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Case Study Disclaimer

Participants Case Studies

The six case studies included in this folder were created for training
purposes only by the participants of the Managing Structural
Adjustment from Trade Reform Training Program.

They have not been presented to Ministers in the respective countries.

Case Study on Industry Reform and Adjustment:

Philippine Fertilizer Industry

1. The Issue

The industry in focus is the Philippine fertilizer industry. Fertilizer policies have been
and will always be an important component of Philippine agricultural policy. Such
policies have taken a dual and often conflicting objective of providing low-priced
fertilizers to farmers as well as adequate incentives to local fertilizer manufacturers.

The issue which the fertilizer industry currently faces is the unilateral decision of
government to eliminate the tariff protection on all fertilizer grades, thereby exposing
them to foreign competition. This government move is in response to its commitment
to the agriculture sector to enable it to reduce the cost of inputs in order to improve its
global competitiveness in the light of agricultural trade liberalization brought about by
the countrys accession to the WTO; and to be better equipped to respond to food
security issues.

2. Structural Features and Historical Development

The players of the industry are merchant/commercial groups that obtain their products
either by manufacturing certain grades of fertilizers or importing finished fertilizer
grades and selling it to the domestic market. At present, there are five fertilizer
producers in the Philippines, with a combined capacity of 1.52 million metric tons per
year. PHILPHOS, the largest player in the industry accounts for more than 80% of the
capacity. It exports 70% of its production to Southeast Asia. The remaining 30%,
including the output of other producers, is sold to the local market. PHILPHOS is one
of the ASEAN regions largest fertilizer manufacturers and its plant covers an area of
about 200 hectares within an industrial estate in Central Philippines, adding a regional
angle to the issue. One of the major foreign exchange earners of the country, it is also
responsible for the employment of thousands of Filipinos. Aside from the five
companies, there are also other manufacturers which produce liquid foliar fertilizers
and commercial organic fertilizers.

In the early 70s, the government launched a program geared towards attaining
sufficiency in major staples in which fertilizers played a major part. There was a
marked increase in the demand for fertilizer especially nitrogenous grades which are
mostly imported. Government realized the need for some form of control over the
fertilizer industry. In 1973, government changed its policy of non-intervention to one
of rigid and all encompassing control through the creation of a Fertilizer Industry
Authority (FIA). The FIA jurisdiction included control over prices, mark-up,
distribution channels, promotion, import-export, and production. The law also
mandated the eventual tax exemption for the importation of all kinds of fertilizer. In
1977, the government merged the fertilizer and pesticide agencies, creating the
Fertilizer and Pesticide Authority (FPA). The FPA retained the broad powers of the
FIA on fertilizer regulation. In 1986, in line with the liberalization policy, the FPA
relegated considerable control on the industry. Such deregulation mandated that FPA
could no longer exercise power to control prices and establish quotas, among others.
Such deregulation led to a very dynamic and competitive market situation generally
beneficial for the countrys overall development goals.

In an effort to reach zero tariffs, the government in 1994 reduced from 5% to 3% the
tariff for all fertilizer grades, including raw materials. In 1999, the tariff on fertilizer
was totally eliminated as mandated by the governments Agriculture and Fisheries
Modernization Act (AFMA). This move caused stiffer manufacturer and importer
competition, resulting in lower prices of nitrogenous fertilizers. While the five-year
mandate of AFMA lapsed in February 2003 which reverted fertilizer tariffs to 3%, it
was recently reinstated by Congress, thus removing the protection on fertilizers again.

The industry employs some 3,500 direct and 12,000 indirect labor in its various
subsectors. The most recent available statistics show the following averages:
production of 1.2 million MT; imports of 1.1 million MT; and exports of 365,000 MT
worth about $50 million. Fertilizer production and importation have been fairly steady
over the period 1997-2001 but exportation have seen a decline.

3. Features of the Adjustment Issue

While the removal of tariffs on all fertilizer grades has a short-term adverse effect on
the industry in the form of lower fertilizer prices, the long term-effect of the policy
reform would stimulate increased use of fertilizers. The demand for all types fertilizer
is in fact expected to continue growing over the next 15 years. Despite the increased
competition brought about by the earlier reduction in tariff on fertilizer, the industry
was able to weather such effects. The move in fact would help manufacturers reduce
their input costs inasmuch as raw materials are included in the trade reform.

4. Affected Interest Groups

The Fertilizer Industry Association of the Philippines (FIAP), representing the interests
of the fertilizer firms, is the most adversely affected by the policy reform among the
stakeholders in the fertilizer industry. These stakeholders oppose further liberalization
of the fertilizer industry.

On the other side are the farmers groups, representing the farmers who stand to benefit
from the reform. These groups are supportive of the government move.

5. Other Government Departments/Organizations with a Stake in the Issue

Trade policy issues are discussed and decided at the Cabinet-level Tariff and Related
Matters Committee (TRM). The TRM is co-headed by the Department of Trade and
Industry (DTI) and the National Economic and Development Authority (NEDA) with
members other major departments of government as members (e.g. Departments of
Agriculture [DA], Finance [DOF], Budget [DBM], Labor and Employment [DOLE],
etc.). The Tariff Commission (TC) is the consultation arm of the TRM.

The DOF is expected to oppose the trade policy reform in view of the revenue losses
that the move would entail. Considering the implications of the policy reform on
employment, the DOLE and the local government unit where the largest fertilizer firm
is located are also expected to be critical of the move.

Arrayed on the other side are the DA which is strongly supportive of the move that
would benefit its stakeholders, and the DTI and NEDA which are likewise pushing for
further enhancing the productivity of the agriculture sector which would maintain its
position as a consistent source of growth for the economy.

6. Existing Adjustment Programs in Place

As an incentive for local fertilizer manufacturers, the government continues to exempt

raw materials such as rock phosphate, anhydrous ammonia, sulfuric acid and other
finished fertilizer grades needed in the blending process of fertilizer production from
payment of the 10% value- added tax. The policy reform in question likewise benefits
fertilizer manufacturers inasmuch as the tariff on these raw materials is also removed.

7. Need for Research Support/Consultations

Considering the importance of fertilizer in the economy as a critical input for improved
agricultural productivity as well as to address the concerns of the fertilizer industry and
other sectors that may be affected by the elimination of tariff on fertilizer, there is a
need to conduct consultations with all concerned sectors in the country. The TC will
conduct a public hearing on this matter. Among the interested parties would be the
major players in the fertilizer industry (manufacturers, importers, dealers), farmers
organizations, and the local government unit in areas where the major fertilizer plant is

In order for government to make a more informed decision on the issue, the Philippine
Institute of Development Studies (PIDS) will be commissioned to conduct a deeper
evaluation of the issue. Specifically, the PIDS shall be requested to: (1) investigate the
costs that the fertilizer industry in particular and the economy in general will incur as a
result of the policy reform (e.g. effect on employment, etc.); (2) identify the
impediments that the industry faces in competing with imported fertilizer as well as
how these impediments may be surmounted; and (3) recommend possible alternative
measures for the industry to take in order to adapt to the policy reform. The PIDS may
conduct a quantitative analysis should it deem it necessary. The findings and
recommendations of the TC consultations and the PIDS study shall serve as guides to
the TRM in discussing and deciding on its recommendations to the President on the

8. Adjustment Required for Future Industry Development

With the current agricultural productivity enhancement program of government

promoting balanced fertilization usage, fertilizer manufacturers should align their
production mix with the requirements of the program. The elimination of tariff on
fertilizers is expected to result in a significant drop in import prices of nitrogen grades
which will only enhance bias of usage to nitrogen grades and cause further imbalance.
Government will have to induce manufacturers to produce or import a wider range of
fertilizer grades that should be more soil-specific to fit the customized needs of the
farmers as well as the government program.

The rising demand for organically-grown vegetable and even staples may also
challenge current marginal fertilizer producers to shift to the production of organic soil
supplements. This will not only mean higher value but more labor intensive processes
as well as ensuring the absorption of labor to be displaced.

9. Options for Government Policy Response

The first option is for government to do nothing and let fertilizer tariffs remain at zero.
No additional incentives will be provided to fertilizer manufacturers.

The second option, in conjunction with option 1 is for government to bring together
manufacturers and farmers organizations participating in government agricultural
production enhancement programs in order to forge supply arrangements between
them. This would ensure stable markets for manufacturers and adequate supply of
fertilizers for farmers.

The third option would be to revert the tariff to 3% as demanded by fertilizer

manufacturers, if the results of the TC investigation and PIDS study support such a

Should the PIDS study find that the industry is indeed not competitive and would need
to upgrade facilities, government may consider the option of providing assistance to

firms wishing to modernize. In order to fund this upgrading program, government may
consider collecting a levy on all fertilizer importations, contingent on Department of
Justice opinion on the legality of the levy.

10. Policy Recommendations

The march to globalization is inexhorable. Delay will no longer buy relief. For the
good of the greater number, the greater long-range option may be strongly suggested.
Options 1 & 2 combined.

Tariffs should be maintained at zero. The readily importable fertilizer components may
continue to be brought in by PHILPHOS and at even lower rates position its global
competitiveness better. The marginalized manufacturers facing vigorous competition
from imported products may be induced to switch into the production of organic
fertilizer. Government may be able provide additional incentives to the retooling of
such firms in the form of funding assistance, income tax holiday of at least four years,
and tariff-free importation of required capital equipment. There is therefore a readily
available funnel to catch labor that the possible collapse of the non-competitive firms
will displace.

With the results of the PIDS study supporting the culling of relevant information for
the body of work gathered by the TC, it will be quite easy for our minister to shepherd
this policy issue through the TRM.

Bonding of farmer groups with the providers of major farm inputs is always a sensible
thing to promote, eliminating the intermediaries which tend to increase costs in the