TRADE SECRETARY FAVILA SUPPORTS MORE CONSISTENT

UNCLAS SECTION 01 OF 02 MANILA 004111

SIPDIS

SENSITIVE

STATE FOR EAP/EP, EB/IFD, EB/TPP, EAP/J
STATE PASS USTR FOR BWEISEL AND DKATZ
STATE ALSO PASS USAID AND OPIC
TREASURY FOR OASIA FOR AJEWELL
USDOJ FOR MCRAWFORD
USDOC FOR 4430/ITA/MAC/DBISBEE

E.O. 12958: N/A
TAGS: ETRD ECON EFIN BEXP RP WTRO JP
SUBJECT: TRADE SECRETARY FAVILA SUPPORTS MORE CONSISTENT
ECONOMIC POLICIES

REF: A) MANILA 03955 B) MANILA 03811

SENSITIVE BUT UNCLASSIFIED


1. (SBU) SUMMARY: During a courtesy call by Charge,
Secretary of Trade and Industry Peter Favila expressed

SIPDIS
support for more consistent and transparent policies to
promote trade and investment. The Charge raised questions
regarding inconsistent customs and tax policies as well as
court decisions that have raised uncertainty for US firms.
Although Favila confirmed that the GRP supports the debt-for-
equity proposal by House Speaker Jose de Venecia, the GRP
economic team does not appear to be actively involved.
Favila reaffirmed the GRP's willingness to restore tax
incentives to the Clark Special Economic Zone and help
remove legal obstacles to the opening of the new airport for
Manila. END SUMMARY


2. (SBU) The Charge met with Favila on August 31,
accompanied by the Economic and Commercial Counselors.
Favila was joined by Undersecretary Thomas Aquino. Favila
reported that the Supreme Court would hold a session on
September 1 to "force a decision" on the temporary
restraining order (TRO) that has prevented implementation of
the expanded VAT law. (NOTE: Septel reports the September 1
Supreme Court announcement to lift the TRO. END NOTE) In
anticipation of this expected decision, Favila had joined
Finance Secretary Teves to meet with the Davao business
community on August 29 in the first of a series of "road
shows" to explain the E-VAT. Favila reported a generally
positive response from the 500 attendees.


3. (SBU) Favila stated that the GRP supports the debt-for-
equity proposal presented on behalf of GRP in letter by
House Speaker Jose de Venecia that proposes to divert debt
payments into development projects. Favila views this as a
"diplomatic initiative" that does not directly involve his
department.


4. (SBU) The Charge inquired about recent reports of an
agreement to allow private investors to open Terminal 3 at
Manila Airport later this year (ref A). Favila said that
DTI was not directly involved, but the GRP is willing to
help remove any legal impediments. (Comment: Other GRP
officials, including Malacanang Executive Secretary Ermita,
have asserted that the GRP will retain possession of the
airport, suggesting that significant hurdles remain before
the GRP will agree to reverse its expropriation of Terminal

3. End Comment) Favila noted that the facility requires
additional work to ensure FAA compliance before it can open.
While the US has no direct involvement in the airport, the
US business community has emphasized the importance of this
issue to the investment climate, said the Charge.


5. (SBU) The Charge invited Favila to the Embassy's
Intellectual Property Rights Roundtable on September 13,
where private stakeholders and GRP officials will discuss
IPR issues. He noted our productive collaboration with the
Intellectual Property Office, and underscored that more
progress will be needed on enforcement and prosecution of
IPR violators to remove the Philippines from the Special 301
priority watch list. Favila said he was aware of this
objective.

--------------
Customs issues
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6. (SBU) The Charge expressed concern that proposed tariff
reductions for Japanese vehicles under the Japan-Philippine
Economic Partnership Agreement (JPEPA) may negatively affect
Ford's substantial investments in the Philippines. Favila
said he met recently with Ford reps and will take their
position into account. Favila stated that currently "the
ball is in Japan's court" as GRP awaits the Japanese
reaction to the most recent JPEPA draft.


7. (SBU) While noting that Customs decisions are not
directly within the DTI's authority, the Charge nevertheless
urged the GRP to reconsider a recent BOC decision to
reclassify Tang as refined sugar subject instead of a
powdered beverage, raising its 3% tariff rate to 48%.
Undersecretary Aquino explained that this decision has a
long complex history involving inconsistent interpretations
of customs categorizations by the BOC. The issue is
currently under consideration and the GRP is "trying to
correct the inconsistency", he promised.


8. (SBU) Emphasizing the strong desire in the business
community for greater consistency and transparency in GRP
policies, the Charge asked Favila whether DTI has a remedy
for the removal of tax incentives from the Clark Special
Economic Zone by the Supreme Court. Favila said he supports
a legislative solution proposed by Senator Gordon, as well
as a parallel initiative by House Speaker de Venecia, to
refine existing laws in order to resolve this issue. He
noted that Finance Secretary Teves has promised Clark
investors his intention to maintain the status quo until an
acceptable solution is found. Favila said that he had also
urged Executive Secretary Ermita to create strong guidelines
on the announcement of ad hoc holidays.


9. (SBU) The Charge explained that the US Geological Survey
is offering to conduct a comprehensive survey of mineral
resources that can help to attract investors into this
promising sector, contingent on GRP funding for USGS role in
this joint effort (Ref B). He noted that recent price
increases for mineral products should encourage investment
and growth of this sector. Favila expressed hope that this
study could help attract US firms and avoid the hit-or-miss
exploration strategy used by many small-scale mining
entrepreneurs.


10. (SBU) Favila said he will join President Arroyo and
other members of her economic team to attend the UNGA in mid-
September. He will then return while Finance Secretary Teves
and Central Bank Governor Tetangco continue to Washington
for September 24-25 meetings with the World Bank and later
the Millennium Challenge Corporation.


11. (SBU) COMMENT: As a former banker, Favila appears
receptive to business concerns, notably over inconsistent
tax and investment policies. He will need the support of
the Finance Department, Congress, and other GRP officials to
address these issues. While he might be a strong ally of
the business community, he faces many interagency conflicts
in efforts to establish a more consistent and investor-
friendly environment.


JOHNSON