Davao: A Mindanao Success Story

UNCLAS MANILA 001790

SIPDIS

SENSITIVE

STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV RP
SUBJECT: Davao: A Mindanao Success Story

Ref: A) Manila 1610, B) Manila 1050, C) Manila 0998

SENSITIVE BUT UNCLASSIFIED


1. (SBU) Summary: Davao, located in the southeastern section of
Mindanao, is now one of the Philippines' major economic hubs, with
rich natural resources, good infrastructure, an educated labor pool,
strong local government support for business, and a pro-active
business sector. The city has garnered accolades over the years for
being among the Philippines and Asia's most competitive and livable
cities. Davao actively promotes itself as among the country's
safest cities and most Davao businesspeople and residents seem to
condone alleged extra-legal methods used to maintain safety and
security. The major concerns of Davao businesspeople and investors
are the inadequate and unstable electric power supply and high
domestic shipping costs. In spite of its accomplishments, the city
still feels constrained by Mindanao's fragile peace-and-order
situation. This is one in a series of cables that highlight the
economic diversity of Mindanao, a region often associated with
peace-and-order challenges and high poverty rates (Ref A). End
Summary.

Davao: An Agricultural Center...
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2. (U) Davao City together with the provinces of Davao del Sur,
Davao del Norte, Davao Oriental, and Compostela Valley form the
Davao Region in the southeastern part of Mindanao. Davao City's
landscape differs from the more traditional expectations of a city
in that its 2,444 square-kilometer land area -- the largest among
Philippine cities -- encompasses vast tracts of agricultural (mainly
fruit) plantations and timberland/forests. Agricultural production
accounts for roughly 45% of economic output. Dubbed as the "fruit
basket of the Philippines," Davao is a top exporter of bananas, with
most exports going to Japan, China, the United States, and Korea.
Fruit exporters have recently begun developing non-traditional
markets for fruit in Russia and the Middle East.

...And Mindanao's Service Capital and Economic Hub
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3. (U) Davao City has evolved into Mindanao's unofficial capital
and economic hub. The service sector, mostly trade, tourism,
education, and financial services, accounts for about 40% of Davao's
economy. One of the country's premier convention centers and one of
Mindanao's top tourism destinations, Davao City accounted for nearly
35% of Mindanao's 150,400 total foreign visitor arrivals in 2007
(mostly from the U.S., Japan, Korea, China, and Australia). The
city's nearly 50 colleges and universities currently graduate a
labor pool of 15,000 English-speaking students annually.

Infrastructure Matters
--------------


4. (U) Davao City's relatively good infrastructure and amenities
have made it among the country's top business and investment sites.
Davao City attracted over 4 billion pesos ($90 million) in projects
registered by the Philippine Board of Investments during 2007. The
Davao International Airport -- one of the Philippines' busiest --
provides direct air linkages to Palau, Singapore, Hong Kong, and
Manado, Indonesia, as well as domestic routes. It is Mindanao's
premier international airport. The Davao seaport is the busiest in
Mindanao and among the top five ports nationwide. Export earnings
from merchandise shipped from the Davao Port reached about $720
million in 2007, equivalent to about 30% of Mindanao's total export
revenues.

Ready for the BPO Industry
--------------


5. (U) Davao City is aggressively promoting itself as a hub for the
Business Process Outsourcing (BPO) and call center inustries,
capitalizing on its telecom infrastructure, excellent human
resources, and cheaper wages/salaries and electricity rates,
resulting in overall operating costs roughly 40% below those of
Metro Manila. There are presently over 40 Business Process
Outsourcing operations in Davao providing medical transcription
services, software development, animation/web development, graphic
design, engineering, and other call center services.

The Former Murder Capital of the Philippines
--------------

6. (SBU) Crime statistics confirm that Davao City is now among the
safest cities in the country -- a notable achievement from its
notoriety some two decades ago as the "murder capital of the
Philippines" for regular insurgent assassinations and criminal
violence. Today, Davao City is seen as strongly pro-business and as
Mindanao's "best and safest investment haven."


7. (SBU) The mayor of Davao since 1989 (except for a brief stint in
the Philippine Congress from 1998-2001),Davao City's Mayor Rodrigo
Duterte revels in his reputation for instilling discipline and peace
and order. A Time Magazine article in June 2002 dubbed the mayor
"The Punisher" for his hard line, anti-criminality stance and
Amnesty International and other human rights groups have raised
concerns over his alleged involvement in and/or tolerance for
extra-judicial measures/killings. The mayor publicly denies
involvement. Most Davao businesspeople and residents are aware of
allegations that their mayor oversteps the law in his pursuit of
justice and peace and order. They nevertheless credit his
leadership as a major factor in lowering crime rates and providing
the sense of safety and security that businesses need to thrive.

Lowest Poverty Rate in Mindanao
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8. (SBU) Although a Mindanao success story, Davao City's relative
economic prosperity also illustrates that inequitable wealth
distribution and development is as much a challenge within Mindanao
as it is across the Philippines (Ref B). Davao City often is
geographically lumped with Davao del Sur for the purpose of
generating provincial-level economic statistics. In large part
because of Davao City, the province of Davao del Sur has the lowest
incidence of poverty (27.4%) among all of Mindanao's provinces.
Davao-based officials of the Philippine government economic planning
agency unofficially estimate Davao City's poverty rate at between
20%-22% of its population, well below Mindanao (46.7%) and national
(32.9%) averages. With Davao City as its major economic and
business hub, the Davao Region has the second highest per-capita
gross domestic output among Mindanao's administrative regions (the
equivalent of $1,258 in 2006, according to the latest Philippine
government statistics) and the fourth highest among the country's
seventeen administrative regions.

Davao City Recognized
--------------


9. (U) Davao City has garnered national and international accolades
over the years for being among the Philippines' and Asia's "most
competitive" and "most livable" cities. Foreign Direct Investment
Magazine (a Financial Times publication),in its most recent
2007/2008 issue, ranked Davao City as tenth among Asian cities on
its report on the "Asian Cities of the Future". In its latest
"Philippine Cities Competitiveness Ranking Report" for 2007, the
Asian Institute of Management ranked Davao City as the most
competitive metro city overall, with particularly favorable scores
for the lower cost of doing business, the quality of human
resources, sufficient infrastructure, and the responsiveness of
local government.

But Still Surrounded by Lawlessness
--------------


10. (SBU) The region surrounding Davao City produces over half of
mineral-rich Mindanao's total mining and quarrying output. Guns
still rule the Diwalwal gold fields of the nearby Compostella
Valley. Davao Chamber of Commerce members who had invested in the
gold fields confessed to econoffs that they routinely pay
"revolutionary taxes" to the heavily-armed communist/terrorist New
People's Army insurgents who haunt the region. They also predicted
that the national government would be powerless to enforce a recent
Supreme Court ruling which would give mining rights to the gold
fields to a large Chinese company (the same Chinese company involved
in the high profile broadband bribery scandal, Ref C) and allow much
of the gold fields to be taken from the current small-scale mining
operations. A separate report will examine mining in Mindanao in
greater detail.


11. (SBU) Davao Chamber of Commerce businessmen also spoke of
Liguasan Marsh -- swamps to the northwest of Davao City that are
inhabited by criminals and virtually off limits to law enforcement
officers. One of the problems cited by the Davao Chamber of
Commerce was the vulnerability of the power transmission lines,
which run from hydro-electric plants in northwestern Mindanao all
the way to Davao City. The transmission towers are intermittently
destroyed by insurgents/rebels or bandits, often to extort money.
Despite aggressive efforts to differentiate Davao City from the
conflict-afflicted parts of Mindanao, local officials and
businesspeople lament that Mindanao's peace-and-order stigma
continues to delay or discourage well-known American and European
companies from investing. The business sector wants desperately for
perceptions to catch up with the reality that Davao City is safe,
secure, and business friendly, but the fact that it is surrounded by
regions in which violence and extortion are common has made that
message difficult to sell.

Additional Challenges
--------------


12. (U) Although Davao's power rates are about 40%-50% cheaper than
average rates in the northern Philippines, the business sector is
gravely concerned about the stability and adequacy of the power
supply. The Davao Region already experiences intermittent power
interruptions due to electricity transmission problems in the long
stretch from Northern Mindanao (which has plentiful
hydro-electricity) to southern Mindanao, where Davao is located.
Businesspeople also predict that power shortages in Mindanao will
become a serious growth constraint by 2010/2011 unless there are
investments in additional energy-generation capacity, and no such
investments are currently planned.


13. (SBU) The business sector also cites high domestic shipping
costs as a serious impediment to the competitiveness of Davao's and
Mindanao's local products. The Mindanao business sector has long
called for a review of the Cabotage Law to spur competition and
bring down shipping rates by liberalizing foreign participation in
domestic coast wide trade (Ref A). However, powerful vested
interests have successfully lobbied against such reforms. Several
businesspeople have commented that the response to, and support from
"imperial Manila" for Mindanao's issues and concerns tend to be slow
and arduous, which makes an engaged and pro-active business sector
essential to moving forward.

Comment
--------------


14. (SBU) Davao has made a remarkable turnaround in the past 20
years from the "murder capital of the Philippines" to a peaceful and
secure pro-business environment that is internationally recognized
as one of the most livable cities in Asia. Although the methods
which seem to have been used in Davao to obtain peace are not ones
we would want to see replicated, Davao serves as an example of the
progress which can be made if peace can be established and good
economic policies put in place.

Kenney