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High corruption levels severely restrict the efficiency of businesses operating in the Philippines. Extensive bribery within the public administration and vague and complex laws make foreign companies vulnerable to extortion and manipulation by public officials. Favoritism and undue influence are widespread in the courts, leading to time-consuming and unfair dispute resolution, and to an uncertain business environment. Corruption plagues the customs administration, and fraud routinely occurs for companies when filing import and export documentation. The Anti-Graft and Corrupt Practices Act criminalizes active and passive bribery, extortion, abuse of office and conflicts of interest. Giving gifts, except for gifts of insignificant value given in line with local customs, is prohibited. Facilitation payments are not addressed by anti-corruption regulations and private sector bribery is not criminalized. The legislative framework for fighting corruption is scattered and is not effectively enforced by the weak and non-cooperative law enforcement agencies.
Last updated: October 2017
Corruption risks are high in the judicial system. Bribes and irregular payments in return for favorable judicial decisions are common (GCR 2015-2016). The judiciary is formally independent, but the rich and powerful have frequently influenced proceedings in civil and criminal cases (BTI 2016). Procedural fairness and transparency are severely undermined by nepotism, favoritism, and impunity (HRR 2016). Companies do not have sufficient faith in the independence of the judiciary and they rate the efficiency of the legal framework in settling disputes and challenging regulations as poor (GCR 2017-2018). Investment disputes can take several years to resolve due to a lack of resources, under staffing, and corruption in the court system (ICS 2017). Low salaries for judicial officials are said to perpetuate the problem of bribery (BTI 2016). The judiciary is underfunded by the state and often depends on local sponsors for resources and salaries, resulting in non-transparent and biased court decisions (FitW 2017). Foreign investors have noted that the inefficiency and uncertainty in the judicial system are disincentives for investment; investors regularly decline to file disputes due to the perception of corruption among personnel and the complex and slow litigation processes (ICS 2017). Enforcing a contract takes much longer than the regional average, but the costs involved are significantly lower (DB 2017).
In one recent case, a businessman filed an administrative complaint in the country's Supreme Court against Makati City judge for allegedly asking for a PHP 15 million bribe in exchange for a favorable ruling in an insurance claim (Inquirer, Aug. 2016). At the time of review, no further updates on the case were available.
There is a high-risk of corruption when dealing with the police. The national police force is widely regarded as one of the most corrupt institutions in the country (ABS CBN, Jan. 2017). Reports of the police and military engaging in corruption, extortion, and being involved in local rackets are widespread (FitW 2017). Companies report that they cannot rely on the police services (GCR 2017-2018). More than half of firms pay for private security (ES 2015). Businesses rate the National Police's commitment to fighting corruption as 'poor' (SWS 2016). President Duterte has accused several police generals of being involved in the trafficking of illegal drugs (ABS CBN, Jan. 2017).
In one corruption case, Police Commissioner Mr. Sombero, is under investigation for allegedly facilitating a PHP 50 million bribe from gambling tycoon Jack Lam, who tried to bribe immigration authorities in order to release approximately 1,300 Chinese nationals who were working in his resorts illegally (CNN Philippines, Feb. 2017).
Companies contend with a high corruption risk when dealing with the public services. Approximately half of business executives reported being asked for a bribe by someone in the government in 2016 (SWS 2016). Nearly three out of five business reported expecting to give gifts in order 'to get things done', but only one in ten reported expecting to give gifts to get an operating license (ES 2015). Irregular payments and bribes in the public utilities sector sometimes occur (GCR 2015-2016). Philippine officials involved in processing documents related to civil and property registration and building permits are more likely to solicit bribes compared to officials dealing with other types of services (Ombudsman's Office Survey 2013). Inefficient government bureaucracy is ranked as the most problematic factor for doing business in the Philippines (GCR 2017-2018). Civil servants often do not have the resources or abilities to fulfill their tasks free from corruption and red tape (BTI 2016). Furthermore, civil servants are generally not recruited in a competitive manner; appointments are based on a practice of patronage (BTI 2016).
The total number of procedures required to startup operations, including registering the company with local government and getting a construction permit, are significantly higher than regional averages (DB 2017). Getting electricity takes significantly less time than elsewhere in the region (DB 2017).
Corruption risks in the land administration are high. Two out of five companies report expecting to give gifts when obtaining a construction permit (ES 2015). Property rights are formally recognized and protected in the Philippines, but in practice the law is not always upheld (ICS 2017). Businesses have insufficient confidence in the protection of property rights (GCR 2017-2018). Corruption and arbitrariness in the application of the law is common (BTI 2016; ICS 2017). Multiple agencies are responsible for land administration, which has led to overlapping procedures for land valuation and title registration; this has made the process costly (ICS 2017).
The court system is slow to resolve land disputes (ICS 2017). Land records are not properly managed due to a lack of trained personnel and funds (ICS 2017). Foreigners are not allowed to directly own land, but they may lease land for up to 50 years with a possible one-time extension of 25 years (ICS 2017). Expropriation is possible under Philippine law; the law calls for fair market value compensation, but coming to a mutually acceptable price can be a lengthy process in the court system (ICS 2017). Registering property takes nine procedures in the Philippines, which is double the regional average (DB 2017). However, the total time required is less than half of the regional average (DB 2017).
There is a high risk of corruption when dealing with the tax administration. Around one in seven companies indicate they expect to give gifts in meetings with tax officials (ES 2015). Tax regulations are among the most problematic factors for conducting business in the Philippines (GCR 2017-2018). Companies indicate that they perceive that only a fifth of businesses in their line of business pay their taxes honestly (SWS 2016). Officials at the Bureau of Internal Revenue (BIR) are believed to be prone to corruption and known for embezzlement and extortion (Manila Bulletin, Feb. 2014). A typical example of this can be found in a recent case in the city of Bacolod; an officer with the BIR was caught extorting PHP 125,000 from a local company (Philippine News, Mar. 2017). Businesses rate the BIR's commitment to fighting corruption as poor (SWS 2016). On a more positive note, there are signs that the BIR is pursuing more cases of tax evasion (BTI 2016).
Companies make twenty eight tax payments a year, which is higher than the regional average (DB 2017).
There is a high risk of encountering corruption when dealing with the customs administration. Companies indicate that irregular bribes and payments in import and export procedures are very common (GETR 2016). About a quarter of companies indicate they expect to give gifts when obtaining an import license (ES 2015). A business survey indicates that the Bureau of Customs (BOC) was the only agency receiving a rating of ‘very bad’ when it came to its commitment to fighting corruption (SWS 2016). Companies cite burdensome import procedures and corruption at the border as being among the most problematic factors for importing (GETR 2016). The efficiency and time predictability of procedures are rated as poor (GETR 2016). Border compliance costs in the Philippines are significantly higher than the regional average, whereas the time required is in line with the regional average (DB 2017).
The Bureau of Customs (BOC) has indicated that smuggling of goods, among which cigarettes, vehicles, and oil, into the Philippines has led to the evasion of taxes worth at least USD 1 billion yearly (Philstar, Feb. 2017). Consistent fraud in the form of under-invoicing when importing and exporting costs the state USD billions in revenues each year (Wall Street Journal, Mar. 2014). In 2016, the BOC alleged one of its employees accepted as much as USD 4 million in bribes monthly (Rappler, Aug. 2016).
There is a very high risk of corruption in the public procurement sector, which is subject to rampant corruption, irregularities, and inconsistent implementation of legislation. Likewise, more than a fifth of businesses report they expect to give gifts in order to win a government contract (ES 2015). Two in five companies indicate that most companies in their sector give bribes in order to win contracts (SWS 2016). Diversion of public funds as well as favoritism in the decisions of public officials is very common (GCR 2017-2018). The public sector is obliged to procure goods and services from companies with at least 60% Philippine ownership (ICS 2017). Local-level public procurement lacks transparency, fostering a culture of corruption through the misuse of the pork barrel system; which are funds for discretionary use by representatives for projects in their respective districts (BTI 2016). Philippine law allocates responsibility for monitoring, investigating and sanctioning irregularities in public procurement to a number of different state institutions, leaving potential misconduct, inefficiency and impunity unchecked (Sunlight Foundation, Oct. 2013).
Companies operating in the natural resources sector face a high risk of corruption. The Philippines has shown marked improvements in its natural resource governance in the past few years; the country has a good enabling environment and its regulatory quality and control of corruption are judged as adequate (NRGI 2017). However, poor value realization and revenue management have caused the country's overall resource governance to be judged as 'weak' (NRGI 2017). The Philippines has been working to achieve compliance with the Extractive Industries Transparency Initiative (EITI) since joining in 2013 (EITI 2016). Some mining contracts are publicly disclosed via the EITI portal. While transparency in the sector has improved, poor regulation and overlapping policy responsibilities between local and central governments have meant that small-scale mining is still a contentious issue (EITI 2016).
Government corruption has allowed mining companies to evade government regulations, which has resulted in large-scale deforestation, flattened mountaintops and water pollution (New York Times, Apr. 2017). The government responded by cracking down on illegal mining operations; and as of 2017 Secretary of the Environment Gina Lopez shut down 28 of the country's 41 mining companies for polluting the environment (New York Times, Apr. 2017). However, Lopez was removed from her job by Congress in May 2017 after mounting complaints from the pro-mining lobby (Mining.com, May 2017).
Companies should note that the legal anti-corruption framework in the Philippines is complicated and poorly enforced; there is a lack of cooperation between law enforcement agencies, and officials are rarely prosecuted and convicted for corruption crimes (HRR 2016). The Anti-Graft and Corrupt Practices Act criminalizes active and passive bribery, embezzlement, extortion, abuse of office and conflict of interest in the public sector. Bribery of public officials and trading in influence are also criminalized in the Anti-Red Tape Act. The Act forbids office-holders from accepting any gifts or material benefits in exchange for any government permit or license. Under the Revised Penal Code, gifts are classified as indirect bribery. An exception is made for gifts of insignificant value given as a token of friendship in line with local customs. Facilitation payments are not addressed in the law. Private sector bribery is not criminalized (UNODC 2014). Under the Code, public officials are required to regularly file a statement of their assets and liabilities. In case of any discrepancy between the official's asset declaration and the amount of property or financial assets actually possessed, the official is subject to immediate dismissal. Punishments for corrupt acts includes imprisonment of up to ten years, a fine, removal from office, and/or confiscation of property. The Anti-Money Laundering Act criminalizes money laundering and organized crime. The Act Establishing a Code of Conduct and Ethical Standards for Public Officials and Employees formulates standards for the personal integrity and accountability of civil servants. The Government Procurement Reform Act requires competitive and transparent bidding. Philippine legislation does not contain any provisions on protecting whistleblowers who report on corruption. The Philippines has ratified the United Nations Convention against Corruption.
The Constitution guarantees freedoms of speech and of expression, but in practice these freedoms are not consistently upheld (HRR 2016; BTI 2016). The media environment is largely privately owned and diverse, and the state generally exercises very little censorship (BTI 2016). The views represented in the mainstream media are heavily influenced by the oligarchical owners of many of the outlets (BTI 2016). The Philippines is the second most dangerous country in the world for journalists to operate in, as measured by the number of journalist deaths (BTI 2016). The state is not directly responsible for the violence, which can mostly be blamed on local strongmen and criminals and the weakness of the authorities (BTI 2016). The existence of libel and defamation laws remains a problem and are frequently used by officials and powerful individuals to try to silence journalists (FotP 2016). The media does frequently report on high-level corruption cases (FotP 2016). Independent observers report that bribes and other incentives are often used by high-level officials to motivate journalists to create one-sided reports for the official's benefit (HRR 2016). Internet access is widely available, but there are concerns about the government trying to install some degree of censorship (FitW 2017). The Philippine press is classified as 'partly free' (FotP 2016).
Philippine civil society is active and is represented by a wide variety of different organizations. Public participation is high and civil society organizations (CSOs) enjoy a high level of social capital (BTI 2016). CSOs are normally not included in formal decision-making, but they play a large role in initiating legislation and steering debate in Congress (BTI 2016). There are a multitude of watchdog organizations monitoring implementation of policy (BTI 2016).
- World Economic Forum: Global Competitiveness Report 2017-2018.
- World Bank: Doing Business 2017.
- US Department of State: Investment Climate Statement 2017.
- Freedom House: Freedom in the World 2017.
- Natural Resource Governance Institute: Philippines Country Profile 2017.
- Mining: "Philippines Shows Anti-Mining Environment Minister the Door", 3 May 2017.
- New York Times: "Philippines Moves to Shut Mines Accused of Polluting", 27 April 2017.
- Philippine News: "NBI Entrapment Operation: Bacolod BIR Officer Caught Extorting Money", 16 March 2017.
- CNN Philippines: "Sombero Tries To Clear Name, Says There Was 'Extortion' Not 'Bribery', 16 February 2017.
- Philstar: "Customs Sets Probe on P50B Smuggling", 12 February 2017.
- ABS CBN: "Long History of Corruption in Philippine Police Force", 18 January 2017.
- Social Weather Station: Survey of Enterprises on Corruption 2016.
- Bertelsmann Foundation: Transformation Index 2016.
- US Department of State: Human Rights Report 2016.
- Extractive Industries Transparency Initiative: Philippines Country Profile 2016.
- World Economic Forum: Global Enabling Trade Report 2016.
- Freedom House: Freedom of the Press 2016.
- Inquirer: "Trader Claims Makati Judge Sought P15M Via Middleman", 24 August 2016.
- Rappler: "Customs Bureau Submits 'Strong Case' vs 'Corrupt' employee to DOJ", 22 August 2016.
- World Economic Forum: Global Competitiveness Report 2015-2016.
- World Bank Group: Enterprise Surveys - Philippines 2015.
- UNODC: Philippines UNCAC Implementation Review 2014.
- Wall Street Journal: 'New Philippines customs chief cracks down on corruption', 10 March 2014.
- Quartz: "Smuggling Cost the Philippines USD 3 Billion in 2011", 3 February 2014.
- Manila Bulletin: 'If the price is right', 2 February 2014.
- Office of the Ombudsman: 2013 National Household Survey on Experience with Corruption in the Philippines.
- Natural Resource Governance Institute: Resource Governance Index 2013.
- Sunlight Foundation: 'Transparency case study: public procurement in the Philippines', 7 October 2013.
The issue of corruption in the Philippines has once again hit international newspapers with reports that the chief justice of the Supreme Court, Renato Corona (currently undergoing an impeachment trial before the Philippine Senate), had dozens of dollar accounts with millions of dollars flowing through them. Of course, reports on corruption are continually in the Philippine media.
As I have quoted the Political & Economic Risk Consultancy (PERC) before, “the media, even more than the courts, is the forum in which all sides try to wage their battles of defamation.” I’ve repeatedly written about corruption, and The Asia Foundation has supported efforts to bring more clarity to the discussion – to go beyond politicized battles – most thoroughly represented in the book by Michael Johnston.
A year ago there was another impeachment case against the former ombudsman (anti-graft prosecutor) that led The Economist to ask cynically, “Progress or Payback?” Now, one year on, we are faced with the same conundrum: Is the trial of the chief justice part of a political vendetta (since he was perceived to be protecting former President Arroyo), or just the next logical step in removing blockages to President Aquino’s successful 2010 campaign slogan, “If there’s no corruption there’s no poverty?” The plain fact of the matter is that for those outside a small circle of decision-makers it’s impossible to tell. An optimistic read could point to broader bureaucratic reforms (to which I’ve pointed in analyzing presidential power) while pessimists might cite PNoy’s alleged favoritism to classmates, friends, and shooting buddies.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
The purpose of this blog isn’t to argue either the pessimistic or optimistic case. Rather, it’s to try to better understand the political economy structure of corruption so as to be able to point to some directions forward.
A long-standing starting point for understanding the logic of corruption is Robert Klitgaard’s formulation: C = M + D – A (Corruption = Monopoly + Discretion – Accountability).
That is, when someone has the monopoly over decisions on how to do things (hire people, contract roads, purchase supplies) and a wide range of discretion in making decisions, there’s likely to be more corruption – which can be reduced by introducing accountability mechanisms like transparency of information, independent audits, and the like. Using this heuristic, the Foundation has supported partners in the Philippines working on procurement (particularly with the Departments of Education and Health), cities whose mayors wish to reduce corruption so as to be more investor-friendly, and general civil society (including business associations) efforts to increase accountability.
A recent paper introduces a considerably more complex formal model that includes a bureaucratic decision-maker, different types of clients with differing willingness and ability to pay, and variations in rules about prices, testing, and allocation of the (abstract) good being provided. A warning to fellow non-economists: slogging through the equations and derivations can be slow. The general logic is clear and some of the implications are interesting, such as the suggestion that “red tape” is more likely in governments serving the poor since poor people have less ability to pay than what a service is worth to them (and thus are more willing to endure red tape).
In checking the formal abstract model against what is known about corruption in the real world, the authors note success stories such as those related by Klitgaard. As is the experience with our programming in the Philippines with cities or government agencies, these anti-corruption successes “all seem to involve a person at the top of each institution who was eager to implement” reforms. But then the question arises: why aren’t such examples more frequent or sustained? Why don’t leaders pursue these reforms more often?
Politics, of course, is the answer. Repeatedly, in the Philippines it has been demonstrated that reducing bureaucratic corruption in particular agencies, or in particular cities, is possible with the cooperation of the leaders at the top and in partnership with citizens, businesses, and NGOs. But such successes do not yet seem to touch political corruption – the use of corruption to gain, keep, and exercise power as witness the “hello garci” scandal regarding the 2004 election in the Philippines and the continued pervasiveness of money politics. This is where the analysis of Michael Johnston is valuable in laying out the logic of “Oligarchs and Clans,” which is the political economic situation in which the Philippines finds itself. This is where corruption is the most harmful to economic growth since decisions or policies of one administration tend to be arbitrarily overturned by a subsequent one (even within presidential administrations as one faction takes over, for instance, a department and uses it as a platform for the next electoral cycle rather than technocratic policy-making).
Johnston’s medium-to-long-term prescription is rooted in the need to change the relation between citizens and their elected officials. Under Oligarchs and Clans, voters tend to reward particular favors (from purchased votes to paying health expenses) rather than effective performance in managing government and delivering service. He suggests an indicator and benchmark strategy that picks services important to people (for example, education or health), develops indicators of good performance, publishes them against benchmarks, and helps citizens hold officials accountable. In a sense, this is adding direct governmental involvement to some of the ideas involved in “social accountability.”
A recent book, The Institutional Revolution by Douglas Allen, studies the effect of better measures of performance to explain changes in institutions (such as the military) at the beginning of the industrial era in Britain (roughly 1780 to 1850). For example, purchase of offices used to be the accepted method of staffing a bureaucracy, but after time, distances, tasks, and talent became more accurately measured then meritocracy could become a viable recruitment strategy. In Allen’s historical account, the “sovereign” using benchmarks and indicators was the Crown. In the current version, Johnston is proposing to “deepen democracy” in order to empower citizens to hold government accountable against objective measurements.
Put this way, reducing both the demand for and supply of corruption can take decades. With the modern pace of politics, the campaign for the May 2013 midterm elections (regarded as a rehearsal for the 2016 presidential elections) is already heating up. Necessary as it might be, designing and implementing a long-term strategy is a daunting task.
Steven Rood is The Asia Foundation’s country representative in the Philippines. He can be reached at [email protected] The views and opinions expressed here are those of the individual author and not those of The Asia Foundation. This article originally appeared at the Asia Foundation's site here.