Philippine Fly-Over

posted by
on September 25, 2007

CLARK FIELD, Philippines — The economic potential of the Philippines — and all the reasons it has yet to live up to that potential — come sharply into focus as soon as a visitor lands. Literally. With Manila’s current major international air terminal, some 50 miles to the city’s south, already too congested for serious expansion, the battle over the future of the Philippines’ next premier international air gateway has become a microcosm of all that the country could be, and all that’s holding it back.

Still widely known as “Clark Field,” the old name from its days as an American military airbase, the airport-in-waiting is now officially the Diosdado Macapagal International Airport, in honor of the former Philippine president and father of current President Gloria Macapagal Arroyo. And Ms. Arroyo has been playing the crucial, and often conflicted, role in determining the airport’s future.

Clark and its surrounding community in the province of Pampanga have never been rich. In its heyday during the Cold War, Clark Air Base bustled with energy as a major U.S. listening post and home of the 13th U.S. Air Force. But in June 1991, the U.S. Air Force, under fierce attack from nationalist forces in the Philippine Senate, finally flew out, leaving Clark covered in the volcanic ashes spewed out by nearby Mt. Pinatubo. Clark immediately fell upon hard times. Looters stripped the base clean, down to the toilet lids.

Things began to change in January 2006, when Ms. Arroyo — responding to complaints from the Pampanga business community that too many regulations from Manila were holding back Clark’s potential — signed an executive order unilaterally proclaiming open skies. The move unleashed the forces of economic liberalization at Clark by allowing foreign airlines to fly in hundreds of thousands of tourists from Korea, Singapore, Hong Kong, Macau, Malaysia and as far away as Dubai. It also opened the door to all the trade that could be conducted via the cargo holds of those planes. The formerly sleepy Clark, which processed fewer than 50,000 passengers three years ago, took off, bringing in nearly 500,000 last year. And prices are dropping. Singapore’s Tiger Airways has been offering flights from Macau to Clark for $9.99.

The benefits aren’t so much trickling into the local economy as pouring. More than 50,000 Filipinos now work here, some 10,000 more than were employed when the Americans ran the place. More jobs are coming as foreign companies find it easier and cheaper to move people and goods in and out.

Texas Instruments is putting in a billion-dollar semiconductor plant. The United Parcel Service has made Clark a regional hub. Yokohama Tire Philippines is making a $100 million expansion, and is exporting tires from Clark all around the world. Shoemart, the big Philippine retail giant, has moved in, as has Jollibee’s, the Philippine answer to McDonald’s (which also serves the nearby community). Other foreign and Philippine entrepreneurs are opening up more businesses to cater to the workers and tourists: hotels, restaurants and so on.

But the growth remains fragile, and will come to a halt if Ms. Arroyo’s government insists upon bringing Clark’s passenger traffic back to a trickle. Which, alarmingly, is just what the government has tried to do. In August 2006, just eight months after the initial liberalization, Ms. Arroyo bowed to pressures from domestic protectionist cronies — the most well-known of whom is billionaire Lucio Tan, the owner of Philippine Airlines — and issued a revised executive order aimed at slowing down the foreign airline traffic. While the numbers for arriving passengers were still up some 35% in the first quarter of this year, it is clear that Clark’s ambitions to become the Philippines’ premier gateway have been seriously threatened.

Citing “the continued uncertainty regarding the regulatory situation at Clark,” Tiger Airways announced on March 23 that it would be reducing its flight frequency from Singapore to Clark to nine weekly flights from 14. As Clark spokesman Arnel San Pedro told me, local business leaders are outraged that the national government would “refuse to prosper because of the subservience of some greedy people to the personal interests of ‘Manila’s Imperial Dragons.'”

Ms. Arroyo’s reversal was especially galling because Mr. Tan — the archetypal “imperial dragon” — is such a terrible well from which to draw economic advice. He first got really rich in the 1970s, thanks to various tax breaks and favors bestowed by former Philippine strongman Ferdinand Marcos. Understandably, the Chinese-born tycoon takes a dim view of cuttthroat market-oriented competition from foreign-run budget airlines. His critics revile him as the personification of what’s wrong with the Philippine economy.

But Mr. Tan’s current ally in the presidential palace, Ms. Arroyo, is more forgiving. In 2002, the president honored him for his “lifetime” of achievements in “helping build the nation.” Numerous press reports from Manila have it that Mr. Tan has been among Ms. Arroyo’s most generous sources of campaign financing; presidential press secretary Ignacio Bunye declines comment.

Now Ms. Arroyo is being pressed by a deeply concerned Clark business community that believes that Mr. Tan’s influence upon the Arroyo administration is pulling the economic ladder out from under them. The airport’s energetic chief executive, Victor Jose Luciano, made an impassioned presentation last month to Ms. Arroyo and her cabinet urging the president to issue a third executive order undoing the damage she created with her second one back in August 2006.

Ms. Arroyo holds a doctorate in economics, so she presumably understands that her first instincts to open the Philippine skies were the right ones. Her method may be problematic, though. When she moved to slow down the Philippines’ open skies prospects last year, Ms. Arroyo’s public rationale was that instead of unilateral liberalization, the Philippines would negotiate with foreign governments for increased access to their airports in return. Indeed, the Arroyo administration has recently concluded negotiating a major expansion of passenger landings for flights between the Philippines and South Korea.

But behind the scenes, Mr. Tan seems to dominate the process. A leaked copy of the Aug. 9, 2007, minutes of the Philippine government’s official air negotiating panel shows that nine of the 23 members aren’t government officials, but work for Mr. Tan’s PAL and two other Tan-owned airline and cargo operations. Cebu Pacific, another domestic carrier that is following Mr. Tan’s anti-open skies lead, has another two seats.

Since in practice the Philippine airline negotiating body seeks unanimous consent to schedule negotiations with foreign airlines, Mr. Tan effectively has veto power — and last month’s minutes make clear that PAL sees “no immediate need” for urgency in scheduling many more air talks. Supporters of open skies report that the last air talks the Philippine government held with Macau were in 2001, that similar negotiations with Hong Kong last occurred in 1996, and in 1995 for Malaysia and Thailand.

From PAL’s perspective, why hurry? Philippine airline industry sources who ask not to be identified report that Mr. Tan’s airline has found a wonderful way to profit from current restrictions. When passenger quotas assigned by the Philippine authorities to, say, Macau, or Hong Kong, or Dubai, have been filled, the Philippine government has given expanded entitlements to fly more passengers to PAL, which turns around and “rents” those entitlements to foreign carriers. While the details of such deals remain confidential, credible industry insiders report that Dubai is paying PAL at least $1 million a year in passenger rents. Not that this money is “free,” of course: The foreign carriers pass the extra expense on to fliers — many of whom are hard-pressed Philippine overseas workers — in the form of pricier tickets. Mr. Tan, who declined persistent requests to be interviewed for this column, is turning a profit for PAL without flying his own airplanes.

The question now is whether Ms. Arroyo will be able to summon the political courage to stop him from doing it. She might reflect on some history. When the airport’s namesake, her father — an economic reformer — was elected in 1961, the Philippines boasted the second-largest economy in Asia, second only to Japan. When Ferdinand Marcos won election four years later, he went on to help enrich his cronies while crippling the economy with an array of protectionist schemes. With a stroke of her presidential pen, Ms. Arroyo could not only re-open Philippine skies to economic development, she could also prove that “Philippine prosperity” doesn’t have to be an oxymoron.
Mr. Rushford is editor of The Rushford Report, an online journal that follows the politics of international trade and diplomacy.