Philippines’ infrastructure challenge: A huge gap or a black hole?

BY IAN NICOLAS P. CIGARAL

WHEN President Rodrigo R. Duterte won the race to Malacañang last year, he didn’t just promise to wipe out the narcotics trade, criminality, and corruption — he also vowed to improve the country’s poor infrastructure to help spur the economy.

The former Davao mayor was right on the money.

After all, if the Philippines wanted to keep its growth engine humming, it needs to take care of, and even upgrade, its roads, bridges, and airports.

Obviously enough, that needs a lot of work.

Based on the UN Economic and Social Commission for Asia and the Pacific’s Asia-Pacific Countries with Special Needs Development Report 2017, the Philippines scored 0.336 in the Access for Physical Infrastructure Index (APII) for 2015. The ranking placed the country 24th out of the 41 Asia and the Pacific countries, putting it in between Pakistan’s 0.311 and Samoa’s 0.350.

Within the 10-member Association of Southeast Asian Nations (ASEAN), the Philippines fared no better.

Although the country’s APII score was above Indonesia’s 0.278, Lao People’s Democratic Republic’s 0.225, Myanmar’s 0.198, and Cambodia’s 0.186, it fell below Thailand (0.418), Vietnam (0.419), Malaysia (0.502), and Singapore (0.708). Brunei was not included in the ranking.

Workers descend from a scaffolding at a construction site for an expressway in Manila in this photo taken in March. Desperately-needed airports and trains are part of Philippine President Rodrigo Duterte’s envisioned “golden age of infrastructure”, but graft, red tape threaten the $170-billion plan. / NOEL CELIS / AFP

The Philippines’ crumbling infrastructure has also resulted in transport and economic woes. A 2014 study by the Japan International Cooperation Agency (JICA) showed that, without intervention, traffic costs will likely surge to P6 billion a day by 2030 from P2.4 billion. The same study also said transport cost will be 2.5 times higher by 2030 if congestion is not alleviated.

To address this, Mr. Duterte said he will upgrade the country’s dilapidated infrastructure, which his economic advisers qualified as one of the reasons why the Philippines, one of the world’s fastest-growing economies, had lagged behind its Southeast Asian peers for so long.

KEEPING ‘SHOVEL-READY’ PROJECTS

Philippine history has shown that a newly elected president has always delayed — if not outright abandoned — pet projects pursued by predecessors.

Recall the Estrada administration’s move to scrap the Ramos government’s practice of providing sovereign guarantees for build-operate-transfer (BOT) projects. The Aquino administration, during its incumbency, grounded the Arroyo government’s infrastructure portfolio, causing economic growth to slow sharply in 2011.

But Mr. Duterte’s aides gave an assurance that the current administration will not abandon the previous administration’s “shovel-ready” projects.

“You know in the past administration, they stopped all the projects for the first two years [to ensure systems are more transparent]… Here we did not; we approved everything. So we are continuing moving ahead,” Finance Secretary Carlos G. Dominguez III said in a press briefing in Malacañang on July 6, 2017.

Dubbed as “Build, Build, Build,” the Duterte government’s aggressive infrastructure program aims to jack up infrastructure and social spending to about 7.1% of gross domestic product until the end of its term, in a bid to boost the economy to 7-8% growth next year until 2022 from 6.9% in 2016, and slash poverty incidence to 13-15% from 21.6% in 2015.

Once underway, this “golden age of infrastructure” is expected to reverse the backlog left by previous administrations, the current government said.

“With sound macroeconomic fundamentals, effective policy reforms, and an aggressive infrastructure program, the Philippines is poised for an economic breakthrough. We now have the right ingredients and the right leaders to catch up with our ASEAN peers, and ultimately transform the Philippines into the ‘Asian tiger’ we are capable of becoming,” Budget Secretary Benjamin E. Diokno said in an opinion piece published by BusinessWorld on May 24, 2017.

THE BIG SHIFT

To bankroll this huge infrastructure push, the Duterte administration said it will shift from public-private partnership (PPP) as the primary mode of financing and will rely more on public funding and official development assistance (ODA) to avoid delays and higher project costs. The government will also employ a “hybrid” model, in which construction is financed by the government or ODA and operation and maintenance is entrusted to the private sector.

The sudden change in funding modes is a departure from former President Benigno S. C. Aquino III’s high reliance on PPPs for major projects, which the Asian Development Bank (ADB) said must be continued by succeeding administrations.

Besides the ADB, the Philippines’ PPP program has also earned plaudits from JICA and Moody’s Investors Service. The hospitable international environment for PPP is understandable. As many governments around the world struggle with fiscal deficits, the PPP model has become a preferred mode of meeting infrastructure requirements.

According to a June 28 report, BMI Research said the government’s decision to diversify financing for big-ticket projects from PPP to state or donor-funded schemes could initially hurt investor appetite, but should eventually bode well for the country.

“In the short term, ongoing revisions and modifications of proposed PPP projects will result in increased uncertainty in the Philippines’ infrastructure market, as projects previously launched under the PPP program are withdrawn and switched to other procurement modes,” BMI analysts said.

“We note while this will mean fewer opportunities for private investment in infrastructure. This shift will help reduce the likelihood of contractual disputes and uncertainty over financing that has weighed on proposed PPPs, thereby improving overall project implementation,” they added.

In May, the government removed the plan to develop five regional airports from the PPP pipeline in favor of “other modes” of funding. Last December, the Philippine Ports Authority also withdrew the Davao Sasa Port redevelopment from the PPP lineup to cut costs.

“We expect that other major projects currently part of the PPP program will be withdrawn and relaunched as government-financed or ODA-backed initiatives over the coming months, as the Duterte administration attempts to accelerate infrastructure development in the Philippines,” the Fitch Group unit also said.

However, the change in funding modes, despite its supposed advantages, has also been questioned by experts.

In an opinion piece published on BusinessWorld on June 2, 2017, Bienvenido S. Oplas, Jr., head of Minimal Government Thinkers and a Fellow of SEANET, identified “inherent problems and risks” with that change.

If hybrid model becomes the dominant mode in building important infrastructure projects, the financing scheme “[will] not bode well for Filipinos.”

Since an administration is limited to only six years, it has little political or corporate brand to build and protect, Mr. Oplas said.

As a result, “it can worry less of what the people would say after its term has ended especially if the project is later discovered to be of inferior quality and tainted with corruption.”

Moreover, ODA funding has tight strings attached, he added.

“A China-ODA [arrangement] would mean only Chinese contractors, suppliers, managers, and even workers would do the work. Local firms would be relegated to O&M (operation and maintenance) and their purchase of equipment and supplies might be constrained by the project specifications so that they will be forced to source these from China again,” Mr. Oplas said.

CAPACITY QUESTIONS

Meanwhile, analysts from international think tank GlobalSource Partners has taken a step back to see the bigger picture.

And so far, it’s not looking good.

There has been little sign of the Philippines’ capacity to implement its P8.4-trillion infrastructure spending plan over the next five years, it said. It also cited the uncertainty fueled by questions on the government’s change in preferred funding scheme for these big-ticket projects.

In a July 2017 report, GlobalSource analysts said that the policy shift would likely add to political risks under Mr. Duterte, even as they identified the merits of other financing schemes. They also joined other observers in questioning the national government’s ability to take on these projects — citing, among others lack of technical expertise.

President Duterte has tapped the Beijing-based Asian Infrastructure Investment Bank (AIIB) to help fund his government’s “unprecedented infrastructure buildup,” which aims to minimize traffic jams such as the one seen in this picture taken in September 2016. / NOEL CELIS / AFP

“While the lack of policy continuity would add to assessments of political risk under this administration, one can in fact see the merits of de-emphasizing PPP as the principal driver of the country’s infrastructure aspirations,” according to the report.

“[N]ot many projects lend themselves to a PPP structure; and as government pursues more and more higher risk greenfield projects, a PPP arrangement may not necessarily bring value for money for government, particularly if it is forced to absorb a big share of the demand risk in order to make projects bankable.”

In 2002, the ADB called on the Arroyo government, which was among the previous administrations rife with projects financed through ODA, to improve its use of foreign assistance as a means of easing poverty in the country. It noted that the state’s poor use of ODA continued to burden the government with additional costs while delaying program and (project benefits at that time.

In the meantime, as the Philippines starts building more roads and modernizing ports, the private sector is still finding it hard to carve out a niche in this “golden age of infrastructure” with Mr. Duterte favoring foreign money to fund his massive infrastructure program.

With the absence of PPP while large-scale projects are still under construction, companies have opted to offering unsolicited proposals to take part in the government’s infrastructure drive.

While these ODAs carry extremely low interest rates and easy repayment schemes, they mostly require goods and services to be procured from the donor country, leaving Filipino contractors feeling sidelined after initially becoming enthusiastic about the prospects of the government’s aggressive infrastructure push.

But unlike its predecessor, the Duterte administration is more welcoming of unsolicited proposals, while criticizing the slow progress of PPP initiatives.

With a large political capital and plenty of financing options at its disposal, the Duterte government must work double time to improve its capacity to absorb big-ticket infrastructure projects.

Only after it does will it prevent a repeat of the previous administration’s slow infrastructure rollout.

Ian Nicolas P. Cigaral used to cover Malacañang for BusinessWorld.