By Beatrice M. Laforga, Reporter
WHEN the government ordered the lockdown in mid-March, it must have done so in full knowledge that the dry-season construction period was just gathering momentum, and that any disruptions would put a major dent in its main growth driver, the ‘Build, Build, Build’ program.
It had already been planning to ride infrastructure to a strong bounce-back in 2020, after the delayed-budget disaster of 2019, which saw spending grind to a halt after Congress failed to pass that year’s budget until April — thereby causing many projects to miss their dry-season window as well.
When the pandemic hit, the main spending priorities became public health and helping small firms and the poor survive — dealing yet another setback to the infrastructure program, not just in the form of delays but budget “realignments” that took away large parts of the Public Works department’s funding and, to a lesser extent, the Transportation department’s.
The disruptions in 2020 began showing up as early as February, according to Nicholas Antonio T. Mapa, ING Bank N.V. Manila Senior Economist. He said that countries hit early by the pandemic like China, South Korea and Japan are also major participants in our infrastructure program, in terms of supplying goods and funding. The result for the Philippines was a -0.2% contraction in first quarter gross domestic product (GDP), reflecting in part the disrupted building projects. The first two weeks of the lockdown also took place towards the tail end of the quarter.
“The true drag on the 1Q GDP print was capital formation (-18.3%) with a particular subsector acting as the main culprit: inventories. The change in inventories for 1Q recorded an eye-popping drawdown of P138 billion, the largest drawdown in inventories noted in the data set going back to the year 2000,” Mr. Mapa said in a note.
According to the Budget department, infrastructure spending slumped 12.4% year on year in the first quarter after construction activity was suspended when the enhanced community quarantine (ECQ) was implemented across Luzon on March 17.
A deeper contraction in infrastructure spending is widely expected for April and May, when the lockdown was in full swing.
According to the World Bank, the P5.5-billion Metro Manila Bus Rapid Transit (BRT) First Line Project, which was due to be completed this year, had already been on the verge of missing its timetables when the pandemic hit.
It said “decision taking and delivery of key actions” were not “efficient enough” to ramp up the implementation of the project, which it is financing, following the launch in March 2019. The halt in construction during the quarantine further hampered implementation.
Another BRT project in Cebu worth P16.31 billion was slowed by the pandemic, the World Bank said, while activity and procurement were also disrupted for the Metro Manila Flood Management Project.
In May, flagship infrastructure projects were exempted from the lockdown and were free to resume construction if they observed physical distancing and took temperatures on-site. Projects that resumed included the Harbor Link, North Luzon Expressway-South LuzonExpressway (NLEX-SLEX) Connector, and the Metro Manila Skyway Stage 3, among others.
On the budget side, the Departments of Transportation (DoTr) and Public Works and Highways (DPWH) saw their funding reduced after money was redirected to the COVID-19 containment effort, with the government having spent P355 billion as of early June.
The DPWH had P123 billion taken away, bringing its budget for the year to P457.95 billion, while the DoTr’s funding was trimmed by P8.82 billion to P90.58 billion.
Overall, budgeted infrastructure spending for 2020 fell to P833 billion from the initial funding level of P989 billion and below the P1.05 trillion that had been proposed for 2019.
Fitch Solutions Country Risk & Industry Research said in June that the budget reductions spell more delays in government-funded projects and are likely to slow the overall growth of the construction sector in 2020.
The promised “Golden Age of Infrastructure” was set an infrastructure spending target of 5-7% of GDP, but in 2020, the budget reductions mean spending will not hit even the lower end of the range — 4.6% of GDP, if spent.
The budget crunch was the government’s cue to invite the private sector to take a larger role.
Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua said “solicited PPPs” are welcome as projects are reprioritized to favor those viewed as crucial in the “new normal.”
“We will have, given the smaller fiscal space though fundable, to select projects that will have the most economic impact in terms of getting us back to pre-crisis growth rates and employment levels,” Mr. Chua said in early May, adding: “we stand a good chance to completing a lot of flagship programs and we will pursue them in the next two and a half years.”
Vivencio B. Dizon, the presidential adviser for flagship infrastructure projects, also said the crisis has reinforced the idea that the government needs private-sector help.
“Clearly the government cannot do this alone. The private sector and the government have come together to fight COVID-19 and I think we would not be able to control it the way we have without the efforts of the private sector in assisting the government. We also must work together to further expand our infrastructure projects, given the very limited funding that (will) be available to us in the coming months,” Mr. Dizon said in late May.
While the reconfigured priorities for “Build, Build, Build” have yet to be released, Mr. Dizon said the government will consider the available fiscal space, project readiness, the capacity of line agencies to implement these “swiftly,” the economic impact and boost to employment, risk appetite of the private sector, and urgent works to build up the healthcare system and the digital economy.
Despite delays and reduced budgets, Public Works Secretary Mark A. Villar remained confident that the agency can hit its spending target for 2020 with a “catch up” plan in place for the second half.
“Last year, we faced similar headwinds in a sense that because of the delayed budget, we were only able to implement our projects in the second half of the year, and yet we were still able to disburse about P700 billion, well within our target. So similarly, we are quite confident that we will be able to hit the target again this year, as we have a new normal, we’ll (also) establish our new guidelines,” Mr. Villar said in a briefing in mid-June.
Thatchinamoorthy Krshnan, an economist at Oxford Economics, said in early June that “although social-distancing and other related health protocols might require initial adjustments in the construction sector, the ramping up of public infrastructure projects will play a key role in the recovery.”
Mr. Krshnan said official surveys which showed the construction sector posting double-digit contractions at the height of the lockdown indicated that more companies are deferring expansion plans as the situation remains uncertain.
“Increased expenditure on infrastructure development (in 2021) will provide not only employment opportunities but through the multiplier effect support the recovery in domestic demand and GDP growth,” he said.
He said the economic recovery may start as early as the second half of the year and pick up further next year on higher capital outlays, assuming a second wave does not result in another lockdown .
In 2021 the infrastructure spending target was increased to P1.131 trillion or 5.3% of GDP, indicating that the government is counting on its many building projects to stimulate growth, which is projected at 8-9% next year, “to push the completion of a number of major flagship projects for 2021 and 2022,” and generate 140,000-220,000 additional jobs both directly and indirectly.
However, the projected boost to the economy and additional jobs will only be realized if the proposed higher budget is actually spent. The two main infrastructure-implementing bodies — the DPWH and DoTr — have a track record of missing spending targets.
In a policy brief issued before the pandemic in January, University of the Philippines Professor Emeritus Epictetus E. Patalinghug said there is a need to “go beyond” budgets and examine the “absorptive capacity and institutional framework underpinning the provision of infrastructure.”
“Absorptive capacity constraints explain the inability of the infrastructure-implementing agencies to spend their allocated budgets which are already downgraded from the rosy targets set at the start of the medium-term planning horizon of the Duterte Administration,” he wrote in the paper, “The Build, Build, Build Program: Will It Live Up to Expectations?”
Mr. Patalinghug explained that public investment in infrastructure projects requires “technical and managerial expertise which cannot be expanded in the short-run.”
According to the Budget department, actual infrastructure spending hit P881.7 billion in 2019, exceeding the P859.4-billion budget, largely due to a last-minute spending surge in December when its spending more than doubled to P178 billion from P75.6 billion a year earlier.
In 2018, infrastructure spending hit P990.52 billion, missing the P1.1-trillion target for the year while that of in 2017 reached P991 billion, breaching the programmed P858 billion.
Based on reports by the Commission on Audit, disbursements made by the DPWH did not go past the 40% mark in 2017 and 2018, while DoTr only spent less than 26% of its budget allotted in those two years.
“When public investment is constrained by absorptive capacity, efficiency falls, project costs increase, and the share of investment that translates into public capital declines. Project outcomes depend on the quality of policies and institutions,” Mr. Patalinghug said.
He said for the “big push” on infrastructure development to happen, the Philippines needs to learn from the experience of advanced countries.