A nation’s ‘absorptive capacity’ and its current relevance

Crossroads (Toward Philippine economic and social progress)
Philippine Star, 27 February 2013

Is the nation’s “absorptive capacity” enabling the country to achieve its full potential for growth? Are investment decisions making the economy more efficient? These two questions have an identical answer: No. There is a great deal of room for improvement.

At a time when economic gains are rising to optimistic levels, there should be less excuse for discussing those problems that slow down the achievement of growth objectives. The question of absorptive capacity stares us in the face.

The delays in decisions concerning investment projects in the public sector reduce absorptive capacity. Indecision might be attributable to lack of courage on the part of the principals of government agencies to take responsibility for their actions. We should focus on this problem.

Absorptive capacity in the public and private sectors. Absorptive capacity is the ability to implement projects and investments so that they achieve their intended objectives. If issues arise at any stage in the process, having absorptive capacity implies finding the appropriate ways or adjustments to solve or wiggle out of the problems.

Taken in its wider meaning – absorptive capacity – is possessing the appropriate technical and managerial skills to oversee the completion of economic decisions toward satisfactory results . (There are many economic jargons of greater precision to explain this, but I will avoid that route.)

In this country and in relative terms, the problem of inadequate or low absorptive capacity resides more in the public, than in the private, sphere. The former is much more inflexible when it comes to addressing economic problems while private enterprises can act quickly in biting the bullet as well as in changing course as needed.

In nation building, public sector leadership enables everyone – including the private sector – to achieve good results. Through appropriate policies, the government can make the private sector more competitive and more dynamic or it can create the opposite outcome.

Big indicators of limited public sector absorptive capacity. There are examples demonstrating the lowering of the absorptive capacity. There is loud talk of big projects to be undertaken. This includes the need to fast-track investments in infrastructure and in energy capacity expansion and the expansion of the investment pipeline. But delays in contract signings and in investment mobilization speak louder than words. Delays and postponements only heighten the urgency of the investments.

There is a tendency of the current administration to study and restudy contracts. This suggests a paralysis in decision-making. Is there a palpable fear of being dragged into controversies? Has daang matuwid succeeded also in inculcating fear to decide the among decision-makers? In the case of contracts that have unraveled as defective or disadvantageous, enormous sunk costs have been incurred so that great waste in public funds has resulted.

The much-vaunted PPP (public-private participation) program has been a grand failure so far or, at best, a whimper. Hardly a major project has seen implementation stage. Many have been in the planning phase but few are in contracting stage. The handful that had been initially bidded out and decided upon had become the subject of review, further restudy, or renegotiation.

There are only few participants in PPP projects. This could lead to a monopoly of a few players undertaking the country’s big investment expenditures. Since most participants are dominant enterprises operating substantially in other sectors of the economy, an outcome could only mean further consolidation and concentration of economic power to a few groups within the country.

The rules for contracting for PPP projects differ from those financed from multilateral and bilateral development sources. In the latter case, the projects are open to bidding from a wider set of contractors, including foreign contractors. In the case of PPP, national policies limit contractor preferences to domestic companies, with foreign contractor companies qualifying only if they are in the minority. This is true in practice if not in writing. These are derived from the restrictive constitutional provisions of investment or at the very least in connection with the promotion of the construction companies. Unless the government undertakes an overhaul and liberalization of its procedures and its laws and regulations on this matter, the field will effectively exclude, except for a minor role, foreign contractors.

Further systemic problems that limit absorptive capacity. The first three of the problems cited above have been pointed out in public by other observers – through editorials and feisty commentary – some coming from my colleague in this business column – Boo Chanco.

I can offer a litany of other problems and bottlenecks that cry out for attention of the government. Space limitations make me mention only a few critical ones.

First, there are major agencies engaged in planning and implementation of projects that lack the appropriate managerial and technical skills to deal with the problems they encounter. There are only few workers that can handle the large responsibilities with great confidence and empowerment. The reward system for high professional competence in the government has to be built through improvement of remuneration and greater security of tenure. The civil service provides security of tenure at low salaries for most workers in government. Compensation needs to be competitive with the private sector so that capable workers can deal with their counterparts ably and with confidence.

Salary standardization has dealt a major blow to the development of competence and steady professionalization of critical government agencies. The reason in part is the low general salary structure. Because the bureaucracy is too large, overall improvement of government salaries is highly constrained by its size.

Until the government can truly raise the compensation level in the public sector and achieve a leaner organization, it should direct more attention to the critical agencies that guide its economic development projects. Because these agencies lose their people to the private sector easily through lack of competitive salary levels, they should be awarded a fighting chance to insulate their manpower from loss. The critical technical posts in these agencies should at least be at par with government financial institutions.

Another major issue is the acquisition of rights of ways in public infrastructure. This is a critical cause of delays in many project implementation. The process is graft-ridden. The government seldom exercises its right of eminent-domain even when it could be used. The right of way problem has also been subject to political manipulation because of the preeminence given to squatter rights over public lands when land squatting is involved.