Philippines Free Trade Zones a Smuggling Haven

For months President Benigno S. Aquino III has been taking his war against corruption – so far about the only issue on which he gets high marks – against yet another foe, smugglers who use the country’s free trade zones as landing bases for their illicit goods.

So far, however, his war doesn’t seem to have had a lot of impact, at least not yet. In August last year, he appointed Rozzano Rufino Biazon as customs commissioner and former Army Brigadier General Danilo Lim – who was jailed for seven years for involvement in plots to overthrow two of his predecessors – as his deputy to clean out corruption at the Bureau of Customs and boost revenue collection.

While the customs agency has been filing smuggling cases under its continuing name-and-shame campaign, with the catchy name “Run After the Smugglers,” or RATS, observers say that many of the country’s plethora of special economic zones, which number about 200, continue to be smuggling havens.

Established under legislation passed in 1995 as a kind of magic lantern to create jobs, the zones have proliferated across the island country, including industrial estates, export processing zones and free trade zones of all kinds. Theoretically they are areas in which multinationals establish assembly plants establishing factories for the manufacture and re-export finished goods without the intervention of the customs authorities.

The zones are designed to provide assembly jobs for workers, and indeed they have done so. Subic Bay, the vast former US Navy base that was turned over to the Philippine government along with Clark Air Base in 1991 and 1992, numbers nearly 90,000 workers. While many such as the Mactan Export Processing Zone in Cebu get high marks, others face problems.

The trouble with far too many of the Philippines’ export processing zones is that far too many of the goods that land stay in the country instead of being reprocessed and re-exported. The zones have few or no taxes and no customs officials, meaning smugglers can land their goods tax-free and either pay off officials on their way out of the zones or hold them in warehouses until they can slip them past authorities.

What makes the zones even more popular with smugglers is that in addition, business processes are streamlined to attract foreign direct investment and ideally have modern infrastructure so that goods can be moved efficiently without facing the Philippines’ crumbling and overstressed infrastructure. Incentives for the operators include zero duty on capital equipment, spare parts and accessories, and exemption from all taxes. They are required to pay 5 percent of their gross income to the national government.

The biggest of these is Subic, which featured US$1.3 billion worth of airport and ship repair facilities – and 4 billion barrels of potential oil storage, the largest such storage facility in the country. Consequently, witnesses say, the Subic Clark Tarlac Expressway at night is clogged with scores of oil tankers, some of them bearing the liveries of major corporations as well as more nondescript tankers, filling up with fuel that can be imported free into the duty-free zone.

The problems at Subic and Clark began almost immediately after the bases were handed back to the Philippine government.

“For operators in the Clark and Subic free port zones,” according to a report by the Manila-based country-risk firm Pacific Strategies and Investments, “a duty free license is seen by many as a ‘license to smuggle’. Literally without exception, the major players in the industry have all been implicated or investigated in smuggling controversies.”

Government officials have repeatedly gone after duty-free operators at Subic, a vast base geographically as big as the entire country of Singapore, and largely porous to the point where authorities are basically powerless to stop smuggling – if they wanted to, since the customs authorities in the Philippines have come under considerable fire for corruption.

Along with everything from chocolates to cigarettes, vehicle smuggling has been a major problem in Subic – although far from the only one -- with large-scale operators buying up huge numbers of second-hand vehicles in Japan, Korea and other countries, importing them into Subic and smuggling them out. According to one report, “thousands of vehicles, trucks and other equipment can be seen covering vast tracts of the free port.”

There’s one problem, the Japanese* drive on the left side of the road, meaning their steering wheels are on the right. The operators obtain conversion kits to convert them to left-hand drive on Subic, then sell them on the market. “These vehicles have figured in devastating accidents in recent years. When a conversion fails, the vehicles often suffer simultaneous loss of brakes and steering,” the PSA report notes.

Aquino, in a February press conference, said oil smuggling costs the government an estimated P40 billion (US$937 million) in annual revenues, And, he said, that’s only an estimate. That kind of money, he said, could fund the construction of 218,000 low-cost housing units, or half of the total housing units needed for informal settlers – and that’s just for oil. He called attention to rice smuggling as well.

Neil Cruz, in an op-ed article in the Philippine Daily Enquirer last December, lamented that sugar, frozen meat, garlic, onions, carrots, broccoli and other vegetables also are smuggled into the country at such a scale that fishermen, hog and beef and rice and vegetable farmers are being driven out of business and that their children are being forced to join the army of Filipino overseas workers, which number nearly a tenth of the population.

*Corrected 14 April 2012