Initial Response to COVID

On January 30 2020, the first cases of COVID-19 in the Philippines were confirmed. Since then, the number of cases in the country has increased exponentially.

COVID-19 immediately hurt businesses from nearly all industries in the Philippines.

Within two weeks of the first case, consumer spending began falling. The central bank immediately cut interest rates, pre-empting the possibility of a much worse crisis ahead.[F52] 

Government agencies announced the implementation of a four day workweek to curb the spread of the virus.[F64] Major producers associations, such as the Confederation of Wearable Exporters of the Philippines, began implementing forced leave among its workers due to the fall in demand of their products as well as to decrease the spread of COVID-19.[F62] Hospitals began rationing PPE and preparing for the worst. Most shipping from infected countries such as China to the Philippines stopped.

The entire country braced itself for the worst epidemic in recent human history.

Central Government Response to COVID-19

The government would also initiate various programs designed to stimulate the economy and stave off a recession.
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This included a $3.76 USD billion initiative to stimulate the economy through negative interest rate loans to encourage businesses to retain their employees.[F133] Subsidies to state owned companies were increased by the government by roughly 300% during the first quarter of 2020.[F191]

The government-owned Power Sector Assets and Liabilities Management Corp., which provides powers to most companies in Philippine ecozones, would provide their customers with a grace period of paying their fees which due dates fall during the period of the enhanced community quarantine.[F155]

Writing for Business World, lawyer Tiffany Ann would say:

“Indubitably the economy will take the hardest hit. It is a daunting challenge for the government to balance the economy and the health of the populace. While we are, of course, very concerned about people’s health, we need to keep the economy going. Some businesses must operate, albeit not ‘business as usual’ and with very stringent restrictions.” [F148]

PEZA Response to Government Quarantines

The quarantine measures came as a huge blow to the tenants in PEZA.
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Many of the measures would force the tenants to make difficult choices, and hinder their ability to operate. PEZA, which had been dealing with years of negative growth and issues often related to corporate tax reform, strongly came out in opposition to many of the quarantine measures.

Instead, PEZA would seek to implement measures of its own that would both curb the spread of COVID-19 and allow business to resume in a limited capacity.
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Describing her concerns surrounding the national government’s quarantine rules, PEZA director Charito Plaza said:

“My worry is, if these government prohibitions and requirements will stay longer, companies might transfer their production quota to other countries’ branches of our investors and ultimately transfer entire investments outside the Philippines.” [F149]
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Over time, PEZA’s leadership would see value in the spirit of cooperation. PEZA would continue supporting and working closely alongside other government entities as quarantines would be extended.[F167]

Quarantine Measures in Filipino SEZs

PEZA would be slow to acknowledge the threat of COVID-19.

Publicly, PEZA avoided making references to COVID-19. Privately, PEZA opposed the implementation of quarantine measures.

As late as March, various new zone investment projects continued to be proposed. PEZA would, in its press releases, generally ignore COVID-19 and focus on these. In March the town of Sablan announced plans to attempt to become designated as an economic zone, and PEZA announced plans to expand economic zones in the northern city of Baguio.[F57][F58]

However, as March progressed, the number of COVID-19 cases involving SEZ workers around the country began rapidly increasing.[F60]

This would result in a strong response by the central government as well as local governments, forcing PEZA to begin implementing quarantine measures of its own.

The specific details of the quarantine measures in PEZA zones are in flux, and evolve rapidly on a week to week basis. However, the theme of taking measures to curb the spread of COVID-19 while allowing “business as usual” has been constant.[F135]

Describing some of the earliest measures taken by the regulatory agency, PEZA director Charito Plaza said:

“We are doing our best not to cripple the economy but also to protect each other in times like this because, as Filipinos, it is our inherent duty to our flag and our country. At the same time, we want to give the best quality of service to our clients despite the threat of COVID-19.”[F135]

“Social distancing and thermal scanning are being implemented on all vehicles. Facial masks are also required for their employees when going to work. Big companies have also adapted the work-from-home scheme and provided housing for their skeletal workforce who will need to come in.”[F142]

The first quarantine measure taken by COVID-19 would be to order all SEZs nationwide to implement a skeleton crew system.

The goal of this system would be to minimize the number of personnel physically located in the zone at any given time and maintain minimal continued business operations.[F135]

PEZA workers would be allowed to enter and exit zone checkpoints provided that the employees had PEZA approved stickers designating their status as part of an approved skeletal workforce.[F142]

Instead, the PEZA encouraged tenants to implement “alternative work schemes” so that workers would not have to be physically located in zones or in close proximity to each other.

Some of the alternative work schemes which would be implemented included a four day work week, exemptions from normal quarantines for cargo, and a variety of work from home schemes.[F135][F136]

PEZA would also implement a number of economic relief measures to help its tenants weather the pandemic.

Under normal conditions, PEZA operates on a “use it or lose it” basis to prevent inactive companies from using up available real estate space in zones. PEZA also wants to avoid companies being registered in zones on paper but de facto operating elsewhere in the country.
 

Companies aiming to shut down would still need to seek permission from PEZA regulators.[F146]

The new quarantine rules would also allow companies to partially relocate their equipment and operations overseas for the duration of the crisis and maintain a good standing with PEZA.[F146]

PEZA would also temporarily suspend tenant rent payments for 90 days, utility payments for 30 days, add a 90 day grace period for all prior unpaid bills, and defer various permit and processing fees.[F192]

March 2020 PEZA Guidelines

On March 5, PEZA would release a number of guidelines for tenants operating in economic zones.[F165] These guidelines would be clarified on March 20.[F147]

Below is a list of the guidelines and rules announced by PEZA:

PEZA would work closely with a number of other government agencies to guarantee the enforcement of the quarantine measures.[F166]

Economic Impact of Zone Closures and Quarantines

Quarantines and zone closures would have significant negative economic impacts on zone tenants and the surrounding populations.

Q1 investments into PEZA registered zones fell by 28% from $450 million USD in Q1 2019 to $330 million USD in Q1 2020.[F170]

Exports by manufacturers in PEZA zones would fall 66%, from $12.94 billion USD in Q1 2019 to $4.36 billion USD in Q1 2020.[F170]

Economic zone closures resulted in job loss for hundreds of thousands of workers. 68,000 workers in the Cavite Economic Zone and more than 100,000 workers in the Mactan Economic Zone would lose their jobs.[F150][F141] In Luzon alone, 750 tenants operating in zones would cease operations, leaving their employees without work.[F164]

Case Study: Closure of the Cavite Economic Zone

Nearly all SEZs in the Philippines experienced temporary COVID-19 related closures.

One of the earliest and most significant zone closures was that of the Cavite Economic Zone. The closure of Cavite would set a precedent and mark the beginning of a pattern common to the other zones elsewhere in the country.

The closure of Cavite would only last four days, and would be interrupted by the protests of upset tenants.

The Cavite Economic Zone is one of the largest SEZs in the Philippines. It was inaugurated in 1995, at the start of the country’s economic zone program. Located 30 km south of Manila, by 2020 it had grown to become one of the largest manufacturing zones in the country with 439 tenants located in the zone.[F142] Just prior to COVID-19, the zone exported $3.5 billion USD worth of goods.[F151]

In early March 2020, the region surrounding the Cavite SEZ reported 10 cases of COVID-19. The local government declared a “state of calamity” and began ordering businesses to cease operations. This order did not apply to the Cavite Economic Zone, as only PEZA had regulatory jurisdiction over the zone.[F142]

This triggered a short dispute between PEZA and the local government. The local government hoped to close the zone to prevent the spread of the virus, whereas PEZA sought to continue business operations.

On the evening of March 19 2020, PEZA ordered businesses in the zone to cease operations due to a wave of infections in the nearby area. 68,058 workers suddenly found themselves out of work due to the closures.[F141][F143]

The PEZA memo read:

“No employee shall be allowed entry into CEZ I & II starting 6:00pm today except those designated as part of the skeletal force, without express approval of the Zone Administrator.”[F141]

In the hours following the closure of the Cavite Economic Zone, PEZA would embark on a PR campaign with the goal of calming down worried tenants.

PEZA director Charito Plaza would start by giving interviews explaining that zone operations were continuing as normal elsewhere in the country. She would cite a figure that 89% of companies operating in zones were continuing to do so as normal. She would also clarify that zones were in full compliance with lockdowns, such as Luzon’s island wide lockdown.[F144]

The days following Cavite’s closure were marked by meetings between PEZA officials and upset tenants, eager to resume their business.[F145]

This would force PEZA to juggle between appealing to the Luzon authorities who were trying to maintain a strict quarantine, and placating tenants upset at the disruption of normal business operations.

Finally, on March 24, four days after the start of the closure, PEZA decided to re-open the Cavite SEZ with strict rules governing the operation of companies under quarantine conditions.[F145]

PEZA director Charito Plaza would say:

“The resumption order aims to attain PEZA’s overall goal of business continuity so as not to cripple the economy during this period. We are thinking of the employment of more than 60,000 Filipino workers and maintaining our economy [to survive the] crisis caused by COVID-19. PEZA’s exporters as global market-driven are most vulnerable to world trade and military wars, local and global disasters or calamity like the global pandemic COVID-19 amongst others. However, we will do our best to not totally shut down our economy and the livelihood of our thousands of workers. [...] Nevertheless, PEZA will strictly enforce and comply with the health and quarantine measures and requirements as mandated by the National Government. The Authority assures that it values the health and safety of its locators, workers, and surrounding communities and supports the government’s effort in trying to stop the spread of COVID-19.”[F145]
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Only 16 of the 439 companies in the Cavite Economic Zone would resume operating in the week following PEZA’s decision to reopen the SEZ.[F151]

The companies would only operate in a limited capacity. Only a small skeleton crew would remain in the zones, and in the words of the Inquirer were “barely keeping afloat the export-oriented industry.”[F151]

The largest tenants in the Cavite Economic Zone, such as the Japanese HRD Group which manufactures construction materials for houses, would remain closed. All of HRD’s 23,000 workers found themselves without work.[F151]

Over time, more tenants would slowly re-open shop, although the zone would remain mostly empty.

Online Gambling in Filipino SEZs

The gambling industry plays a significant role in the economy of free zones in the Philippines. Most of the country's legal casinos are located in SEZs, and many operate as gambling hubs.
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In addition to physical casinos, the country hosts numerous online gambling websites. These websites are targeted towards an international clientele. The industry is divided between legal and illegal operators.
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The legal online gambling companies, known as Philippine Offshore Gaming Operators (POGOs), are strictly regulated. A of 2019, there are 60 licensed operators.[F35] Many operate out of SEZs.
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POGO licensing fees are the third largest source of revenue for the Filipino, bringing in more than $1.4 billion USD per year.[F35]
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Various PEZA approved zones have the ability to regulate the online gambling industry in the Philippines.
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With the global pandemic forcing nearly 4 billion quarantined people worldwide indoors, online gambling has seen an unprecedented boom.
Israeli based online gambling firm Optimove reportedly saw unprecedented increases in its activity:
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“The company saw a 43% in online poker games and a massive increase of 225% of people who began to play poker online for the first time, when compared to the pre-COVID-19 figures.” [F38]
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Online gambling, in the biggest market in the world, and the main customer of online gambling services in the Philippines, China, has also seen an explosion of activity. Gambling.com reports that online gambling in China increased by 90% in 2020 compared to 2019.[F40]
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Online gambling is both illegal and very popular in China.
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As a result, most Chinese citizens gamble using online casinos based out of Filipino SEZs. These casinos are legal and state sanctioned to operate the Philippines, but illegal for overseas Chinese citizens to use.
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For years, the Chinese government has pressured countries hosting the online gambling operations such as the Philippines to shut the digital casinos down.
Despite the Filipino desire to continue profiting from the $1.4 billion USD industry, and the increased demand from China, POGOs have faced COVID related challenges.
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Travel bans implemented by the Filipino to quarantine the country have made it difficult for the mostly Chinese POGO workers to visit the Philippines.[F37] Furthermore, many Chinese POGO operations had their passports cancelled by the Chinese government.[F45]
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Instead of obeying the Chinese government, thousands of undocumented Chinese workers have flocked to the Philippines to continue working at illegal online gambling operations.[F45]
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Due to the importance of the gambling industry in Philippine SEZs, we have created a whole report about how the industry will be affected by COVID. Click here to read more.

Effects of COVID-19 on Real Estate in Economic Zones 

Prior to COVID-19, potential tenants interested in doing business inside economic zones faced a shortage of office space. 
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At the start of the outbreak, the Manila Times reported that:
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“Outsourcing firms, for example, lack PEZA-approved spaces to occupy, [a researcher] said, noting that 490,000 sqm out of the 564,600 sqm of available lands in Metro Manila are already pre-leased.” [F37]

Only zones in secondary cities and more rural areas such as Cebu, Iloilo, Metro Clark and Bacolod had enough office space left.[F37]
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COVID-19’s effects on the real estate market in SEZs was severe. In a matter of months, the market would go from overheated to underexploited.
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By May, experts would estimate that Philippine real estate prices had fallen between 5% and 15%, especially in large cities like Metro Manila.[F178]
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Another confounding factor is the presence of the online gambling industry.
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Economists estimate that if COVID-19 ultimately prevents online gambling companies from doing business in the country, SEZ vacancy will increase by 7.5%.[F37] If the Philippines online gambling industry continues to deteriorate as a result of COVID-19, this will force commercial real estate providers in zones to seek other tenants in different industries.[F46]

Real estate companies operating in zones have been hit hard by COVID-19.

Ayala Land Inc., one of the largest real estate firms in the Philippines, had planned to raise $300 million USD in a REITs IPO in February 2020.[F47] Ayala owned many of the largest offices in SEZs across the country. Plans to IPO have faced delays as the Filipino real estate market has slowed down. Furthermore, a wide variety of new costs have battered the company’s bottom line. Faced with a crisis, the company cancelled and postponed many rent agreements for its tenants.[F48] Ayala Land also helped the response effort by converting a number of commercial properties into various response centers such as hospitals, testing facilities, and shelters.[F49][F50]
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The challenges faced by commercial real estate companies like Ayala Land mean that many commercial projects in zones will likely face hurdles as the pandemic progresses. Instead of investing in potentially risky projects such as office buildings, real estate companies will focus on preserving the integrity of their current investments.
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Furthermore, many of the materials used in the Philippines come from China. This caused significant delays in the early stages of the pandemic in March as many ports banned shipments from China. As the factories in China began re-opening, the construction industry faced a new problem: the lack of workers due to disease and quarantine.[F128]
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Despite COVID-19, some real estate companies predict that the growth of the business process outsourcing sector will continue to drive up demand for offices in economic zones. As late as early March, some real estate companies estimated that outsourcing companies would still need more than 1.2 million square meters of additional office space in 2020.[F59] In April, these figures were revised down to between 800,000 and 1 million square meters.[F161]

Some real estate analysts believe that the government could ban the creation of new economic zones in the Metro Manila region.[F54] This move would increase the price of real estate inside Manila’s economic zones, and decrease the price of real estate outside of the zones.

Ports and Shipping

The role of ports to the SEZ industry is especially significant in the Philippines which has 7,500 islands, and thousands of tenants in the import-export business.
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COVID-19 would throw the shipping industry into chaos, resulting in conflict and difficult business conditions.
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In early March, the Philippine Ports Authority began warning sea travelers and shippers that COVID-19 would lead to significant issues and delays. The agency implemented a variety of measures designed to curb the spread of the disease such as the routine fumigation and disinfection of all port terminals, thermal scanning of passengers and workers, the suspension of all events or conferences, the implementation of advanced contact tracing software, and the provision of disinfectants and face masks to all employees and workers.[F129][F130]
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Most burdensome from the perspective of the shipping industry, the Philippine Ports Authority issued a “no-disembarkment” order applicable to all non-Filipino crews. Docking rights from foreign vessels from highly infected countries were cancelled altogether.[F129][F130]
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Numerous disruptions would make business very difficult. On March 26, it was announced that a worker in the Manila International Container Port had tested positive for COVID-19. As a result, all business operations ceased, and the port was closed for several days to undergo a thorough disinfecting.[F156]

These disruptions would cause many delays which would prevent critical supplies from leaving ports.
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In March, thousands of containers which had been cleared for release would be unable to leave the port of Manila. Unclear quarantine rules, failing businesses, unexpected costs, and frequent disinfections all contributed to the container glut in the port. This included more than 8,000 containers, 850 of which were refrigerated and contained food or medicine.[F158]
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A port official would complain that “containers are simply not being removed from the terminal.”[F158]
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The presence of thousands of containers stuck in transit in Philippine ports prompted a government response.
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Inter-Agency Task Force on Emerging Infectious Diseases officials responded by implementing measures to fast track the removal of medical supplies and PPEs.[F159] Later, the Bureau of Customs would respond to the stuck freight  by implementing software to track the excess containers.[F184] PEZA would lobby the other regulatory agencies for simpler rules.
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Shipping lobbyists argued that the response had been inefficient. COVID had made it hard to offload cargo, and therefore the normal demurrage fees needed to be temporarily suspended.[F179]
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Demurrage fees are fees that are charged to companies for storing cargo in ports which has not yet been offloaded. They are usually implemented to incentivize shippers to rapidly offload their cargos.
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The Filipino shipping industry would request to extend the free storage period from 5 days to 10 days, and suspend demurrage fees.[F180]
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Port operators urged the government to maintain the demurrage fees.
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Asian Terminals Inc., which operates many ports in the Philippines, would respond by calling on the shipping industry to remove as many containers as possible from terminals as soon as feasible. They would recommend using private warehouses and other solutions while the logistic complications caused by the pandemic were resolved.[F183]
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Many cruise ship workers from around the world come from the Philippines. The closing of the port left them stranded with no way of going home and came as a serious financial blow to the already impoverished workers.[F131] Nearly 100,000 cruise ship workers around the world would be stuck on their ships as late as May.[F176]
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As the Philippines began the process of repatriating their cruise ship workers, dozens of boats would arrive per day in the Port of Manila. The Filipino crew members would be quarantined for 14 days, then returned to their families. Incredibly, not a single one of the repatriated cruise ship workers tested positive for COVID, and the process proceeded without any major issues or interruptions.[F186][F177]
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Despite the chaos, authorities would work hard to ensure that the export reliant Philippines would have continual access to maritime trade.

This can be seen when Chinese billionaire Jack Ma donated 500,000 masks and 57,000 COVID-19 test kits which needed to be processed through Filipino ports. Authorities ensured that the process was as smooth and rapid as possible, and made sure that the critical supplies reached hospitals as fast as possible.[F157]

Over time, the quarantine rules imposed on ports would become streamlined to help business resume despite the pandemic.
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For example, the Department of Transportation and Philippine Ports Authority would amend quarantine rules requiring cargo ships to secure a special permit when going to islands under “community quarantine.”[F139]
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The country’s largest ports would continue operating at roughly 70% capacity into April, a normal rate during non-pandemic times.[F183] Yard utilization would also remain at 50% capacity, a usual rate.[F183]
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Port officials would also continue taxing and accessing goods at normal rates, despite closures and quarantines.[F185]

Regulatory Changes

Many of the legal precedents being set by COVID-19, from quarantines to work at home policies, will likely outlast the pandemic. COVID-19 will reshape the Philippine’s SEZ regulations in many ways. This has resulted in confusion as well as many new opportunities.

Regulatory Changes: Confusion Surrounding Quarantine Regulations

The changes in rules as a result of quarantine measures would cause confusion on the part of investors and tenants. Following every announcement of new quarantine related rules in SEZs, PEZA would report that its entire staff would be overwhelmed with inquiries and questions.[F147]

Concerning the confusion, PEZA director Charito Plaza would say:

“There have been many questions, suggested solutions, interpretations of directives and memos from various agencies at the moment. With our three deputy director generals, zone administrators, zone managers, and few others, we are corresponding 24/7 just to keep everything in order. We are also making urgent solutions so our investors and employed Filipino workers will be assisted.”[F147]

Despite clarifications, many companies operating in zones continued reporting trouble moving cargo due to complicated and unclear quarantine rules surrounding checkpoints.[F149]

One of the most troublesome quarantine regulations for companies in economic zones is the rule that companies have to house workers within their premises.
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A PEZA memorandum enunciating the new rules would say:
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“There shall be no commute or pick-up of employees from place of residence or pick up point to zone.”[F152]
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The purpose of this rule is to mitigate travel and contact with outsiders. PEZA and other regulators hoped that if companies’ employees had no contact with outsiders or employees from other zone companies, it would slow the spread of COVID-19.
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The rules would allow for off zone housing as long as a strict quarantine was maintained, travel distances limited, and transport was provided by the zone tenants.[F151][F152]

Because companies had to house workers in or near the zone to minimize travel and the potential for infection, many companies would struggle to find adequate housing for the workers amid the pandemic.
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For example, the 16 firms which would resume operations in the Cavite Economic Zone would house their workers in a nearby touristic resort which was empty as a result of COVID-19.[F151]
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This rule would significantly increase operating costs for companies, and force the government to begin looking for alternative solutions.
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PEZA would appeal for help to the government to aid its tenants in finding affordable housing for the ecozone workers.
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On March 28 2020, PEZA director Charito Plaza would directly appeal to President Rodrigo Duterte for assistance with housing PEZA workers. In the public letter, she would explain that PEZA was home to 1.6 million workers, and finding temporary housing for them that was near the zones and isolated would be extremely difficult. She would also propose that schools, warehouses, and other government buildings which were unused due to the pandemic be used to house workers. She would also ask for government assistance to help with transport, protective equipment, and rule relaxation.[F153][F154]

Regulatory Changes: Corporate Tax Reform

COVID-19 has become a major lynchpin in the debate about whether or not the Philippines should engage in corporate tax reform.
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The tax reform bill, which is now called CITIRA, will have major implications on the future of SEZs in the Philippines.
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For years, the Philippines struggled to reform its taxes to improve efficiency and simplicity.
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The last major wave of tax reform in the Philippines had been the Tax Reform Act of 1997.
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The 1997 tax reform law had cut tax rates, but created numerous exceptions and loopholes. For example, PEZA, which was only two years old at the time, enjoyed numerous highly favorable tax incentives.
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Over time, the presence of tax loopholes became increasingly controversial.
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Furthermore, neighboring countries had slowly cut their own tax rates. By 2017, the Philippines had a corporate tax rate of 30%, the highest in the ASEAN region. 
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The country also had other disadvantages that made it a less desirable location than its ASEAN neighbors. These included poor logistics infrastructure, high cost of electricity, and slow internet.
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Supporters argued that tax reform would have several benefits:

In 2016, when Rodrigo Duterte ran to become President of the Philippines, he vowed to embark on a massive program of tax reform to make the Philippines more internationally competitive. Shortly after winning, he embarked on his project to reinvigorate the Filipino tax code.
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The initial part of the tax reform package, called Tax Reform for Acceleration and Inclusion Act (TRAIN act) focused almost entirely on personal taxes. This passed in December 2017 with little controversy.
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The second part of the tax reform package, now known as CITIRA, focused on corporate taxes. As part of the second wave of tax reform, the government planned to standardize and “flatten” incentives, to make them more uniform across the country.
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This threatened the country’s economic zones in a number of significant ways. Notably, it threatened to transfer regulatory authority away from existing government agencies, make the areas outside of economic zones in the Philippines more tax competitive, and reduce the incentive that zones could provide to their tenants.
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As a result, two political factions, respectively supporting or opposing corporate tax reform have emerged.
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The first camp is led by the Department of Finance (DoF) and the Department of Trade and Industry (DTI). It is supported by a variety of industry and trade organizations such as banks, and real estate associations. It is also supported by Chinese special interest groups, as well as think tanks promoting free market economics.
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Opposed to tax reform, is a loose coalition of diverse business interests. Most notably, as it relates to economic zones, is the Philippine Economic Zone Authority (PEZA). Also opposing tax reform are importer and exporter industry associations, the chambers of commerce of Western countries, and other zone operators and tenants.
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Negotiations over corporate tax reform began in early 2018, and after extensive negotiations, came to a close in late 2019 when the DoF and DTI came to a tentative agreement with PEZA. However, this would not mark the end of negotiations.
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The first COVID-19 cases were detected in the Philippines on January 31 2020, only weeks before the planned implementation date of the new tax reform package.
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PEZA would withdraw from the negotiations, and argue that COVID justified a more favorable version of the tax reform legislation.
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As a response, the supporters of the tax reform bill have also began incorporating COVID-19 into their arguments in favor of tax reform.
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If the DoF and DTI succeed in using COVID-19 as a justification to pass corporate tax reform legislation, it could spell the end of Filipino economic zones. Conversely, if PEZA succeeds in using clauses within COVID-19 related economic legislation to covertly protect its incentives, it guarantees the survival of the program for years to come.

Due to the importance of tax reform to Filipino SEZs, we have published a separate study just about the impact of COVID-19 on Filipino SEZs. Click here to read it.

Regulatory Changes: Work From Home

PEZA has given permission to IT companies to let its companies work from home.
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Prior to COVID-19, the Filipino government wanted to keep the tax benefits given to companies doing business in zones geographically confined.
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The goal of this policy is to avoid the proliferation of countries which are based on paper in the economic zones, but in practice operate outside of the zones. To achieve this, PEZA would only allow employees to work from home if they had special letters of authorization issued by the agency.
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On March 6 2020, PEZA issued Memorandum Circular No. 2020-011 which would allow IT workers in outsourcing firms to work from home without prior authorization.[F61]
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This legal precedent is extremely important, as it may, over time, open the door for businesses to be legally based inside economic zones to take advantage of tax and regulatory benefits, while in practice being physically located outside of the zones.
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Memorandum Circular No. 2020-011 is still very limited in its scope. It only automatically applied to workers exhibiting COVID-19-like symptoms, workers exposed to those displaying potential symptoms, and IT workers deemed “critical.” The law did leave open the possibility for companies to allow other workers to work from home if they received the necessary authorization from PEZA.[F61]
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The new rules also allowed the firms to have IT workers working from offices and buildings located outside of the zone for the duration of the pandemic.[F61]
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If this precedent proves durable, and outlasts COVID-19, this will enable companies to register their businesses in the SEZs to take advantage of the tax and regulatory benefits, but still maintain a workforce that is physically located outside of the zones. With many companies struggling to find affordable office space in the zones, this could have positive long term impact for the zones.

Regulatory Changes: Access to Domestic Markets

World Bank and other studies have found that economic zones do better when manufacturers and service providers can sell their products to consumers in the zone’s home countries.[F63]
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Despite this, prior to COVID-19, many export zones in the Philippines did not allow manufacturers to sell their goods to Filipino consumers.
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Due to COVID-19, this may change. Soon, manufacturers in Filipino SEZs might soon be able to sell their products to a domestic market.
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In March, the National Economic and Development Authority released predictions that between 30,000 and 60,000 jobs would be lost in the tourism and manufacturing sectors due to COVID-19.[F62]
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To deal with the job loss, the National Economic and Development Authority asked the senate for permission to let exporters sell their products to the domestic market. The National Economic and Development Authority also began investigating whether this measure could be implemented by a PEZA board resolution.[F62]
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Strengthening PEZA’s argument to allow manufacturers to sell their products domestically, prominent politicians began requesting ecozone firms manufacturing medical equipment to prioritize domestic markets. Some politicians even attempted to pass regulation to prevent medical equipment supplies from selling more than 20% of their products overseas, which would either require exempting manufacturers from rules preventing sale to domestic markets or nullify the rule altogether.[F168]
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Should the measure be enacted, exporters located in economic zones would be allowed to sell up to 30% of their products to the domestic market.[F62] Medical manufacturers would be forced to sell 80% of the products on the domestic market.[F168]
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Should this regulatory change come to pass, it will set an important precedent for economic zones in the country. If it outlasts COVID-19, then PEZA can expect to see significant growth in many of its economic zones.

COVID Success Stories in Philippine Economic Zones

The SEZ industry would act highly charitably during COVID-19, working hard to help mitigate the effects of the pandemic on their local communities.

In addition to becoming the main centers of production for medical supplies, protective equipment, food, medicine, and other critical goods zones would also reallocate their unused capacity towards combatting Coronavirus.[F169]

Government owned facilities such as the Ninoy Aquino Stadium in Malate and the World Trade Center in Pasay City would be converted into quarantine centers to help house quarantine patients to relieve hospitals. PEZA would similarly help by converting warehouses and offices into quarantine centers.[F170]
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Many private companies associated with economic zones would make significant pandemic donations.
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Badan Building Materials Corporation, located in the Alviera Industrial Park Special Economic Zone, would donate 6,600 face masks normally intended to protect workers to local charities during the closure of their plant.[F169]

Alliance Global Group, a large holding company with investments ranging from real estate to food and beverages, would donate $12 million USD. San Miguel Corporation, another holding company, would donate $23 million USD to the recovery efforts. International Container Terminal Services would donate $7 million USD. These donations funded initiatives to feed urban poor families, programs to give hand sanitizer to hospitals, and charity funds to supply personal protective equipment (PPE) to medical professionals, among others.[F171]
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In addition to large corporate donors, many smaller PEZA registered companies would also make significant contributions. 137 companies from 45 PEZA-registered economic zones would donate $1.11 million USD in cash, $800,000 USD in food, $240,000 USD in PPEs, and $50,000 USD in medical equipment.[F187]

Other, less significant, donations were also made by PEZA firms to local governments, low income communities, senior citizens, single mothers, disabled people, the Philippine National Police, COVID-19 volunteer groups, and various nonprofits such as Project Pearls and SOS Children.[F188]

Six companies located in the Mactan Economic Zone would produce large quantities of PPEs for the purpose of donating it. These companies were Metro Wear Inc., Globalwear Manufacturing Inc, Feeder Apparels Inc., Mactan Apparels Inc, Vertex One Apparel Philippines and Minoura Philippines Corp.[F189]

Manufacturing of Medical Devices and Critical Goods in Zones

Economic zones across the country would take a leading role in the manufacturing of goods which saw a pandemic related increase in demand such as ventilators, protective equipment, and sanitizer.
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Firms producing PPE would be entitled to special incentives to ensure their continued production.[F190]
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The Inquirer would report:
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“Companies operating the country’s economic zones have shifted to manufacturing medical supplies and health-care-related products as the new [coronavirus pandemic] triggered an increase in demand for hospital equipment.” [F162]
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“Electronics companies producing computer chips, for example, are now focusing on making hospital ventilators and RxBoxes, a device that monitors a patient’s vital signs. Those in the garment sector, meanwhile, have begun making face masks and PPE for doctors and other medical front-liners.” [F162]

Although all but two factories in the Freeport Area of Bataan closed, Taiwanese firm Medtecs Group’s factory manufacturing medical masks remained in operation. The masks were then sold to the Department of Trade and Industry, Philippines Red Cross, and pharmacies. As a result of increased demand, the company increased its mostly female workforce from 298 to 318. The only other company in the freeport to remain open was an alcohol manufacturer.[F151]
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Another zone in Batangas province would be home to Taiwanese Kinpo Electronics Inc. which normally  produces semiconductor and electronic parts. During COVID-19, the Taiwanese manufacturer would shift production to instead build hospital ventilators.[F162]
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A wide variety of companies operating in PEZA zones would not only pledge to donate their proceeds and products to help fight COVID-19 but would reallocate their production towards critical medical supplies. These companies include Analog Devices, Artesyn, Cypress Manufacturing, Excelitas Technology, i3 Technologies, IMI, Ionics EMS, Maxim Integrated, Microchip Phils., Nexperia, ON Semiconductor, PCA, ROHM Phils., STI Electronics, Team Pacific, and Texas Instruments (TI) Phils.[F169]
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Food manufacturers would also redouble their efforts to cope with the coronavirus.
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Gardenia, a bread manufacturer which operates in Biñan City, would double its food production to 750,000 loaves of bread daily to cope with increased demand for food. The factory would operate 24/7 and increase its workforce.[F162]

Success Story: Telecom Industry

A report from the Philippine National Bank from March 2020 would reveal that the telecom sector had been the least affected by COVID-19. The report concluded that:
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“In our view, business continuity plans and requiring more people to stay at home might increase the demand for call/text/data.” [F134]
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In the same report, the bank also predicted that even if COVID-19 affected the physical supply of telecom equipment, it would only reduce the quality of telecom services, not the quantity demanded or provided. By contrast, the bank predicted that the gambling tourism and port industries would be the hardest hit.[F134]

Success Story: Business Process Offshoring

The Business Process Offshoring (BPO) industry is one of the largest and most important industries in Philippine SEZs.
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A BPO firm is one where a foreign (usually Western) company outsources part of its operations to the Philippines through the internet.
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For example, a Western bank might employ a Philippines based customer support workforce. Likewise, a Silicon Valley tech company might make use of a BPO to get extra developers to do the more repetitive tasks involved in software development.
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As of 2019, BPOs employ between 900,000 and 1.2 million  people in the Philippines, mostly in SEZs.[F137][F199] Roughly 60% of the customers making use of BPO services are based in the United States, with Australia and the UK also taking advantage of the large English speaking workforce.[F199]
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BPOs would adapt relatively well to COVID-19.
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Had the BPO industry failed to take proper precautions, there could have been serious consequences. The cramped working conditions of BPOs posed a serious risk in terms of spreading the disease, and could have potentially become a significant infection vector.
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Luckily, early in the pandemic, BPOs would quickly take many critical steps to curb the spread of COVID-19.
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The nature of the industry meant that working from home was a viable option.

Early during the pandemic, a major trade consortium, the Information Technology and Business Process Association of the Philippines, would early on start working with government agencies to recommend a number of measures to prevent transmission. These measures included allowing workers to take office laptops home, providing alternative transportation to work to avoid public transportation, avoiding office space when possible, staggering shifts to minimize contact, and only leaving a skeletal workforce in offices.[F137]
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The BPO industry would be hit less hard than other sectors during the pandemic.
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In one city, 55 out of 69 registered BPO companies would remain open while in compliance with strict quarantine rules.[F163]
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In fact, it is possible that the BPO industry might benefit from a COVID-19 related recession.
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During the 2008 recession, the Filipino BPO sector saw significant growth from foreign companies offshoring their business operations to cut costs. Likewise, BPO executives expect the COVID-19 recession to cause a similar increase in demand, mostly from mainland Chinese companies.[F160]

PEZA and SEZ Industry Lobbyist Opposition to Lockdowns

PEZA would clash with other government regulatory entities over whether or not the lockdown should be extended.
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PEZA has an incentive to end the lockdowns as soon as possible to reinvigorate economic activity in zones. Government healthcare agencies have the opposite incentive to avoid being blamed for potentially high death tolls.

As a result, PEZA has continuously clashed with other government agencies over the question of whether the lockdown should be extended or ended.

PEZA would argue that the lockdowns either needed to end, or that it would need to be exempted from lockdowns. PEZA director Charito Plaza would say:
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“Extension of lockdown must be selective only in areas where [the tally of] Covid cases is higher, but exempt economic zones which are insulated and provided support and assistance by IATF—not to hamper the passage and flow of trade activities so our industries will continue with their business operations and their workers to continue having jobs; thus, our economy will not be crippled.” [F170]
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The most consistent inter-agency dispute involving over lockdowns would be between PEZA and various local governments. PEZA would argue that “local governments are issuing rules that do not comply with national guidelines which continue to hamper the mobility of goods and workers.” [F174]
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The conflict between PEZA and local government agencies can be illustrated by the agency’s dispute with the city of Lapu-Lapu.
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Lapu-Lapu is home to several special economic zones, the largest being the Mactan Economic Zone and Cebu Light Industrial Park. On March 29, Lapu-Lapu City Mayor Junard Chan ordered a general community quarantine and shut down all non-essential businesses. PEZA would respond with an open letter opposing the lockdown, stating that the zone was taking necessary precautions, the lockdown was too strict, and that the city had no authority over PEZA zones. [F172]
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After a week of intense negotiations, the city of Lapu-Lapu would concede, allowing 97 tenants of the Mactan Economic Zone to resume limited operations.[F173]

Various lobby groups closely aligned with PEZA would also come out in favor of ending the lockdowns early.

Semiconductor and Electronics Industries in the Philippines Foundation president President Danilo C. Lachica would say that the quarantine could be extended for as long as manufacturing operations were allowed to resume, roadblocks were removed, and the transport of goods remained unhampered. [F170]

Foreign Chambers of Commerce would also call for an end to lockdowns.

The European Chamber of Commerce of the Philippines would call for quarantines to be shifted down from the national level to the local level.[F170] The German-Philippine Chamber of Commerce and Industry would caution against extending the community quarantine stating that “the impact of every additional day of ECQ will be exponentially more painful.” [F170]
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A coalition of lobbyists in the shipping industry would eventually form to not only challenge the quarantine rules, but further deregulate the shipping industry.

Ultimately it remains to be seen whether or not COVID-19 will lead to any deregulation of the shipping industry in the Philippines.

Conclusion

It is unclear when the Philippines will fully re-open.
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By late April, clearer PEZA guidelines had allowed some businesses to start resuming limited operations. PEZA would report that 551 of the 835 companies on the island of Luzon, 70 of the 176 companies based in the Visayas archipelago, and 29 out of 31 companies in on the island of Mindanao had partially resumed operations.[F174]
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Considering the sheer enormity of the global chaos caused by COVID-19, PEZA and Philippine zones have done pretty well.
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While SEZs in the country face serious challenges and an uphill battle for economic recovery, the gradual re-opening has brought hope back to thousands of tenants and workers across the country.
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The confusions surrounding unclear quarantine rules have given way to potentially beneficial legal precedents.

Zones, like Cavite, are slowly reopening, and workers are going back to work.
Some zone industries, such as BPOs and medical suppliers, have even managed to turn this tragedy into an opportunity.

SEZs in the Philippines faced many challenges before COVID-19. Perhaps this pandemic will offer them the shakeup they need to fully actualize and resolve their long standing issues.

COVID-19 will mark a new era for Filipino SEZs. Zones in the Philippines will never be the same again.