Laboracay no more

Nelson Charsegun L. Aquino Assurance Partner, PwC Philippines 27 Apr 2018

As we celebrate Labor Day next week, an estimated 17,000 formally employed workers and 19,000 others in the informal sector are at risk of losing, or have already lost, their jobs and livelihood as a result of the six-month closure of Boracay that started yesterday, April 26. What used to be an exciting and busy time for resort operators and workers has now become a nightmare as they begin to deal with the impact of the temporary shutdown.

Data from the Boracay Tourism Stakeholders, citing the Boracay Foundation, shows what is at stake: P56 billion in tourism revenue from the first three quarters of 2017, which translates to roughly 20 percent of the country’s total tourism receipts. The impact extends to businesses in the Kalibo mainland and other locations that supply goods and services to Boracay resorts, business establishments and tourists. Even airline companies are not spared. They will have to look for alternate routes to fill in the void – the expected number of flights bound for the Caticlan and Kalibo routes is expected to significantly drop from a reported 35,163 inbound flights in 2017.

The blame game

Have you ever seen an unidentified floating object (UFO) in a swimming pool? It certainly isn’t a pleasant experience. There was a kid who seemed to enjoy the water so much that he couldn’t care less about leaving the pool to do his private business elsewhere. Let me tell you, until that incident, I’ve never seen people scramble out of the pool as if their lives depended on it.


Now, multiply that lethal combination of human waste and wastewater by a thousandfold, but this time, it’s discharged into the sea. This is the sad and sorry state of Boracay – a number of irresponsible owners illegally connect their business establishments and residences to drainage pipes that are intended to catch rainwater, discharging untreated wastewater onto the beach.

Going back to my swimming pool experience, resort management was quick to react to the UFO threat by immediately shutting down the pool area for cleaning. This is exactly what the Duterte administration did despite appeals from various stakeholders for a partial shutdown or to postpone the shutdown until off-peak season. Some resort owners were quick to suggest that only non-compliant establishments should be shut down – but the fact is, they themselves didn’t do enough to prevent the island’s degradation, so they’re not exactly blameless.

The master plan

Resorts and other businesses have expressed concern over the government’s lack of concrete rehabilitation plan during the six-month closure. Let me put it this way – when your house is on fire, you don’t necessarily sit down and plan on how to suppress the fire. You just do everything within your control to put it out! The Duterte administration did exactly what is needed by declaring a temporary shutdown to stop the water pollution and other environmental violations, and activated all concerned agencies to work on rehabilitating the island.

While there is no detailed rehabilitation plan released to the public, bits and pieces of information from Malacañang press briefings and interviews with government officials are enough to paint a picture of the financial accounts of the affected establishments. The six-month closure during the peak season would most likely bring down this year’s revenues by not less than 50 percent, compared with last year. Businesses will have to fully absorb non-controllable costs as losses, such as depreciation of property and equipment (it will continue even though assets are idle), lease payments under non-cancelable lease arrangements, insurance, local business taxes and permits, and real estate taxes. Business owners then would most likely cut down controllable costs in an attempt to limit its operating losses during this time.

Unfortunately, first to go would be the employees, as business would go on a hiatus, save for the skeletal workforce that will maintain and secure their properties and assets. While the Department of Labor and Employment has warned businesses against the repercussions of terminating employees during shutdown, options such as forced leave, relocation, or ‘no work, no pay’ arrangement do not appeal to employees because they live from paycheck to paycheck as they support their families. They would most likely seek employment opportunities elsewhere and accept separation pay, which employers would have to shoulder.

Acquiring a beachfront property on which to build and operate a hotel resort in Boracay involves a huge amount of investment. Even existing establishments spend heavily on renovations and improvements to remain competitive in such a cutthroat industry, where the best facilities get to attract more tourists and command a higher price.

To a certain extent, funds for these capital expenditures are sourced through bank financing. With reduced to possibly zero cash inflows during shutdown, companies with existing bank loans will struggle in meeting payments and might renegotiate to extend credit terms at rates that may be unfavorable to them as borrowers.
Under existing guidance on financial instruments, significant changes to loan terms may sometimes lead to extinguishing the original loan and recognizing new financial obligation.

According to Environment Secretary Roy Cimatu, business establishments constructed on wetlands and structures that have violated the required 30-meter easement from the shore at high tide will be demolished.

Upon demolition, these assets should be written off and recognized as a loss in the company’s financial accounts, and would most likely be considered as non-deductible expenses when settling tax obligations. In a worst-case scenario, can you imagine a company with existing borrowings being left with no cash-generating assets to service loan repayments?

Going back to the government’s master plan – the real marching order from the President is to address the “cesspool” problem and improve the water quality before reopening the island. The two water concessionaires in Boracay have been instructed to improve the connections to the sewer and drainage lines. I imagine a massive excavation work will have to be carried out to identify business establishments and residences that have illegal connections to drainage pipes. My best guess is that business establishments guilty of clear violations will be served a notice of closure similar to the earlier move by the local government unit (LGU) of Malay, Aklan, against establishments that lack sanitation permits – quite a late response following the President’s shutdown threat.

It’s unclear if violators will be fined to help foot rehabilitation costs or if they will be allowed to continue doing business on the island. This ambiguity is perhaps the real cause for concern for business owners who demand a more concrete rehabilitation plan.

The public needs to understand why the Malay LGU allowed establishments to continue to operate without checking for clear violations of environmental laws. The said LGU also has to explain and show records on how environmental fees collected from tourists have been used. The public wants answers because the taxpayers’ money will be spent on rehabilitation.

A wake-up call

The unprecedented shutdown order is a message to the business community in Boracay and other tourist destinations that the privilege of doing business comes with a responsibility to help implement plans and policies for sustainable tourism environment. Whether it’s a silent alarm or an extremely loud wake-up call, let’s see how things will unfold within the next six months, especially the government’s action toward business owners and local government officials who are responsible for this fiasco.

One thing is sure – the displaced employees and informal workers will not need a wake-up call as they already know they are bound to have sleepless nights figuring out how to survive and provide for their families.

Sustainability is everyone’s business

As part of our firm’s celebration of Green Week 2018 from April 23-27, we, at PwC Philippines, are reminded about what sustainability means and how it remains to be one of our focus areas in Corporate Responsibility. The International Union for Conservation of Nature (IUCN) defined sustainability as improving the quality of human life while living within the carrying capacity of supporting ecosystems. Simply put, sustainability is trying to avoid the depletion of natural resources, such as air and water, and managing the use of basic commodities like electricity, gas, paper and food. The combined efforts of individuals will make a huge difference.

(To know more about Sustainability and Climate Change, you may visit www.pwc.com/sustainability.)

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Nelson Charsegun L.  Aquino

Nelson Charsegun L. Aquino

Assurance Partner

Tel: +63 (2) 8845 2728

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