "politically desirable" to 
delay the VAT on electricity and gasoline to let recent 
political turbulence cool off.  He said it looks like tax 
and customs collection figures are improving, but he 
admitted there is still much to do on this front.  On 
IPR, he said that members of Congress want to ensure that 
the legislation they provide (such as the Optical Media 
Act) is enforced.  Oversight, he said, will be more 
vigorous because "if we just pass legislation and there 
is no follow-through it won't be worth it." 
 
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Need more anti-corruption justices 
---------------------------------- 
 
¶10.  (SBU) Ombudsman Simeon Marcello told Michalak his 
greatest obstacle to prosecuting corruption cases is the 
low number of cases the Philippine corruption court 
("Sandiganbayan") is able to handle.  The key to change 
is increasing the number of justices and allowing single 
justices to hear cases instead of using the current panel 
system, he said.  Acknowledging the need to improve anti- 
corruption efforts, Marcello asked, "How can I fight a 
war without soldiers?"  The budget now before Congress 
increases his office's funding by enough to add an 
additional 48 prosecutors and 200 investigators to his 
staff, but according to Marcello, that is still not 
enough.  He estimated he needs another 100 prosecutors to 
effectively pursue all of the cases the Ombudsman's 
office should be prosecuting.  Even with the increased 
budget, he said it will be difficult to find enough 
qualified individuals to fill the new positions because 
authorized salaries are low.  He also said that if he 
files more than the current number of cases each month, 
the court would not have the capacity to hear all of the 
cases.  He was hopeful that some of the MCA money the 
Philippines may receive will be used to address these 
inadequacies. 
 
---------------------------- 
Business leaders pessimistic 
---------------------------- 
 
¶11.  (SBU) Michalak also met with American and Filipino 
Business leaders during his visit.  They welcomed the 
news that APEC is pursuing action on Avian Flu, 
underscoring that a widespread outbreak could be 
devastating for the region (ref A).  There was limited 
awareness of APEC's activities among leaders not already 
engaged on APEC, but APEC Business Advisory Council 
(ABAC) members are influential in Philippine circles. 
Former Foreign Affairs Secretary and ABAC member Roberto 
Romulo told Michalak he thinks trade facilitation should 
be the top priority for APEC.  He noted that the growing 
number of FTAs in the region sometimes disrupts trade 
more than stimulates it.  Templates for WTO-plus 
agreements from APEC could prove useful in ensuring that 
these trade pacts harmonize.  Michalak told ABAC members 
that the U.S. hopes to see ABAC more active in APEC 
deliberations. 
 
¶12.  (SBU) Concerning the economic situation in the 
Philippines, the business leaders were uniformly critical 
of the Philippine courts and the BOC.  Potential 
investors need more predictability from both regulatory 
agencies and the courts in interpreting laws, they said. 
While agreeing that East Asia will be a growth driver for 
firms, both American and Filipino business executives 
expressed concern that the Philippines is becoming 
marginalized.  Business leaders said the Philippines does 
not stack up against other investment destinations 
because of the unpredictable implementation of laws and 
regulations as well as rising labor costs. 
 
Johnson