Dindo Manhit, President of the Stratbase ADR Institute for Strategic and International Studies
Last week, the Asian Development Bank (ADB) released its 2017 outlook for the region. The Philippine economy is expected to grow by 6.4% in 2017—a moderate pace that is still faster than several economies in the region. The ADB underscored, however, that greater investment in infrastructure would be crucial in insulating our growth from external risks, such as higher commodity prices and the uncertainties surrounding global trade.
In a round table discussion on “Infrastructure and Economic Growth: The Philippine Experience,” a Special Study written by Dr. Epictetus Patalinghug and published by the Stratbase ADR Institute, participants from the government, civil society, and the private sector discussed the Philippines’ infrastructure experience.
The country’s infrastructure deficit has often been identified as a key bottleneck to sustaining economic growth and making it more inclusive. Due to decades of underinvestment, the quality of infrastructure has lagged behind our peers in the region, with demand rapidly outpacing capacity. Underinvestment in the sector is partly attributed to the lack of fiscal space. However, while the fiscal balance improved during the previous administration, the government continued to grapple with low infrastructure spending.
In November, the Duterte administration launched its ‘Build, Build, Build’ campaign in its bid to roll out big-ticket projects. While PHP 8.2 Trillion is committed until 2022, President Duterte’s team has to overcome some of the challenges that constantly riddled the previous administration’s infrastructure program.
In 2016, infrastructure spending reached PHP 493 Billion, a 42.8% increase, due to accelerated spending on roads, construction of school and educational facilities, and the AFP modernization program. Despite this improvement, 7.5% of the budget was still unutilized, in part because of poor planning and institutional weaknesses—the same issues that have hounded the Aquino administration. As Dr. Patalinghug asks, “How will the Duterte administration address the lingering technical deficit in the project planning, implementing and monitoring agencies?”
Long-term infrastructure planning
During the roundtable discussion, several participants suggested that a long-term infrastructure planning should be adopted. Separately, the Department of Budget and Management (DBM) has said that it is considering a Medium-term Expenditure Framework to “ensure the consistency and responsiveness of the spending program.” Dr. Patalinghug notes that since the legislative budgeting process is conducted annually, funding over the medium-term only provides budget ceilings over a period, which may be difficult to follow especially as administrations come and go. The link between the medium-term budget framework and longer-term planning can be strengthened by introducing long-term budget commitments for large investment projects.
Ideally, a national policy or masterplan on infrastructure could be crafted, detailing the country’s priorities on the sector. An independent commission could decide which projects to roll out based on the framework established by national agencies. For instance, Infrastructure Australia, an independent body mandated to prioritize nationally significant infrastructure, was established to depoliticize the public investment assessment and decision-making processes.
The Public-Private Partnership (PPP) program was popularized under the Aquino administration to fund large-scale infrastructure programs. At the end of his term, however, 12 projects were awarded but only 3 were completed. Delays were partly caused by weaknesses in the Build Operate Transfer Law and institutional limitations. Compared to traditional modes of procurement, PPPs could be advantageous since developers could internalize cost savings by bundling project development, operations, and maintenance. Dr. Patalinghug, however, reasons that internalization could also be undesirable because of developer risk aversion.
Early into Duterte’s presidency, DBM Secretary Benjamin Diokno proposed a ‘hybrid’ PPP deal. Under this scheme, the government builds, while the private proponent operates and maintains the project. Dr. Patalinghug concurs that pursuing a hybrid PPP might be a more preferable option, since the government has the comparative advantage of ‘build’, given its responsibility of addressing Right-of-Way (ROW) issues. Once built, the project will be bid out to a private proponent, which is better-suited to maintain, operate, and market the project. A hybrid PPP will also guarantee that projects are built based on the government’s infrastructure plan, and reduce unsolicited proposals that are more oriented towards profitability rather than connectivity.
While the government has a number of policy and financing options at its disposal, it must prioritize improving its absorptive capacity in order to implement its infrastructure plans; otherwise, it risks repeating its predecessor’s sluggish infrastructure rollout. National agencies should also adopt a long-term infrastructure plan, one that can withstand changes in government. Most of all, the current administration should not waste this opportunity to boost economic growth.