Business World, 21 February 2013


Why do our economic managers continue to underspend for public infrastructure given the poor state of our airports, seaports, roads and bridges, urban mass transport, and the flickering power supply, and given that the cost of public borrowing is at its historic low? Why do they rejoice whenever the budget deficit is below planned target, when the economy needs higher, not lower, spending to fix the crumbling public infrastructure and, in the process, create more jobs?

Is it because they’re so obsessed with the credit upgrade? But why? The stature of rating agencies have suffered so much as a result of the ongoing global economic crisis. The value of an upgrade is not what it used to be. Besides, even with one notch below investment grade, the Philippines can borrow from abroad at favorable rates.

Where before the ratings of credit agencies are recognized as “true” seals of good housekeeping, recent events have shown that such ratings were of dubious value. Public investigations and reviews abroad have shown that ratings agencies are partly to blame for the second worst economic crisis in the past 100 years.

The reality is that we don’t have to borrow from abroad at this time or even until the end of President Aquino III’s term. We have enough dollars to tide us over for many years. Our gross international reserves (GIR) are hefty enough to finance more than one year’s imports requirement; we only need three months worth of imports. And the GIR will continue to expand since the annual $20-billion plus inflows of OFW remittances will not disappear soon.

The financial system is awash with dollars. And it is awash with pesos, too. Some ₱1.7 trillion are “parked” with the Bangko Sentral ng Pilipinas’ (BSP) special deposit account (SDA) for lack of investment opportunities.

What’s the extent of underinvestment in public infrastructure? I argued that we should be spending some ₱500 billion annually, roughly 5% of gross domestic product (GDP), to make up for more than a decade-long neglect. The World Bank (Manila) delegation head agrees. In fact some countries in Asia — China, for example — have spent the equivalent of 8% of GDP on their way to rapid, sustained growth.

The Manila International Airport and EDSA highway were the first major public infrastructure in this part of the world in the 1960s. Both have not been ungraded. Both are dilapidated and crumbling.

The Aquino III administration’s attempt to make up for past neglect in public infrastructure has been wimpy. Both the fiscal conservatism of his fiscal managers, whose mantra is keep deficit-to-GDP level low despite the low tax-to-GDP ratio, and the ineptness of his line department secretaries have kept public infrastructure spending at horrible levels.

Let’s look at some concrete numbers. Assume that the “ideal” level of spending for public infrastructure is 5% of GDP. The government should have spent ₱486.8 billion for public infrastructure in 2011. But it spent only ₱232.8 billion or 47.8% of the ideal spending level.

In 2012, the “ideal” level of spending for public infrastructure was ₱528.4 billion. But only ₱257.9 billion, or 48.8%, has been spent. And this is even an optimistic estimate.

In 2013, the third full year of the Aquino administration, the “ideal” level of spending for public infrastructure is ₱608.9 billion. The President asked, and Congress authorized, for a public infrastructure budget (including national government, government-owned and -controlled corporations, and local governments) of ₱328.2 billion. This is only 53.9% of the ideal budget. And as in previous year, what has been budgeted may not necessarily be spent.

Roughly only half of the “ideal” level of expenditures for public infrastructure is met or will be met based on what has been planned by the Executive and authorized by Congress. But even this is an overestimate.

The total public sector infrastructure budget includes allocation for local government units which ranged from ₱54.7 billion to ₱60.5 billion. But we know that a big chunk of these amounts is not spent on “hard” infrastructure, those that would enhance the productive capacity of the economy such as farm-to-market roads, rural water supply, communal irrigation, and the like. Most are spent for the construction of barangay halls, beautification of the plaza, or purchase of motor vehicles.

It is an overestimate because what has been appropriated for public infrastructure would not necessarily be spent for capital projects. A significant part of it will remain unspent or realigned for some low priority, quick-disbursing programs.

At this stage of the Philippines’ economic development where job creation should be the policy makers’ number one concern, what is needed is an expansionary monetary and fiscal policy. On the fiscal side, what is needed is a bold program of infrastructure spending to make up for past neglect and for the Philippines to be at par with its ASEAN-5 neighbors.

Sadly, the President’s men have opted to be wimpy.